CONTRACTS OUTLINE, FALL 2009

PROFESSOR DAVID SNYDER

%Answering a contracts question:
% Who is the potential P?
% Who is the potential D?
% What is the cause of action?
% What does P want?
% Why is P entitled to it?
% What are the defenses?
% What are the counter-defenses?
% What can be argued back and forth?
%Elements of a Contract Analysis:
% Intent
% Does each party have intent to enter K?
% Do parties have legal capacity?
% Contract Formation
% Offer
% Acceptance
% Consideration
% Breach
% Remedy
% Specific performance
% Money damages
% Interpretation – Determine the parties’ intent, as expressed by them in their contract or as inferred
from surrounding evidence and reasonable expectations

**WHAT IS A CONTRACT?

What is a Contract?
%A contract is a promise or a 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
% Basically, a contract is when parties make a legally enforceable promise
%A promise is a commitment or undertaking that a given event will or will not occur in the future and may
be expressed or implied from conduct, or language and conduct (so made as to justify a promisee in
understanding that a commitment has been made)
% Note: A mere promise does not give rise to an action
% A promise is legally enforceable where it:
% Was made as part of a bargain for valid consideration;
% Reasonably induced the promisee to rely on the promise to his detriment; or
% Is deemed enforceable by a statute despite the lack of consideration
%An agreement is a manifestation of mutual assent on the part of two or more persons
%A bargain is an agreement (aka “manifestation of mutual assent...”) to exchange promises or to exchange
a promise for a performance or to exchange performances

Types of Contracts
%A Contract may be of the following types:
% Express – an agreement manifested by words
% Implied-in-fact – an agreement manifested by conduct
% Implied-in-law ("quasi-contract") – not a true contract but an obligation imposed by a court despite
the absence of a promise in order to avoid an injustice

CONTRACTS GOVERNED BY UCC

**Contracts for the Sale of Goods

 Application of UCC
%Article 2 of the Uniform Commercial Code covers all transactions for the sale of goods other than
securities (article 9) and leases (article 2A). It applies to any party; it is not limited to merchants
although individual provisions may be.
**"Goods" Defined
%Under the UCC, a "good" is any tangible thing that is moveable
%UCC § 2-105(1)
%In addition to manufactured products, "goods" include:
% Growing crops or timber, unborn young of animals and other identified things attached to land (other
than minerals or the like or structures), regardless of who severs them from the land provided that
they can be removed without causing material harm to the land
% Currency exchanged as a commodity (as opposed to the medium of payment for a good)
% Minerals or the like or a structure or its materials to be removed from realty that are to be severed by
the seller
%The term "goods" does NOT encompass:
% Intangible rights such as intellectual property
% Investment securities
% Money which is the medium of payment for goods
% Minerals or the like or a structure or its materials to be removed from realty that are to be severed by
the buyer

"Merchant"  A "merchant" is one "who deals in goods of the kind or otherwise by his occupation holds
himself out as having knowledge or skill particular to the practices or goods involved in the transaction" or
who employs an agent or broker in such occupation. UCC § 2-104(1)

"Good Faith"  Every contract for the sale of goods imposes an obligation of good faith dealing on all
parties in its performance and enforcement. [UCC § 1-203]
%All parties, including non-merchants, are subject to UCC § 1-201(19) which defines "good faith" as
"honesty in fact in the conduct or transaction concerned"
%Merchants are subject to an additional good faith standard, set forth in UCC § 2-103(1)(b), which
requires "honesty in fact and the observance of reasonable commercial standards of fair dealing in the
trade"

I.Introduction to Contract Remedies: What It Means to Have a Contract

**Why do we have contracts?

% To promote economic efficiency, morality, and justice
%A. Legal Remedies
% Damages – Expectation, Reliance, Restitution
%B. Equitable Remedies
% Specific Performance
% Injunctions

%A. The Three (Money) Damages Interests: 1. Expectancy, 2. Reliance, and 3. Restitution
% Courts usually grant the promisee money damages in order to compensate for the harm to the
promisee’s interests caused by the promisor’s failure to perform the promise

%1. Expectation Damages/Interests

% Compensates the injured party for the benefit he would have received had the contract been
performed (i.e. not been breached), minus any amount he would have spent in performance of the
contract
% Formula for calculating: ED = value of D’s performance (usually contract price) minus any benefits
P receives from not having to complete his own performance

% a) Hawkins v. McGee-- (Hairy Hand case, promise of a 100% perfect hand)

% Facts: P sued D seeking damages for failed operation on 2 counts; 1) Assumpsit- An action for
 expectation damages caused by the breach of a promise or a contract not under seal, and 2)
Negligence (tort)
% Issue: Can oral guarantee of “100%” success in operation hold D liable when operation fails? i.e. when
a special contract is made?
% Holding: Yes, utterance of words are done with the intention that they would be taken at face value by
patient inducing them to consent to operation
% Standard for judging D’s conduct is external, not internal
% This is the objective theory of assent
% What the D said would lead a reasonable person to believe the D was indeed making a guarantee
% D went beyond offering a medical opinion when offering a “100%” hand
% Expectation damages= value of good hand (a+b) – value of current hand + incidental damages
% Such damages must be proven with certainty, and may be measured by the contract price, loss in value,
or lost profits (Certainty of harm – limitation

%2. Reliance Damages/Interests

% Puts the P in the position he would have been in if the promise had not been made
% Does not take into account P’s loss profits--so it is ordinarily less generous than expectation
% Used when (1) expectation damages cannot be proven, and may not exceed the anticipated benefit of
the bargain; [(2) when the P recovers on promissory estoppel]
% We only compensate for expenses/loss incurred in reasonable reliance on the contract that was
breached
% Two types:
% Incidental reliance: whether you have done something that is incidental to the contract Ex. The P
may have already incurred costs associated to the contact
% Ex. You contract for a pool, and to prepare you get rid of trees etc...The pool installer breaches but
has not gotten any benefit from you
% Essential Reliance: Ex. P sells land to D; takes down “For Sale” sign; has title search done; D
breaches  we want to award P damages for the gains prevented and opportunity lost
% Basically, P has changed his position in reliance of the promise
% Ex. Doc charges for missed appt. Why? B/c he could have scheduled someone else

%3. Restitution Damages/Interests

% Compensates a party for the benefit conferred on the other party as a result of partial performance or
reliance, and is aimed at preventing unjust enrichment of the promisor who broke the contract
% Promisor is disgorged of the benefits he may have received
% There has been reliance on a promise AND a gain by the promisor (or breaching party)
% Restitution may be available:
% In cases of breach, to either party
% Where a contract is unenforceable (e.g., due to lack of consideration or writing)
% Where a contract is voidable
% Where a duty is excused or discharged due to impracticability, frustration of purpose, non-
occurrence of a condition, or disclaimer by a beneficiary
% Remember:
% Where a party cannot estimate cost of completion they collect restitution for market value of the
work done
% A party who has not fully performed can collect amount in excess of total contract price
% If Fully performed – P recovery is limited to contract price even if market value has gone up

%B. Equitable Remedies in General and Specific Performance and Injunction

% Equitable Remedies can also be referred to as “extraordinary” remedies
% While damages were available in courts of law, extraordinary relief was available in courts of equity or
chancery courts (hence the term “equitable relief”)

%1. Injunction
% Equitable remedy in the form of a court order that restrains a person from beginning or continuing an
action threatening or invading the legal right of another, or that compels a person to carry out a
 certain act, e.g., to make restitution to an injured party

%2. Specific Performance

% Is a form of injunction that compels the D to act to perform his contract with the P
% Specific performance is NOT available if expectation damages are adequate to put the aggrieved party
in as good a position as he would have been had the contract been fully performed
% Specific performance is sought in these cases (b/c expectation damages are deemed to be an inadequate
remedy):
% Where the subject matter is unique (e.g. LAND)
% In real property transactions
% In goods contracts, "where goods are unique or in other proper circumstances," e.g., where the
goods are in short supply. [UCC § 2-716]
% Pros of Specific performance
% Provides incentive to settle rather than breach and litigate. Settlement is more likely to reflect
idiosyncratic values
% Unlike damages, where the price is set by the court, here the price is set by the parties (but much
more by promisee than by promisor because the former has most of the leverage)
% B/c it is more likely than damages to capture true values, it is more likely to result in efficiency
% More likely than damages to compensate fully
% Disgorges surplus, spreading it over both parties
% Elimination of complex damage calculations would reduce litigation costs
% Cons
% Courts aren’t very good at administering/supervising
% Administration/supervision can be costly
% Bargaining process can break down

% i) Contracts for Land

% a) Loveless v. Diehl-- (Specific performance on option to purchase land improved upon)
% Specific performance should be ordered as the remedy as a matter of course
% Facts: P’s land forcibly taken by D; P was renting and wanted to sell, but D stopped it
% Issue: Whether damages can substitute an order for specific performance?
% Holding: Yes in some cases, BUT in this case NO b/c apart from land being special/unique, D would
have been unjustly enriched b/c P had invested improvements in land
% Public policy - if no specific performance, people would not want to enter purchasing deals

II. Contract Formation

% Formation of a contract requires TWO BASIC elements:
% 1) the mutual assent of the parties
% 2) some showing that this assent is the kind that the law will enforce

%A. The Objective Theory of Assent (Mutual Assent)

% Rule: If a party’s words or acts, judged by an objective standard, manifest an intention to agree, the
agreement is established, and it is immaterial what be the real but unexpressed state of his mind on
the subject (objective wins over subjective)
% An agreement on the “same bargain at the same time” or “a meeting of the minds”
% Factors that help determine whether the Intent (as understood by a reasonable person) was to be
bound by a formal contract:
% 1) Whether a party expressly reserved the right to be bound only when a written agreement is
signed
% 2) Whether there was any partial performance by one party that the party disclaiming the
contract accepted
% 3) Whether all essential terms of the alleged contract had been agreed upon
% 4) Whether the complexity or magnitude of the transaction was such that a formal executed
writing would normally be expected
%a) Embry v. Hargadine, McKittrick Dry Goods Co. (St. Louis Court of Appeals, 1907)
% If a reasonable person would have taken a party’s words to constitute assent to the formation of a
contract, then that contract will be enforceable (Not subjective intent)
% Facts: Employment termination thought to be re-contracted by words of D, “Go ahead, you’re all
right; get your men out don’t let that worry you”
% Issue: Whether a contract can be formed regardless of the subjective intention of D?
% Holding: Yes, a contract is not determined by the secret (subjective) intentions of the parties, but by
their expressed (objective) intention, which may be wholly at variance with the former
% Test: (1) Was there mutual assent/ meeting of the minds? and (2) Would a reasonable person in P’s
position have done the same thing and interpreted the agreement in the same way?

%b) Texaco v. Pennzoil ((Court of Appeals of Texas, Houston, 1987)

% The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in
the conduct and knows or has reason to know that the other party may infer from his conduct that he
assents (RST (Second) of Contracts § 19(2))
% Facts: Two big oil companies competing to buy out another, third oil company
% Issue: Whether the two parties to this case intended to be bound by signing the written MOA?
% Holding: (1) Parties’ manifested intent towards each other, by their words and deeds, not towards
anyone else, is what matters. (2) This can include intent shown by dealings with others if that info
was made public. (3) Does not include secret meetings or privileged documents. (4) The existence of
a binding contract is not dependent on the subjective intent of the parties.

%c) Lucy v. Zhemer (Supreme Court of Appeals of Virginia, 1954)

% Under the objective theory, the mental assent and intent of the parties is irrelevant; A party's intention
will be held to be what a reasonable person in the position of the other party would conclude his
manifestation to mean
% Facts: Drunken sale of land on back of restaurant check where P and D allegedly agreed to a contract for a
plot of land although D was doing it jokingly
% Issue: Whether mental assent of the parties is a requisite for the formation of a contract?
% Holding: Regardless of the secret intentions of a party, if the words and acts of a party can be
reasonably construed to express intent, the contract then is valid
% Look to the outward expressions only, prefer objective to subjective manifestation b/c subjective
manifestation would result in an increase in broken contracts – increases chance of “exit strategy”,
i.e. fraud
% Also, in a business context even if the party makes an offer in jest and the other party believes that she
is serious, and seriously accepts the offer, the contract will be binding!

%REMEMBER INTENT:
% Domestic situations are different: in social or domestic where they live together, the presumption is
that legal relations were not intended
% Letters of intent
% Say “subject to”  not binding
% Further negotiations  may be biding
% Any procedural formalities ex. Shareholder approval  may not be binding

%B. Offer and Acceptance

% Mutual Assent is ordinarily established by a process of 1) offer and 2) acceptance; both parties
intended to contract and agree on the main parts of the deal (agreed on “essential” terms on the K but
not all terms)
% Mode of Assent: Offer and Acceptance-- Restatment § 22
% 1)The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or
proposal by one party followed by an acceptance by the other party or parties (2) A
manifestation of mutual assent may be made even though neither offer nor acceptance can be
identified and even though the moment of formation cannot be determined

%1. What is an Offer?

% An offer is “‘the 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”-- Restatement
§ 24
% Creates a power of acceptance in the offeree and a corresponding liability on the part of the offeror

%i) Preliminary Negotiations

% Advertisements are not generally offers. Very general and price is not an offer.
% For a communication to be an offer, there must be a reasonable expectation in the offeree that the
offeror is willing to enter into a contract on the basis of the offered terms

%a) Nebraska Seed Co. v. Harsh (Supreme Court of Nebraska, 1915)

% If a proposal is nothing more than an invitation to the person to whom it is made to make an offer to
the proposer, it is not such an offer as can be turned into an agreement by acceptance
% “Mirror Image’’Rule: An acceptance cannot vary or alter the offer
% In this case, the letter of acceptance by D is not in the terms of the offer
% A counteroffer is a rejection of the original offer
% Notification of sent item is an acceptance
% Facts: Proposed seed sale given by letter. P accepted offer
% Issue: Whether an advertisement making a statement of price at which property is held can be
understood as an offer to sell?
% Holding: No, the mere statement of the price at which property is held cannot be understood as an
offer to sell (by a reasonable person)
% Factors: Language in letter is general, it is an invitation to make an offer, it does not fix a time for
delivery, it did not fix a definite and certain amount
% In general you have to look at trade customs, # of persons communication was addressed to,
completeness of terms in “supposed” offer
% Advertisements, catalogs and mass mailings-- Courts have ruled that it is unreasonable for one to
believe that the merchant intends to be bound with all whom receive or read such literature unless
the power of acceptance is clearly limited to the first person(s) that fulfills the act for which the
incentive is offered
% Ex. If you order a pair of jeans from an online store, and then the store sends you an email that they do
not have the jeans anymore, then it is up to you now to reject or accept another offer, if they suggest
something else

% Relevant UCC:
% §2-204 Formation in General-- Even though one or more terms are left open a K for sale does not fail
for indefiniteness if the parties have intended to make a K and there is reasonably certain basis for
giving and appropriate remedy
% §2-206 Offer and Formation in Formation of Contract

%b) Leonard v. PepsiCo (District Court of New York, 1999)-- product points for fighter jet
advertisement
% It is not necessary to consider either party’s subjective intention or interpretation of the
commercial...the only thing that should be considered is what “an objective, reasonable person
would have understood the commercial to convey”
% An advertisement is not transformed into an enforceable offer merely by a potential offeree’s
expression of willingness to accept the offer through, among other means, completion of an order
form (this would be the exception, not the rule)
% How do we know what is an ad and what is an offer?
% The offer test-- (1) offer must be: clear, definite, explicit, and leave nothing open to negotiation;
(2) The reasonable person test (objective reasonable person would not have believed that the
commercial was an ofer)
% Puffery- a legal term that refers to promotional statements and claims that express subjective rather
than objective views, such that no reasonable person would take literally
% Facts: Harrier jet case, where P tried to buy jet from D’s catalog w/o it being on the catalog
% Issue: Whether the advertisement (i.e. television commercial) constituted a valid offer?
% Holding: No, advertisements and order forms are mere notices and solicitations for offers which
create no power of acceptance in the recipient (ads are NOT offers)
% There would be no enforceable contract until D accepted the Order Form and cashed the check
% The commercial itself cannot be regarded as sufficiently definite, b/c it specifically reserved the details
of the offer to a separate writing (i.e.Catalog)
% The absence of any words of limitation such as, “first come, first served,” renders the alleged offer
sufficiently indefinite that no contract could be formed

%ii) Written Memorial Contemplated

% Letters of intent rarely count as offers and the court is reluctant to interpret people into K

%a) Empro Manufacturing Co. v. Ball-Co Manufacturing, Inc. (7th Circuit, 1989)
% An agreement to agree is subject to later negotiations which may fail and release the parties from the
obligation
% Intent is an objective manifestation, determined solely from the language used when no ambiguity in
terms exist
% Parties may decide for themselves whether the results of preliminary negotiations bind them, but they
do this through words
% Facts: Letter of intent by P to purchase assets of D, which eventually was sold to another party...where
in P’s letter there was a “subject to” clause
% Issue: Whether an “agreement in principle” or “letter of intent” is a binding agreement?
% Holding: It depends, but letters of intent also leave unresolved several important factors which
decrease their likelihood of existing as blinding K
% The wording of the letter indicates considerations were necessary before it becomes a contract-- just
sets the stage of negotiation-- i.e. preliminary negotiation (Rst. §26)
% What Empro could have done to prevent Ball-Co from saying “sike”:
% No contract at all
% Option Contract
% it is nothing if not binding even though some terms remain open
% Minimal Contract a.k.a. “Agreement to Negotiate in Good Faith”
% “No Shop” clause- agreement not to go and talk to other parties

%b) Texaco v. Penzoil (Court of Appeals of Texas, Houston, 1987)

% Same case as mentioned above, with the focus on intent
% In deciding whether or not a letter of intent is binding, courts generally examine five factors:
% 1) The language of the letter of intent;
% 2) The context of the negotiations
% 3) Whether either or both parties have partially performed their obligations
% 4) Whether there are any issues left to negotiate, or whether any of these issues are of
material importance to the transaction as a whole; and
% 5) Whether the letter of intent describes a complex transaction which customarily involves
definitive written agreements
% Facts: P contends there was no intent for D and Getty to enter into a contract and D contends there was
an intent based on the pre-contractual agreement and price terms which would be solidified at
another date
% See § 27-- applies unless either party communicates the intent not to be bound before a final formal
document is executed
% The emphasis in deciding when a binding contract exists is on intent rather than on form, based on an
objective standard

%iii) Revoking an Offer

% With limited exceptions an offer is generally revocable at any time prior to acceptance
% The power of acceptance created by an offer ends when the offer is terminated and mutual assent
requirement cannot be met when the termination occurs before acceptance is effective
% An offer may be revoked by any words that communicate to the offeree that the offeror no longer
intends to be bound
% (An offer is also revoked by action that is inconsistent with the intent to be bound once the offeree
learns of such inconsistent action
% Words or conduct must be clear
% Must be communicated to offeree
% Effective when received (minority rule is w\then dispatched)
% A revocation is effective upon receipt by the offeree

%a) Dickinson v. Dodds (In the Court of Appeal, 1876)

% No need for express/actual withdrawal from offer, inferred from D’s intent to sell to 3rd party
% No meeting of the minds at time P chose to accept offer (D already intended to sell to another),
therefore no contract
% This offer, in being a mere naked promise, is just a unilateral contract, which therefore could be
rescinded by the promissor at any time he chooses as long as nothing has been formally agreed
(as long as there was no option contract)
% Promise to hold till 9am is a promise without consideration, therefore it’s not binding
% Facts: Options K for sale of property sold to third party...where P intended to buy property from D, but
failed to inform of his intent to buy before D sold property to 3rd party
% Issue: Whether a promise to hold an offer open is binding where the other party does not accept until
after he learns that the offeror has already conveyed the property?
% Holding: The contract did not constitute a binding agreement b/c there was no continuing offer
% P was aware that D changed his mind and agreed to sell the K to 3rd party
% According to UCC Rule 42 and 43: Revocation is enough to terminate an offer of acceptance if done in
a reasonable time and with reasonable method of notice (it can be directly or indirectly)

% Relevant UCC:
% §2-205 Firm Offers-- an offer by a merchant to buy or sell goods in a signed writing which by its
terms gives assurance that it will be held open is not revocable, for lack of consideration, during the
time stated or if no time is stated for a reasonable time, but in no event may such period exceed three
months

%2. What is an Acceptance?

% A manifestation of willingness to be bound by the terms of an offer made in a manner invited or
required by the offer--Rst. § 50(1)
% An acceptance of an offer must be absolute and unconditional
% Can only be accepted by the person to whom the offeror intended-- §29, 54
% Acceptance results in the formation of a contract: both parties are bound and neither can
withdraw from the bargain w/o incurring liability to the other
% Ordinarily, acceptance must be expressed or communicated by the offeree to the offeror, in
order to manifest mutual assent
% The manner in which acceptance is to be communicated may be specified in the offer, in which case
that becomes the exclusive means of acceptance. But if the offer prescribes no means, any
reasonable and usual mode may be adopted. Rst. §30, Mailbox Rule

%i) The Mirror Image Rule:

% In order for the acceptance to be effective all of the terms of the offer must be accepted without change
or condition
% Consider the effect of varying the terms of an offer (Rst. § 58 & 59)
% Varying the terms in any way operates as a rejection or counteroffer
% Acceptance must be clear and unequivocal
% This rule does not apply once performance has begun

%a) Ardente v. Horan (Supreme Court of Rhode Island, 1976)-- Termination b/c of counteroffer
% Mirror Image Rule-- The acceptance may not impose additional conditions on the offer, nor may
it add limitations
% An acceptance which is equivocal or upon condition or with a imitation is a counteroffer and
requires acceptance by the original offeror before a contractual relationship can exist
% In an offer to form a bilateral contract, the offeree must communicate his acceptance to the
offeror before any contractual obligation can come into being
% A mere mental intent to accept the offer, no matter how carefully formed, is not sufficient
% Facts: P agreed to buy real estate from D, but hinged acceptance on certain conditions (furniture), and
D refused to comply with conditions and refused to enter K
% Issue: Whether P’s letter is reasonably interpreted as a qualified acceptance (conditional) or as an
absolute acceptance together with a mere inquiry concerning a collateral matter?
% Holding: P’s letter of acceptance was conditional, and as such it operated as a rejection of D’s offer
and no contractual obligation was created
% The offeree made a counteroffer and did so not with the intent of accepting the initial terms “if not”
these

% Look at Restatement § 61-- Acceptance which requests change of terms

% An acceptance which requests a change or addition to the terms of the offer is not thereby
invalidated unless the acceptance is made to depend on an assent to the changed or added terms
% Ask yourself:
% Are they important terms?
% Is the variation minor?
% If there is a variation, is it a counteroffer?
% Important from a policy point of view for certainty that contracts will be followed, and a legal
point of view b/c my rights need to be protected

%ii) Acceptance by Correspondence-- The Mailbox Rule

% Unless the offer provides otherwise, a standing offer is accepted upon dispatch
% The burden is on the offeror b/c he is master of the offer and offeree is in reliance
% An offeror retains the power of revocation up to the time that the offer is accepted
% An acceptance creates a contract out of an offer
% If the acceptance is lost or delayed while in transit, there is still a contract
% The contract is formed on dispatch, so what happens after that point does not affect formation of K
% If the offeree attempts to revoke her acceptance, it is void b/c the Mailbox rule states that a contract is
formed upon dispatch of the acceptance
% If the offeree is able to recapture the acceptance before the receipt, it does not change the Mailbox rule
% If the offeree sends a revocation that is received by the offeror before the acceptance:
% Any such communication will not be an effective revocation
% But it could lead to: 1) an offer to revoke (which can be accepted by the other party); 2) a bar or
estop of the offeree from suing to enforce the contract; 3) could constitute repudiation of
contract (which would give original offeror the right to avoid the contract; 4) or offeror may
have the right to withhold performance until he receives further assurance that performance will
be forthcoming
% What happens when an offer is in the form of an option?
% Then acceptance is operative only upon receipt by the offeror (the opposite of the Mailbox rule)
% The “master” of the offer chooses the medium of how acceptance is communicated to them
% Acceptance is made in the same medium as the offer, unless it is indicated otherwise, or is one that is
customary for the offer in that same time and place
% The “master” can also modify the mailbox rule

%Rejection of Offer -- A rejection of an offer by the offeree is effective when received by the offeror.
% If an offeree dispatches more than one response to an offer, regardless of whether the rejection is sent
before or after the acceptance, if the rejection is received later than when the acceptance was
dispatched, a contract is formed since an acceptance is effective upon dispatch but a rejection is
effective upon receipt.
% Nevertheless, estoppel may operate to bar enforcement of such a contract where the offeror receives
the rejection before the acceptance, and acts in reliance on such rejection

%C. Unilateral Contracts (i.e., offers accepted by performance)

% In a unilateral contract, the offeree accepts by performance of the promise
% Ex. When there is an offer to the whole world, you are asking for acceptance by performance (b/c you
cannot expect EVERYONE to send notice of acceptance, etc.)
% Public Policy Aspect: we want to encourage reliance b/c we worry when the offeree is relying on
contract only to have it revoked
% Notice of Acceptance by Performance--Where an offer invites acceptance by performance, no notice
is required to make the acceptance effective, unless the offeror so specifies
% However, if the offeree has reason to know that the offeror has no adequate means of learning of
the performance with reasonable promptness and certainty, the offeror's contractual duty will be
discharged unless:
% The offeree exercises reasonable diligence to notify the offeror of acceptance; or
% The offeror learns of the performance within a reasonable time; or
% The offer indicates that notification of the acceptance is not necessary

%a) Carlill v. Carbolic Smoke Ball Co. (In the Court of Appeal, 1893)-- advertisement offering reward
in use of product
% Acceptance need not be communicated if performed
% The ad was a unilateral offer in which acceptance takes the form of performance
% Ads, for the most part, are offers to anybody who performs the conditions named in the ad, and
anybody who does perform the condition accepts the offer
% Ex. Analogous to lost dog reward
% This offer is a “continuing offer”
% It was never revoked, and if notice of acceptance is required, the person who makes the offer gets
the notice of acceptance contemporaneously with his notice of the performance of the condition
% If an offer is an offer to be bound, then it is a contract the moment the person fulfills the condition
% Facts: Smoking ball ad case, where P was entitled to recover from D b/c P attempted to use D’s
smoking ball and contracted the flue
% Issue: Does one who makes a unilateral offer for the sale of goods by means of an advertisement
impliedly waive notification of acceptance, if his purpose is to sell as much product as possible?
% Holding: Yes, one who makes a unilateral offer for the sale of goods by means of an advertisement
impliedly waives notification of acceptance
% This was not mere “puff” based on fact that money was actually set aside for this reward by D

%Rst. § 32-- Invitation of Promise or Performance

% Where there is doubt as to acceptance-- in cases of doubt, offeree may accept by performing what the
offer requests or by promising to perform, as the offeree chooses

%b) Leonard v. PepsiCo (District Court of New York, 1999)-- product points for fighter jet
advertisement
% The Harrier Jet case again. Not a contract b/c it wasn’t in the catalog
% The offer here constituted an advertisement to receive offers rather than an offer of reward
% The performance that is required to accept an offer must be clearly related to that offer... Mere
preparation to perform is not enough
% The Court discusses the difference btw reward invitations and invitations to negotiate

%c) White v. Corlies & Tift (Court of Appeals of New York, 1871)-- Contract for building offices,
where silence is deemed not to be an acceptance
% Where an offer is made by one party to another when they are not together, the acceptance of it by that
other must be manifested by some appropriate act
% A mental determination not indicated by speech or put in course of indication by act to the other party
is not an acceptance that will bind the parties. D ignored the note and began work
% Note: (In general though, as soon as the answering letter is mailed, the contract is concluded-- Mailbox
Rule)
% Facts: D sent letter to P stating “Upon agreement...”, but P failed to send D actual notice that he was
accepting, instead going about and performing w/o letting D know
% Issue: Whether performance is a sufficient means of acceptance if the offer is not specific on the issue?
% Holding: No, performance is not a sufficient means of acceptance if the offer is not specific on the
 issue
% P had a duty to seek out D to give notice of consent before commencing work
% While P did purchase material for the work, it cannot be proven that what he bought was intended to be
for this specific job with D

%Rst. § 30
% Form of Acceptance Invited

%d) Peterson v. Pattberg (Court of Appeals of New York, 1928)-- Termination b/c revocation before
acceptance
% If an act is requested, that very act and no other must be given
% In case of offers for a consideration, the performance of the consideration is always deemed a
condition
% The offer of a reward in consideration of an act to be performed is revocable before the very act
requested has been done
% An offer to sell the property may be withdrawn before acceptance w/o any formal notice to the person
to whom the offer is made; no matter how brief the interval
% Facts: Bag of money in hand at the door, offeror cancels...Payment of mortgage in full by certain date
to get a discount on it, and P comes to pay and D refuses to accept to payment b/c he has sold the
mortgage, and TC finds that he has rightfully terminated the offer before acceptance
% Issue: Whether, as P is approaching D intending to perform, and before actual performance is
tendered, the offer can be withdrawn?
% Holding: Yes, the offer can be withdrawn even though the condition was partly performed already by
P
% The act requested to be performed was the complete act of payment, a thing incapable of performance
unless assented to by the person to be paid

%i) Acceptance by Silence

% Silence may not constitute an acceptance except where:
% Based on prior dealings btw the parties, it is reasonable that the offeree should notify the
offeror if he does not intend to accept; or
% Rst. § 69...
% 1(a): When the offeree takes the benefit w/ a reason to know that they were offered w/
expectation of compensation
% 1(b): When the offeror has stated or given reason to understand that offer is accepted
through silence.
% The UCC does not allow it when merchants send merchandise w/o reason

%a) Hobbs v. Massasoit Whip Co. (Supreme Judicial Court of Mass., 1893)-- eel skins retained by D
assumed as acceptance
% A course of previous dealing between the parties can create the reasonable expectation with the offeror
that the silence of the offeree implies acceptance
% D didn’t have a duty to notify acceptance, BUT D had duty to negate acceptance by notifying P
% Facts: Eelskins shipped to D, and D did not return them, and they were destroyed some time later
% Issue: Whether silence can be acceptance?
% Holding: Yes, a binding contract between two parties can be reasonably assumed even if the offeree
does not expressly refuse the offer that has been made to them
% This would be unjust enrichment (if you let D get away with this)
% Previous business dealings established that the buyer could accept delivery with silence, and plus he
kept the skins for a long time

%D. E-Commerce and Mutual Assent

% Shrinkwrap License
% When you remove the shrinkwrap on a box. You can see the terms before you open the software.
This is a manifestation of assent
% Clickwrap License
% Like a shrinkwrap case- where you cannot go forward w/o clicking to affirm your assent
% Browsewrap License
% A case that when you go forward, you say that you are agreeing to the terms and conditions
therein, but you never have to affirmatively agree to anything

%a) Specht v. Netscape Communications (District Court of New York, 2001)--Browse-Wrap case;
“Smart Download”; Browse wrap agreement not a K
% If there is no indication to assent to terms and agreements, then there is no mutual assent, thus, no
awareness of entering a K
% There has to be unequivocal manifestation of assent (by both parties)
% Promises become binding when there is a meeting of the minds and consideration is exchanged
% (1) Downloading is not assent (it’s just to obtain a product);
% (2) Affirmative action is required to express consent
% (3) The language here is suggestive; not written as a condition (e.g. “please review”)
% The sale of software is not a goods, thus not governed under UCC Article 2
% Facts:
% Issue: Are the Ps bound by this agreement b/c there was a reference to the agreement? Are they bound
to the arbitration clause?
% Holding: No, the parties did not enter into a binding contract b/c P could download w/o making
assent...so No agreement, no contract, clause was invalid
% It’s free like a free newspaper-- no sense of a contractual relationship

%b) Specht v. Netscape Communications (2d Circuit, 2002)--Browse-Wrap case; “Smart Download”;
Browse wrap agreement not a K
% Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to
a particular fact, has constrictive notice of the fact itself in all cases in which, by prosecuting such
inquiry, he might have learned such fact
% P’s apparent manifestation of consent was to terms contained in a document whose contractual nature
was not obvious
% Facts: Same as above case
% Issue: Whether P, through their acts or failures to act, manifested their assent to the terms of the
License Agreement proposed by D?
% Holding: No, a reasonably prudent offeree in these circumstances would not have known of the
existence of license terms

%c) Register.com Inc. v. Verio Inc. (2d Circuit, 2004)-- Browse-Wrap case; If a reasonable person does
know, then even by silence you would be seen to have accepted
% Rst. § 69(1)(a): Silence and inaction operate as an acceptance where an offeree takes the benefit of
offered services with reasonable opportunity to reject them and reason to know that they were
offered with the expectation of compensation
% It is standard contract doctrine that when a benefit is offered subject to stated conditions, and the
offeree takes the benefit with knowledge of the terms of the offer, the taking constitutes an
acceptance of the terms, which accordingly become binding on the offeree
% Facts: D goes to P’s website, and obtains daily updates of the WHOIS info relating to newly registered
domain names, and then D sends these entities D’s marketing info
% When P caught on, it went ahead and changed the restrictive legend to include “via direct mail,
electronic mail, or by telephone”...this was done without ICAAN consent
% Issue: Whether D is contractually bound to a contract with P, even if the terms of acceptance did not
appear until after D had submitted its query and received the data it was looking for?
% Holding: Yes, D is contractually bound to a contract with P b/c D knew what the terms stipulated and
entered the queries numerous times (once would have been ok, but not after)

%Once the court knows that the party knew subjectively of the terms of a deal, then it has been proven to the
extent that a determination can be confirmed
%You only need to require the objective test when a party claims to not be aware that an agreement had been
established
I.Discerning the Agreement
% Once there has been mutual assent (offer and acceptance) to a contract there has to be
agreement of the terms in the contract. That’s where interpretation comes into play!
% This is done in 3 parts:
% A. Interpreting the meaning of terms
% 1. Ambiguous
% 2. Vague Terms
% B. Gap Filling
% 1. Agreements to Agree
% 2. Illusory Promises
% C. Identifying which term to use

% Different Meanings Intended by the Parties

% Where the parties attach different meanings to a term, the interpretation that prevails is that of the
party that did not know (or had no reason to know) of any different meaning attached by the
other, and the other knew (or had reason to know) the meaning attached by the first party-- Rs. §
201

%A. Interpreting the Meaning of the Terms

% Contractual interpretation is the activity of finding the meaning of words
% Are the terms ambiguous? Ex. “right to bear arms” – is this a weapon or an appendage
% Are the terms vague? Ex. Does “arms” also include nuclear bombs?

%i) Ambiguous Terms

% Basically dealing with a “misunderstanding”-- is there mutual assent? If not, are there enough
facts to deem mutual assent? Intentions are deduced

%a) Raffles v. Wichelhaus (Court of the Exchequer, 1864)-- Mistaken identity of Peerless boat used in
delivery of goods
% MUTUAL MISTAKE VOIDS CONTRACT
% Because there was conflict as to which boat was meant in contract, the Court deemed there was no
mutual assent, no “meeting of the minds”(subjective test) and ambiguity effects a material term of
the contract b/c conditions of wildly fluctuating prices arrival date is important (objective test) and
therefore, no contract
% An agreement between two parties is still binding regardless of if there is a disagreement over a
word...the intent of the original K is what matters
% Facts: Order to ship a certain quantity of cotton from India on a ship named “Peerless.” There was
confusion as to which ship was meant, P wanted Oct. but D sent Dec., and when arrived P refused to
accept the Dec. shipment
% Issue: Whether a contract is formed when one party thinks one thing and the other party means
something else?
% Holding: No, if an objective ambiguity arises that shows that there had been no meeting of the minds,
the parties have not given mutual assent to contract
% Note: The difference between latent ambiguity (each interprets the same term differently) and patent
ambiguity (a term is undefinable)
% Parol evidence pointed to the meaning of a term is allowed by the UCC, this includes usage of trade
and prior dealings between the parties

%b) Oswald v. Allen (2d Circuit, 1969)-- Swiss coin collection, mistake of what was for sale
% Taken from Raffles and Rst.§ 71(a)-- If there is an ambivalent term in a contract, understood
differently by the parties, the contract is not binding unless either party was aware of the others’
understanding
% Facts: P and D were mistaken on which collection was to be sold, D decided not to go ahead with
agreement, and P filed saying there had already been an agreement
% Issue: Was there a valid contract even though both parties had different views of what was being sold?
% Holding: Although mental assent of parties is usually not a requisite to formation of contract, this
cause is an exception b/c there is “no sensible basis for choosing between conflicting understandings

% In determining whether terms are ambiguous, Courts will look at factors:

% The express terms of the parties
% § 2-208: Course of Performance
% § 1-205(1): Course of Dealing
% § 1-205(2): Usage of Trade

%ii) Vague Terms

% Sometimes the terms of the K are ambiguous, BUT the K stands if we can discern meaning
% Did the terms used apply beyond their agreed meaning?
% Think about the need to apply an “objective” standard

%a) Weinberg v. Edelstein (Supreme Court, Special Term, New York, 1952)-- Ladies dresses, coats
and suits
% Custom of trade defines usage here
% P should have used more restrictive terms in the contract if he wanted them enforced
% Restrictive covenants are enforced by injunction against the takers with notice, and one who
subsequently rents premises with knowledge of a prior restrictive covenant agreed to by his lessor in
favor of another tenant will be prohibited from performing (via injunction)
% Facts: Both P and D had women’s store in the same building, and D had a restrictive covenant saying
that he could not sell “dresses”...and when D began selling matching skirt-blouse combinations, P
called that a “dress” and demanded he cease and desist
% Issue: Does the term “dresses” preclude the sale of “blouse skirt” combos? What is the meaning of the
word “dress”?
% Holding: No, b/c both parties were assumed to be in the same community of discourse and therefore
either knew or had reason to know of the special meaning attached to the word “dress” in their trade
(and D was not selling a “dress”)
% Where both parties have convincing arguments, policy dictates that restrictive covenants should be
construed narrowly against the person seeking to enforce it to promote competition and free use of
land
% Important: Court looked at: 1) Express Terms, 2) Negotiation and Bargain, 3) trade usage (of the
word “dress”), 4) public policy, and 5) trends...Court also mentioned that both parties are in the
same business, and therefore they each should have knowledge of this term

%b) Frigaliment Importing Co. v. B.N.S. International Sales Corp. (District Court, New York, 1960)--
What is a chicken?; no breach
% The party seeking a narrower meaning has the burden to show that is what was intended. Courts want
to encourage the party with the narrow meaning to declare it during negotiations and insert an
explicit term
% Objective meaning and trade usage permitted either interpretation
% Need to look at: 1) Express Terms, 2) Negotiation and Bargain btw 2 parties, 3) trade usage (of
the word “chicken”), 4) commercial context
% The key is that the subjective meaning of the term is irrelevant if the P c/n show that there was
subjective agreement
% Facts: D had two Ks with P, but they differed on what “chicken” meant in regard to the contract, and P
sued D for breach of warranty claiming that D delivered goods that did not meet the specifications of
the contract
% Issue: When important terms of a contract are perceived and interpreted differently by each party, may
one party hold the other liable for breach of contract?
% Holding: A party who seeks to interpret a contract’s ordinary terms in a narrower sense than is used in
everyday trade has the burden of proof to establish that meaning

B. Filling in Gaps in the Terms

% The act of supplying the missing terms
% If manifestation of assent is incomplete can a contract be enforced?
% Supplying terms to a contract when contracts are silent on a particular issue
% Two types of terms:
% 1) implied in fact – the terms parties implicitly agreed to
% Such contracts are formed when one party accepts something of value knowing that the other
party expects compensation
% 2) implied in law – thought to be imposed on parties w/o their consent
% It is used when a court wishes to create an obligation upon a non-contracting party to avoid
injustice and to ensure fairness
% It is invoked in circumstances of unjust enrichment
% “Good Faith” is implied in law-- In U.C.C. § 1-302(b)
% Two types of judicially supplied gap fillers:
% Default rules – legal rules that parties can avoid or vary by means of an express clause
% Immutable rules –may not be varied by consent and will override any express clause
% Courts will not set a K for parties, and if there is no clear remedy, will not create one.

i) Agreements to Agree
% Certainty, the less certain a contract is, the less likely a reasonable person would accept

a) Sun Printing & Publishing v. Remington Paper & Power-- Contract for sale of paper
% Cardozo: “We are not at liberty to revise while professing to construe.”
% Court didn’t want to seem like it was completely making a new K; not what it does
% Rule: No, the time (and price) element is essential to the formation of the contract, and inability to
agree upon this element causes the failure of the contract and neither party is bound
% Issue: Is there a contract when a term left open in the contract cannot be agreed upon by the parties?
% Policy aspect:
% Freedom from contract (same as the Empro case)
% Parties do not want to be afraid of negotiating if they might end up accidentally bind themselves to
a contract they were not assenting to yet
% If this happened, then parties would be less willing to enter contracts at all
% Parties want certainty and reliability
% Contra proferentem
% This is a rule of contractual interpretation which provides that an ambiguous term will be
construed against the party that imposed its inclusion in the K – or, more accurately, against (the
interests of) the party who imposed it
% Therefore, the interpretation will favor the party that did not insist on its inclusion
% The rule only applies if, and to the extent that, the clause was included at the unilateral insistence
of one party without having been subject to negotiation by the counter-party
% The reasoning behind this rule is to encourage the drafter of a K to be as clear and explicit as
possible and to take into account as many foreseeable situations as it can

b) Texaco v. Penzoil
% For a K to be enforceable, the terms of the agreement must be ascertainable to a reasonable degree of
certainty so that parties in good faith can find in the agreement words that will fairly define their
respective duties and liabilities
% Parties’ intent not conclusively discernible from their writings alone, extrinsic evidence of relevant
events is considered
% The agreement must be sufficiently definite for the court to be able to recognize a breach and to
fashion a remedy for that breach
% Issue: Can a K be binding even if the terms intended to be included into an agreement are too vague
and incomplete?

ii) Illusory Promises

% Unless both parties are bound, neither will be
% Whether the promise of one of the parties is “illusory” b/c it leaves complete discretion to perform or
not is in the hands of the purported promisor
% Courts generally fill the gaps in the manifestation of assent by supplying an obligation to exercise this
discretion in “good faith.”
% A requirements K is valid where the buyer is obligated to buy all its requirements from the seller, and
if they are obligated to buy anything that they need from the seller, then that is a real promise. The
buyer must act in good faith.
% Nevertheless, common law and the UCC have recognized an implied promise to use best efforts in an
agreement for exclusive dealings, which furnishes the necessary consideration.
% See Wood v. Lucy, Lady Duff-Gordon, (involving an agreement by the defendant to give the plaintiff
the exclusive right to market its name and designs); UCC § 2-306(2)

a) NY Central Iron Works v. US Radiator-- extensive need of radiators not provided by D

% If a part contracts for goods upon a rising market he is ordinarily entitled to such profits as may accrue
to him by a reason of a prudent or favorable K
% The P could not use the K for the purpose of speculation in a rising market since that would be a plain
abuse of the rights conferred and something like a fraud upon the seller
% Facts: Quantity was an open term of contract
% Issue: Was there a mutual mistake in framing K since the intention was to limit the quantity of goods
to be delivered to an amount such as had been ordered in previous years? Should K be reformed to
reflect this intention?
% Holding: No sign of bad faith or unfair dealings on part of P, therefore D breached K. Both parties
must carry out contract in a reasonable way
% P asked for more radiators in good faith and D should have complied

%Illusory Promise- “I will if I want to” Promise

% It looks like there is a promise in place, but in actuality one party has not agreed to
%Requirement Contract (a.k.a “as much as they needed” contract)
% The Requirement Contract is exclusive
%Output Contract (a.k.a. “as much as I can buy” K”)
% The Output Contract is not exclusive

b) Eastern Air Lines v. Gulf Oil Corp-- exclusive gas supply K, issue on $ for renewal
% Mutuality of Obligation- Both parties need to agree to do what they are asked for
% “void for want of mutuality” means that one party was doing one thing and the other party was
doing something else that was not within what they had agreed to
% D claimed that the K was “void for want of mutuality” and was commercially impracticable, BUT P
was acting in good faith, so too bad for D
% Facts: P and D dealt with one another for decades; D supplied oil for P planes
% Issue: Did D violate the K where missing terms of quantity subjects P to the whims of D?
% Holding: YES! K is valid. The real issue is to look at the intent of the parties and to see if there is
good faith. At all times, P acted with the good faith of a merchant
% Notes: This is a requirements K b/c P is giving $ for oil in exchange for D to supply P with “any” of its
needs
% Requirements K are valid if they have good faith. Since P did not demand an exorbitant amt. of gas, it
is. There is also an element of commercial impracticability on the part of D – “too bad if you entered
into a failing contract”

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

% The duty of good faith can compensate for vagueness in an agreement to avoid invalidation of a
K clearly intended by the parties
% Rule: “A promise may be lacking and yet the whole writing may be instinct with an obligation
imperfectly expressed” §2-306
% Holding: B/c D gave an exclusive privilege, which, acceptance by P constitutes assumption of duties
to increase profits (since P’s own profits are tied to his endeavor) – promise has value – reasonable
effort standard. Ct. looks for good faith performance
 C. Identifying the Terms of the Agreement

i) Form Contracts or “Contracts of Adhesion”

% An adhesion K is a K drafted by one party and reduced to a form agreement that generally presents no
opportunity for negotiation
% A “take it or leave it” K
% These are Ks with implied assent
% While not per se objectionable, adhesion Ks are subject to greater scrutiny than Ks that result from
negotiation between the parties
% To protect the non-drafter, who is often in an inferior position, the Restatement provides that only
those contractual provisions that a reasonable person would anticipate and agree to should be
considered part of the K. Restatement § 211(3)
% Also think about whether the term may be unconscionable

a) Carnival Cruise v. Shute-- choice of venue clause on back of cruise ticket

% Rule: this clause is not the sort of thing that one bargains for, and therefore this is governed by
ordinary commercial considerations. The clause is reasonable and was made in good faith.
Clause is enforceable b/c it does not preclude recovery and so long as certain conditions are
explained properly
% Issue: Is clause on venue selection on back of ticket enforceable?
% Holding: Not unconscionable even if P didn’t know until after buying the ticket. There are many
reasonable business interests for requiring litigation in D’s home state. Some of these may lower
costs, resulting potentially in lower prices for other Ps
% Dissent: P does not see conditions of contract until after purchase of tickets; Not enforceable b/c the
forum-selection clause was not freely bargained for
% Test: Is this clause “fundamentally unfair”?

b) Caspi v. Microsoft-- Ps argue D provided more expenses than it wanted to in its products
% Ps must be seen to have had adequate notice of the forum selection clause...
% Issue: Whether Ps had adequate notice of the forum selection clause when they were entering into a K
with D?
% Holding: P had adequate notice of forum selection clause - if adequate notice of forum selection clause
is provided, the clause will control
% Court took an objective anaylsis of this b/c Ps had not conceded that they had read the clause (this
is different from Carnival in that in that case, Ps did admit to reading)
% Rst. § 211-- Standardized Agreements (used b/c efficient)

ii) Which Terms were Agreed to?

% This problem often arises when there are conflicting writings and/or multiple forms used known
as “battle of the forms”
% Typically only takes place in commercial transactions
% This occurs b/c the UCC does NOT apply the Mirror Image Rule!
% UCC does NOT want to release one party from the K, so tries to give them one last chance
% When the terms of an acceptance vary from those of an offer, it becomes necessary to determine
which should constitute the terms of the agreement
% Although the parties have intended to be part of a K, we then are faced w/ the problem of identifying
the terms to which they agreed when their manifestations of assent conflict
% Also the UCC is different than common law b/c btw merchants additional terms can be added if the
other party remain silent on them – acceptance by silence

a) Step-Saver Data Systems, Inc. v. Wyse Technology-- Box-top license case

% Facts: Does the box-top license constitute the final and complete expression of the terms of the parties’
agreement? Did the parties intend to do this?
% Proceeding with a K after receiving a writing that purports to define the terms of the parties’ K is not
sufficient to establish the party’s consent to the terms of the writing to the extent that the terms of the
writing either add to, or differ from, the terms detailed in the parties’ earlier writings or discussions
% In the absence of a party’s express assent to the additional or different terms of the writing, § 2-207
provides a default rule that the parties intended, as the terms of their agreement, those terms to which
both parties have agreed, along with any terms implied by the provisions of the UCC

%According to U.C.C. § 2-207 (the most “infamous” section of the U.C.C.):

% (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 (this part is the opposite of the common law “mirror image rule”
and the “last-shot” rule, which is arbitrary), UNLESS acceptance is expressly made conditional
on assent to the additional or different terms (if the acceptance expressly states it has to be done
this way, then that is the way it will be done...but it HAS TO BE EXPRESSED; if this
“UNLESS” rule is applied, then the “mirror image” rule is resurrected)--(FORMATION rule)
% (2) The additional terms are to be construed as proposals for addition to the contract. Between
merchants such terms become part of the contract UNLESS: (TERMS rule)
% (a) the offer expressly limits acceptance to the terms of the offer;
% (b) they materially alter it; or
% (c) notification of objection to them has already been given or is given within a reasonable time
after notice of them is received.
% (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a
contract for sale although the writings of the parties do not otherwise establish a contract. In such
case the terms of the particular 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.
(TERMS rule)

%Notes on U.C.C. § 2-207--Additional Terms In Acceptance or Confirmation:

% (1)This is about the acceptance (its formation)
% (2)This is about the offer
% This section is about what to do with those terms that are additional?
% This applies when we have a contract formed with the main part of § 2-207(1) (not the
UNLESS part)
% The terms are the proposals, but if it is between merchants, then we have a contract, UNLESS
% a)limits the offer
% b)materially alteration
% c)objection
% (3) If we have a contract, but do not have it in writing, then we need to only look at the terms agreed
upon by both parties to determine the points in the agreement, in addition to the “gap-fillers” of the
U.C.C.
% This is a last resort analysis
% “terms w/o a contract on the forms or otherwise...a contract only by conduct”

%Three Tests that invoke the “UNLESS” clause (meaning that this is not an acceptance, but rather it
is either a REJECTION AND/OR COUNTEROFFER):
% 1) First Test (used) to apply the Roto-Lith case
% An offeree’s response is a conditional acceptance to the extent it states a term “materially altering
the contractual obligations sole to the disadvantage of the offeror”
% THIS HAS BEEN OVERRULED AND IS NO LONGER GOOD LAW
% 2) Second Test considers an acceptance conditional when certain key words or phrases are used, such
as a written confirmation stating that the terms of confirmation are “the only ones upon which we
will accept orders.”
% THE COURT CHOSES NOT TO FOLLOW THIS ANALYSIS
% 3) Third Test requires the offeree to demonstrate an unwillingness to proceed with the transaction
unless the additional or different terms are included in the contract
% THE COURT DOES ADOPT THIS APPROACH FOR ITS ANALYSIS, B/C IT BEST
REFLECTS THE UNDERSTANDING OF COMMERCIAL TRANSACTIONS DEVELOPED
BY THE U.C.C.
% The Court believes this b/c it wants to figure out the parties’ commercial bargain...(are they
willing to go ahead with the transaction? If so, then it was not a conditional acceptance)

a.Union Carbide Corp. v. Oscar Mayer Foods Corp.-- P plastic maker to D sausage wanted back taxes
to be paid by D, and D refused
% Court used § 2-207 here to analyze; Held that an alteration is material if consent to it cannot be
presumed..basically if there is an “unreasonable surprise"
% If the new term does not effect a material alteration, then silence is consent, period...
% ...But, if a new term does effect a material alteration, then the party who proposed it must
present additional evidence, beyond the term itself, to show that he was reasonable to infer
consent to the new term from the other party’s failure to object (by silence)
% Issue: Whether the tax clause materially alters the K to the extent where D’s silence regarding the
matter could not reasonably be inferred as being sufficient as an agreement of the terms?
% Holding: Construed as an indemnity clause, the tax clause altered the contract materially; and since the
clause was at best ambiguous about indemnity, consent cannot realistically be inferred from D’s
silence

iii) Terms that Follow Later

% Whether terms that follow some time after the performance of one party has begun can be considered a
part of the agreement?

a.ProCd v. Zeidenberg-- Shrinkwrapped terms of use agreement w/ a CD phonebook database

% Rule: “Shrinkwrap licenses” within a box are enforceable, as long as there is mention of the additional
terms outside the box, and there is assent by performance (e.g. the buyer does not return the goods,
or the buyer rejects and gets a refund)
% Shrinkwrap licenses are just as enforceable unless their terms are objectionable on grounds applicable
to contracts in general
% Use of product constitutes acceptance of the agreement, so long as there is a right to return the product
if the terms are deemed unacceptable. (UCC § 2-606(1)(b) and UCC § 2-602(1))
% Facts: Every box had warning that terms were within. Buying the product = acceptance. (K is formed
upon payment. Also it flashed every time it was used!
% Issue: Are licenses enforceable upon software buyers?
% Reasoning: Company’s can’t be made to put the terms on the outside of the box! There can be notice
outside, terms inside, and the right to return if you don’t agree. Look at 2-204 – vender is master and
can invite acceptance by conduct. Also D loses b/c if the ct. allowed this – cost of products would
rise (bad for consumers)
% Other examples of terms received after purchase: (1) insurance policies; (2) airline tickets; (3) concert
tickets

b) Hill v. Gateway 2000-- Bought PC over the phone, didn’t like, but waited after 30 days
% As long as they have the opportunity to reject the terms, then the K is okay
% A vendor as master of the offer, and may invite acceptance by conduct, and may propose
limitations on the kind of conduct that constitutes acceptance
% A buyer may accept by performing the acts the vendor proposes to treat as acceptance
% A K need not be read to be effective; people who accept take the risk that the unread terms may in
retrospect prove unwelcome
% Similar to “Shrinkwrap liscense” cases, where the K does not form at the time of purchase, BUT
typically it forms when the purchaser makes the express indication of acceptance, for example
by declining to return the product within a specified period of time (like in this case)
% Issue: Does 2-207 apply? The big questions are: (1) When was the contract formed? (2) What are the
terms of that contract?
% Analysis: Buyer beware! The Easterbrook opinions suggest that “cash now, terms later” is standard
% What’s the best argument you can make in favor of the Easterbrook position?
% It’s a useful way to do a lot of business and it would be tiresome at best and burdensome in many
ways to have all the terms laid out at the time of the deal b/c we’re dealing with complicated
products.
% There is a lot of utility in “deal now, terms later”
% Holding: The P’s had 30 days to return if they didn’t want to accept the terms. They didn’t so D wins

i.Klocek v. Gateway-- P supposedly had 5 days from the date of the computer’s delivery to decide
whether to return it or not
% In typical consumer transactions, the purchaser is the offeror and the vendor is the offeree. P
offered to purchase the computer and the D accepted P’s offer.
% Thus, if either party is not a merchant, additional terms are proposals for addition to the K that
do not become part of the K unless the original offeror expressly agrees
% According to Official Comment 1 of UCC §2-207: § 2-207(1) and (2) applies “where an
agreement has been reached orally...and is followed by one or both of the parties sending
formal memoranda embodying the terms so far agreed and adding terms not discussed.”
% Issue: Did P agree to the arbitration clause enclosed in the package by not returning it in 5 days?
(Holding= No)
% Remember: In this case we do not go to (a), (b), or (c) in §2-207 b/c P is not a merchant
% This only applies to merchant

%ProCD and Hill is actually the current weight of authority in the courts
%Klocek actually got overturned on appeal (it did not reach $75k in dispute)
%Klocek and Step-Saver has more authority among scholars

I.Issues Relating to Writings (Written Manifestations of Assent)

% Writings can affect the enforcement of a K in three ways:
% 1) The existence of a writing may be considered privileged in some manner and given
priority over oral communications when interpreting meaning of assent (Parol Evidence)
% 2) Sometimes writing fails to reflect the understandings of one or both parties and may
justify the reformation of writing (Mistakes in integration- “reformation”)
% 3) Protect against the over enforcement of informal commitments (Statute of Frauds

A. (Interpreting a Writing) The Parol Evidence Rule

% The rule governs whether parties may introduce evidence of extrinsic agreements to prove the
existence of additional or modified terms
% Contemporaneous or prior oral evidence CANNOT be used to contradict the terms of an integrated K
% Remember!, PE is NOT admitted when:
% there is certainty and unambiguity
% terms are conclusively presumed
% there is integration/merger
% PE IS admitted:
% when the writing is incomplete on its face
% when there is uncertainty or ambiguity
% when the writing does not purport to contain the whole agreement
% PE does not bar extrinsic evidence offered for the following purposes:
% Aid in the interpretation of existing terms - vague or ambiguous terms
% Show that a writing is or is not an integration or to establish that an integration is complete or
partial - always allowed
% To establish subsequent agreements or modifications between the parties
% To show that terms were the product of illegality, fraud, duress, mistake, lack of consideration
or other invalidating cause

% Ask yourself: (1) is the writing integrated (meaning, was it intended to be final)?
% IF YES – nothing to contradict (no PE)
% Ask yourself: (2) was the writing supposed to be complete or partial?
% If complete= no PE to add a term
% If partial= PE ok to add a term!
% If NO= PE rule doesn’t apply at all
% Finality of Writing--
% The more formal and complete -- the more likely it is that it represents the final agreement
% The writing need not be signed or complete in order to be deemed final
% Writing as Integration--
% A written doc that serves as a final embodiment of the agreement may be either a:
% (1) Complete integration – an expression of the parties' agreement in its entirety
% (2) Partial integration – an expression of only a portion of the agreement
% If a writing is found to be a partial integration, the parol evidence rule prevents the following types
of extrinsic evidence:
% (1) prior agreements (whether written or oral) that contradict a term in the contract;
% (2) contemporaneous oral agreements
% (3) Consistent additional terms: contemporaneous writing(s); course of dealing, course of
performance or trade usage

a) Thompson v. Libbey-- verbal warranty as to quality of purchased logs

% To allow a party to lay the foundation for such parol by oral testimony that only part of the
agreement was reduced to writing, and prove by parol the part omitted, would be to work in a
circle, and to permit the very evil which the rule was designed to prevent
% The only criterion of the completeness of the written K as a full expression of the agreement of
the parties is the writing itself
% If it imports on its face to be a complete expression of the whole agreement, it is to be presumed
that the parties introduced into it every material item and term; and PE cannot be admitted to
add another term to the agreement, although the writing contains nothing on the particular
one to which the parol evidence is directed
% Issue: Can a verbal warranty be admissible as evidence when whole of K is in writing?
% Analysis: Held no, PE not allowed b/c the written K seems complete – i.e. fully integrated – therefore any
PE evidence that alters or adds to K is inadmissible. The court is saying that there was a clear legal
obligation and it was not unclear or ambiguous

a.Brown v. Oliver-- Parties discussed sale of hotel to include furniture but final K did not include it
% If the terms of an agreement are proved to be final in writing, PE is necessary to figure out if other
provisions were intended by the party
% Must figure out if the writing of the K was intended to cover a certain subject of negotiation. This Test
involves three propositions:
% 1) The intent of the parties to integrate
% 2) Conduct and language of the parties and the surrounding circumstances
% 3) Particular element of the alleged extrinsic negotiation is dealt w/ at all in the writing
% Parol evidence may be used to show that an otherwise seemingly unambiguous term is in fact
reasonably susceptible to differing interpretations (extrinsic evidence)
% Issue: Whether the parol evidence rule applies to fill in a gap to cover a certain subject of negotiation,
when no mention was made when the original writing was drawn up?
% Holding: PE evidence RULE does not apply b/c it was not a complete contract
% Analysis: This is opposite of Thompson b/c you can rely on parol evidence instead of just looking to the K
to determine if the K was final. If there is nothing in the K that discusses the “terms” of the Ks then the
“term” that the P wants discussed may convince the court that the contact is partial not integrated. This K
dealt w/ land only

%Restatement, § 210:
% (1)Completely Integrated Agreement-
% an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of
the agreement
% (2)Partially Integrated Agreement-
% an integrated agreement other than a completely integrated agreement
% (3)Whether an agreement is complete or partially is to be determined by the court as a question
preliminarily to determination of a question of interpretation or to application of the parol evidence rule

i.Pacific Gas and Electric v. G. W. Thomas Drayage & Riggins Co-- Workers repairing a turbine damage
 the rotor, workers sought to prove w/ parol evidence that the indemnity was meant to cover only
damage to third parties, not the employer’s property
% The meaning of writing can only be found by interpretation in the light of all the circumstances that
reveal the sense in which the writer used the words. The exclusion of PE regarding such
circumstances merely b/c the words do not appear ambiguous to the reader can easily lead to the
attribution to a written instrument of a meaning that was never intended
% The test of PE to explain the meaning of a written instrument is not whether it appears to the court
to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a
meaning to which the language of the instrument is reasonably susceptible
% That possibility is not limited to Ks whose terms have acquired a particular meaning by trade usage,
but exists whenever the parties’ understanding of the words used may have differed from the
judge’s understanding
% UCC § 2-202- rejects the four corners rule, assumes the business context and prior dealings were
taken for granted in forming the K
% Issue: Whether extrinsic evidence should be considered in figuring out the intentions between two
parties if the contract is ambiguous on its face?
% Holding: Yes. The argument of the D is not out of the realm of reasonableness
% The English language is ambiguous in itself, and we can not be held to any “plain language”
definitions of terms in a K
% Since the K would always be ambiguous under this reasoning, then PE can always be admitted as
evidence to the parties intentions.
% Court says that evidence cannot be used to change/add/vary terms of the K, but that evidence can be
admitted to determine what the terms are (this is where we part ways from the reasoning in
Brown)-- Once we know what the terms are, we can reject the parol evidence if they
contradict/change/add/vary those terms

%Notes: Merger Clauses--

% A merger clause establishes that the writing is intended to be the complete expression of the agreement
between the parties. Such clauses are generally conclusive on the issue of integration and will be
enforced absent proof of fraud, mistake or other defense. A merger clause contained in a contract of
adhesion, however, may be given less weight than such clauses in non-adhesion Ks

d) Trident Center v. Connecticut General Life Insurance Co.

% The normal rule of construction, is that courts must interpret contracts, if possible, so as to avoid
internal conflict
% Words do not have absolute and constant meanings and parol evidence is permissible where the
intent of the parties is at issue
% The holding in Pacific Gas is not correct...
% You need to look at intent...you cannot only rely on the words b/c there can be many interpretations
% The court says that D’s argument that the K was ambiguous is not right
% Interpreting the K as being ambiguous would result in a contradiction btw two clauses of the K
% Issue: Whether the contract on its face, is ambiguous?
% Policy principles of the Court’s decision--Why looking only at the words and not looking at intent is
NOT good (repudiation of Pacific Gas):
% Efficiency of business matters
% it could lead to “frustration and delay for most litigants and clogs already overburdened courts”
% It would undermine the foundation of our legal system
% “By giving credence to the idea that words are inadequate to express concepts, Pacific Gas
undermines the basic principle that language provides a meaningful constraint on public and
private conduct”
% More likely to get intent by looking at their clear language

B. (Mistakes in Integration) Reforming a Writing

% Duty upon the party seeking reformation is the duty of establishing, beyond a reasonable doubt,
the true agreement to which the K in question is to be reformed
% The PE rule does not bar extrinsic evidence offered to show that terms were the product of
 illegality, fraud, duress, mistake, lack of consideration or other invalidating cause

a.The Travelers Insurance Co. v. Bailey-- Life ins. Policy for $5,000 with annuity of $500/yr after age
65 for 10 years. Mistakenly written as $500/yr after age 65 for life
% Issue: Whether reformation of a an agreement is allowed once an error has been detected by a party
penalized by that error?
% Holding: Yes, Court held that where there has been established beyond a reasonable doubt a
specific contractual agreement between parties, and a subsequent erroneous rendition of the
terms of the terms of the agreement in a material particular, the party penalized by the error
is entitled to reformation, if there has been no prejudicial change of position by the other party
while ignorant of the mistake
% Basically, equity will deal generously with the correction of mistakes

C. (Requiring a Writing) The Statute of Frauds

% Under-enforcement-- the failure of the legal system to enforce a legit exercise of assent
% Over-enforcement-- erroneous enforcement of an alleged assent that in fact never occurred
% Rst. § 110-- Classes of Ks Covered
% The following classes of Ks are subject to Statute of Frauds, forbidding enforcement,
UNLESS there is a written memo or an application exception:
% A K of an executor to answer for a duty of his decedent
% A K to answer for the duty of another
% A K made upon consideration of marriage
% A K made for the sale of an interest in land
% A K that is not to be performed w/in a year
% A K for the sale of goods for the price of $500 or more (codified in UCC § 2-201)
% Requirements of the Statute of Frauds
% be memorialized in a writing or record;
% be signed by or on behalf of the party against whom enforcement is sought;
% indicate that a K has been made between the parties;
% state with reasonable certainty the essential terms of the unperformed promises, in the case of
non-goods contracts;
% specify the term of quantity, in the case of contracts for the sale of goods. UCC § 2-201
specifically states that "a record is not insufficient b/c it omits or incorrectly states a term agreed
upon but the K is not enforceable...beyond the quantity of goods shown in the record."

1) The Statute and Its Exceptions

% There are exceptions to recovery under the Statue of Frauds:
% Where services have been rendered during the life of another, on the promise that a person rendering
the service should receive at the death of the person served a legacy, and the K so made is w/in the
Statue of Frauds, a reasonable compensation may be recovered for the services actually rendered
% A vendee of land is able to recover any portion of the purchase money that he may have made, and any
improvements to the land that he may have made
% And under a K for personal services w/in the statute, and action may be maintained on a quantum
meruit, the doctrine that the D has actually received some benefit for the acts of part performance,
and the law implies a promise to pay
% Where the unjust enrichment of the promisor would ensue

a.Boone v. Coe-- D told P he could rent land in TX, but promises D made not fulfilled
% Issue: May P recover for expenses incurred and time lost on the faith of a contract that is
unenforceable under the statute of frauds?
% It is the general rule that damages cannot be recovered for violation of a K that is voidable under
the statute of frauds
% It has also been held that the vendee of land under a parol contract is entitled to recover any portion of
the purchase money he may have paid, and is also entitled to compensation for improvements
% Under a K for personal services within the statute, an action may be maintained on a quantum
meruit (meaning if D had received benefits, the law would imply an obligation to pay then)
%b) Riley v. Captial Airlines, Inc.-- P supplied D w/ water methanol but lost bid and P thought it had
already made a K w/ D for at least 5 years
% Issue: Whether or not this action (recovery of merchandise, goods, and chattels by the P) is barred by
the Statute of Frauds of the State of Alabama?
% P is entitled to compensation for the loss of equipment which was purchased in a good faith
pursuant to the D’s specifications, meaning that P relied on D to the extent that it got its
product specifically to meet D’s requirements, meaning it was unique to D and therefore it
would not be possible to go ahead and sell on on the market
% e.g. Goddard case, personalized initials on the horse carriage
% Rst. § 139-- Enforcement by Virtue of Action in Reliance
% In determining whether injustice can be avoided only by enforcement of the promise, the
following circumstances are significant:
% a) avaialability and adequacy of other remedies, particularly cancellation and restitution
% b) the definite and substantial character of the action of forebearance in relation to the
remedy sought

2) Satisfying the Requirement of a Writing

% Writing is defined as the intentional reduction to a tangible form
% Today’s rules are medium neutral, and all you need is a record, or anything that is retrievable in
perceivable form

a) In re Realnetworks--
% Issue: Whether online license agreement constitutes a binding agreement if they are not written?
% Holding: Because electronic communications can be letters of characters formed on the screen to
record or communicate ideas by visible signs and can be legible characters that represent words and
letters as well as form the conveyance of meaning, it would seem that the plain meaning of the word
“written” does exclude all electronic communications
% Plus, the license agreement was easily detectable, in fact you had to click on it to proceed to
downloading the software (“clickwrap”), and it was easily printable and storable and as such it was
sufficient to render it written

3) Satisfying the Requirement of a Signature

a.Cloud Corp. v. Hasbro, Inc.-- Aquarium make who contracted sand to P, and P misjudged relevance
of the product in the market and made too much; D did not pay
% Issue: Whether the emails by P’s employee satisfy the requirement by the Statue of Frauds regarding
modification of a contract be evidenced by writing?
% Holding: The UCC does not require that the contract itself by in writing, only that there be
adequate documentary evidence of its existence and essential terms, which there was in this
case
% UCC § 2-201(1) says if more than $500, then quantity has to be put in writing somehow
% A modification of such a K would therefore also have to be written somehow
% And UCC § 2-201(2) says that if btw merchants, one wants to modify or object to something in
the K, they have 10 days after they received it to let other party know
%

%Remember: A K does not need to be in writing; only thing needed in writing is quantity
%Statute of Frauds (Policy Aspect):
% To prevent over-enforcement
% Evidentiary function (this is the policy behind the statute of frauds)
% To prevent perjury and against giving incentives to perjury
% Cautionary function
% Channeling Function/”Signaling Function”

I.Consideration
% Traditional approach to identifying an enforceable commitment
% Only the presence of valuable consideration on both sides of the bargain will make a K fully
enforceable
% Elements of consideration:
% a) Bargained exchange btw two parties (e.g. promise or return promise)
% A return promise is bargained for if it is sought by the promisor in exchange for his
promise and is given by the promise in exchange for that promise.
% b) What is bargained for must be of legal value or constitute a benefit to the promisor or a
detriment to the promisee
% The detriment element is emphasized in determining whether an exchange contains legal
value
% Function of Consideration-- To distinguish unenforceable promises from enforceable ones – i.e.
light interpretation undermines it b/c social promises become enforced
% Consideration requires a bargained for exchange in which each party incurs a legal detriment
% Meaning of Consideration-- The factors which the promisor considered when he promised and
which moved or motivated his promising. Remember: To know why a promise is binding you
need to know why the promise was made

A. The Bargain Requirement

% Enforcing the Bargain Theory of Consideration, according to Rst. (Second) of Contract:
% 1. A contract is an enforceable promise
% 2. With some exceptions, to be enforceable a promise must be supported by consideration
% 3. A promise is support by a consideration if it is bargained for
% 4. A promise is bargained for “if it is sought by the promisor in exchange for his promise and is
given by the promisee in exchange for that promise”
% Professor Snyder’s 4 Step guide to knowing Consideration:
% 1. consideration is a bargained for exchange
% 2. which means that there must be an exchange
% and exchange is a promise for a promise, or a promise for a performance
% 3. “bargain for” means inducement
% this means that whatever is being exchanged from step (2) has to be induced for each
party
% 4. it is not about negotiation! (inducement is enough)

1) Distinguishing Bargains from Gratuitous Promises

% “Gift” promises are only effective upon actual delivery of the thing that was promised

a.Johnson v. Otterbein University-- promise to donate money to Univ to liquidate indebtedness, where
D noted specific purpose of it, amount and time to use it
% Rule: A promise to pay money as a gift may be revoked anytime before payment.
% Issue: Is P’s note an act of advantage or of detriment to the D to constitute consideration?
% Holding: No, the promise by D was w/o consideration, and therefore it was not an enforceable contract
which D was bound to
% Reasoning: Since U is not doing anything to benefit D or detriment itself, there was no bargain for
consideration and therefore no contract

%b) Hamer v. Sidway-- uncle’s reward of $5k for nephew’s purging of vices, which he did
% Rule: A promise is enforceable if it is made to induce the other side to perform
% Consideration is not measured as a benefit to the promisor (so long as a side is induced)
% A waiver of any legal right at the request of another is a sufficient consideration for a promise
(e.g. detriment)
% The P’s Detriment/Benefit need not be economic (one party does not need to profit), it deals
more with the giving up of something (i.e. the P’s right to vice)
% Issue: Was there consideration even if Uncle received nothing tangible?
% Holding: Yes, “it is enough that something is promised, done, forborne, or suffered by the party to
whom the promise is made as consideration for the promise made to him.”
% Extra Comments: This is a unilateral K case b/c the language of the offer made it clear that the
uncle sought acceptance by performance and not by a promise to perform (unilateral K)
% Gift promises do not include consideration, and thus Court will not enforce them
% Definition of Consideration-
% a bargained for exchange
% “each party has to be inducing the other”
% Bargain Theory of Consideration is what distinguishes Johnson from Hamer v. Sidway
% Johnson was not trying to induce the University to pay off the debt

i.Dahl v. Hem Pharmaceuticals Corp-- P’s performed and the D’s were supposed to give them free
drugs for a year if they completed program. Drug not approved by FDA and so D’s breach and
claimed no consideration on the part of the P’s
% Issue: Whether promise in return for performance constituted a bargain?
% Holding: Yes b/c the Ps subjected themselves to medical tests to obtain a new drug and D got the
benefit of the testing for FDA approval. Once the Ps finished w/ the testing, a binding K was formed
and there was a bargain for consideration (this was a promise in return for performance)
% Remember: Rst. § 45-- preparing for performance is not sufficient (e.g. tying shoe to prepare to start
to walk across the bridge)
% BUT, starting the performance (e.g. beginning to walk across the bridge) IS sufficient
% Option contract is irrevocable if performance has begun
% Rst. § 62-- Ex. shipping jeans one has ordered is sufficient
% Even if the wrong pair of jeans is sent, it is still sufficient
% Courts will not inquire into the adequacy of the consideration as long as there is a bargain

2) Past Consideration
% Not sufficient consideration: if something was already given or performed before the promise was
made, it will not satisfy the “bargain” requirement
% The courts reason that it was not given in exchange for the promise when made
% Wages are not enforceable for public policy reasons

a.Moore v. Elmer-- P is fortune teller, D promises to pay her mortgage if prediction by her that he will
die before 1900 is true...and she is right
% The case voided the K b/c of wagers and past consideration
% The bargainer had already received the benefit of the bargain (the reading of his fortune)
% Services rendered upon request implies an undertaking to pay, and do not mean that what was
done as a mere favor can be turned into a consideration at a later time by the fact that it was
asked
% Both parties need to be induced to have consideration (need to have Mutual Inducement)
% D’s promise IS induced by what P had told him
% BUT, P was NOT induced by D, b/c P had ALREADY told D what he was hearing
% Service already happened by the time D made his promise
% Issue: Whether past consideration is valid consideration sufficient to create an enforceable contract?
% Holding: No, there is no consideration since there was no bargain before he sat down for reading; he
only promised to pay post reading
% Remember: Past consideration not binding except in certain situations § 86
% Bets are not enforceable (Public Policy implication)
% Cannot enforce Ks that are “mere wagers”
% Cannot enforce Ks to commit a crime
% Both parties must be induced to have consideration
% No consideration..so No enforceable promise..so No contract

3) Moral Consideration
% Is generally not enough, and does not override past consideration problems

a.Mills v. Wyman-- Dad promises to pay for nurse's prior care of now deceased son
% Moral obligation for a benefit given to another person is not consideration
% The Court will imply an exchange in some situations (discussed below)
% Issue: Is there consideration?
% Holding: No, “it is only when the party making the promise gains something, or he to whom it is made
loses something, that the law gives the promise validity....” nothing more than moral obligation. Also
you need a pre-existing obligation
% In this case, the son had long ago left family, so D was not receiving any apparent benefit
% Remember: Society has chosen to leave it up to the D’s conscience whether to pay back a purely
moral debt
% Policy Implication (cautionary)-- protect honest (and scoundrels) people from inconsiderately
making promises for nothing in exchange
% A moral obligation may only form consideration for an express promise in three cases: cases of statute
limitations, infancy, or bankruptcy

a.Exception to this rule: Webb v McGowan-- P sacrifices self to save boss’s life, and boss promises to
pay stipend for rest of life, but when boss dies, wife stops paying P
% Rule: A moral obligation is sufficient consideration to support a subsequent promise to pay
where the promisor has received a material benefit-- When the promisor gets a big benefit, it
pushes toward enforcement
% Issue: Consideration even if no bargain?
% Holding: Yes, the material benefit rule applies if there is both a moral obligation and a subsequent
promise to pay, even if there was no original duty or liability
% Note: Difference between this case and Mills is that the promissor in this case received a direct and
material benefit (i.e. the saving of his life), while in Mills the benefit was to the D’s adult son, and
not to D directly, so as a result D was not obligated to pay (BOTH CASES ARE STILL GOOD
LAW)
% Rst. § 86-- Promise for Benefit Received
% A promise made in recognition of a benefit received by the promisor from the promisee is binding
to the extent necessary to prevent injustice
% Remember: Courts are wary b/c this type of analysis may open a Pandora’s box by opening up
possibilities under moral obligation that did not exist before

B. Contract Modification and the Preexisting Duty Rule

% Preexisting Duty Rule:
% When a party agrees to perform an obligation for another to whom that obligation is already
owed, although for lesser remuneration (“payment”), the second agreement does not
constitute a valid, binding agreement
% In other words, you cannot bargain for something that you were supposed to do already
% Modification of a K needs new consideration
% UCC §2-209(1) abolishes the Preexisting Duty Rule
% It asks whether the new agreement was made in good faith
% This rule applies IF the party can show an “objectively demonstrable reason” and/or a “legitimate
commercial reason”
% Preexisting Duty Rule is still the rule outside the sale of goods
% In a nutshell: As long as there is a pre-existing duty between the parties to perform, changed
circumstances will not alter the K b/c the additional consideration (legal detriment or bargained-
for exchange) was not in the contemplation of the parties at the time of the contract

a) Alaska Packers Ass’n v. Domenico-- crew in Alaska strikes for higher wages
% Rule: For good faith, the validity of K modification is going to come down to whether it is a change
necessitated by a change in circumstances (which would be okay) or if it is one party exploiting
another (the preexisting duty rule prevents extortion and coercion )
% Issue: Does the replacement K stand even if D’s rep stated he had no authority to contract and even if D
had no alternative but face losses and failure?
% Holding: No, according to the Preexisting Duty Rule, P’s offered as consideration only what they had
already contracted to do. No new consideration in modification of K
 b) Brian Construction v. Brighenti-- excavation underestimate, re-contracted
% Rule(s): (1) There is an exception to Preexisting Duty Rule – where the subsequent agreement
imposes upon the one seeking greater compensation an additional obligation or burden not
previously assumed, the agreement, supported by consideration, is valid and binding
% (2) When a K must be performed under unforeseen burdensome conditions, and the parties
renegotiate a fair and equitable new K, then the new K has consideration-- Separate valid K
% Issue: Whether parties’ (2nd) agreement constituted a legally enforceable K obligating D to remove
unexpected rubble?
% Holding: Since there was no assumption of risks and unforeseen circumstances, modified K is valid
% UCC § 2-209-- Modification, Recision, and Waiver comments:
% Modification must be looked at to see if it met the “good faith” test
% Test (btw merchants or against merchants) requires observance of fair dealing in the trade, and may in
some situations require an objectively demonstrable reason for seeking such modifications
% Notes: Problems with the Preexisting Duty Rule-- It does not account for legitimate unforeseen
circumstances
% Under-enforcement
% Since not looking at the K, this could allow for enforcement of sham rules or clauses that are put
into a K
% Over-enforcement
% Need to create a new duty to have consideration be valid
% “Value in real life is subjective”- D. Snyder

C. Adequacy of Consideration
% Adequacy of consideration relates to whether the bargain involves an exchange of equal value
% Generally, however, courts do not concern themselves with whether consideration is adequate,
honoring the concept of freedom of K
% Courts do require consideration to be "sufficient", which relates to whether there is a legal detriment
incurred as part of a bargained exchange of promises or performances, i.e. nominal considerations
% When an article is fairly sold and purchased for a stipulated consideration, a court or jury could annul the
bargain if they come to the conclusion that article sold was of no value
% If the article is worth something, a court or jury could determine whether it is worth as much as has been
promised for it and if not, to reduce the amount to be paid to that point
% Quantum valebat: “as much as its worth”; an action to recover for goods sold as much as they are worth
% Quantum meruit: “as much as he/she deserves”; a theory or doctrine that permits recovery by a party for
services or materials provided despite the absence of an express K when they were accepted and used by
the D under circumstances which gave reasonable notice that the P expected to be paid for them

a.Newman & Snell’s State Bank v. Hunter-- P’s husband could not afford own funeral and left a note w/ no
worth
% Rule: Since there is no value on one-side of the deal, there is no consideration even though there was
a (attempted) bargained-for-exchanged
% When P surrendered this worthless note to D, it parted with nothing of value and D received nothing
of value, the P suffered no loss or inconvenience and D received no benefit-- Thus, the transaction
was w/o consideration
% A good faith forbearance to litigate a claim which proves to be unfounded, is sufficient for
consideration
% The claim’s validity is a factor to determine if the promise was made in good faith
% Issue: Whether there was consideration in D giving her note in place of her deceased husband’s to the
bank?
% Holding: D is not liable to pay the bank for the note. The bank was stuck with the bad debt. D did not have
any liability for her dead husband’s note
% Notes: In this case, the court does not buy that there was a bargained-for exchange
% The disparity is so great that it would be hard to believe someone would actually be bargaining for it (if
they were on the less-received side, in this case the bank)
% You cannot really measure the value of “love” (or sentimental things)
% ‘WHAT’S LOVE GOT TO DO WITH IT?” -D. Snyder
% The item/issue of the bargained-for exchange has to be of pecuniary value
% Great disparity in the exchange will invite inquiry by the court (e.g. is this a sham?)
% See Rst. § 879-- Adequacy of Consideration; Mutuality of Obligation
% If the requirement of consideration is met, there is no addt’l requirement of
% a) gain, advantage, benefit to promissor; or loss detriment to promisee
% b) equivalence in values exchanged, or
% c) “mutuality of obligation”
% Comment: Disparity in value can also show that the consideration was a mere formality or
pretense, and such a “sham” or “nominal consideration” does not satisfy requirement of §
71-- requirement of exchange; types of exchange

%b) Dyer v. National By-Products-- P lost right foot at work, he was given leave of absence w/ full pay, but
decided to return to same position, but then fired one year later
% Forbearance is sufficient if there is any reasonable ground for the claimant’s belief that it is just to
try to enforce his claim. He must be asserting his claim in good faith.
% Issue: Whether forbearance from asserting an unfounded legal claim can act as sufficient consideration to
create an enforceable K?
% Holding: Yes, forbearance from asserting an unfounded legal claim (in this case, if P believed the
settlement agreement) may act as valuable consideration to create an enforceable K if that claim is
asserted in good faith
% From Rst. § 74 Comment-- But mere assertion or denial of liability does not make a claim doubtful, and
the fact that invalidity is obvious may indicate that it was known
% The idea of Consideration: “We want to enforce promises that are actually worth it” -Snyder
% Notes: If the claim is doubtful it IS consideration...b/c both parties are essentially taking the risk (either
benefit or detriment) in hopes that their claim will go through
% If the claim is meritless it IS consideration...as long of the P believed he could have pressed it in good faith

i.Kim v. Son-- Blood oath by D to P to him back $ lost on investment of D’s bad co. One year passed and
D still had not repaid and so P sued
% Forbearance in filing a meritless lawsuit cannot supply adequate consideration for a gratuitous
promise
% Issue: Was P’s forbearance adequate consideration of D’s blood agreement?
% P’s forbearance had no consideration b/c D never guaranteed the money on behalf of the two corporations
(he was talking about himself, but he personally did not owe the money)
% D did not personally receive any of P’s money

VI. Intent to be Legally Bound

% Using Formalities to Manifest an Intention to be Legally Bound

1) Nominal Consideration
% Nominal consideration is not valid- disparity in value, with or w/o other circumstances,
sometimes indicates that the purported consideration was not in fact bargained for but was a
mere formality or pretense
% If nominal consideration is given as a mere formality in order to create a binding K rather than as a
bargained exchange, the consideration is insufficient. See Restatement § 71
% In option Ks, a payment or promise to pay nominal consideration is sufficient consideration to make
enforceable a promise not to revoke, provided the option time is relatively short (e.g. 10 days) and the
price to be paid if the option is exercised is a fair price. See Restatement § 87

a.Schnell v. Nell-- widower D supposed to carry out wife’s will, but not wanting to pay beneficiaries. The
K indicated D’s purpose for the carrying it out: 1) the consideration for the promise to the three
beneficiaries was his wife’s love and affection and one cent, 2) that wife had been a dutiful and loving
wife and had helped him acquire the property he owned, and the beneficiaries must abstain from
collecting claims against D or his estate arising from wife’s will
% While inadequacy of consideration will not vitiate an agreement, that doctrine does not apply to a
mere unequal exchange of money
% Issue: Whether a nominal sum of money or prior acts or love and affection can act as legal consideration
sufficient to create an enforceable contract?
% The promise was simply one to make a gift
% The past services of his wife, and the love and affection he had borne her, are objectionable as legal
considerations for D’s promise, on two grounds: (1) They are past considerations and (2) the fact that D
loved his wife, and that she been industrious, constituted no consideration and past consideration

%Recitals of nominal consideration in option Ks is allowed sometimes if it is put in an integrated writing, you
can still attack the recital, and say that this is not really the K
%However, some commitments supported only by a recital of consideration are enforced despite the lack of
consideration or detrimental reliance
%Nominal consideration:
% Actually intended to be exchanged
%Recital of consideration:
% When you say in a document that there is consideration, BUT there really is not
% you are merely “reciting it” and not meaning it
% At most, it allows a rebuttable presumption of consideration
%Both of these are not consideration...BUT they are ENOUGH to lead to an option K

2) Lack of Intention to be Legally Bound

% You may disclaim intent to be bound as long as you can make that intent clear

a.Ferrera v. A.C. Nielsen-- P says wrongful discharge after D fired her for lying on timecards. P
claimed D violated employee handbook
% Statements made in an employee handbook limiting an employer’s right to discharge employees
may be the basis for breach of implied contract and promissory estoppel claims by discharge
employees
% Issue: Whether the employee handbook constituted an implied K?
% Implied contract theory: Such statements must be a manifestation of the employer’s willingness to
enter into a bargain that would justify the employee in understanding that his or her assent was
invited
% Promissory Estoppel theory: The promise must be one which the employer should reasonably have
expected the employee to consider as a commitment from the employer
% Restatement (Second) of Contracts § 21:
% “neither real nor apparent intention that a promise be legally binding is essential to the formation
of a K, BUT a manifestation of intention that a promise shall not affect legal relations may
prevent the formation of a K”
% Remember: You CAN enter into a K by mistake (e.g. Lucy v. Zhemer)...w/o intent
% BUT, you can express manifestation of intention NOT TO BE BOUND, and this is okay to prevent the
formation of a K

VII. Promissory Estoppel

% Defined by Rst. § 90(1)-- A promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does induce such action or
forbearance is binding if injustice can be avoided only by enforcement of the promise. Consideration is
not necessary where the facts indicate that the promisor should be estopped from not performing
% Equitable Estoppel
% Where the promisor makes a representation pertaining to the writing and the party seeking to enforce
the K relied to his detriment upon such representation – the promisor may be estopped from raising
the lack of writing as a bar to enforcement
% Promissory Estoppel (substitute for consideration when needed for justice)
% Action of asking for compensation for detrimental reliance on a promise even if there was no
consideration
% Where one party has performed already – the promise has induced reliance
% Usually acts as a substitute in (1) Family promises; (2) Promises to Convey Land; (3) Inducement is a
value conferred in return for promise (4) inducement is a step in the bargaining process
% In other words, a promise is binding if:
% There is an inducement by promisor reasonably expected to produce an action or reliance (reasonably
foreseeable to the promisor that promisee would rely on the promise); and
% Action or reliance actually takes place (actual reliance in a reasonable way); and
% That action leads to some detriment on the part of the promisee; and
% Injustice cannot be avoided without enforcement of the promise

A.Detrimental Reliance and its Limits

A1. The Development of Promissory Estoppel as a Substitute for Consideration

1.Family Promises

a.Rickets v. Scothorn-- Grandpa gives $ so granddaughter doesn’t have to work

% Although a promise given w/o consideration in return is not an enforceable K, the promise can be
enforced even though it was given w/o consideration if the promisee has reasonably relied on the
promise to their detriment
% Issue: Was the promise a gift for want of consideration?
% Holding: Not exactly, b/c Grandpa should have known (indeed he intended) that his promise would
induce P to act, which she did. Reasonable reliance on promise to her detriment and injustice can only
be avoided by enforcing promise. No consideration but equitable estoppel
% Court holds that there is no consideration, but that it would be unjust to not fulfill the promise b/c the
niece relied on the promise. Niece quit her job and was in reliance of her grandfather’s promise,
there must be some relief to P
% Difference between Promissory Estoppel and Equitable Estoppel (aka “Estoppel in pais”):
% Equitable estoppel is about FACTS (misrepresentation of facts)
% Promissory estoppel is about Promise (going into the future)

2) Promises to Convey Land

% A Deed is not a promise, it is an act
% A Deed conveying land does just that, it conveys the land is soon as it is given

a.Greiner v. Greiner-- Son says mom gave him the 80 acres, but bad bro Chester says no
% A gratuitous promise to transfer property is enforceable if the promisee had relied on it to his
detriment by moving onto the land and making improvements
% Issue: Whether a promise can be enforceable even though it does not contain any consideration?
% Holding: A promise is binding if injustice can only be avoided by enforcing the promise, as long as
there is a promise and there is reliance on that promise. The promise does not have to be in any
formal wording. Ritual scrupulousness is not required and manifestation, by words or conduct or
both, which the promisee is justified in understanding as an expression of intention to make a
promise, is sufficient
% D moved, he made improvements, he spent money, he lived on the land

3) Charitable Subscriptions
% The law of charitable subscriptions: a promise of this order is unenforceable if made w/o consideration

a) Allegheny College-- Endownment in D’s namefor training students in Ministry only

% This is a K b/c P relied on D and set up a fund. Reliance constitutes P’s acceptance
% If the condition will benefit promisor, then it is a good indicator of consideration
% Cardozo did not fully bring about “promissory estoppel” b/c there is no reliance to the detriment
of P (but there had been a promise that D intended to fulfill)
% He argues that the moment P accepted the $1,000, there was an assumption of a duty to do
whatever acts were customary or reasonably necessary to maintain the memorial fairly
and justly in the spirit of its creation
% Issue: Whether a charitable subscription is enforceable?
% Dissent: Note was a gift, or a unilateral K. P had not performed stipulations and D has not yet been
 unjustly enriched so no K
% Notes: Courts will not enforce purely gratuitous promises with some exceptions such as charitable
subscriptions. You can bargain for a charitable promise, and you can have consideration. Some
charitable promises are enforceable on these grounds. Other charitable promises may be enforced on
the basis of foreseeable detrimental justifiable reliance. A “smidgen” of reliance will not cause
justice to demand enforcement unless you are dealing with a charity as the promisee
% How is this different from Johnson?
% The elements are different as to what the money will go to

B. Substitute for Consideration

4) Promises of Pension
% If you do something that you would have done anyway, then that is not reliance on the promise and is
not supported by promissory estoppel

%a) Feinberg v. Pfeiffer Co.-- retirement pension for life promised

% Issue: Whether there was a legally binding contractual obligation by D to pay P, and if there was, does
P have a right to recover?
% Holding: Yes. D should have known that P would have relied on the promise and knew that in fact
she did (and did not seek other employment)
% Consideration for a promise (§ 75):
% (1) Consideration for a promise is
% (a) an act other than a promise, or
% (b) a forbearance, or
% (c) the creation, modification or destruction of a legal relation, or
% (d) a return promise,
% bargained for and given in exchange for the promise
% As the parties agree, the consideration sufficient to support a K may be either a benefit to the promisor
or a loss or detriment to the promisee (§ 90)
% There is no bargain...and so there is no consideration...at first look (but promissory estoppel later gives
the case to P):
% There is no mutual inducement btw these two parties
% P has the inducement of the pension, but D has no inducement b/c if you were to consider the
work she did for them, you still cannot, b/c that work happened in the past, and past
consideration is not valid
% The pension was not inducing P to quit
% BUT, in the end the Court says there is consideration b/c the P eventually did come to rely on the
pension once she retired (this is promissory estoppel at work)
% D’s promise was to pay P a pension once she retired
% P relied on this to eventually retire...even though she could have worked a few more years (and
even though she would earn less through the pension)...b/c she says she was tired of working for
so long and figured if the D offered her the pension, she could reasonably rely on them fulfilling
their promise
% P could not return to work anyway, b/c by the time the pension payments stopped, she was of an
elderly age that would have made it hard for her to get that same job back (also considering
those times and that P was a woman)

5) Construction Bids
% Judge Hand says that promissory estoppel does not apply to timely commercial situations

a.Drennan v. Star Paving Co-- Paving company underbid a project to a general contractor, tried to
withdraw
% Rule: If you make an offer that you should reasonably expect will cause the promisee to act in
reliance to their detriment, and it actually does cause them to act, then that offer may become
an option K if necessary to avoid injustice
% Btw the general contractor who relied on the bid and the subcontractor who made a mistake, the
 fault should lie w/ the party who caused the problem
% Issue: Did the P’s reliance make the D’s offer irrevocable?
% Holding: Award of the difference btw bids.
% Analysis: An implied subsidiary promise is a promise to hold the offer open until the general
contractor accepts the big, main K. Since the subcontractor wants the job, and the subcontractor
wants the contractor to use the subcontractor, the offer by the subcontractor is irrevocable until a
reasonable time after the general K is awarded. The general relies on this promise in putting its bid
together
% This is an option contract (§87(2)) with promissory estoppel
% This is different from Dicksinson v. Dodds, b/c in that case P did not rely on D’s promise, BUT in
THIS CASE the general contractor did rely on the subcontractor
% Option contract binds the offeror
% In this case, the offeror, is the subcontractor, BUT J. Traynor reasons that “general contractor”
bound itself to “sub contractor” not b/c of the option K in of itself, but rather to a further sub-bid
submitted by “sub contractor”
% When P used D’s offer in computing his own bid, he bound himself to perform in reliance on
D’s terms
% It is reasonable to suppose that D submitted its bid to obtain the sub-K

C. Promissory Estoppel as an Alternative to Breach of Contract

% Reliance damages are the proper measure in promissory estoppel cases
% What is the test for applying promissory estoppel?
% 1) a clear and definite offer;
% 2) a reasonable expectation that the offer will induce reliance in the other party;
% 3) actual and reasonable reliance by the offeree; and
% 4) a detriment which only can be avoided by enforcement of the offer

a.Goodman v. Dicker-- radio store franchise, P fraudulently led to believe franchise would be granted
% Reliance damages are the proper measure of damages for a promissory estoppel case
% vital principle is that he who by his language or conduct leads another to do what he would not
otherwise have done, shall not subject such person to loss or injury by disappointing the
expectations upon which he acted
% Issue: If a party acts to his detriment, by relying, on the affirmative assurances of another, should he
be protected by estopping the other party from alleging anything in opposition to the natural
consequences his own course of action?
% Analysis: The court finds that the trial court was correct in awarding the P damages based on how
much they spent in reliance on having the franchise and being able to sell radios. The Ds, however,
are found to be not liable for lost profits on an initial order of radios.
% Also: think of this case in terms of damages. A injured party can only recover for reliance damages in
promissory estoppel. Thus he cannot collect profits!

a.Hoffman v. Red Owl-- P grocer was strung along to think he could own Red Owl chain store. P put
in reliance by D in expectation to manage D’s store
% Insofar as it’s necessary to prevent injustice, a promisor will be held to their promise if they
reasonably expected that promise to induce reliance on the part of the promisee and they
actually did so
% Even if there is never an offer, an enforceable promise can be found on the basis of reasonable
reliance on statements or “instructions”, especially when they come from a stronger party
% Basically the court is saying that you do not need a definite promise to be able to enforce
% BUT this case is not been followed by the courts right now (it is an outlier)
% It has not been overruled, but it is definitely “on the edge”
% The aspect that is not being followed is...that you do not need a definite promise to be able to
enforce
% Issue: Do the facts in this case make out a case of action for promissory estoppel?
% On the other hand, in a commercial situation, you’ll have parties that have more equal bargaining
power. In that case, reliance becomes less and less reasonable the more equal the parties are.
% Analysis: Yes, P meets the elements for promissory estoppel – finds sufficient promise and detrimental
reasonable reliance the result of which injustice can only be avoided by enforcing the promise The
court also goes over the damages and finds them all reasonable except for the damages related to
selling the small grocery store

i.Ypshanti v. General Motors-- D decided to transfer facilities to different region, unless P provided
tax abatement for keeping company in town
% A manufacturer using hyperbole and puffery in seeking an advantage or concession does not
necessarily create a promise. Does not constitute a promise to keep a collective bargaining
agreement in force for the foreseeable future as to create by promissory estoppel a continuing
duty of the employer to honor an expired agreement
% Issue: Whether D’s representations indeed constitute a promise and whether it is the type of promise
that should be enforced by the Court to prevent injustice?
% GMs statements were mere sales “puff” and expressed hopes and expectations not promises
% Also, since there is proof of hesitancy on side of D, cannot say the reliance on alleged promise was
reasonable

i.Alden v. Vernon Presley-- Elvis’ promise to pay debts of future mother-in-law

% Promissory estoppel only protects reasonable reliance, and the Court reasoned P’s reliance of
King’s promise after estate had already denied liability was not reasonably justified and she
suffered no loss as a result of justifiable reliance
% Issue: Whether P’s reliance on King’s promise was reasonable after the estate denied liability?
% Holding: No, it was unreasonable for P to rely on King’s promise after the estate denied liability

e) Barnes v. Yahoo
% Promissory estoppel is a breach of contract action
% The majority rule, CONTRARY TO HOFFMAN, is that there must be definite terms to have
promissory estoppel and a K
% Ex. of P’s reliance
% P waited a couple months, waiting to see if D followed with its promise, before submitting a
lawsuit
% P could have called the local news station earlier
% This shows that forbearance is based on a promise

VIII. The Duty of Good Faith in Performance

A. The Implied Duty of Good Faith Performance

% The notion that all Ks contain an implied covenant to perform in good faith
% Rst. § 205-- Every K imposes upon each party a duty of good faith and fair dealing in it performance
and its enforcement
% Comment a: Good faith performance or enforcement of a K emphasizes faithfulness to an agreed
common purpose and consistency w/ the justified expectations of the other
% We have seen this doctrine before in Eastern v. Gulf (requirements contract), in Lady Duff, and in
Wood v. Lucy
% Is a duty of good faith performance a restriction or extension of freedom of k?

a.Goldberg 168-05 Corp. v. Levy-- D failed to use good faith in a K with P by mismanaging store
% Good faith is not required during the negotiation stage, only during the performance stage of the
K
% A purposeful diversion to get out of lease by lowering profits is an act in violation of good faith
doctrine. By diverting business, D was not using reasonable efforts to bring profits into
existence
% Court cited Lady Duff: “a promise may be lacking and yet the whole writing may be ‘instinct
with an obligation’ imperfectly expressed
% Issue: Whether a D has a duty to conduct his business in good faith?
% D cannot avoid liability by abandoning the premises, or diverting the business to another store for the
sole purpose of bringing down the gross receipts below the specified figure in order to cancel the
lease
% Note: landlord should have explicitly prohibited opening of another store nearby or prohibited
advertising of new store

%Remember: Restatement (Third) of Contracts-- §1-201(b)(20)--"Good faith" means honesty in fact in the
conduct or transaction concerned
% “honesty in fact”--- subjective standard
% aka “good heart, empty head” dealing
% “observance of reasonable standards of fair dealing”--- objective standard
% “good faith” is NOT an obligation to be reasonable
%“good faith” is about fairness
%Almost all the states recognize the doctrine to perform a commercial K in good faith
% This does not apply so much in employment K
%Article 1 (1-304):
% general provisions that allow for good faith in Ks, even if it is not expressed
% It is implied
% employment at-will Ks is not covered by good faith
% technically this is not even a K, b/c there is no good faith and there is no consideration
%Where “good faith” has had the most controversial impact is lender liability lawsuits

a.Mutual Life Ins. Co. v. Tailored Woman-- rent prices and fur court case; most important of all cases
in this section
% Absent fraud or trickery, D has a right to carry on its business in the way that suited it, so long
as it did not deviate from those very broad and general lease specifications
% Lack of foresight does not create rights or obligations
% Issue: Whether D’s alleged violation of its lease with P results in D having to be liable for additional
rent not paid for? (by moving its fur department to the 5th floor)
% The fact that P did not anticipate that the 5th floor could become “integrated” with the lower floors into
one store cannot be counted against D
% Dissent: Business practices – In every K there is an implied covenant that neither party shall do
anything which shall have the effect of injuring or destroying the right of the other party to receive
the fruits of the K

c) Stop and Shop v. Ganem-- lot rented to be supermarket was left unused
% An omission to specify an agreement in a written lease is evidence that there was no such
understanding
% Covenants will not be extended by implication unless the implication is clear and undoubted
% Justice, common sense and the probable intention of the parties are guided to construction of a
written instrument
% Issue: If it is not explicitly expressed, is there an implied stipulation to continue using lot as a
supermarket? Did P act in bad faith in transferring business to another store?
% Rule: To determine if there was an implied K, court must look at the intent of the parties in making the
K.
% Holding: No. What factors did the court look at to determine this? The flat rate rent was fair it was not
just a nominal rent with the D depending on the money from % profits (Like other cases had been).
Also the other stores opened were not done in bad faith and were in the area but not directly near the
first store, and the lease did not state what the use/purpose of the land at rent had to be

%Notes: Satisfaction clauses and cancellation “at will” clauses are examples of mutuality of obligation...they
will raise actions of good faith
% these can be seen as an illusory promise unless it is acted on in good faith
% franchise Ks can be rescinded not in bad faith (but it can be for a bad reason)
%Good faith is generally presumed
%The burden is on the person trying to prove the lack of good faith
%It is hard to prove lack of good faith

%Remember: Things to consider in determining bad/good faith:

% What are motives of party in reducing sales at store?
% Was base rent just nominal or was there a disparity between fixed rent and rental value?
% Did party intentionally attempt to draw customers from one store to another?
% Why did party open up another store? Was store nearby?

d) Food Fair Stores, Inc. v. Blumberg-- implied covenant here

% Again, it is necessary to state that in every K there exists an implied convenant that each of the parties
will act in good faith and deal fairly w/ others
% It has been held that if the guaranteed rental provides the landlord an adequate return on his investment
and the percentage rental feature is in the nature of a bonus, there is no obligation upon the tenant as
to the manner of conducting the business not expressed in the lease

a.The Original Great American Chocolate Chip Cookie Company v. River Valley Cookies, Ltd-- no
blanket duty of good faith, everyone’s out for themselves
% K law does not require parties to behave altruistically toward each other; it does not proceed on the
philosophy that I am my brother’s keeper
% K law does not impose a duty, not to “be reasonable,” but to avoid taking advantages of gaps in a K in
order to exploit the vulnerabilities that arise when contractual

%f) Texaco v. Penzoil--

% Where the parties are under a duty to perform that is definite and certain the courts will enforce a duty
of good faith, including good faith negotiations, in order that a party not escape from the obligation
he has contracted to perform
% Good faith does not require altruism, and that parties must avoid taking advantage of gaps in K in
order to exploit the vulnerabilities that arise

I. Warranties
% Scope of performance is often denied by warranty. When parties are silent, K law supplies some
warranties by default.

A. Implied and Express Warranties

% Two questions when thinking about warranties:
% 1)Attachment and 2)Content
% To recover for a breach of warranty the P must prove that the warranty was breached AND that the
breach caused damages

1) Implied Warranties of Merchantability and Fitness for a Particular Purpose

% Implied warranty:
% Implied Warranty of Merchantability, UCC § 2-314
% 1) A warranty that the goods shall be merchantable is implied in a K for their sale if the seller
is a merchant w/ respect to goods of that kind
% 2) To be merchantable, goods must be at least such as:
% Pass w/o objection in the trade under the K description; In the case of fungible goods, are
of fair and average quality w/in the description; Are fit for the ordinary purposes for
which such goods are used; Run, within the variations permitted by the agreement, of
even kind, quality and quantity w/in each unit and among all units involved; Are
adequately contained, packaged, and labeled as the agreement may require; Conform to
the promise or affirmations of fact made on the container or label if any.
% Implied Warranty of Fitness for a Particular Purpose, UCC § 2-315
% 1) Where the seller at the time of contracting has reason to know any particular purpose for
which the goods are required 2) and that the buyer is relying on the seller’s skill or
judgment to select or furnish suitable goods, 3) there is an implied warranty that the goods
shall be fit for such purpose. (Don’t have to be a merchant!)
a.Step-Saver Data Systems, Inc. v. Wyse Technology-- P alleged breach, implied warranty
% Conditions that must be present for a P to recover on the implied warranty of fitness for a
particular purpose:
% 1) the seller must have reason to know the buyers particular purpose
% 2) the seller must have reason to know that the buyer is relying on the seller’s skill or
judgment to furnish appropriate goods
% 3) the buyer must, in fact, rely upon the seller’s skill or judgment
% The warranty of merchantability does not require that the goods be “outstanding or superior.”
They need only be “of reasonable quality within expected variations and for the ordinary
purposes of which they are used.”
% Issue: Whether D breached its implied warranty of merchantability and fitness for a particular purpose
with P?
% Holding: No, No, b/c P failed to present evidence

2) Express Warranties
% Entail a promise to make a good for losses w/in their scope, whether or not such losses were
foreseeable, uncertain, or avoidable
% UCC § 2-313. Express Warranties by Affirmation, Promise, Description, Sample:
% 1)An express warranty is made up of the following elements:
% a) An affirmation of fact or promise made from the seller to they buyer
% b) Description of the goods which is made part of the basis of the bargain
% c) Any sample or model which is made part of the basis of the bargain
% 2) It is not necessary that words such as “warrant”, “guarantee” are used, or there is intent. An
affirmation of the value of the goods or a statement that is the seller’s opinion or commendation
of the goods does not create a warranty.

1) Royal Business Machines, Inc. v. Lorraine Corp.-- sale of copy machines

% Decisive test for whether a given representation is a warranty or merely an expression of the
seller’s opinion:
% whether the seller asserts a fact of which the buyer is ignorant or merely states an opinion or
judgment on a matter of which the seller has no special knowledge and on which the buyer
may be expected also to have an opinion and to exercise his judgment.
% An affirmation of fact which the buyer from his experience knows to be untrue cannot form a
part of the basis of fact which the buyer from his experience knows to be untrue from a party
of the basis of the bargain
% Issue: Did Royal Business make certain express warranties or breached any express warranty? Is there
evidence that Royal breached the implied warranties of merchantability and fitness for a particular
purpose?
% General statements to the effect that goods are "the best," or are "of good quality," or will "last a
lifetime" and be "in perfect condition," are generally regarded as expressions of the seller's opinion
or "the puffing of his wares" and do not create an express warranty
% This was a statement of the seller's opinion, the kind of "puffing" to be expected in any sales
transaction, rather than a positive averment of fact describing a product's capabilities to which an
express warranty could attach

3) Express Disclaimers of Warranty

% Unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like
“as is,” “with all faults,” or other language which in common understanding calls the buyer’s
attention to the exclusion of warranties and makes plain that there is no implied warranty

%a) Schneider v. Miller-- rusted trunk of Chevrolet corvette, sold “as is”
% An integration clause which provides that the entire agreement btw the parties is contained
within the four corners of the K is effective to waive any implied warranty
% When the buyers before entering into the K has examined the goods or the sample or model as
fully as he desired or has refused to examine the goods there is no implied warranty with
 regard to defects which an examination ought in the circumstances to have revealed to him
% Issue: Whether the D made an express disclaimer of warranty to the P that should be upheld?
% Remember: UCC §2-316 comment 7: “terms like ‘as is’ in ordinary commercial usage are understood
to mean that the buyer takes the entire risk as to the quality of the goods involved”

%READ § 2-316 on p. 853!! (WILL PROBABLY BE ON EXAM)

%RE-READ § 2-202 ABOUT PAROL EVIDENCE (WILL PROBABLY BE ON EXAM)
%§ 2-316. Exclusion or Modification of Warranties.
% (1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to
negate or limit warranty shall be construed wherever reasonable as consistent with each other; but
subject to the provisions of this Article on parol or extrinsic evidence (Section 2-202) negation or
limitation is inoperative to the extent that such construction is unreasonable
%When you have words the create an express warranty and words that disclaim it in the same
contract....THE WORDS THAT CREATE THE EXPRESS WARRANTY PREVAILS
% the words that disclaim the express warranty are “INOPERATIVE”
%Best way to get rid of an express warranty is through an integration clause (§ 2-202)
%§ 2-202 wins over § 2-316
%LOOK AT § 2-318!! (PRIVITY)
%LOOK AT § 2-209!! (MODIFICATIONS)

a.Morris v. Mack’s Used Cars-- Seller failed to disclosed to the buyer that the vehicle had been in an
accident and had been repaired
% Issue: Whether a disclaimer of warranty authorized by the Uniform Commercial Code prevents
application of the Consumer Protection Act?
% Disclaimers permitted by ... of the UCC may limit or modify liability otherwise imposed by the code,
but such disclaimers do not defeat separate causes of action for unfair or deceptive acts or practices
under the Consumer Protection Act
% Both the UCC (unless displaced by certain provisions...) and TCA establish that the invocation of one
power shall not be construed as excluding or prohibiting the use of any other available remedy
% State consumer protection laws are considered more effective (b/c federal is seen as failure)

I. Conditions
% Sometimes a performance is due only if something happens or does not happen
% Unless the condition is satisfied, nonperformance is not a breach
% A condition is not the same thing as a promise
% Express Condition-- Parties intended it and said so in words
% Condition implied in fact-- Parties intended it, did not say it in words, but nonetheless such
intention is reasonably inferable from conduct other than words
% Constructive Condition-- Where court believes parties intended it if they had thought about it at
all, or b/c by reason of the mores of the time justices requires that it operate
% aka Condition implied by law
% Condition precedent: condition is preceding what is required by performance
% e.g. buying home insurance in case your house burns (condition is buying before)
% Condition subsequent: “after the fact” where a condition is put after an incident
% e.g. house burning, and insurance co. telling you need to bring suit; this bringing of the suit is a
condition that is needed for performance (but can only occur after house actually is burned)

A. The Effect of a Condition

% Conditions are events that must be met before the provisions of the K are met. Courts will look into
fairness of the condition

a.Internatio-Rotterdam v. River Brand Rice Mills-- D supposed to ship rice to P, but P failed to give D
timely notice, and so D rescinded K, so P filed suit to complete its side
% Issue: Whether lack of performance of promissory condition entitles promisee the right to back out of
the contract?
% Holding: Yes, notice of shipment instructions on or before 12/17 was a condition precedent the
 performance which is required of the D, and the nonoccurrence of that condition entitled D to
rescind or to treat its contractual obligation as discharged
% This is an example of a promissory condition: P promised to give the notice and the D’s duty to ship
was conditioned on the receipt of the notice
% Remember: The mere establishment of the letter of credit was not an act of performance: it was
merely an arrangement made by the P for future performance which as to the Houston deliveries
because of P’s failure to give shipping instructions were never made

B. What Events are Conditions?

% An event that is uncertain- that is, an event other than the passage of time- may be a condition, a
promise, or a “promissory condition” (which is both a promise and a condition)
% The event may be any one of these, and just indicate at what point in time the parties have
contemplated a performance

1) Is the Event a Condition, a Promise, or Both?

% If you cannot tell if something is a condition or a promise, you should go with the promise

a.Howard v. Fed. Crops Ins. Corp.-- P sought to recover for tobacco crop damages caused by rain
damage, but D said P had breached a part of their agreement
% Rst. § 261-- When it is doubtful whether words create a promise or a condition precedent, they
will be construed as creating a promise...the provisions of a contract will not be construed as
conditions precedent in the absence of language plainly requiring such construction
% Issue: Did P forfeit the coverage of policy by plowing before inspection by D?
% A breach of a condition can result in a duty not to perform, but a breach of promise simply results in
damages
% Policy principle:
% Forfeitures are bad b/c doing so would lose protecting the bargain
% Courts want to protect the bargain, in order to protect the K
% Think in terms of reliability (in favor of insurer)
% Notes: In this case:
% “the expression of one thing is the exclusion of another” (aka expressio unius est exclusio alterius)
% i.e. 5(b) says it is not a condition precedent...5(f) says that it is....so in this case you have to go to
the side to protect the bargain
% P plowed the field= P broke the promise
% P might then have to pay damages for work D did in going out to inspect fields (this would be
looked at in retrial)
% NOT EVERY BREACH MEANS THE CONTRACT IS OFF (“Quick and Dirty”)...

b) Is the Event a Condition, a Promise, or Neither?

% “Condition”-- a fact, other than mere lapse of time, which, unless excused, must exist or occur before a
duty of immediate performance or a promise arises
% “if”, “provided that”, “when”, “after”, “as soon as”, “subject to” are words or phrases that have been
commonly used to indicate that performance has expressly been made conditional

1) Chirichella v. Erwin-- decree for performance on a K for real estate

% Issue: Whether a stipulation in a contract constitutes a condition precedent is one of construction
dependent on the intent of the parties to be gathered from the words they have employed and, in case
of ambiguity, after resort to the other permissible aids to interpretation?
% A condition precedent has been defined as “a fact, other than mere lapse of time, which, unless
executed, must exist or occur before a duty of immediate performance of a promise arises
% The court also held that since the buying of the house was not marked as a condition, the passage
of time could not be considered a condition either
% Note: Failures of conditions are not breach of Ks...they are just a less thing for a duty to perform
% For it to be a breach of K and for damages, you need to breach a promissory condition, i.e. a condition
and a promise to perform
I. Avoiding Conditions

1) Waiver and Estoppel

% You may waive incidental condition that does not affect the consideration

a.Clark v. West-- K binding P to total abstention from liquor

% Issue: Whether P’s abstinence from the use of alcohol was a condition precedent which could be
waived by D, such that D would be liable for the higher payment despite P’s use of alcohol?
% A waiver has been defined to be the intentional relinquishment of a known right . It is voluntary
and implies an election to dispense with something of value, or forego some advantage upon.
% Waivers can occur inadvertently
% A waiver may be retracted if there is a reasonable time left to make a condition happen
% If there is reliance on the waiver, estoppel kicks in, and requires that waivers may not be retracted
% Notes: Escape mechanisms (from a K)
% interpretation
% waiver--bargained for/incidental (can be unilateral)
% estoppel--equitable estoppel/estoppel in pais
% Remember: waiver + reliance = estoppel
% By holding that a condition is not really there...thereby interpretation would not even need to take
place, b/c you are saying that there is no condition to begin with
% Reservation of rights
% e.g. implied waiver to go forward...
% ...e.g. accepting late payments of rent
% this would be “waiving the condition of timely payment”
% Modification--need mutual assent (always) and consideration (cannot be unilateral)
% Election -- it is irrevocable (unilateral)

2) Excuse to Prevent Forfeiture

% If the failure to meet a condition will cause a forfeiture and the forfeiture will seriously adversely
affect a party, and that the forfeiture is caused by negligence, the court may excuse the condition

1.JNA Realty v. Cross Bay Chelsea-- D had an option to renew on a K but did not send the notice in
reasonable time
% Issue: If there is a forfeiture, may a court of equity grant the tenant relief when the forfeiture would
result from the tenant’s own neglect or inadvertence?
% A notice exercising an option is ineffective if it is not given w/in the time specified
% “At law, of course, time is always of the essence of the K.”
% The major obstacle to obtaining equitable relief in these cases is that default on an option usually
does not result in a forfeiture
% The reason is that the option itself does not create any interest in the property, and no rights
accrue until the condition precedent has been met by giving notice within the time
specified
% When a tenant in possession under an existing lease has neglected to exercise an option to renew,
he might suffer a forfeiture if he has made valuable improvements on the (b/c now he has an
interest in the property, his improvements)
% A tenant should not be denied equitable relief from the consequences of his own neglect or
inadvertence if a forfeiture would result
% This of course generally distinguishes the lease option, to renew or purchase, from the stock option or
the option to buy guides
% Rst. § 2-229 approves the holding of this case
% To the extent that a non-occurrence 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

XI. Breach of Contract

% Is a party justified in unilaterally ending a contract? Courts have developed 3 doctrines to answer this
 question: (1) constructive conditions; (2) anticipatory repudiation; (3) material breach
% What Constitutes a Breach
% Any non-performance of a contractual duty which has become due constitutes a breach
% An anticipatory repudiation of obligations also serves to breach a K
% In Ks for the sale of goods, in addition to repudiation, a seller breaches the K by offering a tender
or delivery of non-conforming goods, and the buyer breaches by wrongfully rejecting goods,
wrongfully revoking acceptance of goods, or failing to make a payment when due
% Factors which are relevant to a determination of whether a breach is material are:
% The extent to which the aggrieved party will be deprived of the benefit he reasonably expected;
% The extent to which the aggrieved party can be adequately compensated for the benefit of which
he will be deprived;
% The extent to which the breaching party will suffer forfeiture;
% The likelihood that the breaching party will cure his failure, taking into account all the
circumstances including any reasonable assurances;
% The extent to which the breaching party has acted according to standards of good faith and fair
dealing. Restatement § 241

%A. Constructive Condition

% Condition that is not expressed; the breach of a constructive condition by one party can relieve the
other party of its duty of performance
% This requires an inquiry as to the intentions of the parties at the time of formation. (This is different
from a material breach which is looking forward at intention in the future)
% Finding a constructive breach depends on a backward-looking inquiry into the presumed intentions of
the parties at the time of the formation. There are some types:
% Independent Conditions: where there is no excuse for a failure to perform by the D
% Dependent Conditions: when the one promise must be performed before the other, part can

1) Kingston v. Preston-- P agreed to work for D in exchange for D’s business

% Issue: Whether P’s tender of sufficient security was a condition precedent to the D’s surrendering of
the premises, and stock?
% In an agreement, if a condition of the agreement is that A must complete a certain action before
B performs his part of the agreement, and A fails to complete that action, then B does not have
to perform and is not breaching the agreement
% 3 kinds of covenants:
% 1)Mutual and independent, where either party may recover damages from the other, for the injury
may have received by a breach of the covenants in his favor, and where it is no excuse for the D
to allege a breach of the covenants on the part of the P
% 2)Covenants called conditions and dependent, in which the performance of one depends on
the prior performance of another, and until this prior condition is performed, the other
party is not liable to a an action on his covenant
% 3)(Typical with sales of goods) Mutual conditions (aka concurrent conditions) to be
performed at the same time
% If either one fails, then the other does not have to perform

2) Morton v. Lamb-- trade for corn in exchange for payment

% Issue: Whether it was a condition precedent for P to have to have averred to D that he was ready to pay
for the corn?
% Where two concurrent acts are to be done, the party who sues the other for non-performance must aver
that he had performed, or was ready to perform, his part of the K
% If one party covenant to do one thing in consideration of the other party’s doing another, each
must be ready to perform his part of the K at the time he charges the other w/ non-
performance
% D’s action was dependent on P’s averment to D that he was ready to pay

1.Jacobs & Young v. Kent-- P builds house for D but does not follow specific directions for plumbing
pipes, and so P wants difference in what he paid and what it’ll cost to fix
% Issue: Whether P can recover when he mistakenly used the pipe that was not in the K?
% Damages-- The general rule is normally that damages is measured by the cost of completion,
BUT if the cost of completion is grossly and unfairly out of proportion to the good to be
attained, the measure is the difference in value
% The court held that the failure to use the pipes that were specified in the K was not a material
breach, that is, they were trivial and neither fraudulent nor willful, and they were not
important for the purpose to be served in the K (building the house)
% It was negligence not to use the right pipes, not willful disregard or fraud
% The enforced adherence would require a rebuilding of the house, which would be disproportional to the
damage done
% The damages in this situation: In cases of substantial performance, we use the measure of the
difference in market value between the K as performed and the K as it would be if performed
perfectly
% The court must weigh the purpose to be served, the desire to be gratified, the excuse for
deviation from the letter (intentional or unintentional), and the cruelty of enforced adherence

%On Motion for Reargument: The promise to replace, like the promise to install, is to be viewed, not as a
condition, but as independent and collateral, when the defect is trial and innocent
%The law does not nullify the covenant, but restricts the remedy to damages (Motion denied)

A.Prospective Nonperformance

1) Anticipatory Repudiation
% This occurs when there has been a definite and unconditional repudiation of a K by one party
communicated to another
% A statement by a party that he will not or cannot perform in accordance w/ the agreement creates such
a breach
% If a party has reasonable grounds for insecurity, then you may request adequate assurances of
performance
% The suit may occur before the time that the K would have been performed

1.Albert Hochster v. Edgar De La Tour-- P supposed to work as courier for D and D repudiated K
% Issue: Is the D guilty of a breach of contract in refusing to provide compensation to the P? Whether
the P can sue right away or have to wait until the K date has passed?
% The man who wrongfully renounces a contract into which he was deliberately entered cannot
justly complain if he is immediately sued for a compensation in damages by the man whom he
has injured: and it seems reasonable to allow an option to the injured party, either to sue
immediately, or to wait till the time when the act was to be done, still holding it as
prospectively binding for the exercise of this option, which may be advantageous to the
innocent party, and cannot be prejudiced to the wrongdoer.
% An offer to rescind a K is not anticipatory breach and does not give a reasonable reason for adequate
assurances of performance
% Why should P wait, if D has already canceled on him

1.Harrell v. Sea Colony-- parties agreed to purchase of condo and P claimed anticipatory damages on
D
% Issue: Did P’s letter asking for a mutual rescission constitute an anticipated repudiation allowing D to
breach contract and sell to a third party? Is the agent for D liable?
% In order to constitute an anticipatory breach of K, there must be a definite and unequivocal
manifestation of intention on the part of the repudiator that he will not render the promised
performance when the time fixed for it in the contract arrives
% A mere request for a change in the terms or a request for cancellation of the K is not in itself
enough to constitute a repudiation
% Damages in an anticipatory breach
% You can await performance or you can act to cover immediately
% If you demand adequate assurance of performance you can suspend performance while you wait
 for the adequate assurances. (UCC § 2-610)
% Perfect Tender Rule
% In a sale of goods, the seller must get the sale correct, and if not it is a material breach.
% This rule is tempered in the UCC for installment K
% The seller has the right to cure in some situation
% Remember: In a change in contract there must be mutual asset to changes and consideration given to
the change

%2) Adequate Assurances of Performance

% Both the Restatement and the UCC provide that where there are reasonable grounds to believe that a
party will not be able or willing to perform, the party entitled to receive such performance may make
a demand for assurances from the other party that performance will be forthcoming. [Restatement §
251; UCC § 2-609]
% Such demand in goods Ks must be in writing. Between merchants, commercial standards dictate the
reasonableness of grounds for insecurity and adequacy of any assurance offered.

%a) Scott v. Crown-- bushels of wheat K rescinded in belief that buyer couldn’t pay
% When can you act on the basis that the other party will not perform?
% Look at UCC §2-609 (know this UCC)-- reasonableness for grounds of insecurity determined
according to commercial standards
% Must be commercially reasonable, a justified demand, adequate assurance
% A demand for assurance of performance must be in writing in order to be effective...An oral
demand for assurance would suffice when there is a pattern of interaction which demonstrated
a clear understanding btw the parties that suspension of the demanding party’s performance
was the alternative, if its concerns were not adequately addressed by the other party.
% Issue: Did P have reasonable grounds for insecurity and did they properly ask for adequate assurance?
% Holding: Yes, there was reason for insecurity but assurance was asked for improperly. Driver isn’t
appropriate person to ask for assurance and request was oral
% There was no subsequent pattern of interaction between parties that would clearly demonstrate that B
understood S had asked for assurance of performance
% In actuality, S’s actions constituted an anticipatory repudiation allowing B to cancel K
% Class Notes: Seller wrote letter to ask for assurances and demanded partial payment – this is a
unilateral modification of K terms. Is this reasonable?

I. Material Breach and Substantial Performance

a.B&B Equipment v. Bowen-- Ps took on D as partner in firm and dispute arose regarding how much
D owed upon firing (b/c he did not live up to expectations)
% The essential test to determine whether a number of promises constitute one K or more than one is
simple. It can be nothing else than the answer to an inquiry whether the parties assented to all the
promises as a single whole, so that there would have been no bargain whatever, if any promise or set
of promises were struck out

XII. Damages

A. Expectancy, Reliance, and Restitution: This Time for Real

1) Expectancy Damages Revisited

% If there is a material breach the measure of damages should be the cost of performance

a) Groves v. John Wunder-- gravel removal and refusal of land re-grading

% Introduced the doctrine of economic waste (encourages efficient breaches of K)
% Measure of damages was the reasonable cost of performing or if that was too high, then the
depreciation in land value
% If there is substantial performance, the measure of the damages should be difference in market
value
% Issue: Award damages for cost of performance or diminution in value if D has performed?
% Where the contractor willfully and fraudulently varies from the terms of a construction K, he
cannot sue thereon and have the benefit of the equitable doctrine of substantial performance
% The goal, given the lack of good faith, should be to give P what he has bargained for, what has been
promised, and what he has been deprived
% NOTE: Should damages be cost of completion ($60,000) or fair market value of land if performance
had occurred ($12,000)? Land worth nothing w/o leveling. Court gives P cost of completion - most
agree this case was decided wrong

a.Peevyhouse v. Garland Coal-- strip-mining and pit falling; P sued D for damages & breach of K b/c
D had refused to do restoration like the K called for
% Rule - While the default rule is cost of performance, if application of that rule would result in
grossly disproportionate economic benefit as compared to the cost of performance, then use
the diminutive value rule. The basis is that the remedial work was incidental to the primary
purpose of the K and thus the economic benefit of cost of performance rule would be grossly
disproportionate
% Holding - for P - limited to the $300, but the damages should be based on “relative economic merit”
% Dissent: This is not fair to P, since D basically got his own side of the bargain, then screwed over P,
and then the court is screwing P too b/c the restoration was an essential part of K
% “Economic waste” – falls under doctrine of expectancy damages-- critics say that the party should get
want they bargained for!
% NOTE: Ps get fair market value ($300) - cost of completion would have been $29,000. Most people
think this case was decided wrong - they had great subjective value in the farm, were left with
useless land

B. The Law’s Limitations on Damages: 1)Foreseeability, 2)Certainty, and 3)Avoidability

1) Foreseeability of Harm

a) Hadley v. Baxendale-- D failed to deliver on time shaft that runs mill

% Basic Rule for This Case!! (aka Hadley Rule)
% Reasonably Foreseeable = “reasonably contemplated at the time of K”
% Must be foreseeable. For special situations, damages can be awarded only if P informs D of
the special situation or if the damages were reasonable foreseeable. Note that this
encourages information sharing when deviating from a default rule.
% the D may have been told, but they were not effectively told
% Issue: Are Ps entitled to recover for the measure of damages both parties may reasonably foresee as
the result of the breach?
% Holding: No, damages limited to what was contemplated at the time of K
% ** Damages to be awarded should have fairly and reasonably arise naturally **
% Damages will be determined either by the rental values of the new equipment or the interest value of
the equipment

b) Hector Martinez v. South. Pac. Trans.,-- delay and damage of dragline

% THIS IS AN IMPORTANT CASE TO UNDERSTAND WHAT HADLEY HOLDS
% Builds on the Hadley rule, but allows for consequential damages b/c of the foreseeability (there is
no need for special instructions/agreement if the damage is foreseeable)
% If profits are foreseeable, they are recoverable
% Damage is foreseeable as long as it is a “proximate and usual” consequence of the action
% P does not have to give any special notice if harm is foreseeable
% General Rule is that P need only show that his harm was not so remote as to make it
unforeseeable to a reasonable man at the time of contracting
% Issue: Whether P is liable for the loss of use (aka “wrongful deprivation of the dragline’s use during
periods of delay in transit and of repair”) that P incurred for the damages to the dragline?
% Holding: Yes, as long as it’s foreseeable and not remote to a reasonable person
% Although we want to compensate P we do not want to unfairly charge D w/ damages that D could have
 not foreseen-- this would be unfair and could lead to paralyzing commerce
%General damages are the “natural and probable” consequence of a breach and are deemed to have been
within the contemplation of the breaching party. (A party seeking general damages need not offer further
proof that the damages were foreseeable)
% See §351 – Unforeseeability and Related Limitations on Damages
% Notes: This case is a little different from Hadley, in that the millers sued for closing down the mill but
they could have rented a new engine. In this case, P is suing for rental costs b/c the shipment of his
actual machinery was delayed
% How do you measure “Use Value” (this is different from “Commodity Value”):
% may be subjective (b/c it may be different to both parties)
% how much does it cost to rent the object
% ex. Capital Goods
% Ways to measure this...
% Interest on Fair Market Value
% Rental Value
% Commodity Value = fair market value if the K was kept (aka “expectancy) minus the fair market value
right now = Damages
% But Court said this is merely a “method” and it is not applied in cases where another rule will
better compute actual damages

2) Certainty of Harm

a) Chicago Coliseum Club v. Dempsey-- boxing match K breach by boxer

% If damages are foreseeable but are too speculative (can’t calculate), then expectation damages
are not recoverable (e.g. in sporting events, entertainment events, new businesses), and so you
use reliance damages
% Issue: What damages to provide when expected profits can not be determined?
% Compensation for damages for a breach of K must be established by evidence
% A party can only recover for damages which naturally flow from and are the result of the act
complained of (you cannot recover for expenses incurred before the K was entered into)
% Items which are recoverable include those which were a necessary expense in furtherance of
performance
% Policy reasons for this rule-- fairness to the parties

b) Winston Cigarette v. Wells-Whitehead-- speculative v. measurable profits

% Damages can’t be awarded to punish someone for breach of K
% Claims for lost profits will be rejected if the profits are subject to too many contingencies (e.g. mkt.
fluctuations, chances of business to constitute a sale)
% We must distinguish between profits that are provable by some standard, and profits that are wholly
speculative
% Will not award expectation interest where damages are too speculative/remote
% Better to explicitly include such terms in K, instead of giving jury blank check
% Parties should be ones to provide for enlarged responsibility (e.g. liquidation)

c) Mistletoe Express v. Locke-- P contracted w/ D and D ended K before end date

% As an alternative to expectation damages, 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
% To recover these expenditures, they must have been reasonable made in performance of the
contract or in necessary preparation
% Issue: Whether P is entitled to reliance damages for the losses incurred b/c D’s breach?
% The victim of a breach of K should be restored to the position he would have been in had the contract
been performed
% Determining that position involves finding what additions to the injured party’s wealth have been
prevented by the breach and what subtractions from his wealth have been caused by it
% The burden of certainty is on the breaching party

%Notes: Expectancy is a cap on damages

% P sues for reliance
% D must prove the expectancy
% burden is on D to prove the expectancy...or else (if P had asked for reliance) P will get reliance
% Sellers of goods are not entitled to consequential damages (under UCC § 2-715)
% § 2-712-- required to cover - contract price + incidental damages + consequential damages =
DAMAGES
% § 2-713-- market price - contract price + incidental damages + consequential damages =
DAMAGES
% § 2-714(2)-- goods as warranty - goods as they are + incidental damages + consequential damages
= DAMAGES
% § 2-706(1)-- contract price - resale price + incidental damages = DAMAGES
% § 2-708(1)-- contract price - market price (+ incidental damages) = DAMAGES

3) Avoidability of Harm
% A party aggrieved by a breach must use reasonable efforts to mitigate damages (don’t pile on)
% In the specific case of breach of an employment K, courts will not generally require an employee that
has been discharged to take onerous or difficult measures to secure new employment, such as taking
a far inferior position or relocating

a) Rockingham County v. Luten Bridge-- bridge builders didn’t stop when warned to stop
% Issue: Should D be liable for damages sustained by P post-notification of breach?
% Holding: No, it is P’s duty to do nothing to increase the damages flowing from breach
% Damages = expenses incurred up to notice of breach + expectancy interest (profit expected)
% The Court holding was a repudiation of the breach of contract (not good to breach)
% Policy Reasons for Discouraging Breaches of Contract
% protecting the bargain
% discourage breach
% promote economic efficiency/promote productive use of assets/labor
% discourage economic waste
% personal liberty/freedom (this outweighs “promotion of economic efficiency”)

a.Shirley Maclaine Parker v. Twentieth Century-Fox Film Corp-- take the western instead of the
musical case
% When a contract is for personal services, plaintiff is not required to accept any position
substantially different from, or inferior to, the one contracted for in order to mitigate damages
% A job that required different sets of skills did not constitute reasonable mitigation
% An employee’s rejection of or failure to seek other employment of a different or inferior kind,
cannot be used to claim she failed to mitigate damages. Other employment must be
substantially similar to that promised in the K, “not different or inferior
% Damages that could be avoided cannot be recovered

C. The Parties’ Limitations on Damages: Disclaimer and Liquidation Clauses

% You can liquidate and say how much the damages will be as long as it is not a penalty

%UCC § 2-706-- Resale of Goods  The seller may, in good faith and in a commercially reasonable
manner, resell goods that the buyer wrongfully does not accept. In such cases, damages are measured by
the difference between the resale and contract prices plus incidental expenses, less expenses saved as a
consequence of the breach.

%UCC § 2-708-- Damages for Buyer's Non-acceptance or Repudiation  Where a buyer wrongfully
rejects goods or unjustifiably revokes acceptance of goods or repudiates, damages are measured by the
difference between the market price at the time and place for tender and the contract price together with
any incidental damages less expenses saved as a result of the buyer's breach. [UCC § 2-708]
%Damages for lost profits If the usual damages allowed for breach are inadequate to give the seller the
benefit of the bargain, the seller may recover the lost profit (including reasonable overhead), along with
incidental damages, due allowance for costs reasonably incurred, and due credit for payments or
proceeds of resale. [UCC § 2-708(2)]
% Remember: § 2-708(2) aka “lost volume seller”-- when this circumstance arises...this is the black
letter law
% The reasoning behind awarding this damages to the selleris that since the seller is essentially a dealer
with an unlimited supply of boats (since he can order as many as he needs), the resale to replace the
breaching buyer costs the dealer a sale, b/c, had the breaching buyer performed, the seller would
have made two sales instead of one. Thus the buyer’s breach depletes the seller’s sales to the extent
of one, and thus seller should be awarded the damages for the profit of one sale (e.g. If would’ve
made $500, then get $500)
% revenues - direct costs/variable costs (i.e. incidentals) = DAMAGES

1) Express Limitations on Consequential and Incidental Damages

% Parties may seek to limit their liability under the default rules of consequential damages by including a
warranty clause that is expressly intended to be the exclusive remedy for breach of K, thereby
excluding damages for other foreseeable losses
% See UCC § 279

2) Liquidated Damages v. Penalty Clauses

% You can liquidate and say how much the damages will be as long as it is not a penalty.
% Liquidated Damages (aka stipulated damages)-- At the time the K is formed, the parties may agree
to a fixed sum of money or a set formula for setting damages in the event of a breach
% Stipulated damages will be enforced if they reflect an honest effort to anticipate the harm caused by a
breach. (Liquidated damages)
% Stipulated damages will be deemed invalid if they represent an attempt to punish the breaching party,
such as in the case of unreasonably large damages. (Penalty Clauses)
% Under common law, the reasonableness of stipulated damages must reflect:
% (1) The anticipated or actual harm caused by the breach; and
% (2) The difficulties of proof of loss
% In sales contracts, stipulated damages must be reasonable in light of:
% (1) The anticipated or actual harm caused by the breach;
% (2) The difficulties of proof of loss; and
% (3) The inconvenience or nonfeasibility of otherwise obtaining an adequate remedy

1) Kemble v. Farren-- comedian’s breach in K for failure to perform

% Issue: Whether the liquidated clause agreed to as part of the contract by both parties is enforceable?
% Holding: NO this is a penal sum
% R: If you have a clause that says “for any breach the damages will be X”, that clause will be held
to be a penalty b/c it’s not measured, it instead has a punitive effect
% However a clause would have been reasonable if actual damages cannot be ascertained, but, in this
case, actual damages are easily calculated
% The absurd nature of the sum agreed to pay (1000) can reasonably lead one to conclude it was not a
liquidated sum but rather a penal sum
% Remember: Punitive damages are the monopoly of the state (private punitive damages are no longer
allowed)
% Penalty clauses are NOT allowed

%How do you tell what is valid liquidated damages as opposed to penalties:

% Did the parties intend for damages or penalties
% How hard is it to measure damages
% The harder it is the more likely we will uphold the damages
% Is it reasonable in light of anticipated damages at the time they made they K
% Is it reasonable in light of the actual damages incurred
 2) Wassenaar v. Towne Hotel-- liquid damages in termination of employment K
% Issue: Does P need to mitigate damages other than what is stipulated in contract?
% Reasonableness test: Is clause reasonable under the totality of circumstances?
% 1) Did the parties intend to provide damages or for a penalty? –This question of law the parties
really don’t decide this
% 2) Is the injury caused by the breach one that is difficult or incapable of accurate estimation at the
time of the K? (aka “difficulty of ascertainment test”)
% difficulty and practicality
% 3) Are the stipulated damages a result of the harm caused by the breech? (aka “are stipulated
damages a reasonable forecast of compensatory damages”)
% reasonable forecast at the time of the contract and now
% Why we do like Stipulated Damages’s:
% Control exposure to risk,
% Advantages are undercut,
% Avoid uncertainty, delay, expense of judicial process,
% Freedom of K,
% Create economically efficient remedy,
% Correct inadequate judicial remedies → introduces element of certainty,
% Once the liquidated damages are considered to be reasonable, there is no duty to mitigate damages
% Look at UCC § 2-718 and Rst. § 355 & 356 (and § 2-719)

3) Lake River Corp. v. Carborundum Co.-- comments on liquidation clause

% R1: Penalty clause may discourage efficient and inefficient breaches of K
% R2: Should be applied only if gains > costs of penalty clause and other costs
% Remember: If damages would be easy to determine, or if the estimate greatly exceeds a
reasonable upper estimate of what the damages are likely to be, it is a penalty

I. Specific Performance and its Limits

1) Contracts for Goods

% We do not have specific performance in K for personal service b/c it would be akin to slavery

%a) Sedmak v. Charlie’s Chevrolet-- limited edition customized car breached

%Issue: Whether the Ps were entitled to summary judgment for purchase of a limited edition car customized
for the Ps who had put a down payment on car?
%Under UCC § 2-716: the court may decree specific performance as a buyer’s remedy for breach of contract
to sell goods “where the goods are unique or in other proper circumstances (aka unreasonably difficult to
cover)”
%Holding: Yes, since car is limited edition, it is unique and hard to obtain, and SP is appropriate
%The court considered factors:
% Mkt price, Mkt demand, Loss, Delay, Trouble in finding another one, Milage, Condition, Ownership,
Appereance (since it was customized for Ps), Options (rare collectible)

%Notes: Specific Performance (can also be given by negative injunction, i.e. Lumley):
% Land- usually can get b/c land is unique (e.g. Loveless v. Diehl)
% Goods- generally no, but is rebuttable; but can get if unique & peculiar/sentimental
% Personal Services-
%Replevin: P has superior right of possession of goods (chattels) based on ownership

b) Lumley v. Wagner-- contracted singer breaches in attempt to sing at competitor’s theater

% Issue: Can injunction be awarded preventing D from performing elsewhere if SP can not be awarded
forcing D to perform at P’s theater against her will?
% R: Since court can not order specific performance, it will attempt to bind parties to contract by
preventing her from doing something she bound herself not to do – injunction allowed due to
negative stipulation specifically written into contract
% Rationale: The court cannot compel the D to sing, but the court can issue an injunction barring her to
 abstain from the commission of an act which she has bound herself not to do. The K states she is to
refrain from singing elsewhere during the period in question.  If she attempts to do so she will have
broken the spirit and meaning of the K

c) Dallas Cowboys v. Harris-- injunction against D playing for other football team
% Issue: Whether D may be enjoined from playing football somewhere else?
% All equitable relief is discretionable to the parties
% Test: Can the same skill be easily obtained from others?
% Rule: if the employee is of unique skill or has special knowledge, and this skill and knowledge
cannot be easily obtained from others, then injunctive relief is available
% Holding: Court affirms P’s injunction of D (he can’t play anywhere else)
% UCC §2-716 (where the party possesses a unique skill there may be a right to injunction) – does this
hinge on the player’s unique skill? (If there were another equally skilled player available to the
Cowboys, would this even matter?)
% Philosophical support: we value our individual liberty so highly that SP interferes with it. There is a
freedom to enter into contracts.
% Equitable support: court won’t grant remedy they can’t enforce (such as SP) because there is no police
power over the quality of performance
% Preventing a party from working for someone else would be too much like slavery, but it didn’t matter
here because D’s new league doesn’t compete with P

%Note: Negative Injunction (look at Lumley):

% A court order prohibiting a party from a specific course of action
%Mandatory Injunction
% Although the court is vested with wide discretion to fashion injunctive relief, it is also restricted to
restraint of a contemplated or threatened action
% It also might compel specific injunction of an act
% In such a case, it issues a mandatory injunction, commanding the performance of a positive act
% Because mandatory injunctions are harsh, courts do not favor them, and they rarely grant them
% Such injunctions have been issued to compel the removal of buildings or other structures wrongfully
placed upon the land of another
%Assignment
% Assign rights
% Rights are generally assignable unless the K says otherwise
% e.g. leases, Sea Colony case
% Assignment extinguishes the right in the assignor, and the right resides in the assignee
%Delegation
% Delegate duties
% Whether duties are delegable depends on whether it is a personal services K or whether the identity of
the performing party matters
% Delegation opposite to the assignment of rights does NOT extinguish the right in the assignor
%Cannot get specific performance for personal services

I. Restitution and Quasi-Contract

% Restitution generally pertains to situations where one person has, w/o intending to make a gift,
conferred a benefit on another
% Restitution can provide an independent cause of action when there is no K at all
% This is called quantum meruit or quasi-K

1) Restitution for Breach of Contract

% Restitution takes a variety of forms:
% Remedy to the non-breaching party for the breach of a contract
% Remedy to the breaching party for the breach of a contract
% A separate cause of action where there is no contract at all

a.Bush v. Canfield-- K for $7/ barrel...Buyer pays but seller never delivers; price of wheat has fallen to
 $5/ barrel
% Issues: When are restitution damages an acceptable remedy?
% Restitution seeks to prevent unjust enrichment
% Rule: Even where promisee would have lost from performance, promisor cannot breach and
then sue on the K
% Even when a K is cancelled, you may sue in quantam maeuit, which means that you get as much
as you deserve
% Measure for non-delivery = Value of article at time and place of delivery and interest (expectancy)
% When expectation damages would not fully compensate the non-breaching party, restitution damages
will be granted
% For a breach of K, the sum to be recovered is, not the damages sustained by the non-performance, but
the consideration which the P may have advanced
% Dissent: The dissenting judge says they are over compensating the P and the D suffers too much

2) Restitution to the Party in Breach

%a) Britton v. Turner-- 1 yr employment contract/worked for 9 months

% Issue: What is the measures of damages?
% Restitution to the Party in Breach: prevent unjust enrichment of non-breaching employer
% Labor or certain goods have already been used or put out there
% A hired laborer is entitled to compensation for work actually performed unless there is an
express stipulation to the contrary in the contract
% Reward laborer so that he does not enrich the non-breaching party
% P awarded quantum meruit for the work performed until his breach
% How much do you pay? Is there a measure of damages that isn't arbitrary?
% Is there a market value? Can we ascertain that?
% If goods can be rejected still, then money is not owed
% Britton rule: maximum amount is that for which parties contracted - cannot get more in
restitution
% Notes: quantum meruit= “as much as he deserves”
% quantum valebrant= “as much is they are worth”
% These are based on restitution-- unjust enrichment (off the contract)
% This D can “plead the contract”, b/c he did not breach (different from Bush v. Canfield, b/c in
that case the D had breached)
% “Implied in Fact”= reasonableness, what the standard for the community is
% “Implied in Law”= as a matter of justice
% This case is “implied in fact” and not the other, b/c they had not put a condition precedent into
the K (Restatement § 374(2)) and look at Restatement § 371)

b) Vines v. Orchard Hills, Inc.-- Breach by buyers for condo – want deposit back
% General Principle: the availability of the remedy of a cause of action in a K
% One who (1) w/o intent to act gratuitously, (2) confers a measurable benefit on another (3) is
entitled to restitution
% A party whose breach is not willful can bring a claim to recover moneys paid, under restitution,
that unjustly enrich the seller
% He affords another an opportunity to decline the benefit or else (3) has a reasonable excuse for failing
to do so
% If the other refuses to receive the benefit, he is not required to make restitution unless the actor
justifiably for the other a duty imposed upon him by law

3) Restitution and “Quasi-Contract”

% Ex. A doctor who performs a service on an unconscious patient, and that patient dies should receive
the market value of the services rendered

a.Cotnam v. Wisdome-- Docs perform emergency surgery on D who had fallen off street car, but in the
end D dies, and now Ps want to be paid for their services
% Issue: Whether Ps can recover for professional services that they rendered to the deceased? 
% Holding: Yes, since a surgical operation is conceived and performed with due skill and care, the price
to be paid therefore does not depend upon the result
% This is by way of implied K, when such medical care is provided in good faith
% Remember: In this case, there is actually no (express) K b/c there is no mutual assent
% BUT, if this happens (like in this case), the court would need to “imply a contract”
% This would essentially be a “quasi contract”

a.Martin v. Little, Brown and Co.-- student finds plagiarized material and reports it, and wants to be
compensated, but D refuses
% Issue: Is P entitled to recovery w/o a contract?
% Holding: Volunteers generally have no right to restitution
% When a party’s services have been voluntarily given there is no reasonable inference that the recipient
intended to pay; there was no inferred K
% The general rule is that you can act and be recovered in emergency situations, but beyond that no
% Notes: Volunteer= someone who gives up something freely
% The “officious intermeddler” also cannot sue for restitution (just like a volunteer)
% This is a “busy body” who interferes w/o invitation (the exception is an emergency)
% Principle based on “freedom from K” (example case is Britton v. Tuner)
% If P wanted a real K, he should have bargained with D, instead of just giving them the source

I. Defenses

A.Obtaining Assent by Improper Means: Misrepresentation, Fraud, Duress, and Unconscionability

%1) Misrepresentation
% Innocent misrepresentation of fact is still grounds for rescission to a K
% It must be a material misrepresentation
% Misrepresentations of facts and opinions may count, but puffery does not
% The question is what would a reasonable person rely on
% An aggrieved party may avoid a K based on misrepresentation where:
% the assertion was either material or fraudulent; and
% the person seeking to avoid the K reasonably relied to his detriment on such assertion.
Restatement § 162
% A misrepresentation is material if:
% it would be likely to induce a reasonable person to agree to the bargain, or
% the party who made the misrepresentation knew or should have known that it was likely to induce
the other party to manifest assent to the bargain, whether or not a reasonable person would have
been induced.
% A misrepresentation is fraudulent if it was made with:
% the intention of inducing the other party to rely on it, and
% knowledge of its falsity or lack of adequate foundation for the representation. (scienter)

a) Halpert v. Rosenthal-- termites were discovered in the house

% Issue: Can the misrepresentation of a fact, whether it is “innocent” or fraudulent, be the basis for the
rescission of a K?
% Rule: An innocent misrepresentation of a material fact is grounds for the rescission of a K
% Holding: Yes. It is not necessary, in order that a K may be rescinded for fraud or misrepresentation,
that the party making the misrepresentation should have known that it was false
% A party who has been induced by fraud to enter into a K may pursue either one of two
remedies...1) he may elect to rescind the K to recover what he has paid it, or 2) he may affirm
the K and sue for damages in an action for deceit
% Action of Deceit based on fraud:
% party bringing the suit has the burden that D, in making the statements, knew they were false and
intended to deceive him
% Fraud is a tort action that requires some degree of culpability on the misrepresenter’s part
% Suit to rescind a agreement induced by fraud:
% pivotal issue is whether an innocent misrepresentation of a material fact warrants the granting of a
claim for rescission
% This is a Ks issue
% Note: This particular case is concerned with the first remedy (Rescind the K to recover what he has
paid), and whether an innocent misrepresentation of a material fact warrants the granting of a claim
for rescission

b) Byers v. Federal Land Co.-- purchaser of land paid more than land was worth
% In this case: Whether a K may be rescinded based on (alleged misrep. of material fact)...
% Issue #1-- ...whether the seller is the owner?
% Holding #1-- No, it is immaterial that seller was not the owner of the land
% Issue #2-- ...whether land was really worth $35 per acre?
% Holding #2-- In this case No, b/c what was said by these brokers was evidently intended as but an
opinion, and the P cannot be heard to say that he relied upon such an opinion
% VALUE IS USUALLY SUBJECTIVE, I.E. A MATTER OF OPINION, BUT NOT ALWAYS
% Issue #3-- ...whether the seller has possession of the land?
% Holding #3-- Yes, the misrepresentation as to the delivery of possession was material, b/c of the value
of such possession during the long period that the K might continue, and is s
% Remember: Must pertain to a material fact

c) Vokes v. Arthur Murray, Inc.-- bad dancer induced to purchase more dance lessons
% Issue: 1) Under what circumstances may a statement of opinion be relied upon as fact?
% Rule: Generally for a misrepresentation to be actionable it must be one of fact rather than of
opinion, BUT a statement of a party having superior knowledge may be regarded as a
statement of fact although it would be considered as opinion if parties were dealing on equal
terms
% Notes: Was reliance on the opinion objectively reasonable? Did the speaker expect his statement of
opinion to be relied on? Should the buyer have relied on the seller’s opinion, or should he have
formed his own opinion?
% Diminished Capacity-- e.g. is this person vulnerable? (not too common)
% Undue Influence doctrine-- (more common, in cases like wills and contract)
% Looks at the relative power of the parties...i.e. whether one party is unusually susceptible or
vulnerable
% Looks at suspicious patterns...i.e. unusual/inappropriate time (“you got to do it now”; “no time to
seek legal advice”)
% Look at multiple persuaders

2. Duress
% Generally by threat
% Physically compelled assent
% Economic duress
% Actor must show that he has no reasonable alternative
% Examples of duress include threats to:
% commit a criminal or tortuous act against the party, his family or his property
% extort money
% commence a civil action under circumstances which could be deemed abuse of process
% refuse to do business with the party
% blackmail the party
% refuse to perform a K in order to extract an economically unjustified modification
% terminate an employment K unless the party or someone close to him consents to an
agreement not connected with the employment K

%a) Hackley v. Headley-- log delivery, P had to settle for less due to economic hardship
% Issue: Does this constitute economic duress, and if it does, is the K then unenforceable?
% Holding: No, the poor financial situation of a party is not sufficient to rescind a K modification on
 grounds of duress
% Duress exists when one by the unlawful act of another is induced to make a K or perform some
act under circumstances which deprive him of the exercise of free will
% Duress can be of the person...such as by imprisonment, threats, or by force which apparently
cannot be resisted
% Duress can be of goods...which may exist when one is compelled to submit to an illegal exaction
in order to obtain them from one who has them in possession but refuses to surrender them
unless he exaction is submitted to
% Where one party threatens nothing which he has not a legal right to perform, there is no duress
% Policy: The Court says that it does not want to discourage people from making K with people who are
or seem to be in financial distress
% It’s P’s own fault that he has economic problems that put him in this position
% This would have not caused duress if the P had not been in financial strain
% Courts want parties to settle their disputes on their own; uncomfortable w/deciding what the price
should be

%Remember: Unconscionable K are voidable, not void

%Proper Threats--You can threat if you have a good faith reason to do it (e.g. capitalism reason) (LOOK AT
RESTATEMENT §§ 175 AND 176)
%On Remand, in this case the Court Reversed and ruled in favor of P:
% Court said contract lacked consideration (applying the preexisting duty rule)
% “coerced modification” of the contract is not allowed
% i.e. D knowing P was under economic hardship and using his need for money against him, in
order to put down the price he had to pay
% UCC § 2-209(1) abolishes the preexisting duty rule
% modifications must be made in good faith
% Good faith= honesty in fact; objective fairness
% This was applied in a good way in Alaska Packers Ass’n
%Good reason for a modification (good faith):
% Objectively demonstrably reason
% Legitimate commercial reason
%Common Law for Duress (Restatement § 175(1)):
% 1) No reasonable alternative
% 2) Improper Threat (§ 176)
% This is the main question that needs to be shown to prove Duress
% e.g. (d) the threat to breach is a breach of the duty of good faith and fair dealing under a contract
with the recipient

a.Austin v. Loral: Austin sues b/c Loral doesn’t pay. Loral says they were under duress to agree to
change the payment terms in order to get the materials needed for the Navy job
% Duress occurs when consent is induced by improper threats and leaves the victim with no reasonable
alternatives
% A contract is voidable on the ground of duress when a threat deprives a party of free will
% A “classic case”-- D was time sensitive
% The Court found that the D could not have obtained the parts from any other source, and that the
normal remedy of damages for breach in this case would be insufficient b/c of the clause for
liquidated damages for late delivery
% D looked around for reliable alternatives but couldn’t find any that would meet the timeline of the
contract that D had with the Gov’t

3) Unconscionability
% Unconscionable K are those that do not include a meaningful choice by one party w/ terms which are
unreasonably favorable to the other
% The court will consider the bargaining power of the parties, business practices, ability to buy,
educational background, bargaining power
% The majority rule is that you need to have both to rule unconscionability
% Procedural unconscionability, which is manifested by unfair surprise, relates to the aggrieved
party's understanding of the contract terms due to factors such as:
% Deals with the contracting process
% e.g. How do you go about it? Did you trick them? Take advantage of them?
% inconspicuous print in the writing
% unintelligible legal language or highly technical language
% lack of opportunity to read the contract or seek clarification of terms
% illiteracy
% imbalanced bargaining positions (such as in adhesion contracts) - gross inequality of power
% terms unreasonably favoring the stronger party
% no meaningful choice for the weaker party - no real alternative
% one-sided at the time the contract was made
% Substantive unconscionability relates to contract terms that are, in whole or in part, deemed to
be oppressive, such as:
% provisions that deprive one party of the benefit of the agreement or an adequate remedy for the
other party's breach
% provisions that bear no reasonable relation to the risk involved
% provisions that are substantially disadvantageous to one party without producing a commensurate
benefit to the other party
% a great disparity between the cost and the selling price of the item that is the subject of the K in
absence of objective justification for such disparity

a) Walker Thomas-- Purchase of furniture on installment plan

% Issue: Whether the terms of the K were so unfair that enforcement should be withheld?
% Holding: Where the element of unconscionability is present at the time of K is made, the K should not
be enforced
% Unconscionability has generally been recognized to include an absence of meaningful choice on
the part of the parties together with contract terms which are unreasonably favorable to one
party
% Rule #1: Unequal bargaining power – procedural unconscionability
% Rule #2: Terms unreasonably favorable to one party – substantive unconscionability

a.Wille v. Southwestern Bell Co.-- P sued for omitted listings saying that he had to purchase other
listings to compensate. P sued for lost profits from omissions in a telephone directory and breach
of K
% Issue: Was the K unconscionable?
% Holding: In this case No, b/c the court looked at the terms of the K, the manner of its execution
and the knowledge and experience of P, and held that the K was neither inequitable nor
unconscionable so as to deny enforcement
% UCC does not require that there be complete equality of bargaining power or that the agreement be
equally beneficial to both parties...
% There must be additional factors such as deceptive bargaining power to render the contract between the
parties unconscionable
% The doctrine of unconscionability is directed against one-sided, oppressive and unfairly surprising Ks,
and not against the consequences per se of uneven bargaining power or even old-fashioned bad
bargain
% Remember: Unconscionability cases almost always never succeed

i.In re Realnetworks--
% No, an arbitration clause is not unconscionable merely because the agreement does not draw
attention to it
% No, the mere fact that an arbitration forum selection clause specifies a forum that is
geographically distant from another party does not render that clause substantively
unconscionable

%d) Gatton v. T-Mobile USA, Inc.-- Ps wanted to sue for unfair cancellation fees, but D service
 agreement has arbitration clause that prohibit class action suits
% To be unenforceable, a contract must be both procedurally and substantively unconscionable,
but the elements need not be present in the same degree
% The analysis employes a sliding scale: the more one there is of one element, the less that is
required of the other element, to prove that the term is unenforceable
% Issue: Whether the class action waiver, element of surprise, and/or uneven bargaining power between
the two parties render the arbitration provision unconscionable and thus unenforceable?

B. Mutual and Unilateral Mistake

% When there is a mutual mistake the K may be voided
% The adversely affected party may void a K based on mutual mistake made at the time of the contract
formation where:
% the mistake concerned a basic assumption on which the K made;
% the mistake materially affects the agreement; and
% the adversely affected party does not bear the risk of the mistake. Restatement § 152
% The Restatement's requirement that the mistake concern a basic assumption deviates from early case
law that required the mistake to concern the subject matter of the K

a.Sherwood v. Walker-- mistaken breeding cow for barren cow

% Issue: Whether a mutual mistake regarding the substance of the subject matter of a K can render a K
unenforceable?
% Holding: Both parties' belief that the cow was barren is a mutual mistake going to the essence of a
thing, thus voiding the K
% This MUTUAL mistake was not about the mere quality of the thing but went to the very nature (aka
substance, aka root) of the thing
% A barren cow is substantially different than a breeding cow
% Mistakes alone are not enough to make a contract voidable
% Test of Sherwood v. Walker:
% 1) The mistake must be mutual
% 2) Mistake must go to the substance (the very nature of the thing) of the K, and not just
about the quality (incidental, accident, etc.)

%b) Wood v. Boynton-- uncut diamond sold for $1

% Issue: Whether the P is entitled to rescind the sale b/c she was ignorant as to the "hypothetical fair
market value" of the stone she sold D?
% Holding: No, in the absence of fraud or warranty, the hypothetical value of the property sold, as
compared with the price paid, is no ground for rescission of the sale
% D committed no fraud, D didn’t act in bad faith, D truly didn’t know what item was when he bought it
% CONSCIOUS IGNORANCE IDEA-- This was NOT unfair b/c both P and D were entirely
ignorant at the time of the character of the stone, and of its intrinsic value
% P consciously knew she had not done research into the contents of the stone (and that she could
have done so), and knew that going in to selling it to D, that she did not know anything
% The only reason to rescind a K:
% 1) vendee was guilty of fraud in procuring a sale to be made to him
% 2) that there was a mistake made by the vendor in delivering an article which was not the article
sold...a mistake in fact as to the identity of the thing sold with the thing delivered upon the sale
% Policy Reasoning: In this case, the Court wanted to...
% ...to protect the basics of what Ks are about:
% This is the Certainty value
% Allocating risk
% Protecting the bargain

c) Lenawee County Board of Health v. Messerly-- building condemned by poop, worthless

% Issue: Can this K be voided on grounds of mutual mistake and failure of consideration?
% Holding: In cases of mistake by two equally innocent parties, the court should determine which
blameless party should assume the loss resulting from the misapprehension they shared (based
 on Rst. § 154)
% Rescission is not available, however, to relieve a party who has assumed the risk of loss in
connection with the mistake
% The court should look to whether the parties have agreed to the allocation of the risk between
themselves
% In this case, through the "as is" clause, the risk was allocated to the buyers
% The court does not allow recession – why?
% Step 1. Was there a mutual mistake?
% Step 2. Determine that if there is a mutual mistake did the mistake concern a basic assumption that
materially affected the aggrieved performance of the parties?
% If yes to 1 and 2 then go to 3-- is there anything that warrants allocating the risk to one party over the
other?
% Also see Raffels! (Peerless)
% Notes: In this case, the Court holds that Sherwood v. Walker is limited to the facts of its own case
% Basically, this does not overrule the case per se, but it just limits it to cases involving barren cows,
etc.
% Opposite of “as is” clause (where buyer takes the risk) is a warranty (where seller takes the risk)!
% MAIN ISSUE IN ALL OF THESE TYPES OF CASE: WHO, BETWEEN TWO INNOCENT
PEOPLE, GETS THAT “BAG OF MONEY”?
% First look at if there were any stipulations, or clauses, were included in the K that allocated the
risk(s)

1) Unilateral Mistake and the Duty to Disclose

% Common law provides that a party may avoid a K based on a unilateral mistake where the mistake was
palpable, i.e. the other party knew or had reason to know of the mistake, such as where the K
contains an egregiously erroneous recording of a price
% If the unilateral mistake is not palpable, the aggrieved party may avoid the K where:
% enforcement of the K against the mistaken party would be unconscionable; and
% avoidance would not result in substantial hardship to the non-mistaken party
% Additionally, the following circumstances must exist in order to avoid a unilateral impalpable mistake:
% the agreement is entirely executory or the other party can be placed in the status quo ante;
% the mistake is substantial (but not astronomical as that would likely make the mistake palpable);
and
% mistake is of a clerical or computational error or other such misconstruction of the terms

a) Tyra v. Cheney,-- subcontr. mistakenly left off amount stated in oral bid in written bid
% Issue: Can P collect damages for a mistake in estimate made to D that D knew about when accepting
bid?
% Holding: Yes, D knew of mistake.
% Rule(s): Since D knew mistake was made, there was no mutual assent (error in K formation)
% There was no enforceable K to begin with, so terms of Ks are refused to be imposed by ct.
% This is an implied agreement – no K here
% Since the work did benefit the other party, to prevent unjust enrichment, Court awards restitution
% P can recover reasonable value off the K (restitution action)
% When only one party has made a mistake – “tough on them” (you gotta be careful)
% But, since D knew about mistake, he didn’t really rely on the bid, therefore, no K
% Good Guy, Bad Guy Rule:
% If one party knows what the other does not, then we have to use the subjective method (as opposed
to the objective method)...b/c that party knew a [mistake was made]
% Court does not want to give incentive for mistake, rescission, etc.

b) Drennan v. Star Paving-- misquoted sub-K estimate, general-k wins bid on estimate
% Issue: Can D rescind since it made a mistake?
% Holding: NO, b/c P did not know about mistake and relied on it, K is enforceable
% Rule: Burden of loss on party that made the mistake in the case when both parties are innocent
unless otherwise stipulated
% P entitled to $3,000 since P relied on mistake
% Look at § 153 and § 154 to find if this K is voidable

c) Laidlaw v. Organ-- Treaty of Yent, Tobacco investment, S attempts to take tobacco back
% Issue: Can Seller claim fraud when Buyer knew price of tobacco would rise due to Treaty of Yent
which was not yet known to other persons? Is suppression of info known by buyer considered fraud?
% Rule: A buyer is not required to share knowledge of any external factors that might affect the value of
the goods in an exchange with the seller of those goods as long as there is no imposition of one party
on the other
% aka “That would be tantamount to fraud/in bad faith”
% Law and ethics are separate -- the maxim caveat emptor (“buyer beware”) would not be part of the law
if they were bound together
% See § 160- When Action is equal to an Assertion and § 161-- When Non-Disclosure is same

C. Impracticability and Frustration

% Supervening Impossibility and Impracticability of Performance: If, after a K is formed, circumstances
arise which make a party's performance impossible or impracticable, his duty to render that
performance is discharged
% In order to prove impracticability:
% an event must have occurred that makes performance, or performance in the contemplated sense,
impossible or impracticable;
% the party seeking relief must not have been at fault in causing the event to occur;
% non-occurrence of the event must have been a basic assumption upon which the K was made; and
% the party seeking relief must not have assumed the risk of the event occurring

1) Impossibility and Impracticability

a.Paradine v. Jane: P rented land from D. The Prince invaded the land and P was kicked off and
stopped paying. D sued P for lost rent.
% No longer good law
% P had an obligation to pay-- When a party by his own K creates duty or charge upon himself he is
bound to make it good, if he may, notwithstanding any accident by inevitable necessity, b/c he might
have provided against it by his K

b) Taylor v. Caldwell-- place of rental (theatre) burned down before use

% Issue: Whether, b/c place burned down before use by P, the loss which P sustains needs to fall upon
D?
% Holding: The parties contracted on the continued existence of the particular place, b/c the
theater burned down, the impossibility of performance shall excuse the performance
% Rule: Implied condition in K for existence of place for K results in an excuse for performance,
however exceptions include N on party in causing fire, foreseeability, or expressed terms to the
contrary
% Implied condition can be contracted around. Look for evidence for assumption of risk.
% If party’s K becomes impracticable and not fault of party and not assumed by parties, then party
is no longer under any duty to perform unless contracted around

%2) Frustration of Purposes

% If the impracticability or frustration of purpose exists at the time the K was made, no duty to perform
arises where:
% the party raising the excuse, without fault, had no reason to know of the facts giving rise to the
impracticability or frustration; and
% the non-existence of such facts is a basic assumption on which the contract was made.
Restatement § 266

a.Transatlantic Financing Corp. v. United States-- P contracted with D to bring wheat from US to Iran
% Issue: Whether Trans is entitled to relief based on the extra distance it had to travel to fulfill its
 commitment to the K?
% Holding: No, b/c performance for the contract was rendered not legally impossible
% Remember: 3 Factors to Consider (the same to UCC § 2-615):
% Unless the court finds these 3 requirements satisfied, the plea of impossibility must fail:
% 1) Unforseeability
% 2) Risk (the most important one)
% It’s not really “unforeseeability” more so than it is “unaccounted for”
% 3) Impracticability
% If the K is impracticable, then you cannot collect on it-- it is avoidable
% When performance of a K is deemed impossible, it is a nullity

b) Krell v. Henry-- D leased a flat on Pall Mall to see the coronation of the King
% Issue: Is K void b/c the purpose of the K, to get a good view of coronation, was no longer present?
% Holding: Yes, K was based on the basic assumption that D rented to view the coronation
% The value of the room to the promisee has greatly diminished
% Lower court: Implied condition that the coronation would take place, like Taylor v. Caldwell.
% Rule: This is not a mistake case. Only a mistake case if window was facing the wrong way
% Not a impossible/impracticability case b/c the K can still be performed, it’s not commercially
impossible or impracticable
% The change in event must be the purpose of the K in order to claim frustration of purpose
% Everything in K was structured around the coronation
% Three part test (based on UCC § 1-103):
% 1) What was foundation of the K? Event has to be foundation of K
% 2) Was the performance of the contract prevented? Take into account surrounding circumstances
% 3) Was the event which prevented the performance of the K of such a character that it cannot
reasonably be said to have been in the contemplation of the parties at the date of the contract?
Unforeseeable? If foreseeable, parties could have taken steps to allocate risk-- This becomes a
very important question

D. Public Policy Limitations

% On grounds of public policy, the court will go with not enforcing an otherwise valid K
% This notion offends the concept of freedom of K
% Cannot make Ks involving servitude
% Doctrinal points:
% Some Ks are not enforceable b/c of well-established authority (e.g. legislation, etc.)
% Restraint of Trade
% E.g. noncompete clauses
% Against maritus relationship
% Public policy is not a doctrine to legislate by the courts
% “Go take to the legislature”
% “Weighing Test”
Reasons normally for enforcing a K must be really outweighed by the public policy arguments for it to be
unenforceable