0.

The Contracts Timeline… 2

1. A Roadmap for Contract Law… 4
2. The Bargain Theory of Contract… 6
A. Consideration … 7
B. Reliance… 10
C. The Restitution Interest … 11
3. Negotiation and Formation of the Contract…12
A. Introduction: The Role of the Courts… 12
B. Offer and Acceptance… 13
C. Negotiation and Closure… 18
D. Good Faith in Contract Formation… 20
E. Problems With Standard Form Contracts…. 21
F. The Statute of Frauds… 25
4. The Contents of the Contract… 28
A. The Parol Evidence Rule… 28
B. Interpreting the Terms of the Contract… 31
C. Implied Terms and the Implied Covenant of Good Faith… 35
D. Express and Implied Warranties… 36
E. Modifications… 39
5. Legal Regulation of Contracts… 42
A. Misrepresentation and Mistake of Fact… 43
B. Public Policy and Illegality … 45
C. Unconscionability … 47
6. Remedies… 49
A. Expectation Damages… 50
B. Mitigation… 57
C. Reliance Damages… 59
D. Restitution Damages… 60
E. Specific Performance … 61
F. Liquidated Damages and Agreed Remedies … 63
7. Conditions and Self-Help Remedies During Performance …. 65
A. Express Conditions … 66
B. Implied or Constructive Conditions … 68
C. Impossibility, Impracticability, and Frustration …. 75
8. Third-Party Rights and Responsibilities … 77
A. Third-Party Beneficiaries … 77
B. The Assignment of Rights and Delegation of Responsibilities … 79

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The Contracts Timeline
Formation  Avoiding the Deal  Performance/Nonperformance  3rd Parties  Remedies

Formation – Do we have a deal?

Mutual Assent (Offer + Acceptance) + Consideration (Bargained-for exchange)
 Offer
o Objective Test
o “Master” of offer
o Contractual Intent
o Certainty of terms
o Prelim negotiations
o Terminating an offer
 Revocation
 Rejection/Counter/offer
 Lapse of time
 Death or incapacity
 Acceptance
o Power of Acceptance
o Unilateral Contract
o Bilateral Contract
o “Mirror-Image Rule”
o “Mail Box Rule”
o “Battle of the Forms”
o Irrevocable Offers
 Option Contract
 “Firm offer”
 Consideration
o “Peppercorn” theory – if bargained for, court won’t review adequacy of consideration
o Benefit/detriment
o Illusory promises
o Gratuitious Promises
o Past consideration
o Moral obligation
o Promissory Estoppel
o Contract modification
 Pre-existing Duty Rule
 UCC § 2-209
o Requirements/output contract
o Accord and Satisfaction
 Additional formation concepts
o Implied-in-fact contracts
o Implied-in-law or “quasi contracts”

Avoiding the Deal – We have a deal, but…

 Statute of Frauds
 Misunderstanding
 Mistake
o Unilateral
o Mutual (bilateral)
 Incapacity
 Fraud/Misrepresentation
 Duress

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  Undue Influence
 Unconscionability
o Procedural
o Substantive
 Illegality/Public policy

Performance/Non-Performance – Who has to do what and when, or maybe not?

 Finding the Contract Terms
o Parol Evidence Rule
o Interpretation
o Ambiguity
 Implied Terms
o Good Faith
 Warranties
 Conditions
o Express/Implied
o Constructive
 Excuse/Waiver of Condition
 Modification
 Impossibility/Impracticability
 Frustration of Purpose
 Anticipatory Repudiation & Adequate Assurances
 Material Breach
o Substantial Performance
o UCC Perfect Tender Rule

Third Parties – Is there another party to the deal?

 At formation?
o 3rd Party Beneficiary
 Intended
 Incidental
 Subsequently
o Assignment
o Delegation

Remedies – Someone failed to perform when required, now what?

 Measuring Money Damages
o Expectation Interest
 Loss in value
 Cost of repair/completion
 Diminution in value
o Reliance Interest
o Restitution Interest
o Consequential Damages
o Incidental Damages
o Liquidated Damages
 Limitations on Money Damages
o Foreseeability
o Mitigation/avoidability
 Equitable Remedies
o Specific Performance
o Injunctive Relief

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1. A Roadmap for Contract Law
R2K § 1 – Contract Defined
K = a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in
some way recognizes as a duty.

R2K § 2 – Promise; Promisor Promisee; Beneficiary

 A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a
promise in understanding that a commitment has been made.
 The person manifesting the intention is the promisor
 The person to whom the manifestation is addressed is the promise
 Where performance will benefit a person other than the promise, that person is a beneficiary

Expectation Interest – The interest of a non-breaching party in being put in the position that would have resulted if the
contract had been performed

Reliance Interest – The interest of a non-breaching party in being put in the position that would have resulted if the
contract had not been made, including out-of-pocket costs

Restitution Interest – A non-breaching party’s interest in preventing the breaching party from retaining a benefit
received under the contract and thus being unjustly enriched. The benefit may have been received from the non-
breaching party or from a 3rd party.

Mutual Assent – An agreement by the parties to contract, usually in the form of offer and acceptance. In modern
contract law, mutual assent is determined by an objective standard (apparent intention of the parties as manifested by
their actions).

Objective Theory of Contract – A K has nothing to do w/ the personal or individual intent of the parties; it is an
obligation attached by the mere force of law to certain acts of the parties (usually words) that ordinarily accompany and
represent a known intent.
 Pros – easier to determine if contract formed; can now have contract btwn person & electronic agent
 Cons – form contracts tricky, sometimes hard to judge objective intent

Force Majeure Clause – A contractual provision allocating the risk of loss if performance becomes impossible or
impracticable, esp as a result of an event or effect that the parties couldn’t have anticipated or controlled (“act of God”)

Doctrine of Impracticability – A fact or circumstance that excuses a party from performing an act, esp a contractual
duty, because, though possible, it would cause extreme and unreasonable difficulty – something that happened to make
the performance for which he would be paying worthless to him (e.g. king’s parade and hotel). (R2K § 261/UCC § 2-
615, Frustration in § 263).

UCC – Exists in all states but Louisiana, covers the “sale of goods,” sometimes has different provisions for merchants
compared to non-merchants, R2K borrows a lot from it.

CISG – Usually covers non-consumer transactions btwn parties that are based in different signatory nations, hybrid of
common law and civil law.

Main Benefits of Contract

1) Secures the future for the parties in light of economic or social uncertainty
2) Allows for planning and allocation of resources
3) Allows for risk allocation
4) More efficiency is gained when risks & burdens can be allocated ot the party that’s best able to bear them
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 5) Limits state intervention

Lucy v. Zehmer, SC of VA, 1954

Objective Theory of Contract used to determine if an enforceable contract had been formed; that one of the parties
subjectively did not intend to form the agreement does not matter.
 Facts: P allegedly entered into a written K w/ D for sale of land. P says they were serious, but D says he was
clearly joking around. K formed at bar when both parties were drinking. P wants specific performance.
 Issue: Was there a K? Is it enforceable?
 Holding: A person can’t set up that he was joking when his conduct and words would warrant a reasonable
person in believing that he intended a real agreement. Although there was some drinking/festive atmosphere, it
was not to an extent that they were unable to understand what they were doing.
  An agreement is essential to a valid contract, but the law imputes to a person an intention corresponding to the
reasonable meaning of his words and acts. If his words and acts, judged by a reasonable standard, manifest an
intention to agree, it is immaterial what may be the real, but unexpressed, state of mind.
 Relevant Rules
o R2K § 21, Intention to be legally bound
 Neither real nor apparent intention that a promise be legally binding is essential to the formation of
a contract, but a manifestation of intention that promise shall not affect legal relations may prevent
the formation of a contract.
 § 17 – formation req. a bargain w/ manifestation of mutual assent
o R2K § 16, Intoxicated Persons
 A person incurs only voidable contractual duties by entering into a transaction if the other party
has reason to know that by reason if intoxication
 He is unable to understand in a reasonable manner the nature and consequences of the
transaction, or
 He is unable to act in a reasonable manner in relation to the transaction
 Note: R2K § 12, Capacity to Contract – exception of capacity to contract for persons under
guardianship (§ 13), infant (§ 14), mentally ill or defective (§ 15), or intoxicated (§ 16)
 Equity might  unenforceable if deal was unfair
o So unfair as to be unconscionable  contact unenforceable
 Problem 1-1, Pepsico Commercial
o Court says that when viewed objectively, commercial was clearly a joke and not a serious offer to form a
contract – it doesn’t matter if P thought it was real, it’s the objective viewpoint that matters.
o Reason commercial was funny was in part b/c it was unreasonable

Nipsco v. Carbon County Coal, US Court of Appeals, 1986 (Posner)

The possibility in the change in the price of the coal was an element of the bargain and P assumed the risk; P can’t
invoke force majeure, impracticability, or frustration to get out of an agreement.
 Facts: Parties entered into a 20-year contract during the 1970s energy crisis; included an escalator clause for the
price of coal; in 1983 K price was way higher than market price; NIPSCO said that NIPSCO had the burden of
adverse effects of entering into long-term supply contracts (legally couldn’t pass on costs to taxpayers); NIPSCO
cancelled contract
o P (NIPSCO) seeks declaration that it’s excused from its obligation
o D (CCC) sought specific performance
 Issue: Can P invoke force majeure, impracticability, or frustration to end the contract? Is the appropriate remedy
damages, or specific performance?
 Holding: P’s appeals turned down – a force majeure clause isn’t intended to buffer a party against the normal
risks of a K (risk of fixed-price K is that market price will change), EPO’s actions didn’t trigger FM clause.
Impossibility/Frustration = device for shifting risk based on parties’ intentions – no place when K has explicitly
assigned a particular risk to one party (P assumed risk of increased price). Specific performance only available if
damages aren’t adequate – no reason to think that damages aren’t an appropriate remedy here, and would be

5
 inefficient to force specific perf (first example of an efficient breach), expectation damages enough to put CCC in
as good a position as if contract had been fully perf’d.
 Key Points:
o Incidental 3rd party beneficiaries (the people of the company town) shouldn’t be considered b/c they don’t
have a stake in the contract (no privity)
o When determining damages due to the seller from the buyer, the court uses UCC § 2-708:
 Market differential rule
 Damages = the difference in the market price at the time of place of tender and the unpaid
K price, together w/ incidental damages, but if this isn’t sufficient…
 Difference measure rule (hypothetical profit)
 Damages = the profit that the seller would’ve made had the buyer fully performed,
including reasonable overhead and incidental damages.
 Here, court uses B b/c it’s impossible to know the market price of coal for duration of the K
 Relevant Rules
o UCC § 2-615, Excuse by Failure of Presupposed Conditions
 Delay in delivery by a seller isn’t a breach of his duty under a K for sale if perf as agreed has been
made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic
assumption on which the K was made (only for sellers)
o UCC § 2-708, Seller’s Damages for Non-acceptance or Repudiation
 The measure of damages for non-acceptance or repudiation by the buyer = the difference between
the market price at the time and place for tender, and the unpaid contract price, together w/ any
incidental damages provided in this Article, but less expenses saved in consequence of the buyer’s
breach.
o UCC § 2-716(1) – Specific performance may be decreed where goods are unique or in other proper
circumstances (mostly for prop)
o SoF  contract had to be in writing, b/c it was about the sale of land.
o RSK § 261, Discharge by Supervening Impracticality (see definitions)
o R2K § 263, Destruction, Deterioration or Failure to Come into Existence of Thing Necessary for
Performance (see definitions for Frustration/Impracticability)

2. The Bargain Theory of Contract

 In “executory” contracts (neither party will yet have performed or be performing), the “consideration” for each
promise is the other’s promise.
 Without consideration, executory K’s are not enforceable in US law
 19th and 20th century US law has seen the rise of reliance as a basis for enforcement of promises that generate no
reciprocal promises.
 Definition of Consideration (R2d 71)
o (1) “To constitute consideration, a performance or return promise must be bargained for”
o (2) “A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is
given by the promisee in exchange for that promise”
o (3) “The performance may consist of
 (a) An act other than a promise
 (b) A forbearance
 (c) The creation, modification, or destruction of a legal relation”
 Basic organization of a contract today (with exception for reliance and restitution):
Contract = enforceable promise  (which req.) consideration  (which comes from) a bargain or exchange.

A. Consideration

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Key Concepts
 Consideration is the principal device that our law uses to determine whether a promise is worthy of legal
protection – something that is exchanged for the promise.
o Note: old common law required benefit to promisor and detriment to promise. This was done away w/ in
R2K § 79.
 R2K § 71, Requirement of Exchange (defines requirement for consideration)
o To constitute consideration, a perf or a return promise must be bargained for
o A perf or return promise is bargained for if it’s sought by the promisor in exchange for his promise and is
given by the promisee in exchange for that promise.
o The perf may consist of (a) an act other that a promise, or (b) a forbearance, or (c) the creation,
modification or destruction of a legal relation
o This is consideration in terms of a bargain btwn the promisor and the promisee
 Bargain Theory (dominant view) – promise is enforceable if and only if it’s consciously given in return for
something that is sought, an exchange
o **Note that in the R2K, benefit/detriment test gone and replaced w/ the “bargain,” where crucial element
is an exchange. (Hamer)
 R2K § 79, Adequacy of Consideration, Mutuality of Obligation (no more benefit/detriment test)
o If the requirement of consideration is met, there is no additional requirement of a gain, advantage, or
benefit to promisor or a loss, disadvantage, or detriment to the promisee

Types of Contracts
 Unilateral Contract – When a promise is given by a promisor in exchange for a future act by the promisee
 Bilateral Contract – The exchange of a promise for a promise; each promise serving as consideration for the
other
 Illusory Promise – A promise so indefinite that it can’t be enforced or which, by virtue of provisions or
conditions contained in the promise itself, is one whose fulfillment is optional on the part of the promisor; not
adequate for consideration
 Output Contract – Contract in which a seller promises to supply and a buyer buy all the goods or services that a
seller produces during a specified period and at a set price. The quantity term is measured by the seller’s output.
An output contract assures the seller a market or outlet for the period of the contract.
 Requirements Contract – Contract in which a buyer promises to buy and a seller to supply all the goods or
services that a buyer needs during a specified period. The quantity term is measured by the buyer’s requirements.
A requirements contract assures the buyer of a source for the period of the contract.
 Option Contract – A promise, legally binding on the offeror, to keep an offer open for a period of time; a valid
option eliminates the offeror’s usual power to disregard her commitment to keep the offer open and to revoke it at
any time before it is accepted.
o ** See UCC § 20295 and R2K § 87 definitions in 7

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

Forbearance of a legal act can constitute consideration; Uncle benefitted in a legal sense
 Facts: Uncle promised nephew $5k if he didn’t drink, smoke, swear, or gamble before he turned 21
 Issue: Is forbearance from legal conduct sufficient consideration to create a valid and enforceable contract?
 Holding: Nephew’s forbearance amounts to consideration necessary for contract enforceability. There’s a
detriment to nephew (constraint on his liberty); doesn’t matter if uncle didn’t benefit b/c he benefited in the legal
sense
 Relevant Rules/Definitions:
o Unilateral v. bilateral contracts, outdated test of benefit-detriment to get consideration
 Problem 2-1, Calculator Watch
o Opening the envelop should count as consideration, since that’s what Fortune was seeking
o There’s intrinsic value for magazine, opener did bargained-for act
o But court says not going to police this b/c it’s so insignificant

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  Problem 2-2 – P agreed not to sue in return for lifetime employment, P fired, court says had consideration b/c
was forbearing a right (even if couldn’t actually exercise that right, b/c didn’t know that by collecting workers
comp, P wasn’t allowed to sue).
o If you believe you’re giving up something, even if you can’t legally do that thing, still consideration

Lake Land Employment Group of Akron, LLC v. Columber, SC of OH, 2004

Consideration exists for a non-competition agreement when, in exchange for assent of the employee, the employer
continues at-will employment. Dissent strongly disagrees
 Facts: P was an at-will employee, signed a non-competition agreement after his employment had already begun,
violated the non-competition agreement and pled lack of consideration
 Issue: Whether subsequent employment alone is sufficient consideration to support a covenant not to compete
that an at-will employee entered into after employment began
 Holding: Consideration exists to support a non-competition agreement when, in exchange for the assent of the
employee, the employer continues at-will employment.
o Execution of NC = alteration of terms of employment, which P agreed to in return for D’s forbearance
from firing P.
o Note: Only reasonable non-competes are valid (Hopper v. All Pet Animal Clinic)
 Dissent: Continued AW employment ≠ consideration, no benefit-detriment or change in status

Petroleum Refractionating Corp v. Kendrick Oil Co., 10th Cir. AC, 1933 (illusory promises/alt perf)
 Facts: D contracted to buy oil from P unless P stopped making that grade of oil. D stated that the oil wasn’t the
correct grade and refused to accept further deliveries, P sold the rest of the oil for much less (cover)
 Issue: Whether the K had consideration given that one party had power to terminate? Does D’s ability to
withdraw make the contract an illusory one?
 Holding: Discontinuance by P to manufacture that grade of oil specified in K would constitute a detriment to it,
and would be sufficient consideration for the promise of D to purchase oil.
 Relevant Rules/Definitions
o R2K § 77, Illusory and Alternative Promises (D makes this arg, but loses)
 A promise or apparent promise isn’t consideration if, by its terms, the promisor reserves a choice
of alternative performances
 If there is a unilateral out for one party, then there really is no binding promise
 E.g. Arthur and Betty have a K, but Betty can cancel at any time
o Betty’s promise is an illusory promise, so there’s no consideration, so Arthur can
cancel at any time b/c there’s no K at all
o Doesn’t matter that Betty has no intention of cancelling either
 Why Court finds they DID have a binding K?
o Court upholds K b/c P can’t “just cancel” the K; it has to discontinue manufacturing that type of oil as
well.
 I.e. can’t cancel the K and then start selling that type of oil to someone else  consideration
 If performance was entirely optional, and seller could actually cancel at any time, then the contract
would be illusory.
 Party giving up right to alternatives = consideration for what other party wanted in return

Harrington v. Taylor, SC of NC, 1945

 Facts: P suffered serious injury while saving D’s life; D promised to pay damages, but then stopped.
 Issue: Whether a voluntary act that saves another’s life is sufficient consideration recognized by law to support
promise made in response to that action
 Holding: Humanitarian act that is voluntarily performed ≠ consideration that would entitle one to recover at law.
 Relevant Rules:
o Two main circumstances where a promise not bargained for might be worthy of enforcement
 Moral Consideration – If promisor acts from a strong sense of duty towards promisee

8
 
Past Consideration – If promisor is seeking to recompense the promisee for a benefit previously
conferred.
o R2K § 86, A Promise for Benefit Received
 A promise made in recognition of a benefit previously received by the promisor from the promisee
is binding to the extent necessary to prevent injustice, but not binding if
 The promisee conferred the benefit as a gift or for other reasons, and the promisor hasn’t
been unjustly enriched (Webb v. McGowin)
o Court imagining that falling block suspended in air and parties make a bargain that
they would’ve made before the bloc kfalls
 Its value is disproportionate to the benefit
 Another traditional exception in R2K § 90(2) is promises made to charitable organizations
 Generally not binding if in the past, or there was no obligation to do the act
 Problem 2-3 (“exclusive dealing contracts”)
o The promise to allow someone to be the exclusive dealer of a product is supported in consideration from
the promisee by an implied promise to use “reasonable or best efforts” to market the product, UCC § 2-
306(2)

Hamilton Bancshares, Inc. v. LeRoy, IL AC, 1985 (option contract)

 Facts: 2 stock purchase options w/ an 80-day option period for P. Each option granted “in consideration of $1.” P
didn’t pay $1, but did put $5,000 down for each option to be applied if option taken. D withdrew options, P
seeking to exercise options.
 Issue: Whether this is an offer (non-binding) or an option contract w/ consideration
 Holding: The consideration to support an option contract consists of some right, interest, profit, or benefit
accruing to one party, or some forbearance, detriment, or loss by the other  earnest money put down as deposit
by P was consideration to support the K, b/c it was a detriment to P & benefit to D.
o Steinberg v. Chicago – Money = valuable consideration, & its transfer for payment or benefit from right
to use it can be consideration to support a contract.
 Relevant Rules
o UCC § 2-205, Firm Offers
 An offer by a merchant to buy or sell goods in a signed writing (under certain conditions) is valid
for a reasonable time, not to exceed 3 months, despite the absence of consideration
o R2K § 87, Option Contract (offer + consideration)
 An offer is binding as an option contract if it’s in writing and signed by the offeror, recites a
purported consideration for the making of the offer, and proposes an exchange on fair terms within
a reasonable time (or is made irrevocable by statute)
 An offer which the offeror should reasonably expect to induce action or forbearance of a
substantial character on the part of the offeree before acceptance and which does induce such
action or forbearance is binding as an option K to the extent necessary to avoid injustice
 P didn’t actually need to pay $1 consideration in recital (some states do though)
 Problem 2-4, Price for car that’s open for one week
o This is an offer, meaning that it can be withdraw
o But Frier thinks it should be a form of option contract or firm offer

Fisher v. Jackson, SC of CT, 1955

 Facts: P quit job as a baker to work as a reporter (for less money, but yearly increases), P arg’d was induced
under oral contract that employment would be for life. P was later fired, P sued for breach of oral agreement.
 Issue: Does P giving up employment at another employer constitute consideration to make lifetime employment
enforceable?
 Holding: In the absence of consideration in addition to the rendering of services incident to the employment, an
“agreement for permanent employment” is no more than a general AW employment hiring.
o No bargained-for detriment that would entail consideration of agreement

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  D didn’t know about P’s bakery job, just b/c P suffered detriment doesn’t mean that D bargained
for that detriment, and tried to induce P w/ offer of “permanent” employment.
o D didn’t promise “infinite employment,” just AW job w/ no set end point.
 Problem 2-5, tenured prof who changes jobs
o More compelling, b/c prof gave up something very specific that the other university knew about and tried
to bargain for, and they weren’t indifferent to this as the employer in Fisher was.
 Five distinct contract formation issues so far observed
o Offer – no legal obligation to keep it open, can be revoked at any time b/c not supported by consideration
 Unless it’s a “firm offer” under the UCC
o Option – this is a contract in its own right, binding b/c it’s supported by consideration, which can even be
nominal under the R2K
o Unilateral contract – an offer is accepted by action alone, not favored in the legal system, it remains an
offer until the act that constitutes acceptance (e.g. I’ll give you $100 if you find my cat)
o Conditional Contract – Contract that’s entered into subject to a condition in the contract
 E.g. Purchase of a condo if a certain mayor is elected, or will sell oil if we continue to make the
type of oil
 In some cases, GF effort to meet the condition seen as condition, if otherwise not there
o Conditional Offer – can look like a unilateral contract, but it’s really just an offer, showing up isn’t
consideration to make it a binding contract, it’s just a condition for acceptance of an offer
 E.g. If you come to this restaurant, I’ll buy you lunch
 Would be different if offering somebody $1k in appearance fees if they show up
 Needs to be a “real bargain”

B. Reliance
Key Concepts
 Reliance = an alternative basis for making promises binding
 Promissory Estoppel R2K § 90
o A promise
o Foreseeable reliance – the promise has to be of such a nature that it would be reasonable to rely on it
o Actual reliance (reliance in fact)
o Injustice absent enforcement
o (Law generally hesitant to grant relief for PE)
o 2nd restatement broadened what claims could be allowed under PE, but allowed courts to cap damages as
justice so required.
 Equitable Estoppel (estoppel in pais) – Available when one party knowingly misrepresents material facts that
are then predictably relied upon by the other. The misrepresenting party is estopped from asserting facts that
contradict its misrepresentation. Key here is it’s based on fraud.

 R139(2) is a good generalizable checklist for thinking about reliance

o Though it deals specifically with reliance in the context of the SOF
o “In determining if justice can be avoided only by the enforcement of a promise, the following circumstances are significant”
 (a) The availability and adequacy of other remedies, particularly cancellation and restitution
 (b) The definite and substantial character of the action or forbearance in relation to the remedy sought
 (c) The extent to which the action or forbearance corroborates evidence of the making and terms of the promise,
or the making and terms are otherwise established by clear and convincing evidence
 (d) The reasonableness of the action or forbearance
 (e) The extent to which the action or forbearance was foreseeable by the promisor

Ricketts v. Scothorn, SC of NE, 1898

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  Facts: Grandfather promised P $2k so she wouldn’t have to work, but her right to the money wasn’t based on her
not working. P stopped working, P sued D’s estate for perf of promise.
 Issue: Whether equitable estoppel exists when the note lacks an essential element of a valid K, b/c here there was
no consideration since there wasn’t bargain between P & D.
 Holding: Court creates promissory estoppel, which is often confused (like court does here) w/ equitable
estoppel. D induced P w/ promise, P in GF relied upon D’s promise and was induced to change her position for
the worse. Having intentionally influenced P to alter her position for the worse on faith of getting money, it
would be grossly inequitable for D’s estate to resist payment.
o Equitable estoppel would be if D made a fraudulent assertion of fact  P’s reliance
o Reliance Damages = winning amount relied on
 Relevant Rules – 4 elements of Promissory Estoppel (PE) in R2K § 90
o Promise
o Foreseeable Reliance
o Actual Reliance
o Injustice absent enforcement
 Problem 2-6, employee retires w/ promise of pension
o Was a bad idea for company to cut off payments, since employee pretty cleared relied on them  PE
 Charitable Promises
o Charitable promises can be binding absent consideration or even w/o reliance (R2K 90(2))
 BUT most courts don’t accept this, would req. actual reliance in order for promisor to be bound

Cohen v. Cowles Media Co., SC of MN, 1992

 Facts: P gave info about a candidate to a reporter and was promised anonymity – report revealed P’s ID, he lost
his job and was reviled.
 Issue: Whether P’s failure to plead promissory estoppel at trial bars him from pursuing it later. Does PE apply?
 Holding: Although there was no K, PE here bars D from using P’s name  damages are due.
o D made a promise to P, reasonably expected P’s reliance, P relied on promise, and P suffered harm, would
be unjust not to enforce agreement.

Midwest Energy, Inc. v. Orion Food Systems, Inc., MO AC, 2000

 Facts: P building a gas station/convenience store that would house D’s products. D warned that no agreement
until notification in writing, D req. certain modifications be made by P, P made requested changes by D, but D
later backed out of deal.
 Issue: Can P claim PE?
 Holding: While there was no enforceable K, there was all elements of PE (promise, foreseeable reliance, reliance
in fact, and injustice absent enforcement)  SJ for D overturned.
o Contract never signed, so no ev for breach of trial claim by P, just the PE claim.
 Dissent: P was unreasonable to rely on D’s alleged promises.
 Problem 2-7, GM and Ypsilanti tax abatements
o Not legally enforceable reliance-based promise on part of GM
 All of the promises hedged w/ general qualifiers (“if there are favorable market conditions,” etc.)
 So it wasn’t clear enough of a promise to support reliance
 Hoffman v. Red Owl – more egregious example of promises  reliance & PE, but also maybe unreasonable
reliance by naïve Ps

C. The Restitution Interest

Key Concepts
 Restitution is both a cause of action and a measure of damages (rarely awarded restitution damages though, even
if can prove had restitution interest)
 Restitution Interest – The interest in getting back to point the parties would have been in had there been no K

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 o If A gave B $5 in creation of K (like in Lucy v. Zehmer, restitution interest = $5 that would have to be
returned from B to A.
 This is a nonbreaching party’s interest in preventing the breaching party from retaining a benefit received by the
D that justly belongs to the P and was conferred onto the D.
 Contract Implied in Fact – A contract that the parties presumably intended as their tacit understanding, as
inferred from their conduct and other circumstances. E.g. you drop your clothes at the drycleaners. This is a K
o Mutual obligation + intent to promise
 Contract Implied in Law / Quasi-Contract / Restitution – A pseudo-contract created by the court; one party
has something they weren’t entitled to in the first place, and in good conscience should either return it or pay its
value; the law implies a contract where no contract existed previously, and dispenses relief according to that
implied contract; the contract implied in law is a legal fiction imposed by the court to remedy justice. This is not
a K.
o Posner – prof service rendered by Dr. to unconscious person on the street, person will have to pay
(emergency situation, imagine if the parties had actually bargained for Dr.’s services)
o A benefit has been conferred and one shouldn’t be able to take it w/o paying (unjust enrichment arg)
o If something is done by a volunteer, that’s different – won’t be compensated for services you voluntarily
rendered.
o Quasi Contract = (a) Benefit from P to D, (b) Appreciation of benefit by D, and (c) acceptance/retention
of benefit by D  inequitable for D to retain benefit w/o paying

Bailey v. West, SC of RI, 1969

 Facts: D bought a horse, discovered it was lame, servant dropped it off at P’s house. P billed D regularly, but D
refused payment and said it wasn’t his. P sued D for restitution damages for 4 years P boarded horse.
 Issue: Did a K implied in fact exist? Did a K implied in law exist?
 Holding: (a) No K implied in fact, no mutual agreement or intent to promise btwn P & D to est a K. (b) No K
implied in law, P didn’t meet essential elements of a quasi-contract (a benefit from P to D, appreciation by D, and
acceptance and retention by D of benefit)
 P as an officious intermeddler, don’t need to compensate somebody who voluntarily does something (unlike Dr.
who gives unconscious P necessary benefit) – consider social values & what parties would do if could bargain

3. Negotiation and Formation of Contract

A. Introduction: The Role of the Courts
Key Concepts
 Traditional Contract Formation: One party (offeror) makes an offer of K to the other (offeree). Offeree may
either extend negotiations by giving a counteroffer or it may conclude the deal by an acceptance.

Sun Printing & Publishing Assoc. v. Remington Paper and Co., Court of Appeals of NY, 1923 (Cardozo)
 Facts: P agreed to buy paper from D from 9/1919 to 12/1920 w/ the price and length of price term set for first
months, price and pricing periods for months from 12/1919 on to be determined in the future, w/ stipulation that
price wouldn’t be higher than current price listed by a 3rd party (agreement to agree). When time came to agree
on new price and term, D said K was imperfect and it wouldn’t be delivering further.
 Issue: Was D within its rights to release itself from K due to lack of a specific length of pricing period? Is it the
court’s responsibility to intervene in Ks and invent new terms to achieve equity?
 Holding: No set price + no set duration  no enforceable contract, agreement to agree ≠ binding contract.
o Contract should be interpreted based on its explicit terms, D not bound b/c falling back on higher-bound
3rd party price term didn’t make up for additional absence of pricing period
o Court shouldn’t interfere w/ individual autonomy of parties, here parties intentionally left terms too vague
 Dissent: We shouldn’t sanction D’s breach of contract, should compel D to accept reasonable price (3rd party $)
 Should/shouldn’t courts intervene?
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 o Is society appreciably benefited if courts strictly enforce K rules?
 Cardozo – yes, biz prioritizes certainty > equity
 But how explicit do contracts need to be/should be?
o To what extent can judicial decisions actually influence patterns of contracting behavior?
 Knowing that ambiguity  judicial restraint
 Will biz’s now decrease vagueness of contracting terms?
 Will biz’s actually decrease vagueness and have resulting, beneficial rise in certainty?
 Subordinating equity to value of enforcing explicit K terms
o Cardozo’s opinion depends on assumption that courts influence people’s behavior
 Not sure how legit his belief is that way courts enforce rules  better social behavior
 Makes dissent view better, b/c admits likelihood that contracts will continue to be vague, so we
should resolve the problem in the most equitable way.
 Cardozo’s view  high stress getting it right in the formation process
 Today, court would adjudicate under UCC § 2-305 (open price terms) – price should be fixed in GF

B. Offer and Acceptance

Key Concepts
 R2K § 24: Offer = manifestation of willingness to enter into a bargain, so made as to justify another person in
understanding that his assent to that bargain is invited and will conclude it.
 R2K § 36, Methods of Termination and the Power of Acceptance – the offer is terminated:
o If the offeree rejects the offer or makes a counteroffer
o At the time specified in the contract, or, failing that, at the end of a reasonable time after the offer is made
o If the offeror revokes the offer
o If either the offeror or the offeree dies or becomes incapacitated
o If the terms of the offer include a condition for acceptance and the condition fails to occur
 Acceptance – An acceptance is consent to the terms of an offer, creating a contract
 Promise – a promise is a declaration of one’s intention to do or to refrain from doing something, it can bind the
person making the declaration to the thing declared
 Counteroffer – a counteroffer destroys the original offer and replaces it for the original offer to accept if he
chooses
 Mirror Image Rules
o R2K § 59 – A reply to an offer which purports to accept it but is conditional on the offeror’s assent to
terms additional to or different from those offered isn’t an acceptance but is a counteroffer
o R2K § 61 – Acceptance which requests a change or addition to the terms of the offer isn’t valid unless the
acceptance is made to depend on assent to the new terms
o Unless an acceptance mirrors the offeror’s terms, neither omitting nor adding terms, it has no legal effect
as an acceptance and operates as a rejection and a counteroffer
o UCC and CISG are more liberal re: mirror image
 R2K § 30, Form of Acceptance Invited
o An offer may invite or req. acceptance to be made by an affirmative answer in words, or by performing or
refraining from performing a specified act, or may empower the offeree to make a selection of terms in
his acceptance
o Unless otherwise indicated by the language/circumstances, an offer invites acceptance in any manner and
by any medium reasonable in the circumstances (Rabbit stole example of binding advertisement)
 R2K § 45(1), Option Contract Created by Part Performance or Tender
o Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory
acceptance, an option contract is created when the offeree tenders or begins the invited performance or
tenders a beginning of it
 E.g. it would be unfair for Uncle William to revoke his promise to nephew 2 weeks before his 21st
birthday, when nephew has already undertaken performance of his end of the bargain
 UCC § 2-206(1), Offer and Acceptance in Formation of Contract
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 o Unless otherwise unambiguously indicated by the language or circumstances,
 An offer to make a K shall be construed as inviting acceptance in any manner and by any medium
reasonable in the circumstances
 An offer to buy goods, if it is ambiguous, can be accepted either by a prompt promise to ship or by
the prompt or current shipment of conforming or non-conforming goods
 R2K §§ 30, 32, and 62 follow this closely
 R2K § 32, Invitation of Promise or Performance
o In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perf what
the offer requests or by rendering the perf, as the offeree chooses
 R2K § 62, Effect of Performance by Offeree Where Offer Invites Either Performance or Promise
o Where an offer invites an offeree to choose between acceptance by promise and acceptance by
performance, the tender or beginning of the invited performance or a tender of a beginning of it is an
acceptance by performance.
o Such an acceptance operates as a promise to render complete performance

Ford Motor Credit Co. v. Russell, MN AC, 1994

 Facts: D sold P a car w/ a higher APR than advertised, P defaulted on payments. P counterclaimed against D’s
deficiency judgment by arguing D breached contract based on initial television ad offer.
 Issue: Is advertisement an offer to the general public so as to bind the advertiser?
 Holding: An advertisement ≠ an offer. An ad is merely an invitation to bargain
o Rationale – seller doesn’t have an unlimited # of good to sell. It was unreasonable for P to believe that the
ad was an offer binding the advertiser (similar to kid in Pepsico case)
o Ads are not usually regarded as legal offers, even when they refer to fairly specific items. An ad
constitutes an offer only when it is clear, explicit, and leaves nothing open to negotiation.
o Quoting a price ≠ intent to offer, unless done to induce immediate acceptance
 Relevant Rules:
o R2K § 26, Preliminary Negotiations
 A manifestation of willingness to enter into a bargain is not an offer if the person to whom it’s
addressed knows or has reason to know that the person making it doesn’t intend to conclude a
bargain until he has made a further manifestation of assent.
 Problem 3-1 (medical school application brochure case)
o Was this an advertisement or an offer?
 This is probably an ad and not an offer, b/c the consumer had reason to know that the person
making the advertisement doesn’t mean it as such
 And it would be impossible for the alleged offeror to honor the contract if accepted

Davis v. Satrom, SC of ND, 1986

 Facts: P and D negotiating sale of a mobile home park. P sent “letter of intent” to D’s real estate agent that
contained T&Cs. D changed some of the conditions and returned it to P, then P submitted new terms w/ an
unsigned agreement. D added new conditions, incl agreement subject to sellers’ attorney, returned to P. Ds real
estate agent later told P they wouldn’t be selling, P sued arguing that D had agreed to terms
 Issue: Did the parties have an enforceable contract?
 Holding: No, K never became effective. D’s modifications were a counteroffer, not an acceptance. P’s final
response was an acceptance to terms that included attorney provision. Attorney didn’t approve the K (a condition
of D’s counteroffer)  specific performance of contract denied.
o No K, b/c never unqualified acceptance of offer w/o intro of new terms
 Relevant Rules:
o R2K § 36, Methods of Termination of the power of Acceptance
 An offeree’s power of acceptance may be terminated by:
 Rejection or counteroffer by the offeree
 Lapse of Time
 Revocation by the offeror
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  Death/incapacity of offeree
 Non-occurrence of condition to the offer
o Greenberg v. Steward – Contract acceptance requires:
 Meeting of the minds btwn the parties w/ respect to all of the T&Cs of the sale, and
 There must be unqualified and absolute acceptance of the an offer

Merced County Sheriff’s Employees’ Ass’n v. County of Merced, CA AC, 1987

 Facts: Both sides in 2 separate negotiations (firefighters and sheriffs) thought they had made a K, but had
interpreted terms differently. In sheriff’s negotiations, court determined that the county didn’t act reasonably in
formulating its understanding of the meaning of the disputed term. In firefighters, determined both parties equally
at fault.
 Issue: Is a K enforceable if there’s a misunderstanding btwn the parties?
 Holding: There’s no manifestation of mutual assent (a requirement for a valid contract) to an exchange if the
parties attach materially different meanings to their manifestations and neither party knows or has reason to know
the meaning attached by the other or each knows or each party has reason to know the meaning attached by the
other.
o In sheriffs, County had reason to know sheriffs meaning, so K enforceable w/ sheriffs’ interpretation
o In firefighters, both parties were at fault, so no K.
 Relevant Rules
o R2K § 19 – The manifestation of assent may be wholly/partly by written/spoken words or acts
o R2K § 20, Effect of Misunderstanding
 There is no manifestation of mutual assent to an exchange if the parties attach materially different
meanings to their manifestations, and
 Neither party knows or has reason to know the meaning attached by the other, or
 Each party knows or has reason to know the meaning attached by the other
 E.g. Peerless example, no meeting of minds
 “What is chicken case” should’ve been resolved under doctrine of misunderstanding
 The manifestations of the parties are operative in accordance w/ the meaning attached to them by
one of the parties if
 That party doesn’t know of any different meaning attached by the other, and the other
knows or has reason to know the meaning attached by the first party (e.g. sheriffs
agreement)
 Doesn’t have to be identical understanding of terms, but it has to be enough that there’s a core of
common meaning sufficient to determine their performances w/ reasonable certainty or to give a
reasonably certain basis for appropriate legal remedy.
 Problem 3-2, Prof who leaves the college knowing its interpretation of re-instatement
o No, per R2K § 20, he can’t win, b/c he knew their understanding of the terms, and knew it was different
from his own.

Ardente v. Horan, SC of RI, 1976

 Facts: P bid on D’s house for sale; after D stated offer was acceptable, P prepared an agreement and sent it to D
w/ a check and a letter asking for confirmation that several items were included (like furniture) in the transaction,
as they’d be difficult to replace. D then refused to sell items or house, returned check to P. P sued for sp perf
 Issue: Was the letter a counteroffer, or a valid acceptance?
 Holding: Since P’s letter of acceptance was conditional (acceptance if furniture incl), it was not a valid
acceptance. In order for an acceptance to be valid, it must be definite and unequivocal. It can’t impose additional
conditions on the offer or add limitations.
o Court recognizes an acceptance may be valid despite conditional language if the acceptance is clearly
independent of the condition
 Relevant Rules:
o R2K § 59, Purported Acceptance Which Adds Qualifications

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  A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms
additional to or different from those offered ≠ acceptance, but is a counteroffer
o R2K § 61, Acceptance Which Requests Change of Terms
 An acceptance which requests a change or addition to the terms of the offer isn’t valid, unless the
acceptance is made to depend on an assent ot the new terms
o Together, these two concepts  Mirror Image Rule
 Unless an acceptance mirrors the offeror’s terms, neither omitting nor adding terms, it has no legal
effect as an acceptance and operates as a rejection and a counter offer.
 Frier – don’t be a piggy during negotiation, and don’t do these two things:
o (1) Tendency to want to get things that you don’t bargain for
 E.g. P wanting to incl furniture in house transaction w/o losing opp to buy the house, trying to
insert terms after deal concluded
o (2) Desire to have the other side bound when you’re not
 This goes against the idea of mutuality of obligation
 Problem 3-3, Prof who signs under protest
o His addition of “under protest” was probably not a “counter-offer” and was acceptance, so probably
wouldn’t have a basis for suing the school who then denied his purported counter offer

Mailbox Rule
 “Mailbox Rule” (still the rule at common law), R2K § 63
o A “mailed” (what does this mean today?) acceptance becomes effective when acceptance passes out of
the control of the offeree (i.e. goes into the mailbox, offeree hits “send” from his email)
 BUT all other contract formation communications besides acceptance are effective at the time of
receipt (revocation, offer, etc.)
o Note that you can vary from the default mailbox rule if you are the offeror and stipulate the variation
 Since the offer is the master of the offer
o Two Exceptions
 Options contracts are formed only when the acceptance is received by the offeror, R2K 63(b)
 Under the CISG, international sales of goods follow the civil law rule that acceptance only occurs
at receipt.
 Difficult problems w/ mailbox rule
o Overtaking Rejection – By letter, A offers to sell B a drill press for $5k. B mails A a letter of
acceptance, but before A receives the letter, B telephones to reject the offer. Is the rejection effective?
 No, there’s a contract.
 What if, relying on rejection, A sells to a 3rd party before receiving B’s acceptance?
 The rejection might then be effective, but only on basis of PE to the extent that rejection
was construed as a fact and relied upon by A
o Overtaking Acceptance – By letter, A offers to sell B a horse for $3k. B mails A a letter of rejection, but
before A receives the letter, B mails a letter of acceptance. Is B’s acceptance effective?
 Yes, under the trad rule, but b/c of change in R2K § 40, it’s not necessary
 Does it matter if A receives rejection before the acceptance? What if A relies on rejection?
 Note that R2K § 40 changes the rule w/ respect to overtaking acceptance, and the new rule
is whatever communication arrives first governs transaction since it would be unfair to
have A rely on the rejection that he receives before acceptance, even if B accepted before
A received rejection
o But note then that B has in effect a negative option K, b/c binding once put in mail
as rejection, but he could alter and accept by phone before reaches A
o Overtaking Revocation – Corporation A sends corporation B a letter offering to sell an airplane for
$10M. A short time later, A mails a revocation of the offer, but before B receives A’s revocation, it mails
an acceptance. Is the acceptance effective?
 Think so, b/c mailbox rule applies to acceptances but not revocations
 Problem 3-4, JJ White and the RA, and Target online shopping
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 o (1) JJ’s acceptance would be effective, since the overtaking revocation wasn’t received by JJ before he
accepted the offer sent by email
o (2) Hard problem, b/c the computer interface is both advertisement and bargain making center
 Target probably okay in cancelling the deal, assuming that they didn’t take the money yet, since
legally all they did was refuse to accept consumer’s offer – it’s the same as you putting an
incorrectly labeled good on checkout counter and them saying we can’t sell for this price
 What if Target ran out of car seats, must they still honor it?
 Would it change if the confirmation email said it was “accepted”? Yeah probably be binding
o Lots of strain being put on the old rules
 Does it matter that no human being involved in the sale? Usually nah these days
 What about soft drink bottle cap where they give too many winning caps/letters (or Piggy case)
 End it immediately and try to revoke offer if able to, have to pay redeemers, try to settle w/
people who collected everything but haven’t redeemed

Mid-South Packers, Inc. v. Shoney’s Inc., 5th Circuit AC, 1985

 Facts: P wrote a proposal to D that set forth prices and terms for sale of pork, letter also said D would be
informed 45 days before any adjustment in price. P then said price would be 10¢/lb higher b/c error in orig calc,
D continued to buy form P until final order, when it offset the amount due on the invoice by amount allegedly
overcharged by P.
 Issue: Did the initial letter establish a long-term requirements K? Was P bound to continue selling at orig price?
Was P’s proposal just a “firm offer” that was revocable after 3 months? Was each purchase order between P and
D a new contract?
 Holding: No long-term requirements K was formed, b/c there was no exclusivity – D had right to change
suppliers, each purchase order was a separate K for amount stated at the price P asked for.
o At most, letter was just a “firm offer,” which can be rescinded after 3 months
o Shoney’s could’ve reserved rights by listing prejudice (“under protest”) under UCC § 1-308(a)
 Relevant Rules:
o Requirements Contract (RST §§ 71, 79)
 A contract in which a buyer promises to buy and a seller to supply all the goods or services that a
buyer needs during a specified period. The quantity term is measured by the buyer’s requirements.
A requirements contract assured the buyer of a source for the period of the contract.
o UCC § 2-205, Firm Offer
 An offer by a merchant to buy or sell goods in a signed writing, which by its terms gives
assurance that it’ll be held open, isn’t revocable, for lack of consideration, during the time stated
or if no time is stated then for a reasonable time, but in no event may such period of irrevocability
exceed 3 months, but any such term of assurance on a form supplied by the offeree must be
separately signed by the offeror.
o R2K § 41, Lapse of Time
 An offeree’s power of acceptance is terminated at the time specified in the offer, or, if no time is
specified, at the end of a reasonable time
 What is a reasonable time is a question of fact, depending on all circumstances existing when the
offer and attempted acceptance are made
 Additional mailbox rule
o R2K § 42, Revocation by Communication from Offeror Received by Offeree
 An offeree’s power of acceptance is terminated when the offeree receives from the offeror a
manifestation of an intention not to enter into the proposed contract
o R2K § 43, Indirect Communication of Revocation
 An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent
w/ an intention to enter into the proposed K, and the offeree acquires reliable info to that effect
  R2K §§ 41-43, b/c at Common Law, the offeror’s promise to keep the offer open isn’t
supported by consideration, and may be revoked at will (exception = option contracts in R2K §87)

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Double AA Builders, Ltd. v. Grand State Const. LLC, AZ AC, 2005
An offer can be accepted by reliance when the offeree relies on the offer to his detriment, at least in the construction
bidding context – in this sense, the reliance forms the consideration that accepts the offer and makes the promise binding
 Facts: P is a general contractor, D is the subcontractor. P relied on D’s quoted bid price in its bid to Home Depot,
got the bid, then D said they couldn’t do it at bidded price. P sued for difference btwn D’s bid and ultimate cost to
P to perf the same work.
 Issue: Whether a subcontractor’s bid is enforceable/binding promise by the PE doctrine
 Holding: Yes, all elements of PE are met. Sub made promise that bid was good for 30 days, sub could foresee
reliance on that bid, general contractor reasonably relied on sub’s bid, and suffered harm  needing enforcement
 PE = R2K § 90
 Drennan (Traynor), articulated in R2K § 887(2), offer which offeror should reasonably expect to to induce action
or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such
action or forbearance is binding as an option contract to the extent necessary to avoid injustice

C. Negotiation and Closure

Key Concepts
Business negotiations today are FAR from ordinary legal template of offer and acceptance
 In actual cases, difficult to tell when parties moved from negotiating to closure
 During negotiations, parties may signal their growing commitment to bargain by preparing “intermediate docs”
that describe their consensus in parts of the final contract? What’s the status?  Objective theory of contracts can
lead courts to discover the existence of K despite absence of final formalities
 Today (opposite from Sun Printing), courts may imply a contractual duty to negotiate in GF on remaining
differences in “agreements to agree”

Situation Management Systems, Inc v. Malouf, Inc, MA SC 2000

In complex deals, parties may have very different conceptions about when an agreement has actually been reached.
 Facts: P made a somewhat ambiguous oral promise to D that they’d sign a 5 year deal, based on promise that D
would buy another company. P then refused to sign 5 year deal and came up w/ a K significantly different from
past Ks. Negotiations failed  P sued for cost of products, D counterclaimed for breach of K.
 Issue; Did a K exist btwn SMS and Malouf (LMA) even though the deal wasn’t finalized and signed?
 Holding: Yes, enough ev from which jury could reasonably determine that when SMS assured LMA of SMS’
commitment for 5 years, in return for LMA’s purchase of 3rd party company, the parties created an enforceable
contract
o LMA had no reason to expect 5-year agreement came w/ new terms
o SMS knew LMA buying comp based on reliance that 5-year agreement w/ SMS wouldn’t incl new terms
o Prior biz & personal relationship  LMA reasonably inferred material terms of contract were settled and
that written contract would just be a formality
o SMS was looking to a written contract, but court says assurances of exec sufficient for a K
o It’s important that this seen to be an actual K and not just a PE claim, b/c reliance would only  reliance
damages (cost of buying comp), but w/ a K breach you get expectation damages.
 What should SMS have done?
o Made intent not to be bound clear, been explicit that 5 year K coming w/ new terms.
 What should LMA have done?
o Get it in writing, too big a contract to do just orally

Arnold Palmer Golf Co. v. Fuqua Industries, Inc, 6th Cir. AC, 1976
Court taking a more comprehensive approach to see if parties reached an agreement, by looking at context
 Facts: P and D negotiated over use of manufacturing plant, D acquired plant and parties had Memo of Intent,
public signing, and D’s press release, all indicating agreement. D withdrew from agreement, P sued, D got SJ
 Issue: Did the parties enter into a K, even though agreement wasn’t a final version?

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  Holding: There’s a factual issue as to whether the parties intended to be bound by the MOI. Disagreement about
the inferences to draw from memo’s language  trier of fact (jury/judge) should determine these inferences
o Possible parties treated final written contract as mere formality
o MOI used unqualified language that suggests intent to be bound, press release further suggests D felt
obligation to be bound by MOI
o Permissible to refer to extrinsic ev to determine whether parties intended to be bound by MOI
 Relevant Rules
o R2K § 27, Existence of Contract Where Written Memorial is Contemplated (what if written
contract treated by parties as a formality?)
 Manifestations of assent that are in themselves sufficient to conclude a K won’t be prevented
from so operating by the fact that the parties also manifest an intention to prep and adopt a written
memorial thereof, but circumstances may show that the agreements are just prelim negotiations
 Cmt c: Among the circumstances which may be helpful in determining whether a K has been
concluded are:
 The extent to which express agreement has been reached on all the terms to be included
 Whether the K is of a type usually put in writing
 Whether it needs a formal writing for its full expression
 Whether it has few or many details … etc. etc.

Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc. 7th Cir. AC, 1989
7th circuit using a more four-corners approach to see if the parties reached an agreement – since it said they didn’t on
paper, then no K.
 Facts: P and D were negotiating an agreement for purchase of D’s assets. P included in all of the docs, incl a
General Letter, statements like “subject to a definite agreement” and “subject to the approval of shareholders and
board of directors,” saying deal wasn’t final. D backed out of negotiations, P sued for breach of K.
 Issue: Did the letter of intent  K, even though the agreement was not in the final version?
 Holding: No, there was no agreement – all of the statements in the LOI saying it wasn’t final must be taken on
their face value, D had no obligation to sell only to P.
o Easterbrook – “Intent can only be found in unambiguous language” (contrary to Arnold Palmer’s
suggestion that circumstances can suggest intent).
 Arnold Palmer (6th Cir.) v. Empro (7th Cir.)
o Can we reconcile these cases?
 Each has a memo/letter of intent
 Each has some ability for final approval (“subject to” or “board approval”)
o Probably makes a difference that the memo of intent in Arnold Palmer was negotiated, whereas the letter
in Empro just drafted by one party.
o + Fuqua (in Arnold Palmer) purchased a company, so this could be performance (and therefore reliance)
o BUT real difference might just be in judicial attitude and interpretation
 6th Circuit – Wondering about intent and uses circumstantial evidence and approaches the situation
from a more subjective framework w/ a wider factual scope
 7th Circuit – More concerned w/ the terms in the four corners of the document. Intent in contract
law is objective rather than subjective. Doesn’t care about parol evidence – if intent were wholly
subjective, there would be no parol evidence rule.

Copeland v. Baskin Robbins USA, CA AC, 2002

An agreement to negotiate in GF is enforceable, an agreement to agree isn’t. Courts will sometimes help parties that
have agreed in principle but not in specifics to fill out their terms, but they won’t complete the entire K for them.
 Facts: D selling ice cream plant, P expressed interest. Parties began negotiations, but P made clear purchase of
plant contingent on D agreeing to purchase ice cream that P manufactured. Letter stated “BR would agree,
subject to a separate co-packing agreement and negotiated pricing..” D eventually said no co-packing agreement.

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  Issue: Can a party sue for breach of a K to negotiate an agreement, or is such a “contract” merely an
unenforceable “agreement to agree?” If a party establishes liability for breach of contract to negotiate an
agreement, can he sue for expectation damages?
 Holding: A contract to negotiate an agreement is distinguishable from an “agreement to agree,” and can be
formed and breached like any other contract. But P can’t collect expectation damages, can only collect reliance
damages, which P disavowed/can’t prove.
o If, after GF efforts, parties fail to reach an agreement on the terms in issue the K to negotiate is still
deemed to have been performed.
o P can’t get expectation damages, b/c can’t prove what he lost (no terms decided on)
 Relevant Rules (discussed, but not applied)
o UCC § 2-305, Open Price Term
 The parties if they so intent can conclude a K for sale even though the price isn’t settled. In such a
case the price = a reasonable price (determined by the court) at the time for delivery, if nothing is
said as to price, price is left to be agreed by parties, and they fail to agree, price is to be fixed in
terms of some agreed market…
 A price to be fixed by the seller or by the buyer = price for him to fix in good faith
 But where parties intend not to be bound unless the price be fixed or agreed and it isn’t fixed, then
there’s no K
o UCC § 2-204(3), Formation in General
 Even though one or more terms are left open, a K for sale doesn’t fail for indefiniteness if the
parties have intended to make a contract and there’s a reasonably certain basis for giving an
appropriate remedy.
o UCC § 1-304, Obligation of Good Faith
 Contract  obligation of GF in its performance & enforcement
 No such obligation during negotiation
o R2K § 205, Duty of Good Faith and Fair Dealing
 Contract  duty of GF & FD in performance/enforcement
 Comment C – doesn’t deal w/ bad faith in contract formation
 But egregious activity could have other penalties
 Why use indefinite contracts?
o Too much time to specify all the terms for a routine transaction
o Parties’ reluctance to raise difficult issues for fear that the deal may then fall through
o Simply impossible to deal w/ every remote contingency that could arise
 White worried courts finding of a K to negotiate in GF another way for court to develop creeping duty to
negotiate in GF. Generally, 4 ways that pre-contractual liability has developed, and the K/no K dichotomy has
been undermined:
o Unjust enrichment resulting from the negotiations
  restitution interest, e.g. architect who prepped plans during negotiation and other party used the
plans w/ another architect
o Misrepresentation made during the negotiations
 Like the public contracting case, somewhat based in tort
o Specific promises made during the negotiations
  reliance remedy, e.g. Red Owl or Midwest Energy gas station case
o An agreement to negotiate in good faith
 E.g. Baskin Robbins
 Problem 3-6, Bethlehem steel
o Should the court fill out the terms for the parties?
o Is there evidence that this was contemplated, or was it rather that the deal would fall through if no
agreement?
o Often one party wants the court to provide K terms, other party wants to get out of K altogether.

D. Good Faith in Contract Formation

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Key Concepts
 In Common Law, a duty of good faith arises only after the contract is concluded.
o UCC § 1,304, Obligation of Good Faith – Every K or duty within the UCC imposes an obligation of GF
in its performance and enforcement.
o R2K § 205, Duty of GF and FD – Every contract imposes upon each party a duty of good faith and fair
dealing in its performance and its enforcement (NOT in pre-contractual state.
 “Culpa in Contrahendo,” “fault in making of a contract” (a Civil, European Law concept)
o Pre-contractual obligations arise from a legally imposed duty of care – since negotiations can often
involve $$$, each party is expected to avoid deliberate/negligent conduct that might induce reliance.
 Liability limited to reliance damages.
 Should liability build gradually, or come all at once when the contract is formed?

Racine & Laramie v. Department of Parks and Rec, CA AC, 1992

There is no duty to negotiate in good faith in US law, GF is limited to performance of the K
 Facts: P was in a 40-year K as concession stand, P began negotiations w/ D for modified agreement, negotiations
broke down. ¶ 25 of agreement said “the parties may by mutual assent agree to modifications or additions” to K,
P felt this meant that once negotiations started, must be in GF. Jury found D guilty of breach of covenant of GF
in its negotiations of an amendment/new K to concession agreement.
 Issue: Did D have an implied duty to negotiate in GF?
 Holding: No, D had no obligation to negotiate new terms of concession K, and US law has no duty to negotiate in
GF, even if it would be an amendment to existing K.
o There is no duty to negotiate in good faith
o No contract  no covenant of GF to break
o Negotiation  parties can break off for any reason/no reason at all, no binding GF obligation unless in K

New England Insulation Co. v. General Dynamics Corp, MA AC, 1988

 Facts: P submitted a bid to work on project for D, P was told that the bids would be kept secret and would be
assessed after all of the bids had come in. D though was planning to go w/ another sub all along, had no intention
of reviewing P’s bid, and also shared P’s bid w/ a competitor.
 Issue: Could there have been an implied contract between P and D?
 Holding: Yes, complaint suffices to warrant analysis to see if P may recover damages.
o Just b/c bids are non-binding invitations for offers, doesn’t mean that D can simply make false
representations in its invitations to bids which it knew/should’ve known would be relied on.
o Stipulated conditions of bid (not sharing, would be considered)  implied contract to follow conditions
 Hayer Products v. U.S. (cited here) – First case that said rigged govt. auctions  reliance liability
 Parties bear the loss of expenditures in deal making if the deal falls through.
o No reliance damages for the expenditures incidental to negotiating a deal (Empro)
o Why? Difficult to determine at what point obligations arose, could have a chilling effect on negotiations,
could have acceleration effect of increasing pressure on parties to come to a hasty conclusion.
 Problem 3-7, landlord installs new wiring for the party, who then decides not to enter a lease case
o Should probably be unforgiving, parties can protect themselves, not courts’ job to bail them out.
o Don’t want parties running up reliance costs and then passing them on to bargaining partner.
 Should build risk of deal falling through into actions/decisions themselves.

E. Problems With Standard Form Contracts

Key Concepts
 Standard/Form Contracts/Boilerplate (“contracts of adhesion”) ubiquitous in modern commercial life –
substantially altered K law
o Can reduce costs of drafting a standard contract repeatedly, makes biz’s legal risks more manageable and
less costly
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 o But, also tends to facilitate efforts by one party to construct K according to their wishes, can accentuate
inequalities of bargaining power.
 UCC § 2-207
o In light of the development of form contracts, UCC tried to deal w/ battle of forms w/ 2-207
 1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance
even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent
to the additional or different terms.
 (2) The additional terms are to be construed as proposals for addition to the K. Between merchants such terms become part of the contract unless:
 (a) the offer expressly limits acceptance to the terms of the offer;
 (b) they materially alter it; or
 (c) notification of objection to them has been given or is given within a reasonable time after notice of them is received.
 (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the
parties do not establish a contract. In such case the terms of the contract consist of those terms on which the writings of the parties agree, together
with any supplementary terms incorporated under any other provisions of this Act. (only go here if K fails to be formed under subs 1)
o Accepts ordinary rules of contract formation (esp §§ 2-204 & 206), but tries to deal w/ issue of when B
sends in an order for computer specifying model and price only and S responds w/ acceptance form that
accepts order, but adds list of new terms favorable to S  If they proceed as if they have a binding K, and
B becomes upset over computer’s quality, under traditional K, rule holds their K was formed on seller’s
terms. “Last Shot” Rule
 2-207 trying to avoid inequalities of “last shot” rule
o Caution – true that 2-207 mainly concerned w/ boilerplate, NOT true that problems w/ boilerplate mean
you look first to 2-207
o UCC § 2-207 summarized:
1. Deals w/ forming a K; ensures that an exchange of documents which do not exactly match may still
form a K (“additional or different”).
 K formed UNLESS acceptance is expressly made conditional on assent to additional/different
terms
 Ardente v. Horan wouldn’t have been expressly conditional terms… would have constituted
acceptance under 2-207
2. Deals w/ interpretation of a K after formed in (1), tells which of the offeree’s proposals become part of
K (“additional”)
 They become part of the K, unless:
o The offer expressly limits the acceptance to the terms of the offer
o They materially alter it
o Notification of objection to them has already been given or is given within a reasonable
time after notice of them is received.
 Subsection 2 should only be used when subsection 1 is met. A tendency to jump straight to
subsection 2 by students, don’t do that.
o If dining room furniture in Ardente didn’t materially alter K, it would go in K; if it did
materially alter, it wouldn’t
3. (don’t’ turn here too fast) If parties proceed w/ the contract w/o explicit consent to additional terms, this
section applies. Then the terms that the parties agreed upon would be in the K, but the ones that were in
contention would not.
 “Different” v. “Additional” terms
o Confusion among courts about subsection 1’s reference to “additional or different,” followed by
subsection 2’s reference only to “additional” terms
o Courts have taken 3 different approaches (Frier prefers knockout rule):
 (1) Different isn’t to be distinguished from additional in 2-207(2) analysis
 (2) Different terms is to be distinguished from additional terms, and any different terms are
simply discluded from the K
 (2) Different or conflicting terms get knocked out and the default UCC rules & warranty rules
govern. Comment 6.
 “Rolling Contracts”

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 o There’s a K after a phone call to place the order, but it isn’t fully formed with all of the terms until
after 30 days, or until customer receives the product and has chance to return it (Hill v. Gateway)
 Some standard boilerplate terms, usually exist to take away the default rules provided by the UCC
o Limitation of warranties
o Limitation of legal remedies
o Forum selection
o Choice of law
o Attorneys’ fees
o Limitation on right to modify a contract
o Limitation on principles of interpretation
o Limitation on assignment and delegation of a contract
o Arbitration clause
o Integration/Merger clause
 Problem 3-8 (battle of the forms)
o (1) Yes, Buzz’s terms apply and become part of the contract
o (2) No, an essential term of the contract is in contradiction, so this would be a counteroffer
o (3) This would be a counteroffer at common law and if the parties just begin to perform, then the last shot doctrine
would govern and all of Sally’s terms would control; under 2-207, Sally’s terms would arguable fall into the last
clause of (1) since the offeree made agreement expressly conditional on the assent to the additional terms, and in
this case it would be a counter offer accepted by Buzz; or they may just be additional terms that are incorporated
as between merchants unless they are material (and they probably are, in which case they would not) or Buzz
rejects them in 10 days, or if Buzz’s offer had been expressly limited to the terms; we could then proceed with
knockout rule to the extent that it is applicable

Gardner Zemke Co. v. Dunham Bush, Inc., NM SC, 1993

When using UCC § 2-207, when appropriate we can use the knock out rule to get rid of different terms and replace these
w/ UCC default terms in order to form the agreement.
 Facts: P ordered a part for an AC from D using an order form w/ a basic warranty provision for the part. Offeree
responded w/ the part and a reply receipt that contained numerous warranty disclaimers. The part broke.
 Issue: Were D’s actions a counteroffer, or an acceptance?
 Holding: This is a K construed under 2-207. Offeree’s response w/ new terms is not a counteroffer but is an
acceptance w/ proposals for different terms  confusion on what to do w/ different terms. Court ultimately
decides that using Comment 6 is best option “different terms cancel each other out and the existing applicable
code provisions stand in their place,” knock out rule.
 Relevant Rules
o UCC § 2-207
o Knock out rule, when different terms cancel out and the UCC terms stand in their place.
 Takeaways:
o A responding doc will fall outside of the provisions of 2-207(1) and convey a counteroffer only when its
terms differ radically from the offer, or when “acceptance is expressly made conditional on assent to the
additional or different terms.” This must be clearly and unequivocally communicated to the offeror.
o Undickered boilerplate language will not propel transaction into “expressly conditional” language

Step-Saver Data Systems v. Wyse Technology, 3rd Cir. AC, 1991.

When terms represent a material alteration to a pre-existing K, those terms aren’t included in the K per UCC § 2-207(2)
 Facts: P ordered and continued to order software license from D. P ordered over the phone, when software
arrived there was a set of terms claiming to be the final K on the box top of the product (very favorable to D),
terms took effect when P opened the box.
 Issue: Under § 2-207, were the terms of the box-top license incorporated into the parties’ agreement?
 Holding: No, the telephone order was the K, not opening the box. Terms on box were at best an acceptance or
confirmation, terms included a material alteration to the previously est K, so not included per 2-207(2)
o Box-top terms aren’t necessary for there to be a contract, K sufficiently definite w/o box-top
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 o Box-top terms weren’t explicitly conditioned on assent
o P continuing to order program, even after saw box-top terms ≠ incorporation of terms
o Can’t incorporate box-top new terms, b/c they materially alter the agreement.
o Also doesn’t seem reasonable for D to expect P to “reject a counteroffer” by sending programs back
 UCC § 2-204 (2), Formation in General – An agreement sufficient to constitute a K for sale may be found even
though the moment of its making is undetermined
 Takeaways
o UCC provides for express and implied warranties if the seller fails to disclaim them (K wouldn’t be found
insufficient w/o them)
o Not necessarily true that software is a good under UCC as court treats it here
 Problem 3-9 (mIcrodot and software program)
o All of (1), (2), and (3) factual scenarios would constitute a contract under 2-207, with (3) especially constituting a
contract under 2-207

Carnival Cruise v. Shute, SCOTUS 1990

Introduces idea of the “rolling contract,” at least some contracts will be upheld even though their full terms aren’t
known by the consumer until after the essential agreement is agreed upon (e.g. to pay for the cruise)
 Facts: P bought non-refundable tickets for cruise, received terms after payment. Terms req. P to litigate any
claims against D in FL, P wanted to litigate in WA.
 Issue: Are non-negotiated terms presented after non-refundable payment binding on a consumer?
 Holding: Yes, they’re binding.
o Indicated SCOTUS willing to uphold some consumer Ks even when their full terms weren’t
communicated until after the basic K had been arranged and paid for
o Case = barrier against consumers who would escape from form Ks merely b/c they weren’t capable of
renegotiating terms.
o Whole boilerplate, not just forum terms, were binding so long as not unduly oppressive/unconscionable

Hill v. Gateway, 7th Cir. AC, 1997 (Easterbrook)

Rolling contract – this has come to define consumer contracts. In a sense, such contracts aren’t made complete until the
final terms received by the consumer, in some ways undermining UCC 2-207 and reverting back to the last shot rule. In
other ways, could be viewed as a unilateral contract that’s accepted by the conduct of the consumer (not returning goods
= acceptance, this sort of makes sense since they have an option to return it within certain time period, so K not binding
on them until time period over, but seller can’t renege).
 Facts: P ordered a computer that came w/ shrink-wrap terms, incl arb clause. P had problem w/ computer and
tried to litigate, but D arg P assented to arb terms by not returning computer within 30 days.
 Issue: Are post-purchase terms enforceable?
 Holding: yes, post-purchase terms are enforceable, concept of a “rolling contract.”
o This decision is pretty hard/impossible to reconcile w/ Step Saver
o It’s a sale of goods, so UCC § 2-207 should apply.
 But Easterbrook completely ignores 2-207, says that it’s only for when 2 forms are used, not one
(even though by its own terms this is 2 forms). Easterbrook just flat out wrong here.
o You should assume that judges will rule like Easterbrook – whatever confusion there is in his analysis
(and there’s a lot), people willing to accept the creativeness to deal w/ change in contract biz
 Rolling Contracts – Easterbrook and others seem to accept their presence.
o Idea – there’s a K after initial order or phone call, but it isn’t fully formed w/ all of the terms until after 30
days, or until consumer receives product and has chance to return item and reject terms
o Convenience of not having to agree to all terms up front
o But what protections still exist for a consumer? Easterbrook says…
 Right of return within a reasonable period
 Terms can’t be too onerous or courts will find them unconscionable/unenforceable
 Executive agency regulations
 Non-governmental consumer protection orgs
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  And the good old market would disincentivize anti-consumer terms (… sure)
o Peggy Radin’s response
 By contracting, you can waive certain default background rights
o Legislative
o Constitutional
o Common law
 You can get rid of remedies to which you are entitled
o This is a “democratic and normative degradation”
 The “Chicago philosophy” is more concerned with the market as a whole, not the individual consumer
 So we should have tort remedies for bad (defective) boilerplate
o But then there is the question about whether or not the terms would actually be defective
under either the consumer expectations or risk utility test
 So the FTC and other should regulate more heavily, since neither classic contract law
(or tort law, perhaps) is not the best way to regulate this
 Additionally, firms don’t actually pass on savings they get from using boilerplate
 Since the market is not completely competitive and there is not perfect information
 And some rights cannot be sold because of due process concerns about unalienable rights
 “Click-wrap” contracts are usually okay, but “browse wrap” contracts aren’t
o Advent of internet sales reduces the importance of rolling contracts, since now the consumer can at least
theoretically look at all of the terms and agree before actually purchasing the product.

C&J Fertilizer v. Allied Mutual Insurance Co., SC of Iowa, 1975

Reasonable Expectation another way to deal w/ the battle of the forms – courts won’t enforce K that goes against
reasonable expectations of the parties. This approach is not widely followed, except for some insurance cases.
 Facts: P bought an insurance policy that required that clear evidence of a break-in that left physical marks be
present before insurance would compensate for loss incurred through burglary. P aware of this provision, but
didn’t closely read policy and argues that it was unreasonable to expect that in an insurance policy.
 Issue: Can P recover under the doctrine of reasonable expectation?
 Holding: Yes, where the other party has reason to believe that the party manifesting assent to an agreement
wouldn’t do so if he knew that the writing contained a particular term, that term isn’t part of the agreement.
 Dissent: Overreaching to apply RE doctrine, P knew definition was there, can’t claim didn’t expect it to be.
 Relevant Rules
o R2K § 211(3), Standardized Agreements (Frier says not to use, courts don’t like using broad rule)
 Where the other party has reason to believe that the party manifesting such assent wouldn’t do so
if he knew that the writing contained a particular term, that term isn’t part of the agreement.
o Policy of courts to interpret insurance policies against drafter. Almost never used except re: insurance.
 Some methods for dealing w/ standard form contracts:
o Traditional View – Mirror image/last shot
o UCC § 2-207 – Such terms often excluded if sale of goods irreparably concluded, unless parties insist on
inclusion
o Reasonable Expectations – Insurance, reading out of unfair terms
o Legislative protection for consumers.
 Problem 3-1, signing arb agreement while distressed before abortion
o Arb agreement likely enforceable, since it’s not an unreasonable expectation (unless signed during duress,
or so distressed couldn’t actually consent).

F. The Statute of Frauds

The Statute of Frauds is designed to protect against fraud of an orgal K in court, but Ks singled out seem to be very
arbitrarily decided, especially the one-year provision.
 What’s the purpose of SoF?

25
 o UCC takes a minimalist view – concerned mainly w/ possibility that someone might fraudulently assert
existence of a K.
o Restatement cases are more demanding.
 R2K § 110
o Lists the types of contracts, list basically from English 1677 statute
o Two types of contracts included
 (1) Contracts thought to be generally more important:
 Contract for the sale of an interest in land
 Contract that is not to be performed within 1 year from the making thereof
 Sale of goods for $500 (now governed by UCC)
 (2) Contracts that are potentially dangerous to promisors if made on a whim w/o proper
determination, and that can be made on an almost unilateral basis
 e.g. Suretyship, like when one spouse says they’ll answer for debts of their spouse
 UCC § 2-201, Formal Requirements; Statute of Frauds
o § 2-201(1) Sale of goods > $500 isn’t enforceable unless there’s some writing sufficient to indicate that a
K for sale has been made btwn the parties and signed by the party against whom enforcement is sought
o Important Exceptions
 2-201(2) Btwn merchants if within reasonable time a writing in conformation of the K and
sufficient against the sender is received and the party receiving it has reason to know its contents,
it satisfies the requirements of subs 1 against such party, unless written notice of objection to its
contents is givin within 10 days after it’s received (e.g. ConAgra v. Nierenberg)
 2-201(3)(b) If a party against whom enforcement is sought admits in pleadings, testimony, etc.
that a K for sale was made, K is enforceable.
 Criticism of SoF
o Appellate judges hate SoF, so they create a lot of exceptions and constrain the rule pretty tightly; willing
to piece together things to find a written agreement.
o BUT trial judges love it, helps clear the docket w/ clear rules to apply.

C.R. Klewin v. Flagship Properties, SC of CT, 1991

ACs want to limit SoF  one year provision is strictly read to mean that the SoF only applies to Ks that by their own
terms can’t be performed in one year.
 Facts: P agreed to be general contractor to large UConn development project that would take many years to
complete. They had an oral K + written agreement for 1st stage, D dissatisfied w/ P’s work and negotiated other
contracts for remaining phases.
 Issue: Is an oral K unenforceable under SoF when the method of perf called for by K contemplated perf to be
completed over multi-year period, but the K itself doesn’t explicitly negate the possibility of perf within 1 year?
 Holding: No, an oral K that doesn’t say, in express terms, that perf is to have specific duration of more than a
year is the functional equivalent of a K of indefinite duration for purpose of SoF.
o Court says little need for SoF (only remaining purpose = forestalling adjudication of meritorious claims)
 narrow view of 1 year provision.
o Provision only covers those Ks whose perf can’t possibly be completed within one year  court
determines “possibly” = “only K whose completion within a year would be inconsistent w/ express terms
of the K.”
o P would be entitled to damages representing his lost wages from D’s failure to carry out its promise
(likely settled after decision came down)

Migerobe v. Certina USA, 5th Cir. AC, 1991.

Reqs. to satisfy SoF for goods can be satisfied through the integration of several docs, which alone wouldn’t suffice.
 Facts: P wanted to buy a bulk quantity of watches from D at reduced price. There was no single doc
memorializing agreement, but internal memos and purchase orders were there. D tried to pull out of K, P sued.
 Issue: Did the parties submit writings sufficient to satisfy the SoF?

26
  Holding: Yes, the two memos and the purchase order together provide a sufficient writing to satisfy SoF. Don’t
necessarily need all in one doc, SoF can be satisfied through integration of several docs that alone won’t suffice.
o UCC doesn’t req. as much as common law does to satisfy SoF. Requires a writing:
 Sufficient to indicate that a K for sale has been made
 Signed by the party against whom enforcement is sought
 Broad def of what’s “signed,” company seal can count as “signed”
 Must specify an essential term (here, it was quantity)
 Relevant Rules:
o R2K § 132, Several Writings
 The memorandum may consist of several writings if one of the writings is signed and the writings
in the circumstances clearly indicate that they relate to the same transaction.
o UCC § 2-201, Formal Requirements Statute of Frauds
 Req (1) a writing sufficient to indicate that a K for sale has been made btwn the parties, (2) writing
must be signed by the party against whom enforcement is sought, and (3) specify a quantity
o R2K § 131(c), General Requisites of Memorandum
 Writing must state w/ reasonable certainty the essential elements of the unperformed promises in
the contract (contrast w/ broader UCC § 2-201 above)

Conagra v. Neirenberg, SC of MT, 2000

SoF under UCC satisfied between merchants when a party sends confirmation of an oral agreement and recipient party
doesn’t object in writing within 10 days.
 Facts: P and D discussed sale of wheat from D to P on the phone. P contends oral agreement was made (routine
for trade), D says just checking the market and parties understood no K. P mailed D confirmation K, D continued
dickering w/ P neither acknowledging nor refusing existence of K. D ultimately sold to another party, didn’t
notify P of sale, D kept telling P would deliver wheat “one of these days.”
 Issue: Whether the parties formed an enforceable oral agreement
 Holding: Yes, written “confirmation of grain purchase contract” + failure of D to object = enforceable agreement.
o 10 day time period to reject confirmation was a reasonable period of time, price fluctuation ≠ justification
for TC finding that 10 day time period unreasonable.
o 2 factors for what’s a reasonable time: (1) usual practice/policy for transactions, (2) excuse for not
following that practice/policy
 UCC § 2-201(2)
o If both parties are “merchants,” one party may send written confirmation of an oral contract to the other
which, if received within a “reasonable time,” provides that the receiving party has 10 days to objet in
writing. If the receiving party doesn’t object, he can no longer assert a SoF defense.
o Exception to 2-201(1) rule that oral contract unenforceable unless written/signed by party
 Side question of if farmers are even merchants (UCC applies to all sales of goods, but certain provisions like 2-
201 only apply to merchants).
o UCC § 2-104(1), Merchant = deals in goods of kind, has specialized knowledge  prof status, has
knowledge/skill particular to practices/goods involved
 Goal to hold those who hold themselves out as having specialized knowledge to a high standard.

Lige Dickson Co. v. Union Oil Co. of California, SC of WA, 1981

 Facts: P and D had long biz history, D encouraged P to enter asphalt paving biz, never executed written K. In
response to rising costs, P requested and D provided an oral guarantee against further increases of cost of asphalt
for P’s existing Ks – D later reneged on this oral agreement.
 Issue: May an oral promise otherwise within the SoF nevertheless be enforceable on the basis of PE?
 Holding: No, PE can’t be used to enforce an oral K for the sale of goods within SoF notwithstanding a valid
defense based on UCC SoF.
o P arg that Court should adlopt R2K § 139, which authorizes courts to make a contract that would be
voided by SoF enforceable on PE basis.
o Court refused to adopt R2K § 139 in Klinke, but instead adopted narrower rule described below
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  Court probably slightly in the minority, more probably would allow PE despite SoF
o Another tension here between UCC § 1-103(b) (common law applies if not displaced by UCC) and §2-
201(3) (might allow for broader SoF excuses than R2K)
 Some jx’s have ruled that 1-103 provides authority for use of PE to defeat SoF
 Other jx’s have ruled that SoF language of 2-201 makes the exceptions listed in 2-201(3) the only
possible exceptions for SoF
 State courts pretty evenly divided on this bttle
 Takeaways:
o WA SC has held that a narrower rules applies: a party that promises to reduce a K to a signed writing, but
then fails to do so, may be estopped from pleading the absence of a writing if the other party relies on the
promise (didn’t happen here).
o States split on how UCC § 1-103 and § 2-201(3) should work together

4. The Contents of the Contract

Even after words in K are understood, there is more K “content.”
 Gap Fillers
o Terms supplied by law to fill the gaps that have been left in a K
 UCC implied warranties
 Course of performance, course of dealing, trade usage
 Oral or written terms that were part of the negotiation but never made it into final doc
o Side agreements
 Oral or written terms that came after K was signed
o Modifications

Section Includes:
 Parol Evidence Rule (R2K §§ 209, 210, 213, 214-217, UCC § 2-202)
 Interpreting the Terms of the Contract
 Implied Terms and Implied Covenant of Good Faith (R2K § 205, UCC § 1-304)
 Express and Implied Warranties (UCC §§ 2-312 – 316)
 Modifications

A. The Parol Evidence Rule

Parol Evidence Rule (PER) is supposed to function to allow parties to commit their final agreement to writing w/o fear
that outside ev will be brought in to lead the court to think that the parties agreed to something different. Definition:
 A substantive common law rule in K cases that prevents a party to a written K from presenting extrinsic evidence
that discloses an ambiguity and clarifies it or adds to the written terms of the K that appears whole.
 During litigation a party might seek to introduce evidence of earlier negotiations, partial agreements, etc. to show
that the terms of the parties’ agreement are other than what it states in the writing
 “Parol Evidence” = any ev other than the parties’ written agreement that’s offered by a party to prove contract
terms that don’t appear in the writing.

Parol Evidence Rule Under Common Law

R2K § 209, Integrated Agreements.
1) An integrated agreement = writing(s) constituting a final expression of one or more terms of an agreement
2) Whether there’s an integrated agreement is determined by the court
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.

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Completely vs. Partially Integrated, R2K § 210
1) A completely integrated agreement = an integrated agreement adopted by the parties as a complete and exclusive
statement of the terms of the agreement.
2) A partially integrated agreement = an integrated agreement other than a completely integrated agreement.
3) Whether it is completely or partially integrated is to be determined by the courts.

What happens to prior agreements if it’s integrated (R2K § 213) – “Parol Evidence Rule”
1) An integrated agreement (complete or partial) discharged prior agreements to the extent that it is inconsistent
2) In a completely integrated agreement, even consistent additional terms are discharged.

Evidence of Prior/Contemporaneous Agreements and Negotiations (R2K § 214) (exceptions to PER)

Agreements and negotiations prior to or contemporaneous w/ the adoption of a writing are admissible in ev to establish:
a) that the writing is or is not an integrated agreement; (Traynor’s view)
b) that the integrated agreement, if any, is completely or partially integrated;
c) the meaning of the writing, whether or not integrated;
d) illegality, fraud, duress, mistake, lack of consideration, or any other invalidating cause
 Traynor’s view (Masterson) = whether or not a question is integrated can’t be answered w/o looking at parol
evidence and context of the circumstances. This is contrary to the four corners approach.

Contradicting Terms, R2K § 215 – Complete or partially integrated agreement, evidence of contradicting
prior/contemporaneous agreements is not admissible

Consistent Additional Terms, R2K § 216 – Evidence of a consistent additional term is admissible to supplement a
partially integrated agreement, but is not admissible to supplement a completely integrated agreement.
 Agreement is not completely integrated if the writing omits a consistent/additional agreed term which is:
o Agreed to for separate consideration, or
o Such a term as in the circumstances might naturally be omitted from the writing.

2 broad approaches to determining if agreement is integrated:

 Prevailing view, R2K § 209, Integrated Agreements – judge makes determination by considering evidence of
prior negotiations, incl all the surrounding circumstances in which the writing was made. Theory = can’t be
known what the parties intended to cover in the writing until all that was intended to be covered is known.
o This is Traynor’s view in Masterson v. Sine
 Four Corners Approach – by examining the doc itself, does its wording appear to be integrated? If yes, PER
applies, any ev other than written agreement is prevented from being evidence.

2 Question Test:
 (1) Is the parties’ writing an integration? Did the parties intend the writing to be a final embodiment of their
agreement?
o If yes, is it a complete or partial integration?
 If complete integration, it can’t be contradicted/supplemented by any type of evidence or
additional terms.
 If incomplete integration, it may be supplemented by consistent additional terms, but can’t be
contradicted.
 (2) If it’s an incomplete integration, next question: Is the parol term consistent or contradictory to the written
agreement?
o This is a difficult question, courts don’t approach it in a uniform way (e.g. Masterson v. Sine)
o Key here is thinking broadly and considering whether parol term can be reconciled w/ the overall
substance of the writing.

The UCC’s Parol Evidence Rule: UCC § 2-202

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Terms in a final expression of a party’s agreement may not be contradicted by evidence of any prior agreement or of a
contemporaneous oral agreement, but may be explained or supplemented
a) by course of dealing or usage of trade or by course of performance (hierarchy, see UCC § 1-303)
b) by evidence of consistent additional terms, UNLESS the court finds the writing to have been intended as a
complete and exclusive statement of the terms of the agreement.

Additional notes
 Like w/ SoF, trial judges love PER b/c they can clear dockets quickly, tiresome biz of hearing ev reduced.
 PER has become even more significant in recent decades w/ rise of standard form Ks
o Standard form Ks often have integration or merger clauses, stating written terms = entire and final
agreement between the parties. But standardized terms often decided entirely by one party  courts have
been challenged to call such clauses into question.
 PER = another manifestation of the contract/no contract dichotomy.

Baker v. Bailey, SC of MT, 1989

This court holding that the language of a written K is clear and ambiguous  there’s nothing for the court to construe
 Facts: To ensure Baileys would have access to water, Water Well Use Agreement prepared. Stated that
Agreement was “solely for the benefit of the Baileys and shall terminate in the event Baileys no longer occupy.”
But Ps believed that although it wasn’t in K, would transfer water rights to a reasonable purchaser of P’s property
(had oral agreement to this effect). P later tried to sell land for $40k, but D told them they wouldn’t share water
supply w/ any new purchaser  value dropped to $8k.
 Issue: Does the PER prevent the use of the parties’ oral negotiations as evidence?
 Holding: Yes, the PER prevents additional evidence not found within the terms of the written K from being
included in the K.
o When using traditional four corners approach, court determines K is integrated b/c it seems complete,
there’s a merger clause, and it’s signed.
 Relevant Rules/takeaways:
o Whether there’s complete or incomplete integration doesn’t matter if the alleged “side agreement” is
inconsistent w/ the term of an integrated writing – R2K § 213
o PER is often a very harsh rule  case shows how important it is to make certain that what you want in the
K makes it into the integrated document.
o PER  fact of oral understanding inadmissible, w/o D violating express term of contract, can’t violate
covenant of GF/FD
 Problem 4-1, Ice House removal case
o Criticized b/c of arbitrariness of the “natural” provision in the analysis, but otherwise a good example of
strict application of the PER
o B/c terms would naturally be included, and aren’t here  no binding obligation (can’t intro parol ev)

Masterson v. Sine, SC of CA, 1968 (Traynor)

The preliminary question of whether or not a K is integrated can’t be answered w/o looking at parol evidence and the
context of the circumstances. The doc itself is the leading indication of the intent of the parties, but it isn’t everything.
 Facts: P owned a ranch, sold it to D (sister) w/ stipulation that P would have an “option to purchase the prop”
within 10 years for the “same consideration as being paid” now. P declared bankruptcy, bankruptcy trustee wants
to buy ranch back to make profit on jump in prop value. D arg extrinsic ev that parties wanted prop kept in the
family should be admitted.
 Issue: Can extrinsic ev of a collateral agreement be admitted in this case?
 Holding: Yes:
o PER won’t exclude this info, and it’s natural to expect that such a collateral agreement that option was
only for family members would be included here, so it’s not something that “certainly would have been
included in a written agreement”  parol evidence may be introduced
o Traynor says PER should only be used when there’s a possibility that a jury would be misled or when
parole v is completely contradictory to the written K, not the case here.

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  Traynor’s view that a judge can’t really decide if a doc is integrated before taking into consideration all of the
evidence, adopted by R2K § 214(a)
o Can’t be restricted to just four corners of doc to determine if doc is integrated
 R2K § 240 – if additional ev would naturally be agreed to by the parties, then include it.
 UCC § 2-202, can explain/supplement doc w/ ev of consistent addl terms
 Dissent: Ruling undermines PER (here language was clear/absolute), lets family get one over on P’s creditors,
renders instruments of conveyance suspect on face, decreases ability to rely on written instruments.

Thompson v. Estate of Coffield, SC of OK, 1995

Where there is ev of mutual mistake supporting contract reformation, there’s an exception to the PER
 Facts: Seller sold land to buyers, the deed reserved for seller a non-participating royalty interest in half the
minerals and stated all mineral interests covered by a valid, recorded lease wont’ go to buyers until lease expired.
Some of seller’s leases weren’t recorded, but were confirmed by probate clerk. Buyer then turned around and said
unrecorded leases & oral agreements about them cant’ be considered by court b/c parol evidence.
 Issue: Whether parol evidence is admissible in an action for reformation of the deed b/c initial mistake.
 Holding: Yes, in an action for reformation of a K, parol evidence is admissible to show the parties’ intent and a
mutual mistake.
o It’s not admitted to contradict the written agreement, but rather to show that the final writing didn’t reflect
the true agreement.
 Reformation of a written agreement will be ordered when the words in agreement don’t correctly express the
meaning that the parties agreed upon.
o R2K § 155 makes reformation available where a writing that evidences or embodies an agreement in
whole or in part fails to express the agreement b/c of a mistake of both parties as to the contents or effect
of the writing.
o R2K § 166 reformation is also possible if it can be shown that the other party induced assent to document
by misrepresenting the writing.
o Corbin – to get reformation, seller must show (1) instrument representing prior agreement that should be
reformed, (2) mutual mistake (or mistake by 1 party & inequitable conduct of the other), and (3) proof of
these elements by clear/convincing evidence

B. Interpreting the Terms of the Contract

Interpretation = the process used when parties dispute the meaning of the words clearly “in” their writing, or when
courts try to figure out what those words “mean.” Interpretative difficulties include:
1) Inherent haziness of language itself
2) High cost in nailing down every remote contingency  parties may prefer to not answer every contingency
3) Unexpected occurs frequently, sending adversely affected parties back to agreement in hopes of procuring refuge
from bad effects.

How to interpret?
UCC/Sale of Goods:
 If K is for sale of goods, UCC doesn’t req. finding ambiguity before evidence of parties’ course of performance,
course of dealing, or trade usage can be admitted.
Common Law/Services:
 Plain Meaning Rule – only looks at the four corners of the doc to determine what the language means. If
contract language appears clear and unambiguous to judge, extrinsic evidence is inadmissible
o Learned Hand big fan of objective approach
o But object interp pushed to its limits is ridiculous (isn’t anything?), need some subjective ability
 Contextual Approach – Consider all the proffered evidence before deciding whether K language is reasonably
susceptible to the meaning claimed. This is the approach adopted by the R2K.

Frequent Rules of Interpretation

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  What do recitals say?
 What’s the general purpose of the agreement?
 Expressio Unius
 Where a term is in a list, you assume that it’s “of the same kind”
Assumption that every term has meaning and is not redundant
Interpretation should be done as to the whole agreement
Words use repeatedly have the same use throughout
Specific provision controls a general one since it is more likely to be the dickered intent of the parties
Written terms over printed terms
Dickered terms over boilerplate
Contra proferentem
Public interest
Evidence of prior negotiations
Trade usage
Course of performance
Course of dealing

Random House Inc. v. Rosetta Books, US District Court, NY, 2001

Court uses the objective or plain meaning approach and finds no ambiguity.
 Facts: D contracted w/ authors to publish their books in digital format, text of ebook same as normal book. P’s
license agreement was “print, publish, and sell the work in book form.”
 Issue: How do we interpret the K? Does “book form” include ebook?
 Holding: “Book Form” ≠ ebooks. All terms in the contract have a purpose (they aren’t superfluous, lack of
inclusion  no intention of inclusion) and trade usage/dictionary suggests “book form” means printed and bound
material, not ebook.
o Expression unius – explicit listing of certain rights means exclusion of other, broader rights. Separate
language to convey rights to reprint editions wouldn’t have been necessary if “in book form” had
encompassed a broader definition of all books.
 Takeaways:
o Determining whether the K is ambiguous is a question of law. If language of K is ambiguous,
interpretation of K becomes a question of fact, and extrinsic evidence is permissible.
o This is an “objective approach” or “plain meaning” approach to interpreting a K
o It’s tough to draft a K that won’t be made obsolete somehow in 40 years – how can parties protect against
what will change?
o Expression unius rule – since Random House enumerated certain forms of media, it excluded others
 Differentiating from broader allowance of Boosey and Bartsch (movie cases)
o B/B had broader language of granting of rights; reuse was within the same medium, whereas ebook is a
different medium than books; B/B licensees created a new work based on creator’s material, unlike here;
B/B didn’t want to chill/disincentivize use of new tech
 Danger of the objective approach
o The danger in this method of course is that the judge will impose his meaning on the text even if this is not what the
parties intended, or if they did not intend anything at all
o That is, it is actually hard to be objective because you come to the bench with your biases, etc.
 Benefit of the objective approach
o Parties can rely on the written contract to govern their relationship and this protects reliance interest
o Parties will be more scrupulous about forming the written agreement and this will lead to better drafting and prevent
problems from arising and litigation from ensuing
W.W.W. Associates v. Giancontieri, Court of Appeals of NY, 1990.
Clear and unambiguous language will be enforced according to its clear meaning. Extrinsic evidence should only be
introduced if the four corners approach has ambiguity.
 Facts: P planned to buy land from D. The contract they used contained a clause that allowed either party to
unilaterally withdraw form the agreement if litigation concerning the land (but not related to their dispute) was
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 on-going as of certain date. The main reason (arg P) for this term was the litigation and P’s fear couldn’t get
financing due to ongoing litigation. The doc also contained a merger clause. D likely letting litigation continue so
could get out of deal.
 Issue: Should unambiguous cancellation provision be read in light of extrinsic evidence?
 Holding: No, when parties set down their agreement in a clear, complete doc, their writing should be enforced
according to its terms.
 5 Principles of interpreting a document from PA SC in City of Philadelphia
o Entire K should be read as a whole
o K itself must be read in the light of the circumstances under which it was made
o If public interest affected, prefer the interpretation that favors the public
o Specific provisions ordinarily will be regarded as qualifying the meaning of broad general words in
relation to a particular subject
o Interpretation given by the parties themselves will be favored, unless contrary to plain meaning of the K

Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging, CA SC, 1968
Traynor says that the test of admissibility of extrinsic evidence to explain the meaning of a written instrument isn’t
whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to
prove a meaning to which the language of the instrument is reasonably susceptible.
 Facts: D had K to work on P’s steam turbine. K stated that D would indemnify P against all loss, damage,
expense etc. resulting from injury to prop. D says there’s evidence that purpose of insurance was only to cover
damage to 3rd parties, and not to P’s prop.
 Issue: Whether the extrinsic evidence should be admitted
 Holding: Yes, at least a preliminary consideration of all credible evidence offered to prove the intention fo the
parties is required.
o Exclusion of parole v merely b/c the words don’t appear ambiguous can easily lead to the attribution to
agreement of a meaning that the parties didn’t intend
o Extrinsic evidence isn’t admissible to add to, detract from, or vary the terms of a written K, but these
terms must first be determined before it can be decided whether or not extrinsic ev is being offered for a
prohibited purpose.
o  extrinsic ev at least a preliminary consideration
 Decision has been heavily criticized. Kozisnski – undermines confidence re: written contracts
o Stands in contrast to stronger four-corners approaches of places like NY or 7th circuit

Confold Pacific v. Polaris Industries, 7th Cir. AC, 2006

Rule of thumb that Ks should be interpreted against the drafter. Contractual interpretation disputes should only go to the
jury if there’s ambiguity requiring credibility determinations or something of that nature.
 Facts: P consulted on a “reverse logistics analysis” of D’s shipping needs, conducted by mutual NDA prepped by
P. D later requested proposals for design of returnable container and gave it to another company to manu. P
claims it was their design and that D breached NDA.
 Issue: Did NDA for P’s logistics consulting bind D not to reveal designs that P submitted in later bid to others?
 Holding: No, the NDA only applied to P’s logistics consulting, not the later design submission.
o P wrote the terms of agreement (rule that terms should be interpreted against their drafter), and P’s NDA
didn’t incl the design of the container, just the consulting.
o Extrinsic ev probably not necessary to look at here, but if it was, it would further support D.
 Relevant Rules:
o Rule of thumb 1 – in interpreting a K btwn commercially sophisticated parties, unambiguous contractual
language must be enforced as written
o Rule of thumb 2 – enforcing Ks as written has particular merit when the party that drafted the K is arguing
that it should be relieved from the consequences of having neglected to spell out its rights concerning the
very core of the transaction (contra proferentem)
 General judicial tendency to do this even more w/ insurance contracts.

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Nanakuli Paving & Rock Co v. Shell Oil Co, 9th Cir. AC 1981
When dealing w/ a sale of goods, a commercial agreement is broader than the written paper, and its meaning is to be
determined not just by the language used by them in the written contract, but also by commercial practices such as the
course of performance, course of dealing, and trade usage.
 Facts: P had bought all asphalt from D under 2 long-term Ks. D failed to price protect, violating a widespread
trade usage of not raising price of asphalt for deals already contracted. D had also previously price protected for P
(course of performance). Written K between P and D didn’t mention price protection rule at all.
 Issue: Can trade usage, course of performance, or alternative good faith be used to modify or supplement the
express terms of a written commercial contract?
 Holding:
o Court determines that D is a member of asphalt trade (usage of trade is binding on those who regularly
deal w/ members of the relevant trade, here Shell regularly deals w/ Nanakuli. Paving req. asphalt and
crushed rock, here court extending “trade” to incl asphalt in paving trade). Price protection is a universal
practice by suppliers to asphaltic paving trade  price protection in this trade existed and was regular
enough to rise to the level of usage that would be binding on the parties.
o On 2 occasions before this in the K, there had been bumps in price that D had price protected for  ev of
course of performance
o Raising price w/o advance notice is arguably not performing K in GF, separate and secondary reason for
breach of K claim (which Kennedy in his concurrence doesn’t sign onto)
 Relevant Rules:
o UCC § 2-202, Final Written Expression; Parol or Extrinsic Evidence
 Course of performance, course of dealing, and usage of trade can all be used to “explain or
supplement,” but not to contradict the terms “set forth in a writing intended by the parties as a
final expression of their agreement.”
 Note that this is true even if the writing as complete & exclusive agreement.
o UCC § 1-303, Course of Performance, Course of Dealing, and Usage of Trade
 Definitions of course of perf, course of dealing, and usage of trade found here
 Hierarchy when there’s an inconsistency in express terms/party practices:
 Express terms
 Course of performance
 Course of dealing
 Usage of trade
 Note that the court does a poor job of trying to get around the hierarchy that “express terms prevail
over course of performance.”
 Lessons from decision:
o Shell should’ve told P that it was price protecting as a one-time courtesy, so that course of performance
didn’t end up changing the terms of the K
o Drifting away from the written agreement (relational contract)
 Note that in longer term Ks parties often make accommodations for each other, and in so doing
drift away from the terms of the orig K, undermining the doc as representative of the K
 If you’re going to be nice and grant an exception, make sure that it’s clear this is a one-
time waiver.

MCC-Marble Ceramic Center v. Germanica Nuova D’Agostina

CISG more open to trying to ascertain the subjective intent of the parties by looking at the wider circumstances/context
 CISG permits parole v, since it’s intl transaction governed by CISG, PER doesn’t apply.
 Why does US still have PER? Perhaps b/c more jury trials here and juries more susceptible to being unduly
swayed by parol ev
 Asbestos insurance policy interpretation exercise
o The ‘reasonable expectations’ rule against insurers would help the insured in this case, in addition to the
other arguments he can make

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 o Perhaps the insured should update the policy to make it more clear, since he’s in a better position to know
about the needed changes. But the insured knows about the problem, going to be very resistant to change
the policy w/o a huge change in the cost/premiums unfavorable to the insurer.

C. Implied Terms and the Implied Covenant of Good Faith

Implied terms are “default terms” or “gap fillers” – terms available to be added to K if parties fail to provide them

Implied obligation of good faith and fair dealing

 Originated in case law, adopted in R2K § 205 (Duty of GF & FD)
 Adopted by the UCC in UCC § 1-304, Obligation of GF
 Once K is formed, duty of GF in its performance and enforcement.
 UCC § 1-302, can’t disclaim obligation of GF

Haines v. City of New York, NY Court of Appeals, 1977

Court implies a reasonable period/scope of duty to a K that otherwise lacked the duration. This is R2K § 204.
 Facts: Agreement in 1926 that D would provide for filtration of sewage needs of P both now and when “necessitated
by future growth and building construction of the communities.” P grew, D continued to provide services, but D
said system couldn’t take any additional loadings and refused to support 50 new lots in P. P sued.
 Issue: Does 1924 K req. D to continue to maintain the sewage system / req. D to expand the system?
 Holding: D is presently obligated to maintain the existing plant, but isn’t required to expand that plant or construct
any new facilities to accommodate P’s increased demands on the sewage system.
o This isn’t a never-ending K (as P arg), nor is it permissible for either party to exit at will due to no express
duration (as D arg)
o Court implies a duration for a reasonable period on the K based on parties’ intentions
 Relevant Rule: R2K § 204, Supplying an Omitted Term
o Courts can imply reasonable terms (in light of the circumstances) when parties that have a K haven’t agreed
to an essential term.

Centronics Corp v. Genicom Corp, SC of NH, 1989 (Souter)

An implied covenant of good faith is a very limited concept.
 Facts: P and D reached an agreement that had part of the purchased funds go into escrow subject to final adjustment
once arbiter reached a final decision on what the final balance of sale would be. K implied that $$ in escrow would
be released when arb completed. P wants some of the undisputed funds from escrow now, D refused (hold up)
 Issue: Did D violate an implied obligation of GF in not releasing undisputed funds from escrow?
 No, the express terms of the K are inconsistent w/ the claim that an obligation of GF req. D to agree to an interim
distribution of money from the escrow fund
o Under agreement that appears to invest party w/ degree of discretion in performance sufficient to deprive
another party of a substantial proportion of the agreement’s value, the parties’ intent to be bound by an
enforceable K  implied obligation of GF to observe reasonable limits in exercising that discretion.
o BUT, D didn’t have discretion regarding the timing of distribution for the escrow fund b/c K has express
provisions governing timing of payment. But here D didn’t act in bad faith.
o D not exercising discretion in BF, under any conception of good vs. bad faith
 Relevant Rules:
o What’s good faith?
 Traditional (Summers) approach – GF is “not bad faith” in that it excludes behavior that’s
inconsistent w/ common understandings of decency, fairness, and reasonableness
 Burton (slightly easier to apply) – bad faith = promisor’s discretionary action subjectively
intended to recapture economic opportunities forgone or bargained away at the time of contract.
 UCC’s Approach, UCC §§ 1-304/1-201
 (1) Honesty in fact

35
  (2) observance of commercially reasonable standards of fair dealing
 Restatement approach, R2K § 205
 Every contract imposes upon each party a duty of GF & FD in its perf and enforcement
 ** Note that GF has the potential for broader application, but that hasn’t happened.

Shell Oil Co v. HRN, SC of TX, 2004

A commercially reasonable price, one within range of market, is a GF price under UCC § 2-305 absent evidence of
price discrimination
 Facts: Shell in agreement to sell gas to HRN in open price K fixed by Shell ( covered by UCC § 1-305, price
must be fixed in GF). P arg D not acting in GF b/c of subjective intention to drive Ps out of biz, yet price was
within the market standard and D didn’t discriminate among other types of dealers like P
 Issue: Was price fixed by a refiner for the sale of gas under an open price term K w/ its dealers in GF?
 Holding: Yes, the price was fixed in GF
o Drafters of UCC wanted to minimize judicial intrusion in price setting and requiring sellers to justify
prices would result in endless litigation  adopted safe harbor rule of UCC § 2-305(2)
o Comment 3 – anything within commercially reasonable price range = safe harbor, satisfies GF obligation
 Problem 4-3, bakery trucks case
o UCC § 2-306(1), GF required in a requirements contract
 Posner found a breach of GF here, judges vary in aggressive enforcement of GF
o There would be a difference btwn the bakery closing down and not taking any trucks (GF) and the bakery
thinking that it’s no longer a good deal and trying to back out (BF), seems like latter going on here.

Hillesland v. Federal Land Bank Ass’n of Grand Forks, SC of ND, 1987

Generally lno duty of GF in an employment relationship, employees are at will and can be fired at any time w/o cause
 Facts: P fired after engaging in questionable activity. P was longtime employee/CEO of company, arg that it was
BF to fire him, and there should be implied duty of GF in employment agreements (would allow AW employee
to be fired only for cause)
 Issue: Is there an implied covenant of GF & FD in employment Ks in ND?
 Holding: No, ND doesn’t recognize a cause of action for breach of implied covenant of GF/FD where the
claimant relies upon an AW employment K
o Court follows WA view that to imply into AW contract a duty to terminate in GF would subject each
discharge to judicial incursions into amorphous concept of BF  effectively get rid of AW employment
 Key Points:
o P arg that court should adopt CA precedent in Cleary, which said there’s an implied covenant of GF in Ks
where employment was long-term and employer acted contrary to its own procedures for discharge.
o Some states accept implied duty of GF, but don’t see it restricting right to discharge AW employees w/o
stating a cause (e.g. challenge only when reason for discharge violates PP, like racial discrim)
 Problem 4-4, woman fired for blocking employer’s sexual advances
o GF invoked here, but really issue is sex discrim that’s illegal and contrary to PP
 Problem 4-5, GE unaware of option to buy back at low price, other party doesn’t tell them
o Tricky case, might be wise to inform GE in order to keep your relationship
o Judge: other party was required to let GE know of its option b/c such a long time btwn contract & now

D. Express and Implied Warranties

Express Warranties, UCC § 2-313
 Oral or written promises or affirmations of fact made by one party to the other during the formation of the K that
becomes part of the basis of the bargain, e.g. Hawkins v. McGee promise of 100% good hand
 Enter the final bargain as warranties if there is reason to believe that the one party wouldn’t have entered the
bargain w/o the warranty
 Almost impossible to disclaim these

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Implied Warranties
Three major implied warranties from the UCC
 Good Title, UCC § 2-312
o I.e. some sort of title to prove that the seller genuinely owns it and it’s not stolen
o Can be waived, but difficult to do and still make the sale since seller must make it clear to the buyer that
he doesn’t have good title.
 Merchantability, UCC § 2-314 (if the seller is a merchant)
o Goods shall be merchantable, fit for the ordinary purposes for which such goods are used
o Can be waived if conspicuously in writing and includes the word “merchantable”
 Fitness for a particular purpose, UCC § 2-315
o Narrower, more specific. Requires seller to (1) have a reason to know of buyer’s particular purpose for the
goods, (2) have reason to know that the buyer is relying on seller’s skill/judgment to furnish appropriate
goods, and (3) buyer must rely on seller’s skill or judgment in purchasing goods
o Can be waived if conspicuous and in writing.
 Considerable amount of modern litigation concerned w/ avoiding/enforcing warranties
 All implied warranties also excludable by expressions like “as is.”

Carpenter v. Chrysler Corp, MO AC, 1993

A seller’s statement can become enforceable express warranty when it becomes part of the basis for entering the bargain
 Facts: P went to D’s dealership to buy car, salesman told him the car in front of him was a “good car,” “new car,”
and a “reliable car,” which was what P told D was looking for. The car had previous problems, wasn’t new, and
continued to have problems.
 Issue: Did the salesman’s statements create an express warranty?
 Holding: Yes, the statement was sufficiently specific about the quality of the car and induced P into decision
 Key Points:
o UCC § 2-313, Express Warranties by Affirmation, Promise, Description, Sample
 Express warranties by the seller are created by (a) any affirmation of fact/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/promise, (b) any description of
the goods creates express warranty that the goods shall conform to that description
 (2) ** It is not necessary for the seller to use formal words like “warrant” or “guarantee” or to
have specific intention to make such a warranty
 § 2-316(1) – express warranties, once given, can’t be disclaimed
o Note the fact that Carpenter asked for a reliable car and salesman directed him to specific car  warranty.
But these kinds of cases are really hard to guess.
o Puffery – statements made in course of advertising can’t be treated as express warranty, like beer ad
saying buying beer  beautiful island w/ beautiful women
 Puffery = publicity/acclaim that’s full of undue or exaggerated praise

Vlases v. Montgomery Ward & Co, 3rd Cir. AC, 1967

Implied Warranty of merchantability and fitness for a particular purpose are designed to protect the buyer from bearing
the burden of loss where merchandise doesn’t conform to the normal commercial standards.
 Facts: P bought 2k day old chicks from D. Found out chicks infected w/ deadly disease when arrived, impossible
to know if newly hatched chicks had the disease until it manifests itself, and there’s no cure.
 Issue: Did seller breach IW when there’s no skill or foresight on seller’s part that a product is flawed?
 Holding: Yes, the seller breached implied warranties. It doesn’t matter that the seller wasn’t at fault w/r/t chicks
having the disease.
o The UCC doesn’t req. ev that defects should/could’ve been uncovered by the seller. Only req. that the
goods upon delivery were not of merchantable quality (heyo SL)
o Purpose of IW = holding seller responsible when inferior goods passed along to unsuspecting buyer
o Note: Can’t unreasonably disclaim IW

37
  Key Points
o Implied warranty of merchantability, UCC § 2-314
o Implied warranty of fitness for a particular purpose, UCC § 2-315
 Where the seller at the time of contracting has reson to know any particular purpose for which the
goods are req. and the buyer is relying on the seller’s skill or judgment to select/furnish suitable
goods, there is (unless excluded/modified) an IW that the goods shall be fit for such purpose.
o Merchantability vs. Fitness for a particular purpose
 Merchantability centers around the market and ordinary conception of the product
 Fitness for a particular purpose operates in tandem w/ merchantability, but it also covers the
specific needs of a given customer
o The fact that the disease is non-detectable could be an important issue, but only re: charge of negligence
 Limiting the remedies (UCC § 2-718 and 2-719)
o General remedies for a buyer who has taken possession are:
 Rejection
 Revocation of acceptance
 Suit for damages
 If successful rejection/revocation, a right to the return of the purchase price
o It’s permissible to limit a remedy, incl saying that the only remedy is to repair/replace (UCC § 2-719(1))
o But if the limited remedy fails its essential purpose, all UCC remedies come back into play (2-719(2)
 E.g. if the defect can’t or hasn’t been repaired/replaced
 Note that the limit on remedies need NOT be conspicuous, and so in some ways this is a much
stronger tool for the manu, since you can keep the warranties but limit them drastically
o Consequential damages can be limited as long as it isn’t unconscionable, and this also doesn’t need to be
conspicuous, but note that it’s prima facie unconscionable when it prevents consequential damages arising
out of the harm to a person, but not commercial harm (2-719(3))
 Are there some products that by their nature fail the implied warranties?
o e.g., Cigarettes and butter maybe fail the implied warranties because they cause of cancer and heart disease
 So can we say that they are not fit for a particular purpose or merchantable?
o Should dangerous products be excluded from the market? This is patronizing
o (my idea) No, because the products still are merchantable and fit for the purpose for which the person bought the
product, which is to give pleasure or taste; the attendant dangers or side effects do not matter
 This could maybe be tort, but not warranty
Massey-Ferguson v. Utley, KY AC, 1969
A wavier of IWs must be conspicuous, otherwise it doesn’t count and K doesn’t exclude any IWs.
 Facts: D bought a piece of farm machinery from dealer who financed the purchase. Dealer assigned the loan to
manufacturer (P), who was initially involved in the sale. D defaulted and P brought suit, sales K had a waiver of
IWs in small print on back side of K, terms said buyer covenanted not to sue assignee of the loan on basis of
breach of warranty.
 Issue: (1) Did K expressly exclude any IWs? (2) Did Ds agreement not to assert against assignee any defense he
might have against the seller mean that a breach of warranty arg can’t be made against P?
 Holding: (1) No, language wasn’t conspicuous, so exclusion is invalid and the contract didn’t exclude any
implied warranties. (2) No, P was acting as a seller in these circumstances, therefore protection doesn’t apply.
o Attempted exclusion wasn’t in larger font, heading didn’t suggest exclusion being made, and it was on the
back side of K  not conspicuous disclaiming of warranties
o Normally the party in M-F’s shoes (seller’s assignee) is a bank extending credit, and it is obvious that
Utley wouldn’t bring a claim for IW breach against bank. But in this case, court holds relationship btwn
dealer and M-F is so close that M-F effectively the seller, so D can exert warranty claims against P.
 Relevant Rules
o Conspicuous Requirement
 The disclaimer wasn’t conspicuous enough to disclaim IWs under UCC § 2-316(2)
 Things like type size, color, font, capital letters, etc. matter when deciding if conspicuous
 Definition of Conspicuous
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 “Means so written, displayed, or presented that a reasonable person against which it is to
operate ought to have noticed it
 Whether a term is conspicuous is a decision for the court.
o UCC § 2-316, Exclusion or Modification of Warranties.

Gilbert v. Monaco Coach Corp, Georgia DC, 2004

 Facts: P (GA res) bought RV from dealer in AZ, was aware of problems w/ RV, allegedly accepted w/
understanding that D would repair problems
 Issue: (1) did D breach written warranty? (2) Did D breach IW? (3) Was revocation of acceptance an appropriate
remedy?
 Holding: (1) P’s breach of written warranty claim survives SJ. (2) Court grants D’s motion for SJ for claims
alleging breach of implied warranties. (3) Revocation not acceptable, but some damages are.
1. D arg that P must provide ev demonstrating defects covered by limited warranty. Court disagrees, once a
consumer has alerted the warrantor to the defect, warrantor must est that alleged defect isn’t caused by
something covered by the issued warranty
2. Warranty claims must be decided under AZ law, and AZ req. vertical privity (legal relationship in a chain
distribution) for implied warranty claims, and there’s no vertical privity here
3. P can’t revoke the K and get a full refund, b/c this remedy is only available for full warranties, and the
warranty here is limited. Alternatively, remedy may be available if there was privity of K, but there isn’t.
 Key Points
o No privity of K, P suing Monaco (manu) w/o a K between them – P isn’t in privity of K w/ D, and
because of this, P’s options are considerable limited.
o Magnuson-Moss Warranty Act
 Aim of MMWA = helping consumers deal w/ confusing or misleading warranty language
 Supersedes state versions of the UCC where the law applies
 MMWA says that you may NOT disclaim the UCC IW of merchantability/fitness for a particular
purpose per UCC § 2-316 if you have any written warranty, and almost all sellers of goods do
have some written warranty  UCC IWs automatically folded in.
 Here, Safari gave limited warranty re: products manufactured by Safari, which ran for 1 year.
Remedy limited by LW, excluded incidental damages, only incl repair/replacement of part

E. Modifications
Pre-existing Duty Rule, R2K § 73
 Old common law rule that “performance of a legal duty owed to a promisor which is neither doubtful nor the
subject of honest dispute is NOT consideration”  a modification could be held unenforceable b/c a pre-existing
duty can’t serve as consideration
o Brewery case (Lingenfelder), architect demands more $$ and brewery gives it to him
 Court says when a party merely does what he’s already obligated himself to do, he can’t demand
additional compensation, and although by taking advantages of any necessities of his adversary, he
obtains a promise for more, the law won’t regard it
o Purpose of the rule is to prevent the hold up game, but presents problems when parties genuinely want to
modify a contract  modern trend away from strict application fo the pre-existing duty rule
o Other examples: cop trying to get reward for catching bank robber, reducing rent but w/o consideration

Permissible modification, R2K § 89, Modification of Executory Contract

 K may b modified notwithstanding the pre-existing duty rule when modification is voluntary for both parties and:
o (1) the promise modifying the original K was made before the K was fully performed on either side
o (2) the underlying circumstances which prompted the modification were unanticipated by the parties
o (3) the modification is fair and equitable

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  A modification to a K will be enforced w/o consideration if a party encounters unanticipated difficulties, the
modification is fair and equitable, and the K is still executory on both sides (each side owes a performance)

UCC § 2-209
 Departs completely from common law and eliminates the req. of consideration for an agreement modifying a K
for the sale of goods.
 “An agreement modifying a K within this article needs no consideration to be binding”
 Modification must be made in GF
 SoF applies to modifications as well as contracts.

Angel v. Murray, SC of RI, 1974

This is a voluntary and non-coercive modification of the K, so it’s enforceable. Court cites pre-existing duty rule, but
ultimately determines that permissible modification is appropriate here.
 Facts: Maher had K w/ City for Maher to collect trash at fixed price. During the time of the K city expanded,
Maher could no longer afford to collect trash w/o going out of biz. Maher asked City if they could pay him more,
city voluntarily agreed to increase pay, citizen of the city sued the city.
 Issue: Is it permissible for the K to be modified such that Maher is paid more for a pre-existing duty lacking
additional consideration?
 Holding: Yes, we’re not going to follow pre-existing duty rule here. Instead, look at UCC § 2-209 (even though
no sale of goods here) and R2K § 89 are more appropriate.
o R2K § 89 allows a modification if the modification is voluntary for both parties and (1) the promise
modifying original K was made before full perf on either side, (2) the underlying circumstances which
prompted the modification were unanticipated by the parties, and (3) modification was fair & equitable
 Key Points:
o Coercion/Duress
 How do we distinguish this case from brewery case, where a party sought increased payment?
 It’s not easy to distinguish btwn “hold up game” and what happened here
 Could Maher threaten breach? Threaten to declare bankruptcy? Tough questions
o R2K § 175, When Duress by Threat makes a contract voidable
 If party’s manifestation of assent is induced by an improper threat by the other party that leaves
the victim no reasonable alternative, the K is voidable by the victim.
 “Improper threat” (defined in § 176) – physical violence = easy, improper threat
 Cmt e – a threat by a party to a K not to perf his contractual duty isn’t, of itself, improper.
The threat is improper if it amounts to a breach of duty of GF & FD imposed by the K.
 Requirement of protest
o Note that a party that feels coerced into making a modification must protest or object such that the coercing party is on
notice that they are not making the change voluntarily in order for the court to review for coercion or duress
 Problem 4-6(1) (running back contract re-negotiation)
o Make sure the modification is clearly voluntary
 You could take the old sweatshirt approach, where you add something new, so there is new consideration
 Add an additional year
 Just try to cancel the contract and write a new one (each party’s surrender of rights would be consideration for
the other’s surrender)
 Problem 4-6(2) (changing location of window for walk in freezer)
o Damages are probably appropriate for the buyer because per R2d 89 she “materially changed her position in reliance
on the promise” when she bought the walk in freezer
Brookside Farms v. Mama Rizzo’s, TX DC, 1995.
UCC § 2-201(c)…(3) allows for exceptions to SoF, incl (1) promissory estoppel if a party promises to reduce oral
agreement to writing, and (2) a K which doesn’t satisfy general requirements but either (a) the goods have been paid for
and accepted, or (2) the goods have been received and accepted.

40
 Facts: P and D entered into requirements K, D agreed to buy basil from P. D needed stems removed, so K
modified and price increased. D temporarily discontinued order, resumed & agreed to pay higher price. D’s VP
said he’d note the changes in writing in the K, since K provided that it could only be amended by writing, but he
didn’t. K governed by UCC SoF. P brought suit to recover 3k lbs of basil D accepted but didn’t pay for, as well
as refusing to accept minimum amt of basil had agreed to for requirements contract.
 Issue: Was the modification to the K done appropriately?
 Holding: Yes, the K was modified appropriately under both reliance and statutory exceptions to the UCC SoF 
D liable for both 3k lbs accepted but not paid for, as well as breaching requirements contract.
o Statutory exception – oral agreements that materially alter a written agreement within SoF generally
aren’t enforceable, but exception if oral changes don’t materially alter underlying obligations
o Promissory Estoppel exception – Court has held that where one party reasonably relies on oral promise
of another to reduce an oral agreement to writing, the failure to create such a writing won’t prevent the
other party from taking the modifications out of the SoF. Here D promised to make written note of oral
agreement, inducing P and P reasonably relied on it  PE.
o UCC exception, 2-201(3)(C) – A K that doesn’t satisfy the requirements of the general SoF provision but
which is valid in other respects is enforceable w/r/t goods for which payment has been made and
accepted, or which have been received and accepted  oral modification binding if basil received and
accepted.
 New contractual price terms weren’t made enforceable as to future shipments of basil by P, but
they are enforceable as to the 3k lbs shipped under agreed price
 Key Points
o Course of Performance in Long Term Contracts
 UCC § 2-208 Course of Performance or Practical Construction
 Any course of performance accepted/acquiesced in w/o objection shall be relevant to
determining the meaning of the K
 UCC § 2-202(a)
 The terms of an integrated K may be explained or supplemented by course of performance
  beware danger that long-term K can easily morph into something different than K terms
if you’re not diligent about following the terms
 UCC § 2-209, Modification, Rescission, and Wavier
 UCC wants to make it easier for parties to modify their Ks
 Wavier under 2-209(4) and (5)
o (4) an attempt to modify that doesn’t otherwise comply w/ 2-209 can operate as a
waiver, which, (5) the party who waived can retract provided he gives the other
party reasonable notice that strict performance will now be enforced
 Modifications vs. Waivers
o If your apt lease provides you’ll pay your rent on first Monday of month and you
go to your landlord and she agrees you can pay on first Friday  modification
o If you start paying on first Friday w/o asking, and landlord accepts payment w/o
objection  (likely) wavier to enforce the K at least for that payment, if repeated,
creates justified exception that late payment accepted
 K terms haven’t been modified though. Landlord can reinstate K by giving
you timely notice
 Private SoF
 i.e. K has a section prohibiting modification not in writing
o This is an attempt to prevent agreement from drifting away from orig written doc as
“relational contracts” and long-term Ks tend to do (e.g. Nanakuli by course of perf)
o But making a private SoF means that general rules of SoF apply  receiving and
accepting goods, even if that modification wasn’t in writing, an exception to SoF.
 Note on Modifying Modifications, Asmus v. Pacific Bell
o Employer can remove a benefit that it unilaterally conferred provided the benefit was there for a
reasonable time and the employer gives reasonable notice of the removal.
41
 o Interesting application of unilateral contract theory
 Problem 4-8 (Berkeley law professors)
o It might be harder to fire the professors as compared to normal employees because of the tenure, especially since it
was a reason for which they came (as opposed to, as in the case of Asmus v. AT&T, something that was bestowed
on them while they were already there, and something for which they were given benefit as they went along, but still
hard to distinguish—the Brooklyn Bridge Crawl is easier to distinguish since reward comes only at the end)

Wong v. Paisner, MA AC, 1982

Accord and satisfaction can be used to alter the terms
 Facts: P and D made a K in which P would perf services for D and P would be paid (in P’s view) by the hour or
(in D’s view) by a fixed fee. D sent P a check for the full amt under the fixed fee view of the K saying the check
was “payment in full” (offer of accord). P then crossed out that the fee was paid in full and deposited the check.
P then sued for the remainder which P thought was due.
 Issue: Was the bill subject to accord and satisfaction?
 Holding: Yes, the bill as paid according to accord and satisfaction (or at least okay for jury to find so)
o The doctrine of accord and satisfaction allows a party to offer an accord to satisfy the amount due and if
the other party accepts, the first party had a time to satisfy it by actual payment of the accord, like here.
 Key Points
o R2K § 278(1) – if an obligee accepts in satisfaction of the obligor’s duty a performance offered by the
obligor that differs from what’s due, the duty is discharged.
 E.g. if a debtor owes creditor $1k and offers in full satisfaction a machine instead and creditor
accepts machine, debt is discharged by this substituted performance
o R2K § 281(1) – a K under which an obligee promises to accept a stated performance in satisfaction of the
obligor’s existing duty. Performance of the accord discharges the orig duty  accord and satisfaction
 Substitution and accord and satisfaction are closely related concepts
 Note that an offer of an accord must be conspicuous
o Liquidated vs. Unliquidated Debts
 A&S only applies to unliquidated debts (debts that aren’t clearly determined in dollars).
 Reason is a party’s promise to discharge the remainder of the debt lacks consideration (common
law precedent that still holds in U.S.)

5. Legal Regulation of Contracts

Judicial Regulation of Contracts
Judges regulate contracts through many different tools. Their three main tools:
 Mistake
o Must be a mistake in fact, not a mistaken prediction or hope
o Usually must be a mutual mistake
o If the risk of mistake was intentionally allocated to one party by the K, that party can’t claim mistake as a
reason for not enforcing the K.
o Difference between mistake and misunderstanding
 Misunderstanding, R2K § 20
 When the offeror means one thing and the offeree understands another, or vice versa
 Each party believes something different and the law finds there was no agreement. E.g.
Peerless, where each party was thinking of a different ship but same name
 Mistake, R2K § 153
 Each party thinks something about a fact underlying the agreement that’s in fact incorrect
 Sherwood, where each party thinks the cow is sterile (whoops)
 Illegality
o Contracts that are against public policy, as defined by statute (e.g. prostitution) or the judge (e.g. non-
competition agreement that works as a restraint on trade
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  Unconscionability – an old doctrine from equity

A. Misrepresentation and Mistake of Fact

Mistake
 A mistake is a belief that’s not in accord w/ the facts (R2K § 151)
 Mutual mistakes – both parties enter into the K w/ a mistaken belief
o R2K § 152 – mistake of both parties at the time of a K was made re: basic assumption on which the K
was made has a material effect on the agreed exchange of performances, the K is voidable by the
adversely affected party unless he bears the risk of the mistake under the rule stated in § 154
 Unilateral mistake: one party enters the K w/ the mistaken belief
o R2K § 153 – where a mistake of one party at the time a K was made re: basic assumption on which he
made the K has a material effect on the agreed exchange of a performance that’s adverse to him, the K is
voidable by him if he doesn’t bear the risk of the mistake under § 154, and:
 The effect of the mistake is such that enforcement of the K would be unconscionable, or
 The other party had reason to know of the mistake or his fault caused the mistake
 If the party adversely affected bore the risk of the mistake, then the K will not be voidable
o R2K § 154, a party bears the risk of mistake when:
 The risk is allocated to him by agreement of the parties, or
 He’s aware, at the time the K is made, that he has only limited knowledge w/r/t facts to which the
mistake relates, but treats his limited knowledge as sufficient, or
 The risk is allocated to him by the court on the ground that it’s reasonable in the circumstances
 E.g. Lenawee County Board of Health

Misrepresentation
 Misrepresentation is an “induced mistake,” and can also be a tort
o R2K § 164, when a misrepresentation makes a K voidable
 If a party’s manifestation of assent is induced by either a fraudulent or a material
misrepresentation by the other party upon which the recipient is justified in relying, the K is
voidable by the recipient
 Requirements of misrepresentation in comments to § 164.

Weintraub v. Krobatsch, SC of NJ, 1974

Contracts that try to get around the law are illegal and thus unenforceable
 Facts: P (seller) entered into K for sale of house to D (buyer) in its “present condition.” There was evidence
showing P knew that the house was infested w/ cockroaches, but didn’t tell P. After finding out about the
roaches, D attempted to rescind the K. P rejected rescission and filed this action.
 Issue: Is concealment a form of misrepresentation?
 Holding: Yes, rescission is appropriate here b/c seller had a duty to disclose.
o Misrepresentation isn’t just affirmative misrepresentations, it’s also not disclosing defects known to seller
and unknown & unobservable by the buyer
o Still need to determine whether the concealment/non-disclosure was of such significant nature that it
justifies rescission
 Key Points:
o R2K § 164, When a Misrepresentation Makes a Contract Voidable
 If a party’s manifestation of assent is induced by either a fraudulent or a material
misrepresentation by the other party upon which the recipient is justified in relying, the K is
voidable by the recipient.
 ** Requirements of a misrepresentation are in the comment
o Proving misrepresentation requires P to show:
 An intentional misrepresentation
 Of fact or opinion
43
  That is material and
 Intended to induce and
 Does induce reasonable reliance by the P
 Proximately causing pecuniary harm to P.
 Misrepresentation is generally a tort, ut P wanted contractual remedy of rescission, not damages.
o Caveat Emptor – let the buyer beware
 Stronger doctrine in the 19th century, but still something to watch out for
 If a party has the means to inspect product’s defects and doesn’t, court might not bail him out

Lenawee County Board of Health v. Messerly, MI SC, 1982

Mutual mistake can make a K unenforceable unless the risk of that mistake was clearly assigned to one of the parties.
 Facts: Buyer bought prop w/ apartments that had a septic problem. BoH got permanent injunction prohibiting
habitation on the premises (buyer was buying for rental prop revenue). Prop value dropped to zero. K for sale
said that the prop was “accepted in present condition” or “as is” by the buyer.
 Issue: (1) Was there a mistaken belief by one/both of the parties to the K, and if so, (2) what result?
 Holding: (1) There was a mutual mistake of fact, but (2) the circumstances don’t warrant rescission.
o Facts show that the septic system was defective prior to the date on which the K was executed and neither
party was aware of it  parties entered into K under a mutual mistake of fact
o Court determines test for determining whether rescission is allowed are R2K §§ 152, 154
 R2K § 152 – where a mistake of both parties at the time a K was made as to a basic assumption
on which the K was made has a material effect on the agreed exchange of performances, the K is
voidable by the adversely affected party unless he bears the risk of the mistake under § 154
 This is a significant mistake w/ a material effect, however parties allocated risk to buyer in the K
w/ the “as is” clause  buyer assumed risk re: “Present condition.”
 * Note that both parties arguing for other ways to determine legal significance. Seller argued
mistake only re: value of the real estate, buyer arg mistake went to essence of the thing (Sherwood
and “barren” cow). Court abandons these two distinctions.
 Key Points:
o R2K § 151 – Mistake -= belief that isn’t in accord w/ the facts. Must relate to fact in existence at the time
contract executed, not prediction of future occurrence/non-occurrence)
o R2K § 152, When Mistake of Both Parties Makes a Contract Voidable
 (1) mistake of both parties
 (2) basic assumption on which the K was made
 (3) materially affects agreed exchange of performance
 (4) Present at the time the K was made
 Court has a lot of freedom to decide on a case by case basis, but remember R2K § 154
o R2K § 154, When a Party Bears the Risk of a Mistake
 A party bears the risk of a mistake when:
 (a) the risk is allocated to him by the agreement of the parties, or
 (b) he’s aware, at the time the K is made, that he has only limited knowledge w/r/t facts to which
the mistake relates, but treats his limited knowledge as sufficient, or
 The risk is allocated to him by the court on the ground that it’s reasonable in the circumstances to
do so.
 Problem 5-1, valuable coin that’s later shown to be a fake
o Buyer was allowed to rescind on the basis of mutual mistake
o Idea of knowledge (since both merchants) and IW of merchantability (since this would be violation of
that) come into play in this case.

Monarch Marking System v. Reed’s Photo Mart, SC of TX, 1972

Courts are reluctant to not enforce Ks on the basis of a unilateral mistake only. It’ll only happen if the K is
unconscionable or if the other party had reason to know of the mistake.

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  Facts: D mistakenly ordered 4m labels instead of 4k, when the labels arrived, D refused to pay and claimed
mistake as the basis for rescinding the K.
 Issue: Is rescission appropriate given the circumstances?
 Holding: No, rescission isn’t appropriate. Relief from a unilateral mistake depends on the ability of the party
mistaken to put the other party in the same situation he was prior to transaction, and P can’t be (or D won’t be
put) back to status quo b/c P has already performed.
o Precedent that rescission will be denied to a party that negligently made a mistake, if the other party was
innocent, and has materially changed position (performed, or started performance)
o Wouldn’t be equitable to make P here pay for D’s mistake, assuming P was innocent
 Key Points: R2K § 153, Unilateral Mistake
o Where a mistake of one party at the time of a K was made as to a basic assumption on which he made the
K has a material effect on the agreed exchange of performance that’s adverse to him, the K is voidable by
him if he doesn’t bear the risk of the mistake under § 154, and:
 (a) the effect of the mistake is such that enforcement of the K would be unconscionable, or
 (b) the other party had reason to know of the mistake or his fault caused the mistake
o Getting out of a unilateral mistake is much more difficult
o Unilateral mistakes occur frequently in bidding process for construction projects (general contractors
hurrying to get in a bid and typos on numbers).

B. Public Policy and Illegality

Void as against Public Policy – R2K § 178
 A promise or other term of an agreement is unenforceable on grounds of PP if legislation provides that it’s
unenforceable, or the interest in its enforcement is clearly outweighed in the circumstances by a public policy
against the enforcement of such terms.

What makes a K illegal?

 Sometimes illegality is based explicitly on statute, e.g. illegal to have a K for prostitution
 Sometimes it’s based on judicial interpretation, e.g. non-compete agreements.
o When courts invoke PP here, they don’t do so rashly. It’s a vague area and a clear judicial intervention

Traditional areas of judicial prohibition on contracting as against public policy

 Restraints on free trade, e.g. non-compete agreement w/ onerous terms
 Contracts covering marriage, family life, and sex

Clouse v. Myers, MO AC, 1988

Contracts that try to get around the law are illegal and thus unenforceable
 Facts: P paid money to D and entered into a partnership agreement to run a bar w/ D, called it an “Employment
Agreement” so that P could continue operating bar under D’s liquor license instead of applying for a new license.
Govt found out and revoked license, stopping bar operations. P sued, claiming he was deceived by D.
 Issue: (1) Did D make any misrepresentations w/ intent/purpose to deceive that induced P to sign the agreement?
(2) Is P entitled to return of money?
 Holding: No and no
o (1) Nothing in record indicates actionable fraud that induced P to rely to his detriment.
o (2) Even if was the case, court won’t redress a wrong that resulted from the injured party’s own wrongful
and illegal conduct (not having a proper license)
 The K was an illegal K b/c it was made to subvert the law, so court won’t enforce it.
 Key Points:
o 4 elements of fraud: (1) representation made as a statement of fact, which was untrue and known to be
untrue or recklessly made, (2) representations made w/ intent to deceive, (3) other party relied on and was
induced by representation, and (4) other party damaged.
o R2K § 178 – contracts unenforceable on basis of public policy (here, statute  PP)
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 o R2K § 197, Restitution Generally Unavailable – except as stated in §§ 198 and 199, a party has no
claim in restitution for performance that he’s rendered under or in return for a promise that’s
unenforceable on grounds of PP, unless denial of restitution would cause disproportionate forfeiture.
 Problem 5-2 (illegal activity and non-compete agreement)
o The non-compete clause was not related to the illegal activity, so it was held to be enforceable
 So there must be some relation between the illegal activity and the remedy sought/issue at play in order for
the court to decline to uphold the contract on the basis of illegality

Hopper v. All Pet Animal Clinic, SC of WY, 1993

If a non-compete agreement is too broad, it’ll be held to be illegal as an unlawful restraint on trade.
 Facts: P signed a non-compete agreement w/ her employer, later breached agreement to start her own practice in
the city. Agreement said that she couldn’t be a vet for 3 years in the town and in the practice of small animals.
 Issue: Was the non-compete agreement reasonable/enforceable?
 Holding: Yes, 3-year duration imposed is an unreasonable restraint on trade (court reduces to 1 year from date of
termination), but type of activity and geographic limitations were reasonable and don’t violate PP.
o P didn’t prove loss of net profits in order to get damages from D.
 Dissent: D beat system, b/c doesn’t have to suffer from even 1 year of NC (b/c it’s passed by now).
 Key Points:
o R2K § 188, Ancillary Restraints on Competition. A restraint is reasonable only if it (1) is no greater
than is required for the protection of the employer, (2) doesn’t impose undue hardship on the employee,
and (3) isn’t injurious to the public  must examine reasonableness of restrictions on (a) type of activity,
(b) geographic, and (c) durational limits.
 Court here determines that type of activity and geographic restraints are reasonable, but durational
requirement is greater than required for protection of employer  therefore durational portion
violates PP as an unreasonable restraint on trade.
 Comment b, court must determine how much time is needed for the risk of injury to be reasonably
moderated.
o Court adopts R2K § 184, which allows court to enforce a narrower term which is reasonable in a NC. One
year time period (per trade usage) for employer to hire a new person/have them meet clients.
 Court upholds agreement through principle of narrowing to keep enforceable, instead of striking
out the whole agreement.
o R2K § 184, when rest of agreement is enforceable.
 Courts can reduce the scope of an unreasonable term in a contract, but courts can’t increase the
scope of a contract.
o Court’s options when non-compete illegal
 (1) Make entire agreement unenforceable. Strike down the entire agreement.
 (2) Blue pencil rule. Go through illegal K and make it legal by striking out (not adding), generally
not used by courts today.
 (3) Enforce narrower terms. Don’t alter basic idea, but narrow it. This is the R2K/this court’s route

A.Z. v. B.Z., MA SC, 2000

Courts reluctant to enforce Ks that require persons to engage in sexual/familial relationships
 Facts: P and D were husband & wife and had used in vitro fertilization to become pregnant. When they got
divorced, several of the embryos still at clinic. Husband and wife had previously signed a K saying that “upon
their separation” the embryos would go to wife for implantation. Husband usually signed form in blank and wife
filled out info.
 Issue: Can an individual be compelled to become a parent based on a prior agreement over his or her
contemporaneous objection?
 Holding: No, prior agreements to enter into familial relationships (marriage, parenthood) shouldn’t be enforced
against individuals who reconsider their decisions.
o Court finds a ton of reasons why consent form shouldn’t be binding (no set duration, relationship changed
drastically, definition of separation ≠ divorce, legally insufficient, etc.). More of a formalist approach.
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 o But bottom line: even if agreement had been unambiguous, court wouldn’t enforce an agreement that
would compel donor to become parent against his or her will. This is a PP approach.
o As a matter of PP, courts usually won’t enforce Ks compelling individuals to enter familial relationships
 Unclear resolution among the states.
o Some follow MA, hold compelled entering of familial relationships illegal/unenforceable
o Other states straight up enforce contract as written
o Some have balance of interest approach (consider interests of all parties involved)
o IL alone w/ strange maneuver of implied promise to conceive/implant, which overrules consent form
 Problem 5-3 (Same sex impregnation and one couple leaves)
o Massachusetts court sticks to its rule and says that Betty cannot be forced to pay support
 Problem 5-4 (Girlfriend stops birth control in order to get pregnant with boyfriend)
o How to you reconcile this issue with the “cannot be forced into a familial relationship holding of AZ v. BZ?
o Is the policy in MA too broad?
o Maybe we do want to force people in some circumstances, what about the interest of the child?
 In most states they would say that it does not matter that the woman has agreed to take birth control since the
interest of the child trumps, but in MA with their precedent it would be harder

C. Unconscionability
Unconscionability
 Major direct method for courts to use not to enforce contracts
 Requires procedural and substantive unconscionability (see Williams v. Walker-Thomas Furniture)

Under the UCC, § 2-302

1. If the court as a matter of law finds the contract or any clause of the K to have been unconscionable at the time it
was made, the court may refuse to enforce the K, or it may enforce the remainder of the K w/o the
unconscionable clause, or it may limit the application of any unconscionable clause as to avoid any
unconscionable result.
2. When it’s claimed or appears to the court that the K or any clause thereof may be unconscionable, the parties
shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to
aid the court in making its determination.
 Comment 1:
o Basic test is whether, in light of the general commercial background and the commercial needs of the
particular trade or case, the clauses involved are so one-sided as to be unconscionable under the
circumstances existing at the time the K was made
o The principle is one of prevention of oppression and unfair surprise, and “not of disturbance of
allocations of risk b/c of superior bargaining power.”

Under the Restatement, § 208

If a K or term of K is unconscionable at the time the K is made, a court may refuse to enforce the K, or may enforce the
remainder of the K w/o the unconscionable term, or may so limit the application of any unconscionable term as to avoid
any unconscionable result.

Williams v. Walker-Thomas Furniture, US AC, 1965

Procedural and substantive unconscionability can make a K unenforceable
 Facts: P bought a piece of furniture from D, the purchase was pursuant to a “cross-collateral” installment K
which said that as long as P had unpaid balance on previous purchases, payments for the new piece would go to
each piece, pro rata, which effectively kept P from getting title to all pieces until P fully paid the bill for
everything. P defaulted, D seized all her furniture bought in the lst 4 years.
 Issue: Whether the K is unenforceable b/c it’s unconscionable
 Holding: Yes, the K is unconscionable.

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 o Question of first impression for jx, absent other authority, uses recent adoption of UCC as persuasive
authority for following that there’s an element of unconscionability, K shouldn’t be enforced.
o Court gives early definition of unconscionability, which includes:
 (1) Procedural Unconscionability – an absence of meaningful choice for one party
 Look at circumstances of formation, was process by which consent obtained
unreasonably favorable to one party?
 (2) Substantive Unconscionability – K terms which are unreasonably favorable to other party
 Terms of K should be considered in the light of the circumstances existing when the K
was made. Look at terms of K itself, are terms unreasonably favorable to one party?
 Key Points:
o Early Framework of Unconscionability
 Established 2-part analysis, both procedural and substantive unconscionability must be present
 Procedural Unconscionability – the manner in which the contract was negotiated
 Defect in the bargaining process itself, no real bargain
o An asymmetry in bargaining power, such as education or knowledge or need of
service, can lead to procedural unconscionability
 BUT, if substantive unconscionability doesn’t follow, there’s no unconscionability
 Substantive Unconscionability – whether the obligations assumed are unreasonably favorable
to one of the parties
o Decision comes w/ wave of consumer protection concerns. Doctrine becomes marginal when
legislatures passed additional laws and regulations. Gradually as a result unconscionability becomes a
bit of a sleeping presence
 The event it was waiting for = advent of arbitration, see Ferguson and Concepcion
o ** Note that this is applying rule to a transaction that occurred before UCC enacted in DC jx

Batfilm Productions v. Warner Bros, CA TC, 1994

Courts usually won’t invoke unconscionability for parties that are capable of protecting themselves and failed to do so.
 Facts: P sold rights to produce Batman movies to D. Terms of sale provided P got 13% of “net profits,” but “net
profits” a Hollywood term that’s complex and basically designed to ensure that net profits never realized. P a
former general counsel of MGM, so was presumably aware of this process.
 Issue: Is the K (or any part of the K) unenforceable b/c it’s unconscionable?
 Holding: No, the K (any single terms of K) is not unconscionable.
Although K seems unfair, it is not unconscionable since bargaining party was not at a disadvantage and had ample
education/knowledge of trade to know what “net profits” actually meant and how the K would actually function.
Courts are reluctant to accept pleas of unconscionability when they’re between experienced negotiators.
Ferguson v. Countrywide Credit Industries, 9th Cir. AC, 2002
Employment agreements to arbitrate is unconscionable, since it’s procedurally and substantively unconscionable
 Facts: P signed an arb agreement when she obtained job w/ employer, presented as an adhesion K and contained a
# of provisions that tilted the balance of the arb process in the employer’s favor.
 Issue: (1) Was entire arb agreement enforceable? (2) If not, are the remaining non-offending clauses of the K
enforceable?
 Holding: (1) No, arb agreement unenforceable b/c it’s unconscionable. (2) No, offending provisions can’t be
severed/limited.
o If the court finds an arb clause unconscionable, they may refuse to enforce it. There must be both a
procedural and a substantive element of unconscionability (Armendariz) – more substantively
oppressive K terms req. less ev of procedural unconscionability, although still need both.
 Procedural focus, 2 factors: oppression (inequality of bargaining power is an absence of
meaningful choice) and surprise (supposedly agreed-upon terms hidden in K)
 Substantive focus on terms of agreement.

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 Court found ev of one-sided K in that discovery was one-sided, arb compelled for claims
employees likely to bring against D, but exempted arb for claims D more likely to bring
against employees, etc.
o Under CA civil code, court may “refuse to enforce the K as a whole if it’s permeated by
unconscionability”  mult defects here indicate a systemic effort to impose arb as inferior forum that
works to employer’s advantage.
 Key Points:
o Growth of Arbitration
 Federal Arbitration Act (FAA) passed in 1925 to promote quick and cheap resolution to biz
decisions so they could move on with transaction
 Expanded in 60s and 70s by SCOTUS to cover more areas of transactions, to encourage arb as a
way of de-clogging to over-burdened courts.
 Now arb mandatory in almost all consumer agreements, and it can sometimes be abused.
 This is something that a lot of state and lower fed courts don’t like 
o CA and many other states began to reinterpret unconscionability where arb has
been used to harm the consumer (in the court’s view)
 Severability – D would’ve been better off to have severability clause directing court to sever any part of
agreement that’s found to be unconscionable, so entire K not thrown out.

AT & T Mobility v. Concepcion, SCOTUS, 2011

State courts can’t discriminate, in intent or effect, against arb through the use of unconscionability. The purpose of the
FAA is thwarted when this happens, and SCOTUS (or at least Scalia) won’t permit it
 Facts: P signed agreement w/ AT&T cell phones req. arb for disputes and prohibiting class arb. P had a dispute
about tax on their “Free cell phones.” DC and AC said arb provision unconscionable, b/c it didn’t adequately
substitute for deterrent effects of class actions
 Issue: Is the agreement unconscionable? Does the FAA prohibit states from holding class-wide arb waivers to be
unconscionable?
 Holding: No, the agreement wasn’t unconscionable. The state’s unconscionability doctrine preempted by FAA
 Key Points:
o FAA § 2 – a written provision to settle by arb, shall be valid, irrevocable and enforceable, save upon
grounds as exist at law or in equity for the revocation of any K
 Permits agreements to arb to be invalidated by “generally applicable K defenses,” such as fraud,
duress, and unconscionability, but not by defenses that apply only to arb
o Discover Bank Rule (overturned here)
 When a class-action waiver is found in a consumer K of adhesion in a setting in which disputes
btwn contracting parties predictably involve small amounts of damage, and when it’s alleged that
the party w/ superior bargaining power has carried out a scheme to deliberately cheat large #s of
consumers out of individually small sums of money, then the waiver is unconscionable
 Dissent: DB rule proper grounds under FAA for revocation. DB ≠ obstacle to FAA accomplishment & execution.
 Consumer Financial Protection Bureau (est post 2008 recession), found that mandatory arb clauses ought to be
barred. Could be brought into law under Dodd-Frank, but unlikely now (fuck Trump)

6. Remedies
Expectation Damages are the norm in K law. Intent here is to put non-breaching party into the position they would’ve
been in had the K been fully performed.
 The usual measure of expectation damages for sellers/buyers = Market Price – Contract Price (UCC §§ 2-713
and 2-708(1))
 When P can’t show what his expectation damages would be, P may recover:
o Reliance Damages – costs already spent in performing the K, or
o Restitution Damages – part of the costs spent in performing the quasi-K that benefited D.

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  Direct vs. consequential damages
o Direct Damages
 Basic difference btwn what you were promised and what you received (foreseeable in the ordinary
course of things).
 E.g. car was supposed to have working breaks and didn’t. Direct damages = cost to get breaks
o Consequential Damages
 Losses that don’t flow directly from the breach, arise as a consequence of the breach
 E.g. car w/ bad breaks doesn’t stop, so you drive through garage door
 Note that unless special circumstances were communicated at the time the K was made,
not recoverable (per Hadley)
o Incidental Damages
 Incidental damages are consequential damages of an aggrieved party wrapping up a breach of K –
UCC distinguishes btwn incidental and consequential damages. Incidental damages can almost
always be collected, but consequential damages can be excluded
 E.g. arranging for a new buyer, additional shipping costs, etc.
 Duty to mitigate
o Non-breaching party has a duty to mitigate its losses once the K has been breached
 Specific Performance (R2K § 359)
o Damages are generally the remedy, not SP
o SP won’t be ordered if damages would adequately protect expectation interest of injured party.
o Usually SP is only used where the goods in question are unique (most often prop transactions)

A. Expectation Damages
Almost all K cases, damages = expectation damages. P recovers enough money to fulfill their economic expectations
for the K, or the court carries P to the economic place where it would’ve been had K been performed.

Formulas for calculating expectation damages

Expectation damages = loss in value + other loss – cost avoided – loss avoided
 Loss in value: Difference in value between what the injured party would’ve received under the K and what they
did receive
 Other loss: Injured party’s costs arising from the breach, such as costs previously incurred in justified reliance on
the K, or costs associated w/ arranging substitute performance.
 Costs avoided: What the injured party doesn’t have to pay out as a result of the breach. E.g. home owner
breached in me building the house, I no longer need to buy roof shingles to finish the job)
 Loss avoided: Any savings that the injured party may make after the breach

Damages are measured w/ reference to the market price

 If buyer breaches  UCC § 2-708, Seller’s Damages for Non-Acceptance
o (1) Damage = difference between market price at the time and place of delivery and the unpaid K price,
together w/ any incidental damages, but less expenses saved as a result of the breach by buyer.
o (2) If (1) is inadequate, the measure is the reasonable profits that the seller would have made.
 (2) often used in the case of a lost volume seller, or where the seller has made something unique
for the buyer that no one else really wants and ends up selling it for scrap.
 If seller breaches  UCC § 2-713 Buyer’s Damages for Non-Delivery
o Damage = difference between the market price at the time when the buyer learned of the breach and the K
price, together w/ any incidental or consequential damages, but less expenses saved as a result of the
breach by the seller.

General Limitations on Expectation Damages

 Non-breaching party must usually mitigate, unless they’re a lost-volume seller

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  Non-breaching party may only recover for a foreseeable loss, not what is unforeseeable at the time K is made
 Expectation damages aren’t awarded beyond the amount at which they can be proved w/ reasonable certainty

Lost Volume Seller

Two tests to determine if UOP is a lost volume seller. If he is, then appropriate measure of damages = lost profits,
because he could have made 2 sales as a LVS:
 (1) Seller must demonstrate that it could have made a second sale – that it has the objective/ready access to
additional inventory at the time of the breach (objective test)
 (2) Would the seller have made the second sale to the ultimate purchaser even w/o the breach? Must show that the
original sale and resale after breach were wholly independent (subjective test)

 Expectation damages and the efficient breach of contract

o Breach of contract is not a tort or civil wrong
 The central objective behind contract damages is compensatory not punitive
 So per R2d 355 punitive damages are “not recoverable for a breach of contract unless conduct constituting
the breach is also a tort for which such damages are also recoverable”
 So the law permits and seems to even encourage efficient breaches of contract
 This is because of the efficient breach theory
o Not a legal doctrine but an academic explanation
 e.g., In the Hunt for the Red October case, the breach on the part of the paperback publisher was efficient
since it could (or so it believed) make more money while still paying the hardback press for its losses
 e.g., In the case where seller is making widgets and selling them to A; seller then finds out that B needs
the widgets to seller breaches his contract and sells his widgets to B for a higher price; with the extra
money he makes, he can pay the damages that are owed to A on account of his breach and still make a
profit on the breach
 This is a Pareto Superior
o An reallocation of resources where at least one party is better off and no party is worse off
 And if this is true, society is better off, and when you aggregate each individual Pareto
superior, society is way better off
 If the law required specific performance in circumstances otherwise supporting an efficient breach, it would
be inefficient for society since it would require a party to do something that would cost more to him than it
would benefit the other party
o But note the three issues that arise when thinking about an efficient breach
 (1) Theory of efficient breach assumes that the breaching party is able to calculate with reasonable accuracy the
profit that would come from a breach
 But this is often hard because the potential breaching party does not have all the information he needs
and the legal rules determining what the costs of the breach are vary enormously depending on context
o e.g., Will there be consequential damages?
 (2) Theory of efficient breach assumes that the non-breaching party will be fully compensated, otherwise there is
not a Pareto Superior
 But this is not often the case since monetary damages are not representative of subjective loss and there
are transaction and other costs, such as lawyers’ fees, for which the non-breaching party will not be
compensated
 (3) Theory allows the breaching party to gain all of the profit from the breach
 (4) And what about ruining the relationship between the parties for future business transactions?
 This is probably a form of transaction costs
 (5) And what about undermining aggregate societal reliance interest in the stability of contracts?

Freund v. Washington Square Press, Court of Appeals of NY, 1974

Damages aren’t measured by the gain that the breaching party enjoyed as a result of his breach. Where expectation
damages aren’t proved w/ reasonable certainty, they aren’t granted.
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  Facts: P signed an agreement w/ publisher (D) where he’d write a book, D’d pay him nonreturnable $2k,
publisher would read the book and have 60 days to terminate K, P would receive royalties. D didn’t exercise 60-
day right, but refused to publish. TC awarded P amount it would cost to publish book himself ($10k)
 Issue: Are damages in the amount of the cost of publication an appropriate measure of damages?
 Holding: No, $10k inappropriate b/c it was based on cost to publish, and not on the value of the promised
performance to P.
o Error = measuring damages by what would have cost D to perf K, when the measure should be the value
of the promised performance to P. Here, value of promised performance = royalties, so damages
should’ve been loss of royalties.
 BUT P failed to adequately prove what royalties would’ve been  P only gets nominal damages
o Awarding cost of publication would put P in better place than if contract had been performed
o AC’s construction analogy (where damages would be cost of completion of building) inappropriate, D
promised P % of sales, not publication of books
 Should measure what benefit perf would give to P, not cost of D of conferring it.
 Key Points:
o R2K § 359, Effect of Adequacy of Damages
 Specific performance or an injunction won’t be ordered if damages would be adequate to protect
the expectation interest of the injured party
 Freund initially wanted specific performance
 We still don’t award SP even after P can’t calc damages – courts hesitant to order SP
o R2K § 352, Uncertainty as a Limitation on Damages
 Damages aren’t recoverable for a loss beyond an amount that the evidence permits to be est w/
reasonable certainty
 Note that courts today enforce this w/ some leniency, esp if breach is willful
o Damages aren’t measured by what defaulting party saved by breaching the K (damages aren’t punitive)
o New business problem w/ expectation damages
 E.g. new coffee shop is about to open, but landlord defaults on the lease. Really tough to calc
profits here, b/c we don’t know how profitable company would’ve been.
 U.S. Naval Institute v. Charter Communications (Tom Clancy case)
o P doesn’t get D’s profits from publishing early, just the cost to P (loss of hardcover sales) resulting from
D’s breach by early publication of paperback.

Peevyhouse v. Garland Coal Company, SC of OK, 1962

When calculating damages, the diminution in value test is chosen over the cost of performance when the cost of
performance would be disproportionate to the diminution of value and the breach provision is incidental to main
purpose of K.
 Facts: P owned a farm w/ coal deposits, leased it to D. One term in K req. that D do restorative work at end of
lease period. D finished mining and didn’t do restorative work – would have cost $29k to restore land, and
diminution to prop ow/o filling in holes was only $300.
 Issue: Should damages be calculated under “specific performance” or “value” rule?
 Holding: The measure of damages in an action by lessor against lessee for damages for breach of K is ordinarily
the reasonable cost of performance of the work. However, where the K provision breached was merely
incidental to main purpose, and where economic benefit that would result to lessor by full performance is
grossly disproportionate to the cost of performance, the damages are limited to the reduction in value resulting
to the premises b/c of non-performance.
 Dissent: This was a willful and BF breach, D was fully aware of cost of performance when he made the bargain
and this was therefore incl in the bargain. In the performance of the K, D got what he bargained for, and now he’s
denying P what P bargained for. Court shouldn’t permit this, should issue an injunction compelling perf (would
also allow parties to negotiate settlement).
 Takeaways:
o R2K § 348(2), Alternatives to Loss in Value of Performance

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  (2) If a breach results in defective/unfinished construction and the loss in value to the injured party
isn’t proved w/ sufficient certainty, he may recover damages based on:
 (a) the diminution in the market price of the prop caused by the breach, or
 (b) the reasonable cost of completing perf or of remedying the defects if that cost isn’t
clearly disproportionate to the probable loss in value to him.
o Principal purpose of K and Effect on Damages
 Example: Eli has a house and wants to put a statute of himself in the front lawn of him that costs
$25k. If he goes through w/ the project, it’ll reduce value of house by $10k. Contractor building
statute defaults, and Eli has to get someone else to build statute. Can contractor say he saved Eli
money? NO, clearly something w/ real subjective value to Eli.
 How do we distinguish this from Peevyhouse? – Leveling is a side/incidental component of the K
here, doesn’t seem to have same central personal value (or so court finds)
 If Peevyhouse had a separate K for $25k for D to level and that was breached, would’ve
gotten damages  to do a better job, Peevyhouses should’ve had a separate agreement w/
its own consideration.
 What if Peevyhouse had hired 3rd party to do work and sued for substitute performance? – This
would’ve been clear indication that performance was subjectively valuable to Ps and then
would’ve had a much better shot at recovering $25k damages.
o Court does shoddy, incorrect analysis of “economic waste,” actually just shifting who bears cost of D’s
actions (should be D, but now making P pay losses, not actually choosing more efficient option).
o Also likely a corrupt judiciary making decision.
 Problem 6-2 (New Orleans and its fire crew that was not working properly)
o City got nothing
o They did not suffer any loss or injury, so they get no damages
o This has to be solved going into performance
 e.g., An insurance company grants a bond that guarantees performance

New Valley Corp v. United States, US Fed Claims, 2005

 Facts: P signed K w/ NASA to have it deliver its satellite into space. NASA breached when it decided it would no
longer send satellites into space post-Challenger (thanks Reagan). During the same time, P ran out of money,
filed for bankruptcy so it couldn’t have perf’d at launch date even if NASA hadn’t breached. K prohibited
consequential damages, and allowed only for direct damages.
 Issue: (1) Absent the breach, would P have been willing/able/ready/able to proceed w/ perf under k? (found irrel).
(2) In the absence of an actual substitute transaction, is P entitled to damages based on the difference between the
K price and the market price for comparable launch services?
 Holding:
o (1) Breach was the proximate cause of P’s alleged injury
 D arg for R2K § 254(1), P wouldn’t have been willing and ready to perf on launch date  no
right for P to recover.
 Court says this is too narrow, § 254 really concerned w/ recognizing that in an anticipatory
repudiation the breach must be shown to be the prox cause of alleged injury. P could’ve sold their
assets for more than they did if assets incl a NASA launch. This is enough to show prox cause.
o (2) P can collect damages for how much more P could have sold assets for if they included a NASA
launch K.
 Injury here is loss ID’d through hypothetical sales transaction w/ Hughes. Need more hearings to
determine how much more Hughes would’ve paid if included launch K w/ NASA
 Takeaways:
o R2K § 254(1), Effect of Subsequent Events on Duty to Pay Damages – a party’s duty to pay damages
for total breach by repudiation is discharged if it appears after the breach that there would’ve been a total
failure by the injured party to perf his return promise.

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  Damages Hearing – Direct damages are based on the value of performance itself and are measured by the loss of
the value of the performance promised by the breaching party – present in this case b/c the K itself had value and
could be sold (and would’ve been sold at a higher price w/ launch date
o Issue: Are damages direct (recoverable) or consequential (not recoverable)?
o Holding: The damages are direct and they’re recoverable (although P miscalculates them)
 These are direct damages – they’re the addl amt Hughes would’ve paid for assets.
 Takeaways:
o Direct vs. Consequential Damages
 Direct Damages are damages measured by the loss of the value of the performance promised by
the breaching party. They’re based on the value of the very thing to which the P was entitled.
 Consequential Damages are damages that result as a secondary consequence of the D’s non-perf
 Consequential damages are very often excluded 
o UCC § 2-719(3)
 Consequential damages may be limited or excluded (like here) unless the limitation is
unconscionable. Limitation of consequential damages for injury to the person in the case of
consumer goods is prima facie unconscionable but limitation of damages where the loss of
commercial is not.
 Problem 6-3 (Seller where the marginal cost of product changes)
o (1) The proper measure should be $30K since that was the seller’s marginal profit on the sale
o (2) This argument will not work, since the seller would still have made a marginal profit of $30K on that specific sale,
and it does not change his overhead costs, which are fixed, if it were variable, that might be a different situation
 Problem 6-4 (PVC pipe case)
o Tough case

Krafsur v. UOP (In Re El Paso Refinery), US Bankruptcy Court, TX 1996

Lost volume seller isn’t required to mitigate damages, and therefore entitled to recover reasonable profits. But here
UOP ≠ LVS
 Facts: Krafsur signed a licensing K for software from UOP. K then filed for bankruptcy and the licensing
agreement was transferred to its successor. New agreement btwn successor and UOP was more valuable than the
original agreement. Krafsur says UOP’s claim for damages are mitigated by successor’s payment. UOP says they
had an unlimited number of licenses, so they’re a lost volume seller.
 Issue: (1) Were UOP’s losses mitigated by sale to K’s successor? (2) Is UOP a LVS?
 Holding: (1) Yes, UOP more than mitigated its damages. (2) No, UOP ≠ LVS
o Normal measure of damages = contract price – resale price
o LVS isn’t bound by normal calc, b/c it wouldn’t adequately be re-compensated for its loss. Absent the
breach, LVS would’ve earned profits from 2 sales as opposed to just one. Court uses 2-step test (see
below) to determine whether UOP is a LVS, and concludes it isn’t. Successor licenses couldn’t have been
sold w/o breach, b/c if they hadn’t breached and vacated the refinery, the successor wouldn’t even exist
let alone own a factory  any loss UOP suffered is more than mitigated by transfer to successor.
 Takeaways:
o Lost Volume Seller
 Two tests to determine if UOP is a LVS (limitless capacity + independent sales event). If he is,
then appropriate measure of damages = lost profits, b/c he could’ve had a second sale:
 (1) Seller must demonstrate that it could have made a second sale – that it has the capacity or
ready access to additional inventory at the time of the breach (objective test)
 (2) Would the seller have made the second sale to the ultimate purchaser even w/o the breach?
Must show that the original sale and resale after breach were wholly independent (subjective test).
 (a) Did the breach provide the opportunity to make the second sale?
 (b) Examine 2nd buyer’s needs to determine if he would’ve bought even w/o breach
 (c) Examine characteristics of goods involved in breach. The more specialized the goods
are, the more likely it’s a replacement sale.

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  Wired Music – sale of LVS to 2nd restaurant where 1st restaurant that breached used to be ≠
mitigation, b/c P would’ve made 2nd sale regardless of 1st party’s breach.
 Hypotheticals:
 Rembrandt painting sale – if buyer A breaches and buyer B buys, seller suffers no loss.
Seller isn’t LVS since there’s only one Rembrandt piece and he wouldn’t have sold it to
buyer B but for the breach of the buyer A.
 Neri – Buyer A breaches for sale of boat but buyer B buys. Different b/c seller had lots of
boats and his LVS is real – boat supply unlimited, so damages for seller are.
o Damages for Lost Volume Seller, UCC § 2-708(2)
 If the measure of damages provided in subsection (1) [market price - unpaid contract price] is
inadequate to put the seller in as good position as perf would’ve done, then the measure of
damages is profit (incl reasonable overhead) which the seller would’ve made from full perf by the
buyer, together w/ incidental damages, due allowance for costs reasonably incurred, and due
credit for payments or proceeds of resale.
 This section is confusing, but has two purposes:
 (1) deal with the lost volume seller
 (2) deal w/ the seller who’s made a unique item for the buyer for which there’s no market,
but which he can still sell for scrap or on a secondary market. This is the “due credit for
payment or proceeds of resale.”
o Marginal Cost
 LVS may have no bounds on the ability to produce their product, but there may be bounds on
whether they can do so at a profit.
 E.g. a steel mill case where the marginal cost to produce the steel for the seller hits the market
price ($11/ton) after 100k tons. If he has a K to produce 100k tons for $12 per ton that’s breached,
he can sell the steel for $11/ton and recover damages, BUT Calculation here would not be lost
profits, it’d be the difference in market price and K b/c, although the steel mill could produce more
steel, they would not (subjective test) due to diminishing returns.
o Problem 6-3
 Seller has K to sell 10 modular homes for $200K each. Direct costs for houses are: 1-2 = $150K; 3-7 = $120K; 8-
9 = $130K; and 10 = $170K
 If Buyer on K #2 breaches and his modular home is delivered to Buyer #10, and Seller only makes 9 sales,
Seller’s damages are $30K, the loss of profits for the entire transaction

KGM Harvesting Company v. Fresh Network, CA AC, 1995

When a seller breaches, a party can either seek cover and sue the buyer for the difference between K price and the
(reasonable) cover price 2-712. If the buyer can’t or chooses not to cover, the measure of damages is the difference btwn
the K price and the market price at the time the buyer was made aware of the breach 2-713. Amount of damages
awarded does not change even if buyer is able to pass on costs.
 Facts: K terms = seller would sell to buyer 14 loads of lettuce/week at $.09/lb; seller defaulted, buyer covered,
but was able to pass on most of higher cost to its customers. Still sued under § 2-712(2) for difference between
cost of cover and K price.
 Issue: (1) What’s the measure of damages? (2) When does the interest begin?
 Holding:
o (1) Buyer entitled to the difference btwn the cost of cover and the K price, together w/ any incidental
damages. It doesn’t matter if this creates a windfall for the buyer (UCC § 2-712(2))
 Seller argues that despite 2-712, buyer shouldn’t be allowed to recover that much b/c it’d result in
putting the non-breaching party in a better position than it would’ve been if there hadn’t been a
breach. Court disagrees.
o (2) Buyer entitled to prejudgment interest b/c discrepancy in original calc of damages was minor.
 Takeaways:
o UCC § 2-712

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 (1) After a breach, buyer may “cover” by making in GF and w/o unreasonable delay any
reasonable purchase of or K to purchase goods in substitution for those due from seller  standard
here is “commercially reasonable”
 (2) Buyer may recover from seller difference between the cost of cover and the K price, together
w/ any incidental/consequential damages, less expenses saved in consequence of breach.
 Note that if buyer chooses to cover, he can’t also recover damages from 2-713
o UCC § 2-713
 Measure of damages for non-delivery or repudiation by the seller = difference btwn market price
at the time buyer learned of the breach and the K price, together w/ any incidental and
consequential damages, less expenses saved.
o Court completely disagrees w/ decision in Allied Canners

Hadley v. Baxendale, Court of the Exchequer, 1854

Damages must be limited to what was reasonably supposed to be in the contemplation of the breaching party (court says
both, really just breaching party) at the time they made the K as the probable result of the breach of it. If special
circumstances were known to the parties when they made the K, damages resulting from the special circumstances are
included, but if the special circumstances weren’t known, you can’t get damages from them.
 Facts: P ran mill that had broken shaft. Shaft brought to D who was told to transport it to manu to make a new
one molded w/ broken one. D delayed in shipping and mill was unable to operate. D didn’t (allegedly) know that
the mill wasn’t able to operate w/o shaft, P sued for consequential damages based on lost profit for being unable
to operate the mill.
 Issue; What is the measure of damages? Can P recover lost profits?
 Holding: Not lost profits. Non-breaching party is entitled to damages that should be fairly and reasonably
considered either arising naturally from the breach of K itself (direct damages) or they may reasonably be
supposed to have been in contemplation of both parties at the time they made the contract as the probable result
of the breach of it.
o If special circumstances under a K were communicated by P to D, damages resulting from the breach
would be the injury which would ordinarily follow from a breach of K under these special circumstances.
However, if they weren’t communicated, D can only be supposed to be liable for damages in the amt of
injury that would arise generally.
o Court finds special circumstances of broken shaft/potential for greater lost profits not communicated.
 Takeaways
o What does it mean for the issue to be “in contemplation of the parties?”
 Only req. that the breaching party foresees the damages
 Greater problem is meaning of “foreseeability”
 Holmes arg that mere notice at time of K of special circumstances isn’t enough, AoR must
fairly enter into the K (rejected by most scholars)
 Rule one from Hadley – “everyone, as a reasonable person, is taken to know the ordinary
course of things and consequently what loss is liable to result from breach of K in that
ordinary course” – Direct damages??
 Rule two from Hadley – There may have been added in the particular case knowledge
which the party actually possesses of special circumstances outside the ordinary course of
things of such a kind that a breach in those circumstances would be liable to cause more
loss  R2K is influenced by this idea.
o R2K § 351, Unforeseeability and Related Limitations on Damages
 Damages aren’t recoverable for loss that the party in breach didn’t have reason to foresee as a
probable result of the breach when the K was made.
 Loss may be foreseeable as a probable result of a breach b/c it follows from the breach
 (a) in the ordinary course of special events, or
 (b) as a result of special circumstances, beyond the ordinary course of events, that the party
in breach had reason to know.

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 
A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by
allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the
circumstances justice so requires in order to avoid disproportionate compensation.
o UCC § 2-715(2), Buyer’s incidental and consequential damages
 Essentially restates the CL rule above in R2K § 351
 Note that it doesn’t permit consequential damages for the seller.
 Problem 6-8 (manufacturer of a shaft did a bad job and the mill had to shut down)
o Manufacturer has a better notion of the consequences than the shipper in Hadley, probably
 So the results were more foreseeable and might therefore be included in the damages
Herrera v. Union No. 39 School District, VT SC, 2006
As long as certain results are in the contemplation of the parties, damages for the realization of those events may be
appropriate, even though that’s generally not the case for wrongful discharge.
 Facts: P was principal of high school, wrongfully discharged but was paid for duration of the K term
 Issue: What’s the measure of damages?
 Holding:
o P should still get nominal damages to vindicate his claim.
o Although consequential damages usually not appropriate for cases of wrongful discharge, this only b/c the
loss of professional opportunities or damage to professional reputation isn’t usually in the contemplation
of the parties when they made the K. But if it is, consequential damages could be appropriate.
 Takeaways:
o Usually very difficult for unjustly fired employees to win these cases
o Usually no emotional distress damages in K – R2K § 353
 Emotional distress isn’t a basis for damages unless it’s particularly likely to result from a breach
of K (e.g. casket manu’d poorly and corpse fall out during funeral.

Simeone v. First Bank National Ass’n – If there’s no market to determine the market price, it indicates a scarcity and
then the market can be based on an expert’s valuation, or specific performance can be granted since the goods are
probably unique.

B. Mitigation
 Mitigation of damages
o General rule is that when one party breaks a contract the other may not take action that would increase the damage; in
many cases, the non-breaching party may have an affirmative obligation to mitigate its damages by seeking substitute
arrangements
o Per R2d 350: (1) Except for as stated in (2) damages are not recoverable for loss that the injured party could have avoided
without undue risk, burden, or humiliation (2) The injured party is not precluded from recovery by the rule stated in (1) to
the extent that he has made reasonable but unsuccessful efforts to avoid loss
 e.g., Case where the purchaser breached the contract but the obstinately contractor continued to work anyway and
then sued for damages
 Here, the contractor did not mitigate his damages; instead, he increased them
 There is no duty to mitigate, actually
o You do not have to mitigate damages, but you can lose a lot in your damage award as a P if you do not and the case is
one in which you have a duty to mitigate
 Problems with finding when there is a duty to mitigate
o When should there be a duty to mitigate?
 (my idea) if something is more commodity like or indistinguishable for other options/goods
 When it is easy to effectively seek an alternative
o Can we accommodate personal preference?
 e.g., Shirley MacLaine movie breach and the refusal to do the second movie
o What is an adequate substitute?
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 o Does it matter if the opportunity is from the same company
 e.g., Shirley says that they betrayed her
o It is hard to define when there is a duty to mitigate in the case of fairly unique services or opportunities as opposed to
commodity like goods
 e.g., Fourth grade teacher was moved to sixth grade and had to commute farther
 No duty to mitigate under 2-708 (seller’s remedies for buyers breach) and 2-713 (buyer’s remedies for seller’s breach)
o BUT only because those formulas ASSUME the mitigation of damages
In re WorldCom, Inc. Lost volume sellers do not have a duty to mitigate damages because it is logically impossible for them
to do so
FACTS: Jordan was in a contract to work as a celebrity spokesperson; there were two years left on the contract when the
company filed for bankruptcy; Jordan did not seek alternative spokesperson positions
ISSUE:
 What is the measure of damages? Did Jordan mitigate?
HOLDING:
 Jordan was not a lost volume seller because although he could have sold more of his brand (although his reserve was not infinite
as is sometimes invoked by the courts, it was requisite for this purpose), he would not have sold more because he did not have the
subjective intent to further market his brand given his change of business decisions
 In the alternative, since Jordan was not a lost volume seller and had the duty to mitigate, he did not make reasonable efforts by
taking affirmative steps; rather, since he had changed business course, he did nothing; and the dilution of his brand or harm to his
reputation are not sufficient reasons in this case for avoiding his duty to mitigate; his alternative decision to start an NBA franchise
was not an effort to mitigate but rather a completely independent decision, so it does not therefore count; so the court will need to
determine what amount Jordan could have mitigated by in order to assess damages
REASONING:
 Damages rules and the duty to mitigate
KEY POINTS:
 Could you disclaim the duty to mitigate?
o Frier thinks so but is unsure
 Lost volume seller
o When the seller’s supply exceeds demand
o Yes to a licensing company or Michael Jordan
o No to a company selling cars in 1948
 Lost volume sellers have not duty to mitigate damages
o Lost volume sellers do not have a duty to mitigate, but MJ is not a lost volume seller, so he did have a duty to mitigate
 Wrongfully discharged employees have a duty to mitigate damages
o This often seems unfair, since they then have to take another job that is offered to them even if it is not as uniquely good
as the one they lost, as long as it is within reason
 UCC 2-709 suit for price
o Once a buyer has accepted, the seller can sue for the price and does not need to mitigate the damages
 Problem 6-9 (rejection of accepted goods)
o Will the return agreement work?
 Seller does NOT have a duty to mitigate once the buyer accepts
 Acceptance changes the situation
 It allows for the UCC 2-709 “Action for price”
o Siemens is probably a lost volume seller in this case anyway
 Efficient breach revisited
o Criticism of efficient breach theory
 Contracts should be covered by property rules
 If there is efficient breach of contract, why should there not be efficient theft of goods?
o But the response to this is that there is a difference between a property rule and a liability rule
 If a right is protected by a property rule, then the breaching party must pay the costs of
breaching as well as other punitive damages
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  If a right is protected by a liability rule, then the breaching party must pay the costs of
breaching but nothing more
o Our society has decided that contracts are only protected by liability rules not property rules
 Breaching contracts is immoral
 The moral wrong of breaching a contract (a promise) is not fully covered by monetary damages
 Undermines reliance
 Because a party cannot totally depend on the performance, because it will not occur if it is “efficient” to not
perform
 Transaction costs
 Litigation after the breach, loss of the bargaining partner, needing to be more careful next time you contract,
buying insurance all represent transaction costs resulting from the breach
 Assessment costs
 Often difficult to measure the expectation interest, it is time and resource intensive (going to court) and
often not accurate anyway, since it is hard to know subjective value
 Different forms of transaction costs and their effect on efficient breach
o A has contract to sell to B, but C values the goods more than B, so it would be efficient to breach and sell to C, assuming
that A can pay expectation damages to B and still come out ahead
o But why not still sell to B and then have B sell to C, where A takes a brokerage fee?
 Because there are search costs!
o Or why not negotiate out of the deal with B and then sell to C?
 Because there are transaction costs!
o So it is easier to just breach
 But note that there are transaction costs associated with this as well!
o In any case, in all three circumstances, the goods end up in the hands of the person who values them the most, it is just a
question how quickly and efficiently they get there!
 Problem 6-10 (Vase sale)
o This is an example of a potential efficient breach, assuming the transaction costs do not get out of control
 Problem 6-11 (Player moves from baseball to football)
o Maybe this was efficient, but is hard to know because we do not have objective criteria

C. Reliance Interest
 Reliance damages (R2d 349)
o “As an alternative to the measure of damages stated in 347, the injured party has a right to damages based on his reliance
interest, including expenditures made in preparation for performance or in performance, less any loss that the party in
breach can prove with reasonable certainty the injured party would have suffered had the contract been performed”
o Usually used when neither profits nor losses can be calculated with reasonable certainty

Wartzman v. Hightower Productions, Inc. Because neither negative nor positive expectation damages can be proven, the non-
breaching party is entitled to reliance damages
FACTS: D contracted with P to help him incorporate himself; P messed it up and for this reason D could not raise the funds
necessary to accomplish his flagpole sitting competition; D had expended lots of money in order to further this goal
ISSUE:
 What is the measure of damages? Are reliance damages appropriate?
HOLDING:
 Yes, reliance damages are appropriate here
REASONING:
 Because it is impossible to calculate expectation damages, reliance damages are appropriate for the costs expended by P in
preparation and performance; D has the burden and can try to prove that expectation damages would have been negative and by
this reason reduce his reliance damage judgment but he is unable to do so here
KEY POINTS:

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 Usual hierarchy of damages sought
o Usually expectation damages are worth the most, reliance damages are next, and restitution damages are the least
 But this can change when the expectation was for a losing enterprise, but reliance or restitution damages have
been expended
 But note that reliance damages are capped by foreseeable expectation damages (to the extent that they
are negative) but restitution damages are not
 New business problem
o e.g., Security Stove case
o Because it is uncertain if the expectation damages would be successful, reliance damages are given instead
 Reliance damages are in some respects like tort damages
o Because they put the party back in the position that they were before the events began
 Reliance damages are different from the reliance interest
o Note that there is a difference between reliance damages and reliance interest; often when the courts enforce a contract
based on the reliance interest (promissory estoppel), full contractual (expectation) damages are awarded, even though the
R2d aims to discourage this in some instances, saying that “damages may be limited as justice requires”
 Problem 6-12 (New café landlord breaches)
o Ultimately awarded $0 because there time was not given value since it was not proved that they gave up other opportunities
(the fact that they had concrete expenditures may have gotten lost in the record)
o Court will not require exact numbers but you do need to have at least some proof to show that you are entitled to damages

D. Restitution Damages
 Restitution damages
o Goal is to restore to a party the benefit that it conferred on the other party
o Remember that restitution usually involves a situation where there is no actual contract, but the contract finds a “quasi-
contract” or a contract implied in law

Fisher v. First Chicago Capital Markets, Inc. Restitution damages may be available as an alternative to expectation and reliance
damages when those are unavailable
FACTS: P contracted with D to perform certain services over a number of years; the agreement was made in writing and then
modified subsequently orally; P continued to perform based on this modification
ISSUE:
 What is the measure of damages? Are restitution damages appropriate?
HOLDING:
 Yes, restitution damages are appropriate here
REASONING:
 The SOF defense blocks both the contract based expectation damages and the reliance arguments (this state law is one of the few
states that treats the SOF as a defense to reliance); but it is possible for P to get restitution for the fair value of his services (which
is one prong of restitution, the other would be the amount by which D was unjustly enriched, and the court usually choose the
amount more favorable to the non-breaching party)
KEY POINTS:
 Per R2d 139 the SOF is not a defense to a contract enforced through reliance
o But the state law in this jurisdiction does not follow this rule and is in the minority position
 Method for determining restitution interest
o This is often a complex process
o R2d 371
 “If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by
either:
 (a) the reasonable value to the other party of what he received in terms of what it would have cost him to
obtain it from a person in the claimant’s position, or

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  (b) the extent to which the other party’s property has been increased in value or his other interests
advanced
 Generally, the courts pick the choice of measure that is more generous to the party who did not breach the
obligation or contract
o e.g., A agrees to repair B’s roof for $3K; A does part of the work at a cost of $2K, increasing the value of B’s house by
$1.2K; the market price to have a similar carpenter to do the work is $1.8K; A’s restitution interest is equal to the benefit
that he has conferred on B; if A breaches, he will be awarded 1.2K in restitution and if B breaches he will be awarded $1.8K
in restitution
United States for the Use of Palmer Construction, Inc. v. Cal State Electric, Inc. A breaching party may seek restitution but
only if the non-breaching party’s substitute performance did not require it to pay more than it initially bargained for
FACTS: P breached his contract with D; at the time of the breach, P had provided a value of 204K to D but been paid only 114K;
after the breach D needed to expend 126K to complete the work that P had contracted to do, so it ended up spending 6K more than it
had initially bargained for under the contract; but the trial judge awarded restitution damages of 80K to P
ISSUE:
 What is the measure of damages? Are restitution damages appropriate?
HOLDING:
 No, restitution damages are not appropriate here
REASONING:
 Although it is true that a breaching party may receive restitution damages if the breach leaves the non-breaching party unjustly
enriched, it is impermissible to award these damages if they have the effect of making the non-breaching party pay more than he
would have otherwise and so lose the benefit of his bargain
KEY POINTS:
 Cannot get restitution damages if it would force non-breaching party to pay more than contract price
 Contract is often an important reference point for restitution
o Although we are dealing with a restitution action, the original contract still has some governance in terms of reference point
over the dispute
o Note that this was also the case in the TVA case
 Unlike reliance, at least before the completion of performance, there is no expectation cap on restitution damages
o If the victim of the breach has spent more than the contract on performance he can get restitution even if they are more
than the expectation damages
o But once performance is complete, all that is available is expectation damages
 e.g., Lawyer who agreed to do the divorce for $600 and then spent $25,000 on it and the client breached before
the case was over (although this was a tricky one since the jury had gone to the jury room but not yet returned)
o But note that some scholars, e.g., Frier, think that it should not be this way
 Problem 6-13 (School construction case)
o Typically for construction contracts the measure of damages is the reliance + anticipated profits, but if the profit goes
negative should negative expectation damages be factored in to restitution damages?
 The answer is yes for reliance damages, but the R2d does not say for restitution
 Problem 6-14 (Power utility case)
o ?

E. Specific Performance
 Specific performance (R2d 359)
o Specific performance will not be ordered if damages would be adequate to protect the expectation interests of the party
o Generally, specific performance will only be given if the good are unique or represent some special subjective value
 e.g., Real estate
 e.g., Widow who contracted to buy the playing cards of her deceased husband
o UCC 2-716(1) Specific performance may be degreed when the goods are unique or in other proper circumstances
 UCC wants specific performance to be used more often; but judges have not been using it much outside of the
“unique” context
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 Factors for considering specific performance
o Favor
 Damages inadequate
 Damages uncertain
 Goods are unique
o Disfavor
 Availability of substitute
 Performance indefinite or unclear, so hard to direct action
 Return performance is not secure
 Supervision of enforcement difficult
 Not the best decision given the court’s equitable discretion

Almetals, Inc. v. Wickeder Westfalenstahl, GmbH Specific performance may be granted as an equitable remedy when damages
would be inadequate to protect the non-breaching party
FACTS: D and P were in a contract that had 60 day payment terms; D breached the contract to change the payment terms to
cash on delivery; the facts showed that this would cause P to go out of business and lead to layoffs since P could not get the product
that D made anywhere else in the world
ISSUE:
 What is the appropriate remedy?
HOLDING:
 Injunctive relief is appropriate here
REASONING:
 Because this is a unique product that cannot be gotten anywhere else and because the cost of breach would be that P goes out of
business and therefore could not sure for damages and because the public interest if benefited and D is not harmed in anyway,
injunctive relief is appropriate here to force D’s compliance with the terms for the duration of the contract
KEY POINTS:
 Economics of specific performance
o Benefits
 (1) Shifts the burden of determining the costs of the defendant’s conduct form the courts to the parties
 Substitutes costly forensic fact finding with private negotiation
 (2) Costs are more accurately determined by the free market and the parties bargaining than by the courts
o Costs
 (1) Court must oversee performance
 (2) Bilateral monopoly and associated transaction costs are created, and the costs may be so high that negotiation
does not even happen
 Should specific performance be given more often?
o Yes
 It is the best remedy since it neither under or over compensates the non-breaching party
 It would prevent strategic behavior since the non-breaching party cannot argue that something was worth more to
him that it actually is in order to get more damages
 Three reasons why the parties should be able to elect specific performance
 (1) Most damages are under-compensatory
o Because of un-enumerated incidental costs, opportunity costs, frustration, severance of the
relationship, etc., so specific performance should be granted
 (2) Because promisees have economic incentives to sue for damages when they are likely to be fully
compensatory, when they would rather have specific performance it means that it make sense
o Because monitoring costs for specific performance of a party that would rather breach will be high,
so when a party requests specific performance it must mean that damages are truly inadequate
 (3) Promisees possess better information than courts do about the adequacy of damages and the
monitoring costs associated with specific performance
o No

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  If someone values something more, it makes sense to allow that person to have it instead of giving it to someone
who values it less through specific performance
 The law should not impede what the market will bear
 Note how this is such an economic understanding of contracts, you are only getting an agreement to the
extent that it remains a good transaction for the other party and breaking it is no big deal, and in fact
encouraged in order to align the transaction with the market
 Specific performance may bear no relation to the cost of performance for the promisor and the harm suffered by
the promisee for failure to perform
 Peevyhouse and specific performance
o What would have been the outcome in Peevyhouse had there been specific performance?
 Peevyhouses would have probably settled eventually for a price somewhere less than $25K, assuming that they
actually did not value filling in the holes that much
 Civil law is more apt to grant specific performance
o But for purposes of convenience, many business actors prefer damages since they can move on more easily from the bad
contract
 Negative Injunctions
o Court will not force you to perform personal services, otherwise it would be something approximately involuntary servitude
 Problem 6-15 (Opera star’s performance contract)
o Court will not force you to play for the team that you broke the contract with, but they will prevent you from playing for a
different team
 Since you are a unique player
o Negative injunctions often occur in the sports context

F. Liquidated Damages
 Liquidated damages
o Liquidated damages clauses seek to bind the court’s damage award
 R2d 356(1) “Damages for either party may be liquidated in the agreement but only in an amount that is reasonable
in light of the anticipated OR actual loss caused by the breach and the difficulties of proof of loss; a term fixing an
unreasonably large amount is unenforceable on the grounds of public policy
 UCC 2-718 “Damages for breach by either party may be liquidated in the agreement but only at an amount that is
reasonable in the light of the anticipated OR actual harm caused by the breach, the difficulties of the proof of loss,
and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy; cannot amount to a “penalty”
 Three general rules (from Farnsworth)
 (1) Old common law rule was that the amount must be reasonable in light of anticipated loss
o But the UCC, and then the R2d, allows reasonable in light of the anticipated or actual loss, so this
allows clauses that would be unenforceable in light of the anticipated loss if they are reasonable
in light of the actual loss; it should not be a basis for striking down provision that was reasonable
in light of the anticipated loss but not reasonable in light of the actual loss)
 (2) Damages to be anticipated from the breach must be uncertain or difficult to calculate
 (3) Must be an intent from the parties to liquidate the damages
NPS, LLC v. Minihane Liquidated damages are permissible here because the anticipated loss was uncertain and the amount
was reasonable in that it did not arise to the level of a penalty
FACTS: D entered into an agreement that had a liquidated damages clause and D then failed to make payments and he was
required to pay the balance of the lease under the liquidated damages provision
ISSUE:
 Is the liquidated damages clause enforceable?
HOLDING:
 Yes, the clause is enforceable and further the non-breaching party does not need to mitigate its damages because that goes against
the underlying purpose of establishing liquidated damages
REASONING:
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 The court finds that the potential actual damages at the time of making the contract were hard to ascertain and the liquidated
damages provided for under the contract were not unreasonable such that they amount to a penalty, therefore the liquidated damage
provision is enforceable
KEY POINTS:
 Acceleration clause as a form of liquidated damages
o Acceleration clauses usually fall under the category of liquidated damages
o Often acceleration clauses can border on being a penalty
 Should we allow liquidated damages even when there are no actual damages?
o e.g., Private contractor to build a road and there is liquidated damages of an amount per day that it is late but the road was
to have a bridge built by another contractor that also was delayed; so the road was not useable at all since the bridge was
not complete, so the actual damages were zero—should be allow liquidated damages in this case?
 “In light of anticipated OR actual damages”
o Note that a court will probably not enforce a liquidated damages clause that was reasonable in light of anticipated damages
but is grossly disproportionate in light of actual damages, though by the terms of the UCC or the R2d, they could and should
 e.g., Bridge case above
 How wide is the freedom of contract?
o How wide do we allow the parties to contract outside of the background law—is this good, fair, and efficient?
 There is no duty to mitigate when there is an enforceable liquidated damages clause
 When should we have liquidated damages?
o Should you have liquidated damages when the damages are estimable?
 No, probably not
o Liquidated damages are better used when there is a real personal value that is over and above market value
 This is the main and intended use of liquidated damages
 e.g., Sentimental object or unique experience
o But the law does not like when liquidated damages are used as a penalty in cases where actual damages are easy to
calculate
 But why can’t this be an element of the contract?
 Presumably the penalty for non-performance is built into the final price, one party is merely paying for the
added assurance and is willing to pay a premium for it
o Where a penalty is seen as being part of the consideration that formed the contract, the courts will
scrutinize it strictly
 This is one of the only times that courts will scrutinize consideration
 But maybe we do not like penalties since they do not allow for efficient breach
 Ultimately, should we hold people to their contracts or allow them to change their minds?
o Does this undermine reliance in the system since people can then breach so easily?
o This is what the Europeans are to
 Is the law going to be patronizing or allow the freedom of contract?
 “Alternate performance”
o A party can perform its bargain by doing either option
o Sometimes hard to distinguish form a liquidated damages
o And note that the difference matters since a party cannot just pay the penalty of the liquidated damages clause and then
get out of the its principal contractual obligation, though it can of course perform an alternate performance contract under
either alternative
 Problem 6-16 (Alternate performance or liquidated damages?)
o (1) Ok and this happens all the time
o (2) Probably would actually be okay but would be vetted by the court to see if reasonable or a penalty
o (3) Economically, this is the same as two, but legally it is different since it is a bonus and not a (potential) penalty
o (4) This is a take or pay contract and is hard to characterize
o Note that the difference between 2 and 3 is just an issue of draftsmanship
 Limitation of remedies
o UCC allows for the limitation of remedies per 2-719
o Limitations of remedies do not need to be conspicuous like the disclaimer of warranties covered under 2-316
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 o But they do need to be exclusive in order to be effective
 e.g., In order to limit remedies, one needs to say that the buyer’s only remedy is repair or replacement, otherwise
the buyer can chose between this remedy and other remedies
 e.g., Repair or damages, and he will often want damages, and that is not what the seller wants to give the
buyer
o But if the limited remedies fail their essential purpose, all of the other remedies from the UCC can come back into play
o 2-719 also allows for the limit on consequential damages, though when they are limited in relation to bodily injury, they can
be unconscionable
 Summary of remedy rules at common law versus in civil law
Damages Specific performance Penalties
Common law Normal, but limited to what is Rare, except for unique/real property Not permissible in principle
foreseeable
Civil law Normal, unlimited except by proximate Normal remedy Permitted as long as not grossly
cause when there is any fault in breach disproportionate

 Different perceptions about what contract remedies should achieve

o Europeans put more weight on the completion of the contract
 Civil law would say that the overall situation is more efficient when people can place a higher reliance on the
contract almost always being performed
 This this aggregate efficiency makes up for individual instances of inefficient performance
o Common law courts did not take as seriously the ethical component of the promise of the contract
 Efficient breach of contract was the academic idea that was developed to explain why the common law allowed for
easy breaches of contract

Chapter 7: Conditions and Self-Help Remedies During Performance

 Condition (R2d 224)
o “An event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under the
contract becomes due”
o Often rights or self-help remedies arise for one party, who is the beneficiary of that condition, when that condition does not
occur
 Some self-help remedies
 Suspension of performance
 Cancellation of contract
 Rejection of goods
 Revocation of acceptance of goods
 Promise or a condition?
o Conditions are NOT promises
 So if a party does not fulfill a condition placed on him, the other party can NOT sue for breach, UNLESS that
condition was also a promise
o e.g., “Buyer promises to give written notice of any claim within 30 days of the manifestation of the cause of the claim”
 This sounds like a promise, and because it is, and if the seller is injured for a lack of notice, the seller can
counterclaim for a breach of promise, any damages from which would be deducted for the claim that the buyer had
against the seller under the warranty
o e.g., “It is a condition of the seller’s obligation to pay on its warranty that the buyer give written notice of any claim within
thirty days of the manifestation of the cause of the claim”
 This sounds like a condition, and if the buyer fails to meet it, he forfeits his right to sue the seller, but the seller
cannot have any claim against the buyer, since the buyer only failed to meet a condition, not a promise
 Independent promises in the old common law
o It used to be that each parties promise to perform under the contract was independent of the other party’s performance
o So if one party failed the other party had to continue and then sue for damages

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 Dependent promises in the new common law
o Judges then implied the condition that any major (“material”) failure by one party to perform under the contract was a
condition that allowed the other party to suspend performance, and if the other party’s failure was serious enough, to cancel
his performance altogether
o R2d 237
 “Except as stated in R2d 240, it is a condition of each party’s remaining duties to render performances to be
exchanged under an exchange of promises that there be no uncured material failure by the other party to render
any such performance at an earlier time”
 Two forms of conditions
o Express conditions
 Explicitly put into the contract
o Implied conditions
 Courts add these conditions because they are seen as the presumed intention of the parties, even though they are
not in the contract
 Most conditions are conditions precedent

A. Express Conditions
 Express conditions
o Performance of one party is expressly conditioned on the occurrence of an event not certain to occur
 e.g., Dove v. Rose Acre Farm, Inc., where substantial performance on the part of the law student was inadequate
because the condition expressly noted that performance in the form of payment would come only if the law student
worked for the full period, and there was no disproportionate forfeiture, since the law student was being paid normal
wages anyway and the payment was a bonus

Merrit Hill Vineyards, Inc. v. Windy Heights Vineyard, Inc. One party’s failure to meet an express condition relieves the other
party from performing his duties under the contract, but it cannot lead to a breach of contract, unless that condition was
also a promise
FACTS: P entered into an agreement to buy D’s vineyard on the condition that D show up at closing with proof of title insurance;
if D did not show up, the contract provided that the security deposit would be returned
ISSUE:
 Is this a conditional contract?
HOLDING:
 Yes, this is a conditional contract
REASONING:
 P does not need to go through with the purchase and his security deposit must be returned because the condition precedent to the
contract was not met; additionally, P cannot get consequential damages, since no contract was actually formed, since there was
no independent promise to perform the condition that would support such damages
KEY POINTS:
 Difference between a condition and a promise
o Violation of a condition simply stops the transaction, whereas violation of a promise would be a breach that could lead to
damages or other remedy
 (my idea) Are conditions better than promises because of less litigation/transaction costs?
 But one problem with pure conditions is that it gives the person the option of negating the deal by not
meeting the condition
o So should there be a promise to meet the condition?
 The party who does not have the discretion to meet or not meet the condition would like
such a promise
 Because otherwise it would be impossible to rely on the contract, and this would
undermine reliance interest

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  But there is a duty to execute a contract in good faith, so you would maybe have a duty
to try to meet the condition, but this is only if there is a promise, because otherwise there
would not be a contract to support the duty of good faith in performance
 If there is a pure condition then there is no requirement of good faith since there
is not promise and not contract
o Condition and promise often based on the whole context of the deal
 e.g., I will perform a ferry service if I can get a boat and a promise to try to do so
o Court will not save Merritt Hill and read in a promise
Howard v. Federal Crop Insurance Corp. This provision in the contract was a promise, not a condition; this means that P may
have to pay damages for the breach of his promise but he does not forfeit his insurance
FACTS: P was in a contract with D to insure his crops; the contract provided that P could not plow under his crops before the
examiner inspected crops about which a claim was made; the contract was unclear as to whether or not this provision was a condition
or a promise on the part of P
ISSUE:
 Is this a conditional contract?
HOLDING:
 No, this was a promise, not a condition
REASONING:
 Because this is a promise and not a condition, there is no forfeiture, and this is a goal of the law (because it abhors a forfeiture);
this clause is construed as a promise and not a condition before preference is given to promises if the language is unclear; so P
does not forfeit his claim, though damages may be assessed against him since there was a breach of his promise in the contract
KEY POINTS:
 Law prefers a promise to a condition because it minimizes the risk of forfeiture (R2d 227)
o “In resolving doubts as to whether an event is made a condition of an obligor’s duty, and as to the nature of such event, an
interpretation is preferred that will reduce the obligee’s risk of forfeiture, unless the event is within the obligee’s control or
the circumstances indicate the he assumed the risk”
 Note that the event/condition was in fact in the obligor’s control in Howard
o Comment b says that the purpose of this preference is that “the non-occurrence of a condition of an obligor’s duty may
cause the obligee to lose his right to the agreed exchange after he has relied substantially on the expectation of that
exchange, as by preparation or performance”
 But note the policy is as to whether there was a risk of forfeiture as of the time that the contract was made, and is
not meant to consider whether a forfeiture in fact occurred
 Court may excuse the non-occurrence of a condition if it would otherwise cause a disproportionate forfeiture (R2d 229)
o This is an escape hatch for a condition that has the effect of being very onerous
o If a condition is frivolous or ridiculous, etc. the court may not enforce it when it leads to a forfeiture
o e.g., Jacob & Youngs v. Kent
o e.g., If Dove would not have been paid at all for the ten weeks instead of just not getting a bonus
o e.g., If in Howard it was a condition and he had to forfeit the family’s farm
o e.g., If an insured cannot get his medical reimbursement for brain surgery because he did not make the proper notification
 Waiver of a condition (R2d 84)
o It is permissible for the person having the right afforded by the condition to waive it
o It is necessary that the person against whom waiver is claimed have intended to waive the right afforded by the condition
o Any waiver other than by express agreement must be unequivocal and may not be simply inferred from the circumstances
o A waiver of a condition does not need to be put in writing even if the contract containing the condition is under the SOF
o Condition that has been waived can be reinstated as long as there is reasonable notice, provided that the person in whose
favor the condition has been waived has not relied to his detriment on the waiver of the condition
 e.g., Rent payment change with the landlord
o Waivers are permitted “unless (a) the occurrence of the condition was a material part of the agreed exchange for the
performance of the duty and the promisee was under no duty that it occur, or (b) uncertainty regarding the occurrence of
the condition was an element of risk assumed by the promisor”
 Problem 7-1 (wrongful discharge litigation)
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 o Did company waive by responding?
 Although this is a colorable argument, he actually lost in the case
Morin Building Products Co. v. Baystone Construction, Inc. When the obligor’s satisfaction is a condition for payment, a
reasonable person standard for determining satisfaction should be used except in cases where the performance has
subjective, aesthetic, or other personal value
FACTS: P entered into an agreement to put up siding for a factory; the contract was conditional in that D had to accept the
quality of the siding before payment was to be made; there was evidence that the siding was a slightly different color but also evidence
that the siding could not be made to match perfectly
ISSUE:
 Is this a conditional contract?
HOLDING:
 Yes, this is a conditional contract but the standard used is, per R2d 228, whether a reasonable person would be satisfied with
performance, not whether the obligee is actually satisfied
REASONING:
 The facts surrounding the formation of the contract in this case suggest that the reasonable person satisfaction was the standard
adopted by the parties in this case; for items that have a more aesthetic purpose, actual satisfaction can be employed and rejection
can be made even if unreasonable, as long as it is in good faith; but this was not the intent of the parties in this case (given the
form contract and that the structure was a factory and a form of sheet metal that cannot be made to match perfectly was requested)
KEY POINTS:
 Condition of approval objective or subjective?
o Objective (for most performances)
 Reasonableness limitation
 Court says that rejection can only be made if it is reasonable
o Subjective (for aesthetic judgments)
 Good faith limitation
 Nothing can be done if the obligor/approver rejects performance, since it is a completely conditional contract,
subject to the good faith limitation
 e.g., In an artistic commission, you can withhold unreasonably, but not in bad faith, as in e.g., the obligor
does not even look at the picture, since there is discretion in performance and this is an area where the
law requires good faith
 Striking at the freedom of contract?
o Note that Posner is concerned that he is rejecting the form contract and this goes against his default conservative rule of
freedom of contract
o He is unhappy about departing from the plain language interpretation especially since it is two equal commercial entities,
since the language of this contract did seem to suggestive a pretty explicit right of the obligor to reject at his will and for any
aesthetic reason he had

B. Implied or Constructive Conditions

 Implied conditions
o Lots of these cases revolved around the extension of credit in the transaction
 The question is when the law will impose conditions on the party that in effect require one party to extend credit to
the other party
o Common law courts have been implying conditions for a long time
 The implied condition of order of performance (R2d 234)
o (1) “Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously,
they are to that extent due simultaneously, unless the language or circumstances indicate the contrary”
 e.g., A cash sale when the goods are given over the counter at the same time that the cash is given over the
counter
o (2) “Where the performance of only one party under such an exchange requires a period of time, his performance is due at
an earlier time than that of the other party, unless language and circumstances indicate the contrary
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  e.g., Stewart v. Newbury, where a construction contract without the provisions of installment payments, requires
that as a condition for payment the contractor completely finish the building
 When is a breach big enough to warrant suspension of the other party’s performance?
o If the breach is small, it does not rise to the level of allowing the other party to suspend his performance; that is, breaching
the mutual condition of continued performance, though damages could be gotten for this small breach
o If the breach is large enough, it is a material breach, and would allow the other party to suspend their performance, as in a
partial breach, or cancel the contract altogether, as in a total breach
K & G Construction Co. v. Harris A material breach may be either a partial breach or a total breach, and if it is a partial
breach, then the breaching party is given time to cure and the other party is entitled to suspend performance; if cure is not
made, the partial breach will mature into a total breach
FACTS: P was a contractor who hired subcontractor D; D had to perform his services in a workmanlike manner; but D caused
damage to P with his bulldozer but refused to repair it; because of this P withheld payment of the installment contract to D; D then
continued to work for a month until he was not paid again, and then he stopped working
ISSUE:
 Was this a breach permitting suspension of performance?
HOLDING:
 Yes, D breached the contract by not performing in a workmanlike manner; P considered this a partial breach and allowed D to
continue to work but withheld payment (in so doing, suspending his performance); when D then stopped working it was a total
breach
REASONING:
 The general rule of contract today is that covenants are mutually dependent if the intent of the parties suggest that they are, and
the intent almost always is that they are, and this allows an injured party to be free to not perform once the other party has breached,
and this is what happened in this case
KEY POINTS:
 Material breach (R2d 241)
o Factors relevant to determining if there was a material breach
 (a) “Extent to which the injured party will be deprived of the benefit which he reasonably expected
 (b) Extent to which the injured party can be adequately compensated for the part of that benefit of which he was
deprived
 (c) Extent to which the party failing to perform or to offer to perform would suffer a forfeiture
 (d) Likelihood that the party failing to perform or to offer to perform will cure his failure, taking into account all of the
circumstances, including any reasonable assurances
 (e) Extent to which the behavior of the party failing to perform or to offer to perform comports with the standards of
good faith and fair dealing”
o e.g., Destroying wall is not performance in a workmanlike manner, which was a condition of the contract, and there was
therefore a material breach
 So the other party can either wait and sue or withhold progress payments
 Partial breach or total breach? (R2d 236)
o Partial breach
 (1) “A claim for damages for total breach is one for damages based on all of the injured party’s remaining rights to
performance”
o Total breach
 (2) “A claim for damages for partial breach is one for damages based on only part of the injured party’s remaining
rights to performance”
o Some rules for determining when a partial breach can be treated as a total breach
 Per R2d 242 Comment a: “A party’s uncured failure to perform or offer to perform note only has the effect of
suspending the other party’s duties, but when it is too late for the performance or the offer to perform to occur, the
failure also has the effect of discharging those duties; ordinarily, there is some period of time between suspension
and discharge, and during the period a party may cure his failure, but when timely performance is so essential, any
delay can result in an immediate discharge, and no period of time is given for cure”
 Uncertainty about whether a breach is material
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 o Court says that it was a material breach, but if it was not a material breach then they would have been the breaching party
 This is a dangerous situation since both parties are operating in the dark about what actually happened, to know if
it was actually a material breach
 So using self-help pressure remedy can be dangerous if you get it wrong
o Note that if K &G had totally ended right away and treated the material breach as a total breach and not a partial breach,
that may have been problematic since although material, time was not of the essence, so the other party should have been
given a period of time to cure
 Self-help measures
o Suspension of performance (often in the form of suspension of payment) is the main way through which the non-breaching
party pressures the breaching party to cure the breach
 Keep working while in breach?
o Why did the subcontractor keep working?
 Maybe because he was unsure about how the insurance claim would sort out
o What was the consequence?
 The sub gave free work for one month and they do not have a claim in restitution since the damages were higher
than the value conferred in restitution since the non-breaching party had to pay more on the spot market
 Note that this is often the case in these instances, since the spot market will cost more, so there is no
restitution even though the breaching party conferred much more benefit, with respect to the value for his
services outside of the spot market, than he got paid for
 Why giving time to cure is good
o It would be wasteful to through the party in breach off the project if otherwise things are going well and the breach can be
cured cheaply and effectively by the party in breach
o This is better than finding a new contractor, etc.

Taylor v. Johnston
FACTS: P and D formed an agreement to have D’s horse sire foals for P’s horses; D then sold the horse and moved it to another
state and said that the reservation for having the horses sired was cancelled; but P said that he would still like the performance, so D
allowed it to happen and arranged for the occurrence to take place in the other state, to which P’s horses were moved; after a series of
schedule mishaps, P breached by seeking alternate performance
ISSUE:
 Was this an anticipatory repudiation of the contract?
HOLDING:
 There was an initial anticipatory repudiation by D, but this was retracted when P treated it as not a breach and D showed intent to
perform and the parties found a way to move forward with the contract before the term of performance ended; there was never an
express repudiation by D; although D was not super helpful in facilitating performance, there was nothing suggesting his implied
repudiation, so P was not permitted to claim D’s anticipatory breach and end the contract, since D never put the contract out of his
power to perform
REASONING:
 Doctrine of anticipatory repudiation
KEY POINTS:
 Anticipatory repudiation (R2d 250)
o Express
 (a) “Statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give
the obligee a claim for damages for total breach under R2d 243
o Implied
 (b) “A voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a
breach”
 When you put performance out of your power
 Anticipatory breach can be withdrawn, depending (R2d 256)
o If injured party is made aware of the retraction of the anticipatory breach before he has relied to his detriment on the
reality of the breach, or notified the other party that he considers the breach to be final, the breach is nullified and the
contract is put back into place
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 Economics of anticipatory repudiation
o Treating an anticipatory repudiation as a total breach makes sense because it allows the non-breaching party to mitigate
his damages, instead of waiting around for the performance to come, even though the other party has said that it will not
 e.g., Case of De La Tour, whose courier was able to seek opportunities elsewhere once informed of the
anticipatory breach
 Is implied anticipatory breach objective or subjective?
o e.g., In Johnston v. Taylor, was all of the run around in the horse farm enough to constitute implied anticipatory repudiation?
 No, because the promisor still had the power to perform the contract within the period prescribed
 But note here that the issue is that a horse must be bred early in the season otherwise it is not as valuable
since it will have to race with horses much older than it and the judge does not seem to understand this
 Does this then mean that they was anticipatory repudiation?
o Perhaps the other party could ask for a guaranty under UCC 2-609, if the UCC governs
 Damages for anticipatory repudiation
o When buyer repudiates (UCC 2-708)
 Damages are assessed according to the difference between the market price at the TIME and PLACE for
DELIVERY and unpaid contract price, but NOTE THE POTENTIAL CHANGE, at the expiration of a commercial
reasonable time, so the seller cannot just sit around either, so IT IS STILL THE SAME, because of cases like the
Halloween pumpkin example
o When seller repudiates (UCC 2-713)
 Damages are assessed according to the difference between the market price at the TIME the buyer LEARNED of
the breach
 e.g., Case of a rising grain market and the seller repudiates two months before performance is due since
he can get a better offer elsewhere; what can the buyer do? He can cover within a reasonable period and
then sue under 2-172 or he can sue for breach at the market price differential under 2-713, but he cannot
just wait out for the market to go even higher and then sue for higher damages at the time of performance
 So basically his damage award will be pegged at the time of the repudiation
o But then there is the question of whether it was actually a repudiation and what would be a
reasonable time to cover/ascertain the damage award
 Buyer can choose to, or not to, cover

Kunian v. Development Corp. of America When a party has reasonable grounds to doubt the other party’s performance, he
can ask for adequate assurance using UCC 2-609 and if such assurance is not forthcoming, he can treat the other party as
having repudiated the contract
FACTS: P and D were in a contract that provided for delivery in lots and payment in lots; when D failed to make payment after
one installment, P refused to deliver the next installment under its right to suspend performance; per 2-612 this could be a breach by D
if it is seen per 2-612 as a breach of the whole contract, but when P requested past payment and future performance, he reinstated the
contract again per 2-612; P also demanded per 2-609 adequate assurances that D would continue to pay since he had breached earlier
promises and purchased goods from another seller; D did not provide these assurances (since he did not put the funds in escrow as P
required)
ISSUE:
 Was this a breach?
HOLDING:
 Yes, because D failed to provide adequate assurances to P which P was justified in seeking (there were “reasonable grounds”), P
is permitted to treat this as repudiation of the contract per UCC 2-609
REASONING:
 UCC 2-612 and UCC 2-609
KEY POINTS:
 Installment contracts and the question of breach (UCC 2-612)
o Exception to perfect tender rule since each lot must only consist of substantial performance
o If the non-conformity or default of any one installment substantially impairs the value of the whole contract, there is a breach
of the whole

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 o But the contract is reinstated if the injured party requests future lots, accepts the non-conforming lot, or brings an action
only with respect to the non-conforming lot
 Adequate assurance (R2d 251)
 (1) Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would
of itself give the oblige a claim for damages for total breach, the obligee may demand adequate assurance of due
performance and may, if reasonable, suspend any performance for which he has not already received the agreed
exchange until he receives such insurance
 (2) The obligee may treat as a repudiation the obligor’s failure to provide within a reasonable time such assurances
of due performance as is adequate in the circumstances of the case”
o This has the effect of implying a condition that one party not cause the other party to doubt the completion of the contract
through his words or actions
 Adequate assurance (UCC 2-609)
o (1) “A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will
not be impaired/ When reasonable grounds for insecurity arise with respect to the performance of either party the other
may IN WRITING demand adequate assurance of due performance and until he receives such assurance may if
commercially reasonable suspend any performance for which he has not already received the agreed return
o (4) If adequate assurance is not received within 30 days, the other party has repudiated the contract
 What is a reasonable grounds for seeking adequate assurance under 2-609?
o Just a rumor?
o Getting the run around?
o SEC filing?
 Danger of 2-609 letter
o When you send a 2-609 letter and suspend performance you need to be careful, because if you ask for too much you run
the risk of over-demanding, and is you suspend performance, you risk that you are yourself breaching the contract, but if
you ask for too little, you may get a vague response that does nothing to assuage your fears
 7-1 (Pecan growers)
o Perhaps this is adequate
 7-2 (Implied morals clause)
o Should the court imply this clause in OJ Simpson’s agreement?
Jacob & Youngs, Inc. v. Kent Unless the parties are completely explicit (“material part of the agreed exchange”), the court will
imply a condition met by substantial performance when there would otherwise be a disproportionate loss, especially when
the substantial performance is not willful but due to inadvertence
FACTS: P was the contractor for D’s house; the house was made complete but the wrong type of pipe was used (although it
was exactly the same as the type requested); D demanded that the pipe be replaced, but to do this would mean that the entire expensive
house would have to be torn down
ISSUE:
 What is the remedy for this breach?
HOLDING:
 Because the contract did not make it explicitly clear, we assume the reasonable intention of the parties, which means substantial
performance and not performance to the letter in the most absolute sense; although this does not given the party to substitute his
judgments for what the other party specifically requested, it means that de minims errors, especially when paired with a high cost
to fix, are not going to imposed as condition to the performance of payment; usually the measure of damages is the cost of repair
or replacement, but where it is disproportionate, as is the case here, it is only the loss of value, which is essentially nothing
REASONING:
 Unless the intentions of the parties are completely clear showing the contrary, the rule that gives a remedy in cases of substantial
performance with compensation for defects of trivial or inappreciable importance, is an instrument of justice; this is especially true
when the discrepancy is due to inadvertence and not to willful behavior
DISSENT:
 Dissent agrees in principle with majority’s analysis, but he thinks the breach in this case was due to substantial negligence and not
minor inadvertence
KEY POINTS:
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 Cardozo’s analysis
o Parties can contract for an express condition but this is not what happened in this case per Cardozo
 But note that if you look at the actual terms of the contract, they seem pretty clear on this point
o Cardozo says that the court will not imply a condition from the specifications, when it would be so costly and not entail any
actual damages
 Dissent does not treat the specifications as an express condition either
 Rather, the question turns more on an inadvertent versus a willful breach
o All and all it seems to be more of a tort-like analysis, with willfulness, etc. playing an important role
 Substantial performance and the court’s grant of an excuse (R2d 229)
o “To the extent that the nonperformance of a condition would cause disproportionate forfeiture, a court may excuse the non-
occurrence of that condition unless its occurrence was a material part of the agreed exchange”
 But then how do we make allowance for individual tastes?
 You must make this very clear in the contract
 You make it a material part of the agreed exchange
 Express conditions and substantial performance under R2d 229 example 1
o Re-hash of Jacob & Young’s, but the clear express condition is accepted
 Yet substantial performance is still okay because it is not a material part of the agreement and would otherwise
lead to a large forfeiture
 So even if there were an express condition, Cardozo could reach the result under R2d 229
 But note that the contractor cannot just willfully substitute something that he thinks is “just as good”
o So there must be a good faith spin on the issue, that is a breaching party who unscrupulously
forces changes on a customer will not be saved by the substantial performance rule
 Cardozo consistent?
o Is this possible to reconcile with Cardozo’s Sun Printing opinion as regards the PER and the interpretation of Reading Pipe
and what that meant
 Jacob & Young’s as compared to Peevyhouse
o Note that the difference between Jacob & Young’s and Peevyhouse is that P was asking for specific performance, which
would have been inefficient, since the cost to remedy was way disproportionate to the loss of value, and this would have
been social waste; but if only damages are requested, or if an injunction is given and then sold, it is not social waste since
the inefficient work will not be done, it is just a wealth transfer, that may or may not be justified (and the wealth transfer may
be better all things considered, since it will cover any genuine but subjective loss in value that is not reflected in the market
price)
 Also note that this is why the jury award that will fix a median amount, as happened in Peevyhouse, is a nice
solution, even if it is not logical under either damage measure
 Note also that in these situations (Jacob & Youngs, Peevyhouse, and Wunder Co. (Minnesota case) the effect of
willfulness versus inadvertence is used by the court to help tip the scale on how the damage measure should be
accorded
 e.g., Cardozo saw as inadvertence and since the lost value was zero the damages were zero, whereas
the dissent said that it was willful so full damage should be awarded
 Another consideration to take into account on the margin is the presence of evidence of special value, whether it
is a material part of the agreed exchange
 e.g., if Peevyhouse had specifically wanted the land to be graded and made this clear)
 7-4 (Discolored roof case)
o Is there an implied condition that the roof be the same color?
o Probably, yes, this is different from pipes because it has aesthetic properties and is not hidden behind walls

Wilson v. Scampoli UCC rules for the sale of goods from a seller to a buyer; buyer has right to reject if not perfect tender, but
then must give the seller the opportunity to cure
FACTS: P ordered a TV set that was delivered but that had a red hue; P rejected the set immediately
ISSUE:
 Can the buyer reject the goods?
HOLDING:
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 Yes, because D has failed to render perfect performance (per UCC 2-601) and P rejected upon delivery (instead of accepting an
then revoking), P has the right to reject the non-conforming delivery; however, P must at least give D a reasonable amount of time
to investigate the problem and cure the problem by repair if it is not great inconvenience to the buyer
REASONING:
 UCC goods-based remedies
KEY POINTS:
 Matrix for UCC sale of goods
o (1) Inspection:
 There is no “duty to inspect” but the UCC assumes that a buyer will expect the goods that it receives almost as
soon as they arrive
o (2) Accept or reject
 Reject:
 If under 2-601 the goods “fail in any respect” to satisfy the “perfect tender” rule they buyer may reject them
upon delivery
o Note that installment contracts are not governed by the perfect tender rule, and substantial
performance for any one installment is sufficient
 So there is no idea of “substantial performance”
 The rejection does not need to be “reasonable”
o e.g., Scratch on the back of a TV that will never be seen is sufficient to reject
 The right to reject is for a reasonable time after arrival, but it is usually fairly short, though once a court
allowed a rejection to occur after six months, since it took that long to install the good, etc., to it will vary
based on context
 Note P in Wilson v. Scampoli had the right under 2-602(2)(b) to keep the rejected good as a security
interest since she had already paid in full
 Note that if a buyer uses a good that he has rejected it nullifies the rejection and constitutes acceptance
since it would have been “inconsistent with rejection” under 2-602(1)(c)
 If a buyer rejects under 2-602 through 2-604, it must particularize its reason for its rejection under 2-605
 Then, under 2-508 the seller has the right to cure the reason for the rejection
 This has two purposes
o Mitigates the strategic advantage of the buyer who can reject if the goods are not perfect
o Prevents the situation where the buyer wants to reject based on the smallest stitching error in a
dress because he has found the dress somewhere else for a cheaper price
o Accept:
 If under 2-607(1) the buyer accepts the goods, then he is obligated to pay for them and the seller can take
advantage of the action for price under 2-709
 But a revocation can be made under 2-608, but only on the basis of a failure of substantial performance, so the
perfect tender rule is gone
 And there is no right to cure for the seller in this case
 This is probably because the substantial performance threshold is already more forgiving
 Under 2-608(1)(a) if the seller is unable to cure under 2-508 in order to make the goods perfect, but the goods do
substantially perform, then the buyer has to keep the goods but can sue for expectation damages based on the
loss due to the defect
 Under 2-608(b) if the buyer waits a while or does not discover the problem until he has accepted and it is too late
to reject
 Problem 7-5 (Flour bag case)
o Shouldn’t the seller be given time to cure, yes maybe, but the buyer can still reject the goods and force the seller to take all
the bags back with him to cure the defect, and there is generally no problem with bad faith here since although the UCC
introduces the concept of bad faith, it has been weakly applied outside of certain areas (e.g., discretion in performance of
the contract), though it is likely that a good could and would find a breach of the duty to act in good faith

C. Impossibility, Impracticability, and Frustration

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 Why all contingencies are not always accounted for
o A central purpose of contracts is to allocate risk
o But not all risks can be accounted for in the contract
 Because parties forget about something
 Because it would be a waste to try to consider every possible contingency
 Because things change
 Because people die
 Impossibility
o Old common law term, now impracticability is used because the event does not need to be physically impossible to invoke
the doctrine
o When judges interpolate terms into a contract that deal with super remote contingencies that the parties could not have
expected and are therefore not included in the force majeure clause
o Terms that the parties would have agreed on explicitly if they had the time and foresight to deal with every possible remote
contingency
o The decision as to which party should be allowed to not perform his portion of the contract should be based on which party
is better able to bear the risk
 Which party can better prevent non-performance or insure against it if non-preventable, either the promisor of
promisee as regards each component of the deal
 Impracticability
o Modern term for the old doctrine of impossibility
o Impracticable is more than impractical
o UCC 2-615
 Incorporates principle of impossibility as “impracticable” and deals only with the seller
 “Delay in delivery or non-delivery in whole or in part by a seller who [takes certain action] is not a breach of his duty
under the contract for a sale if performance as agreed has been made impracticable by the occurrence of an
contingency the non-occurrence of which was a basic assumption on which the contract was made”
o R2d 261
 Language similar to UCC but deals with both buyer and seller
 “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”
 Frustration
o UCC ?!?!
 Oddly, the UCC does not have a provision for frustration, or for a doctrine of impracticability that would permit the
buyer to get out of the contract
 It is unknown if this was intentional or an accident
 So in principle the buyer cannot invoke this doctrine under the UCC, though common law still would allow it under,
mot usually, frustration of purpose
o R2d 265
 Language is almost identical to that of impracticability
 “After a contract is made, a party’s principle purpose in making the contract 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”
 Usually this is where it does not make sense for the buyer to perform his part of the agreement
 e.g., Henry v. Krell, where the person did not have to pay to rent the apartment when the King’s coronation
was postponed because he was sick, since the apartment was worthless to him for that day at that point
 Where do you draw the line?
o Issue is that when you imply these conditions into the contract it is hard to know when to draw the line
o What is something that rises to the level that is appropriate to imply since the parties surely would have thought about it
o There is the issue that if you call off the contract through these conditions it may harm those that relied on it
 e.g., If someone renovates an apartment for the coronation and spends a lot of money doing so
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 o In this case you must ask who is the better insurer and assign them with the risk, even though it is retroactive
 Impracticability/Frustration as compared to mistake
o Note the idea that impracticability and frustration arise with supervening event and mistake arises with an event or condition
unknown at the time of the contract’s formation
 e.g., Grading area of land where grader and the owner assumed that it was just gravel but it was solid bedrock
 Maybe you could make a mistake argument
 Alcoa example
o Fairly decent argument because of all of the evidence about how they set the price index, etc. so it is sort of an unusual
case
 The question is: are all of the contingencies “in” the pricing mechanism, does the contract take account of
everything when it was made, or will the court add conditions?
o Note that we consider only the contract/controversy and not the wider context, e.g., Alcoa’s financial strength, etc., at least
in the normal case
o Academic reaction to Alcoa was very negative
Karl Wendt Farm Equipment Co. v. International Harvester, Inc. A stable market is not a “basic assumption on which the
contract was made” that would support the court’s intrusion due to impracticability; this is just a losing contract, and that is
not enough
FACTS: P was a franchisee with whom D breached the contract not according to the terms of the agreement in the face of D’s
needing to leave the industry and sell all of its assets due to a collapse in the farm equipment market
ISSUE:
 Is this a case of impracticability or frustration of purpose?
HOLDING:
 No, the events here do not rise to the level of impracticability or frustration of purpose
REASONING:
 Economic unprofitableness is not enough to warrant judicial intervention in the contract; a bad economy is not an event the non-
occurrence of which was a basic assumption of the contract; additionally, both rules require that the party seeking relief be not at
fault, and arguably D was at fault here
KEY POINTS:
 Problem 7-6 (Suez Canal closes)
o I think that people should buy insurance for these sorts of things, there is political upheaval insurance
o It is more efficient and stable to insure for this on the private market then to rely on the judge as your insurance, since you
do not know how he is going to rule, and because of this certainty attention and capital can be focused elsewhere
 Implied condition of impracticability only where there is economic waste?
o Note my idea of there should only be impracticability or frustration where there is economic waste but not where it is merely
a wealth transfer, since the one reduces overall efficiency, and the other does not
 Long term contracts, good or bad?
o Length of the long term contract will depend in part on what the parties expectations are about when the court is going to
step in and help them when the black swan comes along and the assumptions change
o Long term contracts probably have a value that falls off sharply after a certain point, because once you get several decades
removed, it is impossible to know if the assumptions will change or not, so it is good for the court to impose the condition
of impracticability in such cases, but we do not want the parties to rely on this overtly, since it creates a moral hazard
 10, 50, 500 year floods?
o Impracticability should be used for the 500 year floods, not the 100 year floods, for that people should get insurance
 When should impracticability and frustration be invoked?
o Note that idea that the promisor’s promise to pay damages if he breaches is a form of insurance, but like any insurance is
excludes certain events, and impracticability or frustration represent those events
o Usually the superior risk bearer should bear the risk, but for events that are large, unforeseen, and uncontrollable by the
parties, it is probably best that the risk be shared by both parties, through the use of these doctrines
Dills v. Town of Enfield Where one party has been assigned the risk of the failure of the basis assumption, that party must
bear it and the court will not impose an implied condition of impracticability or frustration of purpose

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FACTS: P was in a development agreement with D; the terms of the agreement recognized that the developer may not be able
to obtain financing; they thus said that if P did not obtain financing after the completion of detailed construction plans, he could receive
back his deposit; but if he did not submit construction plans, D got to keep the deposit; therefore the idea that P would have trouble
obtaining financing was contemplated by the parties and allocated in the terms of the agreement
ISSUE:
 Is this a case of impracticability or frustration of purpose?
HOLDING:
 Although this could be impracticability (maybe) it cannot be because the risk of the inability to get financing was specifically allocated
to P by the agreement
REASONING:
 The whole premise of impracticability and frustration of purpose is that the law will imply a condition into the agreement because
the parties presumably would have done so had they thought about the occurrence of a remote event; but where this risk is allocated
in the agreement prospectively, then judicial intrusion has no place
KEY POINTS:
 What happens when the court uses impracticability or frustration?
o Restitution governs, and any benefit conferred must be returned (R2d 272(1))
o Per the R2d, reliance damages should also be permitted, at least as an off-set to restitution, but most American courts do
NOT grant this (R2d 272(2))
 So, e.g., in Krell v. Henry the down payment would be returned, even if part of it were used to renovate the
apartment for the viewing
 Do gap filling policies just raise costs?
o Some economists think that impracticability and frustration and similar judicial conditions just raise costs because they lead
to uncertainty and create new risks, making the situation worse

Chapter 8: Third-Party Rights and Responsibilities

A. Third-Party Beneficiaries
 Privity of contract
o Basic requirement for a person to sue another in contract is that there be privity of contract
 Third party beneficiaries (R2d 302)
o Intended
 Do have legal rights on the contract between third parties
 “Unless otherwise agreed between the promisor and the promisee, a beneficiary of a promise is an intended
beneficiary if recognition of a right to performance is the beneficiary is appropriate to effectuate the intention of the
parties and either
 (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the
beneficiary, or
o A “creditor beneficiary”
 (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised
performance”
o A “donee beneficiary”
o Incidental
 Do NOT have legal rights on the contract between third parties

Lawrence v. Fox It is clear in this case that the promise was made for the explicit benefit of P, who is therefore a third party
(creditor) intended beneficiary, who can thus sue under the contract
FACTS: Party A gave money to D for D to give to P the following day, the consideration being the money from A to D and the
D’s promise to A to pay the money to P; P then sued D for not delivering the money
ISSUE:
 Is P an intended third party beneficiary such that he can sue D?
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HOLDING:
 Yes, P has standing to sue as a third party beneficiary (a “creditor beneficiary”) (if he had not been A’s creditor and A had only
meant to bestow a gift, he would have been a “donee beneficiary”)
REASONING:
 The contract was made for the benefit of P and P can therefore sue as a third party beneficiary, it is okay that there is not privity of
contract (and it is not necessary that the money be given in trust to D with P as the beneficiary of the trust, though if this would have
been the case, then there would be no debate)
DISSENT:
 Dissent says that there must be privity for P to have rights as against D
KEY POINTS:
 Demise of the importance of privity
o Rules for privity became more liberal due in part to the objective theory’s rise in the 20 th Century over the more subjective
theory of the 19th Century
 Irrevocable right in third party beneficiary?
o Per R2d 311(1), it is possible to make the right of the third party beneficiary irrevocable if they wish
o But per R2d 311(2), the promisor and the promisee retain the power to discharge or modify the agreement without the third
party beneficiary’s consent, unless per R2d 311(3) the intended beneficiary has (1) justifiably relied, (2) brings suit, or (3)
promises to accept the benefit
o So this means that unless otherwise provided for the right of the third party beneficiary is contingent, not vested
 Beneficiary subject to any infirmity in the promise or other reason why contract would be unenforceable (R2d 309(1)(2))
o “A promise creates no duty to a beneficiary unless a contract is formed between the promisor and the promisee; and if a
contract is voidable or unenforceable at the time of its formation the right of any beneficiary is subject to the infirmity”
o “Right of beneficiary is discharged when the contract is unenforceable due as against public policy, because it is
unconscionable, impracticable, etc.”
 Overlapping duties to beneficiary and promisee (R2d 305)
o “(1) A promise in a contract creates a duty in the promisor to the promisee to perform the promise even though he also has
a similar to duty to an intended beneficiary”
o (2) Whole or partial satisfaction of the promisor’s duty to the beneficiary satisfies to that extent the promisor’s duty to the
promisee”
o So, e.g., IF in Lawrence v. Fox, performance was in the alternative, payment to one satisfies payment to another
 Without novation, promisee is still liable (R2d 310)
o “Where an intended beneficiary has an enforceable claim against the promisee, he can obtain judgment or judgments
against either the promisee or the promisor or both based on their respective duties to him. Satisfaction in whole or in part
of either of these duties, or a judgment thereon, satisfies to the extent the other duty or judgment, subject to the promisee’s
right of subrogation (against the promisor)”
 Intended beneficiary does not need to be identified, just identifiable
o e.g., H gives money to F to pay L’s heir
o This is fine it is not necessary that the beneficiary be identified at the time of the transaction only that he be identifiable at
the time that the performance must occur
o This is essentially how life insurance works
 A third party beneficiary does not need to be express, it can be implied
o e.g., NYC sewage treatment contract
 Problem 8-1 (Exercycle franchisee boundaries)
o Franchisee won in showing that he was an intended third party beneficiary
o This shows how flexible the rules are today
 Problem 8-2 (Moch water pump case)
o Privity of contract is maintained in areas where there could be huge liability, so usually the public is not considered to be a
third party beneficiary of every government contract
o e.g., Martinez v. Socoma Companies, Inc., but Cf. Shell v. Schmitt and Barksdale Air Force Base case, but the difference
is that in that case it was very clear who the beneficiaries were, otherwise no third party rights are created

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Martinez v. Socoma Companies, Inc. Unless explicitly identified, members of the general public are not considered to be third
party beneficiaries with legal rights under a contract between the government and a third party, since otherwise liability will
just be too wide
FACTS: A class of Ps sued as third party beneficiaries to a contract between the government and several corporations; the
contract was between the government and the corporations and the purpose was to promote development and job creation in the inner
city
ISSUE:
 Is P an intended third party beneficiary such that he can sue D?
HOLDING:
 No, P is not a third party beneficiary with standing; P is a member of the public that would have been benefited but he was only an
incidental beneficiary and it does not matter that he was not benefited more than others
REASONING:
 P claims to be a done third party beneficiary, but this is only the case where the third party was to be the recipient of the gift or the
intent of the parties made clear that a third party would have rights as against the promisor, but this is not the case here; P is a
member of the general public and the intended beneficiary was the public as a collective, we simply cannot allow all members of
the public to sue as third party beneficiaries of government contracts (this is in the R2d somewhere)
DISSENT:
 Dissent says that Ps were clearly the third party beneficiaries
KEY POINTS:
 Problem 8-3 (HP warranty to the end user with a retailer in between)
o Does the warranty extend to the end user? It depends
o HP does not have a contract with the end users, so privity of contract may block, unless they are perhaps third party
beneficiaries
 Third party beneficiaries of warranties (UCC 2-318)
o Gives state legislatures three alternatives
 The alternatives vary in how they provide for rights to person who do not have direct privity of contract
 Legal or natural person
 Persons in household or any person
 Injury to person or any injury
o But note that HP wants people to come to it when there is a problem, they want to create a relationship, but the judge may
or may not allow this, depending

B. The Assignment of Rights and Delegation of Responsibilities

 Assignment and delegation (THEY ARE DIFFERENT)
o Assignment
 Assign the rights (of the promisee) under the contract
o Delegation
 Delegate the duties (of the promisor) under the contract

Contemporary Mission, Inc. v. Famous Music Corp. There is a difference between delegation and assignment and when you
delegate, unless there is a novation, the promisor is still liable to the promisee if the delegatee does not perform
FACTS: P developed music and was in contract one with D to market and develop the music and this contract was not
assignable; there was another contract that involved other duties of D and this contract was assignable; D assigned both contracts
ISSUE:
 Was it okay for D to assign both contracts?
HOLDING:
 It was not permissible for D to assign and delegate contract one since that went against the express terms of the agreement; it was
okay for D to delegate its duties under contract two, but just barely, because arguably this was performance that was sufficiently
personal (oblige has a substantial interest in having the original obligor perform or control the acts promised) such that the delegation
is unfair to P; but after the delegation of duties D is still responsible to make sure that its delagee performs, and in this sense he is
a surety of sorts
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REASONING:
 Rules of contract assignment and delegation
KEY POINTS:
 Parties can limit the right to delegate the duties and assign the rights under a contract (R2d 317, 318, 322)
 It is easier to assign than to delegate
o R2d 322
 “Unless the circumstances indicate the contrary, a contract term prohibiting assignment of “the contract” bars
only the delegation to an assignee of the performance by the assignor of the duty or the condition”
o UCC 2-210(4)
 “An assignment of “the contract” or “all of my rights under the contract” or an assignment in similar general terms
is an assignment of rights and unless the language or circumstances indicate the contrary, it also a delegation of
performance”
 When delegation is not permissible
o When it is not prohibited by the terms of the contract, delegation is okay unless “the promisee has a substantial interest in
having its original promisor perform or control the acts required by the contract” (R2d 318(2); UCC 2-210(1)
 Without novation, assignor is still liable
o R2d 318(3)
 “Unless the oblige agrees otherwise, neither delegation of performance nor a contract to assume the duty with
the obligor by the person delegated discharges any duty or liability of the delegating obligor”
 But where the oblige agrees to accept performance by the delegated person, the contract is novated,
and the original obligor is discharged from liability
o UCC 2-210(1)
 “No delegation of performance relieves the party delegating of any duty to perform or any liability for breach”
 e.g., Manufacturer delegates the production of an item to another, if the item is then defective, can the buyer sue the manufacturer?
o Yes, the buyer could since there was no novation, but the buyer could not sue the person to whom it was delegated since
there was no privity, but couldn’t he sue as a third party beneficiary?
 Unless there was tort liability, which does not need privity, of course—note that this is another way that tort is taking
over contract, and note that if the pass through provision of the revised UCC article 2 were passed then that would
have allowed contract to catch up with tort a little bit
 Once duties delegated, promisee or delegator can enforce against the delegatee
o UCC 2-210(4) “Acceptance by the assignee constitutes a promise by him to perform those duties. The promise is
enforceable by either the assignor or the other party to the original contract”
 Assignment of rights cannot unfair to the original promisor/promisee (UCC 2-210(2))
o “Unless otherwise agreed all rights of either the seller or the buyer can be assigned except where the assignment would
materially change the duty of the other party, or increase materially the burden of risk imposed on him by the contract, or
impair materially his chance of obtaining return performance”
 e.g., Where there is a requirements contract and the assignment of rights under the contract would materially alter
the promisors obligation (as in an assignment of a requirements contract for hamburger patties from Charlie Macs
to Burger King)
 Adequate assurances when there is a delegation of duties (UCC 2-210(5))
o “The other party may treat any assignment which delegates performance as creating reasonable grounds for insecurity and
may without prejudice to his rights against the assignor demand assurances from the assignee under Section 2-609”
 Sally Beauty case
o This is a case where the delegation would be okay except that the promisee has a substantial interest in having the original
promisor perform the contract, as opposed to the person to whom the duties would be delegated, since otherwise one of
its competitors would be marketing its products, so the delegation is not appropriate
o Posner says that the market could handle this, but it probably depends on how similar the goods were

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