Murray J Murray T Corbin On Contracts 2017

1 Corbin on Contracts Desk Edition Author(s)
Corbin on Contracts Desk Edition > Publication Information
Author(s)
CORBIN ON CONTRACTS DESK EDITION
JOHN E. MURRAY, JR. (1932–2015)
University Chancellor and Professor of Law
Duquesne University School of Law
TIMOTHY MURRAY
Murray, Hogue & Lannis
Pittsburgh, Pennsylvania
Corbin on Contracts Desk Edition

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1 Corbin on Contracts Desk Edition
Preface to the 2017 Edition
The Corbin on Contracts Desk Edition is continuously updated based on ongoing research to maintain and enhance
the landmark Corbin treatise on contract law. Well over a thousand cases are examined each year, usually resulting
in more than 250 annual supplements to the treatise. Each new Desk Edition highlights significant developments
and trends based on this research to provide the reader with a clear and concise understanding of current contract
law.
The notion that contract law is static is simply erroneous, as a multitude of examples attest. In recent years, there
has been a veritable explosion of evolving case law dealing with unconscionability, especially as it relates to the
validity of arbitration and forum selection provisions of contracts. Even basic concepts such as contract formation
continue to evolve. The Second Circuit wrote: “The conventional chronology of contract-making has become
unsettled over recent years by courts’ increased acceptance of this so-called ‘terms later’ contracting.” Schnabel v.
Trilegiant Corp., 697 F.3d 110, 121 (2d Cir. 2012). Moreover, the caselaw resolving disputes over preliminary
agreements (e.g., letters of intent) has mushroomed, with courts increasingly willing to hold that ostensibly
preliminary agreements are, in fact, legally operative agreements on the parties’ ultimate contractual objectives
despite the labels on the documents. There is also a modern tendency to imply the duty of good faith to enforce
contracts that, in the past, would have been regarded as illusory. In addition, the effect of the digital revolution on
contract law is still being judicially clarified, despite the enactment of the Electronic Signatures in Global and
National Commerce (ESIGN) Act and the Uniform Electronic Transactions Act (UETA). Contract law of the twenty-
first century is not limited to American common law or the UCC—it includes the Vienna Convention (CISG), and
American courts increasingly grapple with its provisions. And, of course, the thorny “battle of the forms,” UCC § 2-
207, continues to evolve—sometimes in strange and mysterious ways—and to confound even seasoned
commercial practitioners. On and on it goes. The necessity to continually update contract law treatises is beyond
dispute.
This edition is designed to honor and uphold the iconic Corbin legacy by providing meticulously researched and
carefully crafted analyses of the most current cases and statutory developments and trends in contract law. As with
previous editions, this one is dedicated to the memory of the great Arthur Linton Corbin.
Timothy Murray

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1 Corbin on Contracts Desk Edition
About the Authors
Dr. John E. Murray, Jr. (1932–2015) was Chancellor and Professor of Law, Duquesne University. A respected
author of 19 books and a legal scholar, Dr. Murray wrote numerous treatises, classroom books, and teaching
manuals. His articles appeared in many prestigious law reviews and have been cited by courts in every jurisdiction
in the United States. Dr. Murray was the author of the renowned Murray on Contracts and Murray, Cases and
Materials on Contracts. In addition, Dr. Murray was author of the twice yearly supplements to the Corbin on
Contracts multi-volume treatise. He also authored numerous op-ed pieces and articles for national and local
newspapers and magazines. Dr. Murray was particularly well-known for his scholarship dealing with the “battle of
the forms.”
Timothy Murray is a partner in the law firm Murray, Hogue & Lannis in Pittsburgh, Pennsylvania. He has co-
authored the supplements to Corbin on Contracts since 2004. He writes and lectures extensively on the law of
contracts and sales. Among others, he has written various chapters in the Lexis formbook series Current Legal
Forms, including chapters on the sale of goods, franchising, joint ventures, and equipment leasing. He has also
written extensively for Lexis’s Legal Practice Advisor. Mr. Murray has represented numerous businesses and
individuals in litigation and transactional matters, including among many others, General Motors Corporation, Bayer
Corporation, Georgia-Pacific Corporation, Alcoa, Nissan North America, Avery Dennison, companies of the Marmon
Group, General Reinsurance, TWA, Home Insurance, and Kawasaki Motors. He received his B.A., summa cum
laude, in 1981, and his J.D in 1984, from the University of Pittsburgh.

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1-1 Corbin on Contracts Desk Edition CHAPTER 1 Scope
Corbin on Contracts Desk Edition > CHAPTER 1 PRELIMINARY DEFINITIONS
CHAPTER 1 PRELIMINARY DEFINITIONS

This chapter has been adapted from Corbin on Contracts (“Corbin”), Chapter 1. The topics covered here
are discussed in greater detail in that publication. The Practice Resources located at the end of each
section provide a citation to the main Corbin volume for the reader seeking a more in-depth treatment of
the subject matter.

End of Document
1-1 Corbin on Contracts Desk Edition § 1.01
§ 1.01 Sources of Contract Law
[1] The Origins of American Contract Law and the Enactment of UCC Article 2
Inherited from England, the origins of American contract law are found in the evolutionary common law case-
by-case development that continued in America. American contract law was essentially embodied in judicial
decisions. Certain types of contracts later gave rise to regulatory legislation as reflected in statutes and
regulatory agencies dealing with insurance contracts.
By far, the most important legislation affecting classical contract law was the enactment of Article 2 of the
Uniform Commercial Code (UCC) concerning contracts for the sale of goods. The UCC, however, is not a
genuine “code” as found in civil law jurisdictions. While it is a statute that courts must apply, the interpretation,
application, and construction of the sections of Article 2 continue to manifest a common law approach
consistent with the views of the principal draftsman of Article 2 and chief architect of the entire UCC, Professor
Karl Llewellyn. The UCC oes not purport to preempt the entire body of law affecting the rights and
obligations of parties to a commercial t s ctio . UCC § 1-10 provides: “Unless displaced by the
particular provisions of [the Uniform Commercial Code], the principles of law and equity, including the law
merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation,
duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions.”
Toll v. Toll, 2015 U.S. Dist. LEXIS 86341 (D.N.J. 2015).
Prior to the UCC, for the guidance of the bench and bar, the American Law Institute (ALI) in 1932 published the
Restatement of Contracts, its first “Restatement” of the law. Restatements of areas of the law are designed to
analyze the maze of sometimes conflicting decisions in American jurisdictions and to present “black letter”
statements with comments and illustrations of the more sound approaches to issues in that particular field.
Restatements are not statutes. They do not have the force of law but they are well respected by courts. The
Restatement of Contracts was highly influential in assisting courts to pursue sound and more uniform
approaches to the application of contract law principles and rules. In 1964, the first tentative draft of the
Restatement (Second) of Contracts appeared under the leadership of Professors Robert Braucher and E. Allan
Farnsworth, who served as the reporters on the Restatement. The Restatement (Second) of Contracts was
completed some 15 years later.
[2] Contract Law of UCC Article 2 Is Reflected Throughout the Restatement (Second) of Contracts
The ALI was the partner of the National Conference of Commissioners on Uniform State Laws (NCCUSL) in
creating the UCC. Article 2 strongly reflects the scholarship of Professor Corbin, who has been called the
“father in law” of its draftsman, Professor Llewellyn. Article 2 moved Sales Law from a property to a contracts
orientation, necessitating numerous modifications in classical contract law, which were often more radical than
their initial appearance suggested.
The underlying philosophy of Article 2 mirrors Professor Llewellyn’s “Corbinized” approach, as does the
Restatement (Second). The “new” contract law that resulted from these movements is often called
“neoclassical.” The classical tradition, represented largely by Professor Samuel Williston’s scholarship, is
modified to reflect a view of legal rules as workable and flexible rules to be applied in a realistic manner to
modern and post-modern issues. Professor Llewellyn is regarded as a leader in the American Realist tradition.
His contracts masterpiece is Article 2, which is filled with anti-technical provisions. Llewellyn was insistent that
the search for the factual bargain of the parties should not be hampered by technical rules of law. According to
Llewellyn, courts should not only be allowed but should be required to search for the “true understanding” of the
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parties’ agreement by considering not only their words, but all surrounding circumstances including trade
usage, course of dealing, and course of performance evidence.
This is illustrated by the definition of “agreement” in UCC § 1-201 “[T]he bargain of the parties in facts as
found in their language or inferred from other circumstances, including course of performance, course of
dealing or usage of trade . ” (All references to UCC Article 1 are to the 2002 revised version which, at the
time of this writing, has been enacted in 38 jurisdictions.)
Professor Llewellyn believed that the former technical rules of contract law that would interfere with the
identification of the factual bargain of the parties should be modified or discarded. This view is reflected
throughout Article 2 and, for the most part, in the subsequent Restatement (Second) of Contracts. Technically,
the UCC applies only to contracts for the sale of goods. In a mixed contract involving goods and services,
whether the common law (where the Restatement (Second) of Contracts is often cited as authority) or the UCC
governing contracts for the sale of goods applies is determined by whether the predominant purpose of the
contract is to render a service which incidentally involves goods, or to supply goods which also includes an
incidental service. Sutton v. Malibu Dev. Corp., 2009 Wash. App. LEXIS 2893 (Nov. 23, 2009). Courts consider
a variety of factors to determine the predominant purpose of a contract: (1) the contract’s language, (2) the
terms of payment—that is, whether the price is primarily calculated based on the costs of the goods or services,
(3) the mobility of the goods, and (4) the value of both the goods and services, and (5) the business of the
seller. Boardman Steel Fabricators, Ltd. v. Andritz, Inc., 2015 U.S. Dist. LEXIS 119562 (E.D. Ky. 2015). It is not
always obvious whether a transaction is for goods or services. See, e.g., Venable v. SunTrust Bank, 2015 Ga.
App. LEXIS 755 (Ga. Ct. App. Nov. 20, 2015) (conditional sales contract to finance the purchase of a new
motor vehicle held to be a transaction for the sale of goods); Boardman Steel Fabricators, Ltd. v. Andritz, Inc.,
supra (fabrication and supply of steel generally regarded as transaction for sale of goods); Noble Roman’s, Inc.
v. Hattenhauer Distrib. Co., 2015 U.S. Dist. LEXIS 44392 (S.D. Ind. 2015) (predominate thrust of a franchise
agreement is to grant a franchise and allow and enable the franchisee to use the franchisor’s marks and
products; the sale of goods is only an indirect aspect of it); Brandewie v. Wal-Mart Stores, Inc., 2015 U.S. Dist.
LEXIS 12068 (N.D. Ohio 2015) (Wal-Mart’s refund policy to take back any product within 90 days “is a promise
that accompanies, supplements, and is subordinate to the sale of goods” and, while the initial sale is governed
by the UCC, the side promise regarding refunds is not).
In Kentwool Co. v. NetSuite Inc., 2015 U.S. Dist. LEXIS 19982 (N.D. Cal. Feb. 18, 2015), the court explained:
“Because transactions involving software often combine elements of both goods and services and ‘[b]ecause
software packages vary depending on the needs of the individual consumer, we apply a case-by-case analysis’
to determine whether a software transaction is covered by the UCC.” On the one hand, “mass-produced,
standardized, or generally available software, even with modifications and ancillary services included in the
agreement,” is generally regarded as a “good” under the UCC. On the other hand, “software adapted for
specific customer needs” may or may not be considered a “good” under the UCC, depending on the facts. For
example, “[w]here software is designed from scratch, or the transaction is mainly for one party’s knowledge and
skills in creating software, the software is often found to be a service rather than a good.”
[3] Adoption of the United Nations Convention on Contracts for the International Sale of Goods
In 1988, United States law dealing with contracts for the international sale of goods was changed by the
adoption of the United Nations Convention on Contracts for the International Sale of Goods (CISG). The
“Convention” or CISG is the product of the United Nations Commission on International Trade Law
(UNCITRAL). In 1988, 11 nations adopted CISG. At the time of this writing, 84 nations have adopted it,
including most of Europe. The notable exception is the United Kingdom. Unless the parties have agreed to opt
out of CISG (Article 6), it applies to most of the international contracts for the sale of goods made by parties
with their principal places of business in different CISG countries.
While parties may agree to exclude CISG and be governed by one of the parties’ domestic law, absent such an
agreement, CISG preempts the UCC in any such contract. See John E. Murray, Jr., An Essay on the Formation
of Contracts and Related Matters Under the United Nations Convention on Contracts for the International Sale
of Goods, 8 J. Law & Commerce, 11 (1988). References to CISG will be made throughout this volume.
Practice Resources:
Page 3 of 3
• Corbin § 1.21 (general contract law); § 1.22 (UCC as a source of common law).

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§ 1.02 The Meaning of “Contract”
[1] Agreement—Not All Agreements Are Contracts

Useful definitions of complex subjects are rare. The idea of contract suggests “agreement,” but not all
agreements are contracts. By their words or conduct, parties may come to an agreement on certain historical
facts or agree that they will meet for a social engagement or otherwise express themselves in harmony. These
agreements are not legally enforceable. They are not contracts, essentially because the parties did not
contemplate legal sanctions for a failure to perform such agreements. Agreements to buy and sell land, goods,
or services, however, are presumed to carry legal consequences because reasonable parties expect them to
be legally binding.
When it is said that parties have come to an “agreement,” what is meant is that their expressions of mutual
assent evidence their agreement. They may or may not have exactly the same intentions in mind. Courts
cannot read minds. As a practical matter, the law must operate on the basis of objective evidence—the parties’
outward expressions in words and conduct. While “mutual assent” is essential to the formation of a contract, the
popular metaphor requiring a “meeting of the minds” is not to be taken literally. The law does not require the
parties to share a subjective understanding of the terms of their contract. As suggested by the Seventh Circuit
Court of Appeals, “To determine whether the parties intended to be bound by the alleged contract, we look not
to the parties’ subjective intent but rather to objective evidence of their intent.” Cohen Dev. Co. v. JMJ Props.,
317 F.3d 729, 735 (7th Cir. 2003). The UCC, which technically applies only to contracts for the sale of goods,
suggests definitions of “contract” and “agreement” that can be synthesized in the following definition:
Contract means the total legal obligation which results from the bargain of the parties in fact as found in
their language or by implication from other circumstances as effected by rules of law.
A shorter version is simply “a legally enforceable agreement.” Any definition, however, cannot describe all of
the operative elements that make an agreement enforceable at law.
[2] Contracts Are Plans for the Future Created by a Promise

Contracts are plans for the future created by a promise. A “promise” is a manifestation of commitment to do or
not do something in the future. Restatement (Second) of Contracts § 2 relying on the Corbin treatise § 1.1 . It
is an expression of intention by the promisor that his future conduct will be in accordance with his present
expression. H&H Transformer, Inc. v. Battelle Energy Alliance, L.L.C., 2009 U.S. Dist. LEXIS 105753 (D. Colo.
Oct. 23, 2009).
A “contract” may be defined as “a promise or set of promises for the breach of which the law gives a remedy, or
the performance of which the law in some way recognizes as a duty.” Restatement (Second) of Contracts § 1.
Like the previous definitions, however, this one also suggests a conclusion. The breach of some promises will
be remediable in a court of law; others will not. The definition does not attempt to state what is essential to
make a promise legally enforceable or the remedies for enforcement. It also ignores completed transactions
that are referred to as “contracts.” These “executed transactions” suggest still another definition that
emphasizes the idea of “exchange.”
A promise may be expressed in the form of a warranty. In sale of goods cases, if “an affirmation of fact or
promise made by the seller to the buyer” relating to the goods “becomes part of the basis of the bargain,” an
express warranty is created. UCC § 2- 1 1 . Similarly, an express warranty is created by a description or
sample or model which is made part of the basis of the bargain. UCC § 2- 1 1 . The warranty thus may be
the result of an express promise or of a factual representation that is treated as a constructive promise. The
esteemed Judge Learned Hand explained:
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A warranty is an assurance by one party to a contract of the existence of a fact upon which the other party
may rely. It is intended precisely to relieve the promisee of any duty to ascertain the fact it amounts to a
promise to indemnify the promisee for any loss if the fact warranted proves untrue, for obviously the
promisor cannot control what is already in the past.
Metropolitan Coal Co. v. Howard, 155 F.2d 780, 784 (2d Cir.1946).
In In re Caterpillar, Inc., 2015 U.S. Dist. LEXIS 98784, 87 U.C.C. Rep. Serv. 2d (Callaghan) 219 (D.N.J. 2015),
owners and users of Caterpillar engines sued Caterpillar for breach of warranty, claiming the engines were
defective and that the defects rendered their vehicles inoperative. The court denied Caterpillar’s motion to
dismiss because plaintiffs did not allege that the express warranty was part of the basis of the bargain as
required under UCC § 2- 1 1 (“Any affirmation of fact or promise made by the seller to the buyer which
relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods
shall conform to the affirmation or promise.”). Many courts “note that a written express warranty included in a
contract for sale does not require a showing of reliance because it is presumed that such a warranty is a basis
of the bargain.” The court explained that “reliance” requires “no more than reliance on the express warranty as
being a part of the bargain between the parties” and the reliance requirement is satisfied through circumstantial
evidence, particularly the nature of the warranty and the context of the transaction. Some states that require
reliance, however, including Tennessee, Texas, and Utah, “appear to take a less flexible approach.” The court
noted that in states such as Illinois, “affirmations made during the bargain are presumed to be a part of it unless
clear, affirmative proof shows otherwise.” And “[o]ther states, including Indiana, Michigan, and Minnesota, do
not require reliance.” The court inferred from the complaint that “each plaintiff received or was aware of the
Engine Warranty at the time of purchase,” thus the basis of the bargain or reliance requirement was satisfied
“because the express warranties at issue were part of the purchase agreement or because such elements
could be inferred from circumstantial evidence.”
Warranties are also made in connection with contracts that involve services. In Reilly Constr. Co. v. Bachelder,
Inc., 863 N.W.2d 302, 2015 Iowa App. LEXIS 261 (Iowa Ct. App. 2015), the court explained: “The party alleging
an express warranty must show the promisor ‘made some distinct assertion of quality’ that would be relied on
by the promisee, as opposed to a mere statement of opinion. . As in contracts for the sale of goods, an
express warranty is created by ‘[a]ny affirmation of fact or promise made by the seller to the buyer which relates
to the goods and becomes part of the basis of the bargain. (Emphasis in judicial decision.) In Reilly, the
Bachelders retained Reilly to add a recreational pond to their property, and after the pond was built and paid
for, the water level dropped dramatically. The court held: “When Reilly agreed to construct a pond on
Bachelder’s property, he was expressly warranting the pond would hold water. Otherwise, Reilly would have
simply been constructing a dam, without any anticipation it would capture water to form a pond.” The court cited
the Corbin treatise for this proposition: “Where a warranty is made, ‘what the promisee is being led to expect on
the part of the promisor is indemnification against loss in case the facts turn out not as e ese te . The court
also held that the Bachelders were entitled to recover under a theory of implied warranty of fitness for a
particular purpose, which requires a showing of these elements: (1) Reilly had reason to know Bachelder’s
particular purpose; (2) Reilly had reason to know Bachelder was relying on his skill or judgment to furnish
appropriate services; and (3) Bachelder did, in fact, rely upon Reilly’s skill or judgment.
[3] Contracts Typically Have Parties Bargaining and Agreeing to Exchange with Each Other
When parties make a contract, they typically bargain with each other and agree to exchange things of value or
rights. A contract requires a manifestation of assent to a bargained-for exchange. Mason Agency, Ltd. v.
Eastwind Hellas SA, 2009 U.S. Dist. LEXIS 89927 (S.D.N.Y. Sept. 29, 2009). Contract law deals extensively
with the relationship between parties who assent to such bargained-for exchanges. New Welton Homes v.
Eckman, 830 N.E.2d 32, 34–35 (Ind. 2005). A promise, however, may be legally enforceable without any
exchange. Where a promise is made on which the promisor should expect the promisee to rely and the
promisee suffers a significant detriment, the promise will be enforced though it involves no exchange of value.
Nonetheless, such promises are enforced under the rubric of “contract.” See Restatement (Second) of
Contracts § 0 (describing the doctrine of promissory estoppel).
When the rights and obligations of parties emanate from a contract, any claim to enforce them typically is one
for breach of contract. A mere breach of promise does not support a claim for fraud. Tort law seeks to enforce
Page 3 of 3
societal obligations that exist outside the parties’ bargain. FDIC v. Mingo Tribal Pres. Trust, 2015 U.S. Dist.
LEXIS 49777 (W.D.N.C. 2015).
[4] The Document Evidencing the Contract Is Not the “Contract”—“Obligation”

The word “contract” is also used to describe the document—the paper or electronic record—evidencing the
contract. Such a writing or record is not the contract—it is evidence of the contract. The contract is an abstract
relationship between the parties, each of whom has rights and correlative duties created by their contract. A
legal duty exists only if there is a correlative right in another party. The cumulative effect of centuries of case
law and statutory history enables us to look at specific facts and state that one party has an enforceable right to
have the other party perform the correlative duty.
Where a North Carolina statute created a fund for retired policemen “so long as funds are available,” after the
fund was exhausted retired policemen claimed a right to continued pension payments, relying on Article 1 § 10
of the United States Constitution that secures a party’s right not to have contractual obligations impaired. The
court held that the phrase “so long as funds are available” limited the duty to pay the pensions only out of
available funds. Once the funds were exhausted, there was no longer any right to pension payments because
there the duty to pay no longer existed. Thus, there was no impairment of a contractual obligation violating the
Constitution. Crosby v. City of Gastonia, 635 F.3d 634 (4th Cir. 2011).
The fact that it is not possible to frame a definition of “contract” that contains all of the operative elements that
courts and lawyers will consider in the use of this term is anything but remarkable. Again, an all-inclusive
definition would be as long as this volume. Thus, a comprehensive understanding of the concept of contract
can only be gleaned through an understanding of the concepts as they are developed throughout this entire
volume.
Practice Resources:
• Corbin § 1.2 (legal obligation defined); § 1. (definition of contract); § 1.
(definition of agreement); § 1.10 (bargain); § 1.1 (definition of promise); § 1.1
Promise and Warranty.

End of Document
§ 1.03 The Purpose of Contract Law Is to Ascertain the Realization of the

Promisee’s Reasonable Expectations
[1] The Purpose of Contract Law—Reasonable Expectations

Contracts typically involve a manifestation of commitment to act or refrain from acting in a certain fashion—a
promise. Promises induce expectations in the promisee. If the promisee has a reasonable expectation that the
promisor will perform in accordance with a legally enforceable promise, the failure of the promisor to perform
will defeat that reasonable expectations. In a case citing a statement in the Corbin treatise concerning the
purpose of contract law protecting reasonable expectations, monthly benefits were promised to retired
policemen from a fund “so long as the funds are available.” When the fund was exhausted, the court held that it
was not reasonable to expect further payments. Crosby v. City of Gastonia, 635 F.3d 634 (4th Cir. 2011).
“That portion of the field of law that is classified and described as the law of contracts attempts the realization of
reasonable expectations that have been induced by the making of a promise.” Downer & Co., LLC v. STI
Holding, Inc., 76 Mass. App. Ct. 786, 927 N.E.2d 471, 480 (2010) (quoting Corbin on Contracts). See also
Starlite L.P. v. Landry’s Seafood Rests., Inc., 780 N.W.2d 396, 398 (Minn. Ct. App. 2010). The objective is to
place the aggrieved promisee in the position the promisee would have been in had the contract been performed
as it should have been performed by the promisor. Ronan Assocs. v. Local 94-94A-94B, Int’l Union of
Operating Eng’rs, 24 F.3d 447, 449 (2d Cir. 1994).
By announcing the protection of the expectation interest, the law places a value on such expectations.
Expectations of future values are treated as if they were present values constituting intangible property rights.
“Contract rights” can be transferred—sold or assigned—because they are legally enforceable rights as
expectations even before the right has been earned by the performance. In this dimension, the social institution
of contract has an exponential effect on trade and commerce. It is, indeed, the indispensable mechanism of a
free market system.
[2] Failure to Perform a Promise May Cause the Promisee to Suffer a Loss in Reliance on the Promise
The protection of the expectation interest does not signal any diminution of protection of the reliance interest. It
facilitates reliance on agreements since there is rarely a conflict between the two interests. While the reliance
interest has a more basic claim to protection than the expectation interest since the relying party has already
suffered a loss, protecting the expectation interest without requiring independent proof of reliance further
insures the automatic protection of the reliance interest.
The expectation interest is recognized throughout contract law. Thus, with respect to contract remedies, the
measure of damages for breach of contract is typically measured by the aggrieved party’s unfulfilled reasonable
expectations. Where the words of the parties are insufficient to determine whether a contract has been formed,
courts will consider the reasonable expectations of the parties based on their course of conduct. If the literal
interpretation of a contract would provide more than is reasonably expected, a court may refuse to adopt such
an interpretation because, again, the purpose is to place the aggrieved party in the position the party would
have been in had the contract been performed—not a better position or a worse position, but the position the
party expected to occupy if the other party had kept his or her promise.
Practice Resources:
• Corbin § 1.1 (purpose of contract law); § 1.2 (definition of legal obligation).
Page 2 of 2

End of Document
§ 1.04 Classification of Contracts
[1] Formal and Informal Contracts

The formal contract makes a promise enforceable exclusively because of the form in which the contract was
made. A contract under seal is the classic example of a formal contract. A promise made under seal to perform
a duty is not made in exchange for any promise or act of the other party. The promise, however, is enforceable
simply because it is under seal. There are statutes that have the same effect as the seal such as the Model
Written Obligations Act which make written promises enforceable if the writing states the intention of the signer
to be legally bound. The overwhelming majority of contracts, however, are informal contracts where the promise
is enforceable, not because of the form in which it appears, but because it is given in exchange for something
of value called consideration, or because the promise induced reasonable reliance by the promisee. Long
before the twentieth century, it was no longer necessary for the record evidencing the contract to contain any
particular form or words to make the promise enforceable. Objective evidence of informal words or conduct
expressing with sufficient clarity the parties’ mutual assent to a bargained-for exchange creates an enforceable
contract, regardless of the form in which this evidence appears.
[2] Void Contracts Have No Legal Effect

The phrase “void contract” is a contradiction if the intended meaning is void from the inception (ab initio). Since
it never was a contract from its inception, the preferable term would be “void agreement” or “void promise.” The
obvious illustration of a void agreement would be an agreement between two parties that violates a law. Where
a state statute allowed a court to award reasonable attorney’s fees in a contested action “arising out of a
contract” and the underlying agreement was prohibited by law, the court held that the statute was not applicable
since the agreement was “void” and a so-called “void contract” never was a contract. See More Light Invs. v.
Morgan Stanley DW Inc., 2009 U.S. Dist. LEXIS 112927 (D. Ariz. Nov. 17, 2009).
Some statutes may use the term “void” as applied to certain types of contracts, but they may not be so
construed. Thus, there are statutes of frauds in every jurisdiction requiring certain types of contracts to be
evidenced by a writing signed by the party to be charged. Some of these state statutes use the term “void” to
describe a contract that is not evidenced by a sufficient writing, but they are typically construed as meaning
“unenforceable.” The capacity of a government agency to enter into a contract, however, derives from its
statutory authority. If it enters into an agreement beyond the scope of that authority, such an agreement is void
ab initio. District of Columbia v. Brookstowne Cmty. Dev. Co., 987 A.2d 442 (D.C. 2010).
[3] Voidable Contracts May Be Performed Unless One of the Parties Exercises a Power of Avoidance
Voidable contracts may be formed and performed like any other contract unless one of the parties has a power
of avoidance and decides to exercise that power. The law bestows a power of avoidance upon a party who is
suffering from a substantial disadvantage. Thus, while fraud in the execution will “void” an agreement as noted
in the previous section, an innocent party who is simply induced by fraud to enter into a contract has a power of
avoidance that may be exercised to terminate the contract. If the innocent party ratifies the contract
notwithstanding the fraud, however, the power of avoidance is not exercised and the contract proceeds as if it
were not tainted by fraud. A contract with a minor (typically a party below the age of 18) is voidable by the
minor, who is deemed to be disadvantaged because of a lack of maturity. A mentally ill person may also have a
power of avoidance that can be exercised. A power of avoidance may be exercised before trial, or it may be
exercised as a defense to an action at law or a suit in equity.
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[4] Unenforceable Contracts That Are Not Invalid Contracts

While the phrase “unenforceable contract” may initially appear as contradictory as the phrase “void contract,” it
is an accurate and useful characterization of certain types of contracts. Thus, a contract that was perfectly
enforceable when it was formed may become unenforceable because of a statute of limitations that limits the
time for bringing an action on the contract. A contract that fails to meet a statute of frauds writing requirement is
a perfectly valid oral contract, but it will be unenforceable while otherwise manifesting all of the elements of a
valid contract. Silicon Int’l Ore, LLC v. Monsato Co., 155 Idaho 538, 314 P.3d 593, 606 (2013). As noted in the
discussion of “void agreements,” some statutes of frauds may use “void” or “voidable” terminology. In general,
however, such language is construed to make a contract not evidenced by a sufficient writing simply
“unenforceable.” See Maggard v. Essar Global Ltd., 2014 U.S. Dist. LEXIS 57670, at *30 (W.D. Va. Apr. 25,
2014).
The validity of unenforceable contracts is demonstrated by the fact that they may become enforceable. Thus, a
new promise to pay a debt barred by the statute of limitations will lift that barrier to enforceability, and a
subsequent writing or other exception to the statute of frauds will remove the barrier that prevented the
enforceability of the original oral contract. A contract with a governmental unit may be unenforceable if the
government can raise a defense of sovereign immunity. These contracts are obviously not “void agreements”
nor are they subject to a power of avoidance.
[5] A Manifestation of Mutual Assent is Required to Form Express and Implied Contracts
While distinctions are suggested between express and implied contracts, the distinctions relate only to the
mode of expression. It is not possible to form a contract without a manifestation of mutual assent to an
agreement that the parties actually or presumably intend to be enforceable at law. The manifestation of
agreement is typically by words (i.e., an express contract), but it can be by conduct. Parties may communicate
their agreement by sign language, which forms a contract just as effectively as words would have formed the
same contract. A knowing wink may be sufficient to manifest such an agreement. On the way home from work
a customer enters a convenience store to purchase a loaf of bread. The store is crowded. The customer who
knows and is known by the owner of the store lifts the bread and captures the attention of the owner who winks
and nods. The customer leaves the store with the bread under an implied contract (implied-in-fact) to pay for
the bread the next time the customer frequents the store. Such a contract is an express contract.
The characterization, implied-in-fact contracts, suggests an artificial distinction with express contract. The only
distinction between an express and implied-in-fact contract is the manner in which the parties’ assent is
manifested or proven. Spectra-4, LLP v. Uniwest Commer. Realty, Inc., 772 S.E.2d 290 (Va. 2015); Baron v.
Osman, 39 So. 3d 449 (Fla. Dist. Ct. App. 2010). So-called implied-in-fact contracts are real contracts. Indeed,
they are express contracts though the expression of assent to a bargain is by conduct instead of words. Citing
the Corbin treatise, the court in Sparrow Systems, Inc. v. Private Diagnostic Clinic, PLLC, 2014 NCBC LEXIS
70 (N.C. Super. 2014) explained that “[a] contract ‘implied in fact’ is a true contract that arises from the tacit
agreement of the parties.” While words may provide a more certain manifestation of assent than conduct in a
given situation, the student of contract law will encounter innumerable cases of ambiguous words or, at least,
words requiring interpretation. Similarly, conduct, sign language, or code language requires interpretation. Past
conduct (prior dealings) or trade usage may allow for contracts to be made with little current outward
manifestation of intention because the intention that the parties are performing as they had in the past will be
implied. If there is a reasonably certain basis for discovering a manifestation of intention by the parties to be
bound to a contract and an adequate basis for providing a remedy for breach, modern courts will recognize a
binding contract regardless of the mode of expression.
[6] Quasi Contracts Are Not Contracts But Are “Implied-in-Law” to Avoid Unjust Enrichment
Unlike so-called contracts implied-in-fact, courts sometimes create obligations to prevent one party from being
enriched at another party’s expense. Though these obligations do not arise from agreements or bargains, they
are processed under the aegis of “contract” as contracts “implied-in-law.” They are typically called “quasi
contracts,” which immediately suggests considerable caution since the adjective “quasi” (meaning “something
like”) signals that the word following it is a lie. They could be called “constructive contracts” since they are
judicial creations not based on any prior agreement or mutual assent. Their sole and exclusive purpose is to
Page 3 of 3
avoid the unjust enrichment of one party at the expense of another party. In Friedman v. Wahrsager, 848 F.
Supp. 2d 278 (S.D.N.Y. 2012), the defendants argued that the plaintiff’s unjust enrichment claim was an
equitable claim that is unavailable where there is an adequate remedy at law. The court, however, explained
that claims of unjust enrichment where an award of money would fairly compensate the party asserting the
claim are “legal” in nature. They are actions at law even though the underlying rationale is based on fairness
and equitable principles.
A simple illustration is mistakenly paying a bill to the wrong party instead of the true creditor by sending a check
to a party with whom the payor never dealt. If the recipient cashes the check, he or she is unjustly enriched at
the expense of the mistaken payor. To overcome that enrichment at common law, the mistaken party would
bring an action of assumpsit using the common count of “money had and received” to recover the mistaken
payment. The common law writ of assumpsit provided the appearance of “contract,” but there was no contract
between the mistaken payor and the recipient. To remedy the unjust enrichment at the expense of the payor, a
modern action in quasi contract will take the unjust (plus) payment from the store to replenish the loss (minus)
suffered by the mistaken party, restoring the payor to status quo ante—the position he or she occupied prior to
the mistaken payment—which protects restitution interest measured by the value of the benefit conferred on the
unjustly enriched recipient. The need for restitution and the use of quasi contract to achieve that end is found in
myriad situations. Whenever one party, with no intention to make a gift, has unofficiously made a payment that
the other party should have made or has otherwise conferred a benefit for which that party should pay, the
other party is unjustly enriched and is subject to an action in quasi contract to restore the aggrieved party to
status quo ante. Mike Glynn & Co. v. Hy-Brasil Rests., Inc., 75 Mass. App. Ct. 322, 914 N.E.2d 103 (2009).
The difference between express contracts, contracts implied-in-fact, and contracts implied-in-law is illustrated
by Talisman Software, Sys. & Servs. v. Atkins, 2015 NCBC 104, 2015 NCBC LEXIS 108 (N.C. Super. Ct.
2015). Atkins’ written employment agreement as president and CEO of Talisman Software expired in 2010.
Atkins continued to serve in the same position without a written contract until 2014. Talisman then sued Atkins,
and Atkins filed a counterclaim for unjust enrichment. The court held that any claim Atkins might have had was
for breach of contract, and it dismissed the claim for unjust enrichment, noting. quasi contract or a contract
implied in law is not a contract. The claim is not based on a promise but is imposed by law to prevent an unjust
e ichme t. Atkins had a written employment contract until 2010, and after that, the law presumed that Atkins
continued to serve as president and CEO of Talisman under a contract implied in fact, which is also an express
contract. When an employment contract for a definite term expires and the employee continues to provide
services beyond the expiration, he or she is presumed to serve under a contract implied in fact—having the
same terms and conditions as the original one. Talisman Software, Sys. & Servs. v. Atkins, 2015 NCBC 104,
2015 NCBC LEXIS 108 (N.C. Super. Ct. 2015). See also, Land Co. of Osceola Cnty., LLC v. Genesis
Concepts, Inc., 40 Fla. L. Weekly D 1541 (2015) (an express contract covering the services in question
precluded relief in quantum meruit because the law will not imply a contract where a valid express contract
exists); Davidson v. Maraj, 2015 U.S. App. LEXIS 6801 (11th Cir. 2015) (if there existed an implied-in-fact
contract based on the parties’ conduct, a quantum meruit claim would not be appropriate). But a claim for unjust
enrichment is governed by the statute of limitations governing express contracts under the UCC “where, as
here, it relates to the sale of goods.” Harden v. Autovest, L.L.C., 2015 U.S. Dist. LEXIS 98584 (W.D. Mich.
2015).
Practice Resources:
• Corbin § 1. (formal and informal contracts); § 1. (voidable contracts); § 1.
(void contracts); § 1. (unenforceable contracts); § 1.1 (assumpsit: implied
assumpsit, indebitatus or general assumpsit, special assumpsit); § 1.1 (express
and implied contracts); § 1.20 (contract and quasi contract distinguished).

End of Document
§ 1.05 Meaning of “Offer”
[1] An Offer Is a Proposal Manifesting a Willingness to Enter into a Bargain that Will Create a Contract
The anatomy of an agreement begins with an “offer” that can be defined as a sufficiently definite proposal by
one party to one or more specific persons manifesting a willingness to enter into a bargain in such a fashion
that the other party is justified in understanding that his assent will create a contract. In Saye v. Howe, 2004
Conn. Super. LEXIS 3103 (Oct. 25, 2004), the court cited the Corbin treatise in describing an offer as an
unambiguous expression of the terms under which someone is willing to enter into a contract.
If an offer is made to have dinner or otherwise engage in a social engagement, the offer will have no legal effect
because parties to such agreements normally do not intend to be legally bound. If, however, the offer is
designed to create a bargain in a commercial or other situation where legal intention is expressed or presumed,
an offer has a critically important legal effect. An offer creates a power of acceptance in the offeree and the
exercise of that power will create a contract. An offer, therefore, is a juristic act because it empowers another to
create a liability in the offeror without any further expression by the offeror.
[2] Whether an Offer Has Been Created Requires an Interpretation of the Words and Conduct of the
Offeror Under All of the Surrounding Circumstances
An offer must be an expression of the intention manifesting the will of the offeror to enter into a contract. It must
create a reasonable understanding in the offeree that the offeree has the power to create a contract by simply
manifesting assent to the offer. An offer is typically a commitment—a promise—to do or refrain from doing an
act in the future. Corporation X sends a purchase order to Corporation Y ordering (offering to buy) described
equipment for a price of $100,000. The purchase order is a commitment or promise to pay $100,000 in
exchange for the described equipment, thereby creating a power of acceptance in Corporation Y. Promises to
buy and sell goods, services, or real property are exchanged in millions of transactions daily. Employment
offers manifest a commitment to pay a certain salary and other benefits for the services of the offerees.
An offer requires a commitment manifesting a clear willingness to enter into a bargain. Where a real estate
agent faxed several documents to the defendant describing property which the owner had listed with the agent,
the defendant faxed a document stating that he accepted the offer. The property was sold to a third party but
the defendant claimed the owner breached a contract to sell it to the defendant. In the owner’s action to quiet
title, the court held that none of the documents sent to the defendant could constitute an offer, separately or
collectively, because they only provided relevant information about the property. They did not constitute an
“offer” because they did not manifest a willingness on the part of the seller to enter into a bargain with the
defendant (Restatement (Second) of Contracts § 2 . Obremskey v. Anderson, 2009 Mich. App. LEXIS 1216
(May 28, 2009).
The Restatement (Second) of Contracts changed the definition of “offer” from the First Restatement because it
sought to recognize the possibility of an offer that is not a promise. It provides an illustration in which A says to
B, “The book you are holding is yours if you promise to pay me $5 for it.” The Restatement conclusion is that
this statement by A is an offer empowering B to make himself the owner of the book by making the requested
promise. See Restatement (Second) of Contracts § 2 illustration 1. Presumably, A’s offer is not promissory.
This view is not shared by all scholars, including the scholar responsible for the First Restatement of Contracts,
Professor Samuel Williston. It is not unreasonable to interpret A’s statement as a promise to make B the owner
of the book in exchange for B’s promise to pay the $5.
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[3] The Typical Offer Requires a Commitment to Act or Refrain from Acting in a Certain Fashion in the
Future
It is abundantly clear that the typical offer requires a commitment to act or refrain from acting in a certain
fashion in the future. Whether such a commitment in sufficiently definite terms has been made is a question of
fact. Preliminary negotiations absent any commitment to enter into a bargain with the other party are not offers.
Contract formation commonly involves the use of unsigned documents as preliminary negotiations
(Restatement (Second) of Contracts § 2 cmt. e), which are not offers. RDP Techs., Inc. v. Cambi AS, 800 F.
Supp. 2d 127 (D.D.C. 2011). See Chapter 2 below, for illustrations of the distinctions between preliminary
negotiations and offers in contract formation.
While courts dissect the facts of cases to discover whether an offer and acceptance of that offer exist, there are
cases in which it is clear that the parties have arrived at a mutual assent concerning a particular bargain though
exactly who made the offer and which party accepted it is unclear. C, a third party, may propose a particular
bargain to A and B, who enthusiastically indicate their assent, and it is unclear who first assented and could,
therefore, be called the offeror. The inability to determine the identity of the offeror in such a case will not
detract from a holding that a contract has been formed. Neither will the inability to determine the precise
moment in time the contract was formed preclude a finding that a contract has been made. See UCC § 2-
204(2); Restatement (Second) of Contracts § 22 as discussed in Henderson v. NutriSystem, Inc., 634 F. Supp.
2d 521 (E.D. Pa. 2009).
Practice Resources:
• Corbin § 1.11 (offer defined); § 1.12 (simultaneous expressions of assent:
contracts without offer and acceptance).

End of Document
§ 1.06 Unilateral and Bilateral Contracts
[1] The Differences Between a Unilateral Contract and a Bilateral Contract Lie in the Operative Acts of
the Parties and the Legal Relations Created
A contract formed by each party making a promise to the other by which they manifest their mutual assent is
the traditional “bilateral” contract in which there are two promisors and two promisees as well as two rights and
two correlative duties. If, however, an offeror requires acceptance by performance and not by a promise, the
contract is formed only when the performance is completed. Bel Air v. 1st Sec. Bank of Wash., 2014 Wash.
App. LEXIS 776 (Apr. 7, 2014). Where an insurance company made an offer to various suppliers of auto glass
to pay the companies for replacing glass in the autos of their insureds according to the insurer’s pricing
schedules, the insurer was not seeking a promise in return for its offer. The court held that the suppliers
accepted the insurer’s offer forming unilateral contracts by performing the services for the policy holders. The
suppliers, however, were entitled only to the prices for the services as set forth in the insurer’s offer. Auto Glass
Express, Inc. v. Hanover Ins. Co., 293 Conn. 218, 975 A.2d 1266 (2009). Such a contract is “unilateral” in the
sense that only one party—the offeror—was a promisor. There is only one right and one correlative duty at the
moment of formation since the offeror has already received the performance sought and now must perform the
correlative duty to the right earned by the offeree in performing.
The Restatement (Second) of Contracts has not carried forward the distinction between unilateral and bilateral
contracts found in Section 12 of the First Restatement of Contracts on the footing that it is confusing and
generally unnecessary. Restatement of Contracts, § 1 cmt. f. The confusion enters as a result of the dichotomy
of the case law reflected in the First Restatement that preceded enactment of the UCC. One of the quiet mini-
revolutions of the UCC was a change in the pre-Code presumption that offerors desire a particular manner of
acceptance (promising or performing). UCC § 2-20 1 states, “Unless otherwise unambiguously indicated
by the language or the circumstances,” an offer may be accepted in any reasonable manner. This principle is
replicated in virtually identical language in Restatement (Second) of Contracts § 0 2 . The offeror is typically
indifferent as to whether the offer is accepted by promise or performance. In doubtful cases, First Restatement
§ 1 presumed the parties intended a promissory acceptance. Restatement (Second) of Contracts § 2
“replaces” that presumption with a presumption that the offer is indifferent as to how the offer is accepted.
An offer can expressly require a performance acceptance or the nature of the offer may require such an
acceptance, as in the case of reward offers in which neither an offeror nor offeree contemplate a promissory
acceptance. Where the offer relegates acceptance to performance, the beginning of performance is not an
acceptance of the offer but may have the effect of an option contract to preclude revocation of the offer to allow
the offeree a reasonable time to complete performance. Restatement (Second) of Contracts § .
[2] Confusion Arises When an Offer Is Indifferent as to the Manner of Acceptance and the Offeree
Chooses to Accept by Performing
Confusion arises when an offer is indifferent as to the manner of acceptance and the offeree chooses to accept
by performing. On its face, such a performance acceptance may suggest a unilateral contract formed only when
that performance is complete. Neither the UCC nor the Restatement (Second), however, intend that effect.
Where the typical offer that is indifferent to the manner of acceptance is made, the offeree’s choice of a
performance acceptance forms a contract by the beginning of that performance or a tender of that performance
that operates as a promise to complete that performance. Thus, such a performance acceptance in response to
an indifferent offer would form what used to be called a “bilateral” contract. Restatement (Second) of Contracts
§ 0 cmt. b. See John E. Murray, Jr., Contracts: A New Design for the Agreement Process, 53 Cornell L. Rev.
Page 2 of 2
785 (1968). The much older notion that a performance acceptance creates only a unilateral contract is,
therefore, unwarranted.
Notwithstanding these changes, modern case law reveals numerous examples of unilateral contracts to which
courts continue to refer, using that terminology even though it has been excised from the Restatement
(Second) of Contracts.
Practice Resource:
• Corbin § 1.2 (unilateral contracts distinguished from bilateral).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 2 OFFERS: CREATION AND DURATION OF
POWERS OF ACCEPTANCE
CHAPTER 2 OFFERS: CREATION AND DURATION OF POWERS OF

ACCEPTANCE
the subject matter.

End of Document
§ 2.01 Preliminary Negotiations
[1] “Preliminary Negotiations” Begin Bargaining Transactions

For every contractual transaction, there is a pre-contractual starting point involving myriad matters that are
typically bundled under the general heading, “preliminary negotiations.” A buyer may request information about
a product or service as well as the seller’s asking price. A seller may provide numerous statements of mere
commendation of the product (“puffing” or “seller’s talk”) with no legal effects, or make statements that are
factual about a product, thereby suggesting an express warranty that has legal effects. Brochures,
advertisements, or other printed material, as well as electronic material, may be provided to induce
agreements. The seller’s website may be a fruitful source of information concerning the product or service.
There may be considerable haggling about price or other aspects of a possible deal. During this preliminary
stage, there may even be offers that are immediately rejected and counteroffers that are also rejected.
If the negotiations do not culminate in one party making an offer that the other party accepts, the preliminary
negotiations have failed to produce a contract. Absent a contract, they have no legal effect, but the
determination of whether the parties intended to make an enforceable contract will depend upon the
interpretation and construction of the preliminary negotiations. Moreover, if a court determines that a contract
was made, issues concerning whether certain terms were intended to be included in that contract or the
meaning of certain terms may be informed by the preliminary negotiations. Evidence of prior agreements may
be inadmissible when a contract is reduced to a writing intended by the parties as their final and complete
manifestation of assent, but the words and phrases of that writing would still require interpretation, which may
be aided by the parties’ preliminary negotiations.
[2] No Particular Words Are Necessary to Create an Offer

The determination of whether a certain communication constitutes an offer or a mere preliminary negotiation is
a question of interpretation in the light of all surrounding circumstances. In addition to examining the parties’
language, other circumstances include prior communications, course of dealing, whether the communication
was private or made to the public, whether it came in reply to a specific request for an offer and, in particular,
whether the communication contained detailed terms. Honeywell Int’l, Inc. v. Nikon Corp., 672 F. Supp. 2d 638
(D. Del. 2009). No particular words are necessary to create an offer. There is no special interpretation process
applied to determine the intention to make an offer. The interpretation process pervades contract law since the
determination of the parties’ intended meaning of their words and conduct may be necessary in even the most
carefully drafted documents. A large percentage of contract litigation focuses on interpretation issues. Once the
court has completed the interpretation process by discerning the “meaning” of the parties’ outward
manifestations of intention, it must then “construe” the interpreted terms to ascertain their legal effect.
The essential difference between “interpretation” and construction” is the determination of what the parties
apparently intended by the use of certain language or by their conduct, which requires interpretation. The court
then determines the legal effect of that language so interpreted, which is a process of construction.
[3] Existence of an Offer Is Determined by the Parties’ Intent as Manifested by Their Words and
Conduct
[a] The Parties’ Intention to Be Bound Is a Critical Factor

Page 2 of 4
The determination of whether an offer has been made is a question of the parties’ intention as manifested
by their words and conduct. Because of this, there is a tendency to conclude that it is simply a question of
fact and that no better analysis is possible. Indeed, there are statements in the case law that it is impossible
to set forth any rule or principle beyond stating that it is a question of fact. While the issue of the parties’
intent is critical, there are guides that assist courts in determining which manifestations of fact are relevant
in the quest to determine whether an offer has been made.
There are accepted guides to interpretation that are called “rules,” but the careful qualification is that these
“guides” are typically not conclusive. They are aids to assist in the determination of the parties’ intention.
There are also common sense canons of construction that courts use in determining the legal effect of the
parties’ words and conduct. The case law reveals certain factors that can aid a court in determining whether
an offer has been made.
Among other factors, a basic canon of construction is whether the purported offer clearly manifests a
commitment—a promise or undertaking to do or not do something in the future—in exchange for a
commitment, action, or inaction by the offeree. Courts are reluctant to construe a communication as an
offer that will expose the purported offeror to the risk of being bound by a contract unless the
communication clearly manifests his or her intention to make such a commitment. Where a general
contractor invited a supplier to submit pricing for railroad ties for a project on which the general contractor
intended to bid, the supplier’s e-mail response listed prices for various ties and concluded with the terms,
“Delivery to be agreed. We hope you are successful with your bid.” When the supplier later refused to
deliver at these prices, the contractor claimed it had a contract with the supplier. The court found that the
supplier’s e-mail was not an offer since it merely stated that the supplier had certain items for sale at certain
prices. There was no promise or commitment to sell the listed materials at those prices to the contractor.
L.B. Foster Co. v. Tie & Track Sys., 2009 U.S. Dist. LEXIS 26962 (N.D. Ill. Mar. 31, 2009).
[b] The Ordinary Meaning of Words Is Not Conclusive in Determining if There Is an Offer
While the general rule of interpretation that the ordinary meaning of words will guide the court’s
determination as to whether an offer has been made, like other interpretation guides, this rule is not
conclusive. Preliminary negotiations may include a request for a price quotation from a seller of goods or
services and the seller may respond with a “quote.” The “quote,” in the abstract, may appear to be nothing
more than a statement of price with no commitment by the seller, but simply an invitation to a buyer to
make a commitment at the suggested price. Just because the term “quote” is used, however, is not a
sufficient basis for determining that the communication is not an offer. The seller’s complete communication
may still reveal a commitment constituting an offer notwithstanding the use of the term “quote.” See
Restatement (Second) of Contracts § 2 cmt. c. Similarly, the use of the term “offer” when considered in the
context of the entire communication and surrounding circumstances may indicate that a mere price
quotation was intended.
[c] The Parties’ Course of Dealing and Trade Usage Can Be Used in Determining Whether an Offer
Has Been Made
Interpretation and construction of the parties’ manifestations of intention must be in the context of all of the
surrounding circumstances. The parties’ past contracts—their course of dealing—can be very influential in
determining whether their present negotiations manifest an offer. Similarly, trade usage can be helpful and
the local use of language may be illuminating. The relationship of the parties may be indicative of their
intent. Thus, where a family member renders services for another family member, there is a presumption of
gratuity that precludes an intention of legal effect.
[d] The Completeness of Terms Affects Whether an Offer Will Be Found

A proposal that is complete and definite in its terms is more likely to be viewed as offer than a
communication with missing terms. Like other “guides,” however, this one must not be deemed conclusive.
Both the Restatement (Second) of Contracts and the Uniform Commercial Code (UCC) recognize that a
contract may be formed if the terms are reasonably certain and, notwithstanding some missing terms,
provide a court with a sufficient basis to afford a remedy in the event of breach. See Restatement (Second)
Page 3 of 4
of Contracts § 2 which refers in comment b to UCC § 2-20 . The issue will be whether the essential
terms have been included in a communication that manifests a commitment.
[e] Real Property Sales Usually Contemplate Formal Documentation

The nature of the subject matter may also be a factor in determining whether a party has made an offer. A
mere proposal to sell real property is less likely to be construed as an offer than a similar informal proposal
for the sale of goods. Real property sales contemplate the creation of written contracts and deeds to be
transferred while the same formality is not contemplated with respect to a sale of goods. On the other hand,
advertisements, trade circulars, or form letters that merely announce the seller’s goods are rarely treated as
offers.
[f] A Party’s Reasonable Reliance on a Communication May Qualify It as an Offer

Still another factor would be the extent to which a party would reasonably rely upon a particular
communication. To bid on construction projects, general contractors require bids from various
subcontractors who will pursue their specialized work—electrical, carpentry, masonry, plumbing, and other
specialties—as part of the project. A bid from a subcontractor that is used by the general contractor as part
of its overall bid on the entire project will typically be construed as an offer because the subcontractor
knows or should know that the general contractor will rely on that bid along with other subcontractor bids in
making the general bid. It will assume the risk of completing the project based on such bids. Thus, even if
the express language of the subcontractor’s bid, standing alone, may not be stated in terms of commitment
or promise, the nature and purpose of the transaction—the contextual circumstances—may be sufficient to
supply that critical element to constitute an offer.
The subcontractor illustration also suggests that communications authorizing the offeree to take action are
more likely to constitute an offer. A subcontractor’s bid reasonably communicates the desire of the
subcontractor to participate in the project to the extent of its bid and authorizes the general contractor’s use
of that bid in assembling and submitting the overall bid on the entire project.
Similarly, rewards are offers to the public seeking action by any member of the public who can provide
information leading to the arrest and conviction of a party who has committed the crime. A reward promises
the payment of a certain sum to any individual who can perform that act. The offeror does not want a
promise in exchange for the reward—the offeror desires and authorizes immediate action.
Another illustration is a communication from a buyer to a seller such as, “Ship 1000 units of X-35 plastic at
once.” Such a message would clearly be understood to be an offer. Though the words are frugal, the
reasonable interpretation would be, “I offer to purchase 1000 units of X-35 plastic at the price you are
currently charging for that product (assuming it is a reasonable price). You can accept this offer by the
prompt shipment of what I have ordered.” The seller’s act of shipment, without any words, would constitute
an acceptance of that offer forming a contract. See UCC § 2-20 1 (stating “an order or other offer to
buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt
promise to ship or by the prompt or current shipment” of the goods).
While each of the foregoing factors may be helpful, they are not conclusive. The critical question is whether
a party has made a promise—a commitment—proposing to act or refrain from acting in a particular way in
the future in exchange for something of value from the party to whom it is addressed, and whether it was
made in such a fashion that such a party should reasonably understand that assent will create a contract.
While courts often dwell on “sufficient definiteness” to find an offer, there are advertisements and other
communications that are replete with details that are not offers because they promise nothing. They are
simply statements to prospective buyers of what a seller has for sale designed to induce such buyers to
offer to buy the seller’s product or service at the seller’s suggested price. A communication must be
sufficiently definite to constitute an offer, but it is the manifestation of intention of commitment or promise
that is crucial in determining whether a power of acceptance is created in the party to whom it was
addressed—the purported offeree.
Practice Resources:
Page 4 of 4
• Corbin § 2.1 (preliminary negotiations); § 2.2 (preliminary

communications compared to offers); § 2 . (interpretation distinguished
from construction of contracts).

End of Document
§ 2.02 Requests for Offers
[1] A Request for an Offer Is Not an Offer

It is not uncommon for a party to ask another party to make an offer. A school district may desire a new school
building and advertise for bids requesting offers. Businesses often send “RFPs” to suppliers seeking offers to
sell certain products or services. A supplier may not respond with an offer; it may choose not to respond at all.
The typical seller will respond with a mere price quotation that is not an offer but an announcement of prices
and descriptions of the products or services. Such a quotation is inviting the buyer to make an offer on the
terms suggested in the announcement. An invitation to make an offer does not invite acceptance to form a
contract. MacDermid, Inc. v. Cookson Group, PLC., et al., 2014 Conn. Super. LEXIS 2958 (Conn. 2014).
[2] Requests for Offers Are Not Offers—Auctions and Solicitations

The typical auction sale is another illustration of a request for offers. Though auctions may be thought of as
“offering” certain things for sale, in the typical auction the auctioneer simply places something up for sale and
seeks offers. Such a sale is deemed to be a sale “with reserve” unless it is expressly stated to be “without
reserve.” A series of bids (offers) may follow and if the highest bid (offer) is satisfactory, the auctioneer will
accept the offer by the fall of a hammer or in some other traditional manner manifesting acceptance. See
Thomas v. Dore, 183 Md. App. 388, 961 A.2d 655 (2008). In a “without reserve” sale, the auctioneer is making
an offer to sell the item to the highest bidder. A “no reserve” sale was construed to be a sale “without reserve”
in Foley v. Yacht Mgmt. Group, 2011 U.S. Dist. LEXIS 101476 (D. Mass. Sept. 9, 2011). Bidders at auction will
be held to terms of the sale in catalogues provided before the sale. Early Auction Co. v. Koelzer, 114 So. 3d
1038 (Fla. Dist. Ct. App. 2013).
A typical solicitation is not a commitment by the soliciting party. It is a preliminary negotiation that may induce
an offer. In Crouch v. Bank of Am., N.A., 2011 U.S. Dist. LEXIS 152548 (E.D. Va. Nov. 29, 2011), a bank
solicited the plaintiffs to apply for a loan modification. The plaintiffs claimed that the solicitation was an offer.
Citing Corbin, the court explained that acting on a solicitation does not create a contract because a solicitation
is not an offer.
Another common situation occurs when a sales representative visits a business with the hope of making a sale.
If the business is interested in buying the promoted product, the salesperson asks the purchasing manager or
other official in the company to sign the “contract.” Typically, the document contains a clause stating that no
contract will be formed until the document is signed by an official at the seller’s home office or similar language.
If the purchasing manager signs the document, no contract is formed. The manager is making an offer on
behalf of the buyer and the offer is being made on the terms contained in the document provided by the seller.
This common practice is based on the seller’s worry that salespersons may be so eager to make a sale that
they might change the seller’s standard terms. The clause in the document is designed to avoid that risk.
Practice Resource:
• Corbin § 2. (request for an offer is not an offer).

Page 2 of 2
End of Document
§ 2.03 Advertisements Usually Are Not Offers
[1] Advertisements Generally Do Not Contain a Promise or Commitment to Sell a Product or Service
While it is possible to make an offer by advertisement, the case law is clear that the typical advertisement does
not create an offer. Kearney v. Equilon Enters., LLC, 65 F. Supp. 3d 1033, 2014 U.S. Dist. LEXIS 166350 (D.
Or. 2014); Frezza v. Google Inc., 2012 U.S. Dist. LEXIS 166003 (N.D. Cal. Nov. 20, 2012); Zanakis-Pico v.
Cutter Dodge, Inc., 98 Haw. 309, 47 P.3d 1222 (2002). It makes no difference whether the advertisement
appears in a magazine, newspaper, television, or the internet. See Watson v. Pub. Serv. Co., 207 P.3d 860
(Colo. Ct. App. 2008), treating an internet posting as an advertisement that was not an offer. The rationale for
such a conclusion, however, is not always clear. The traditional rationale simply states a conclusion that neither
the advertiser nor the reader of the ad reasonably understands it to be an offer creating a power of acceptance.
A common rationale suggests that, if advertisements were offers, the number of offerees who exercise a power
of acceptance may exceed the available supply of the advertised product, thereby subjecting the seller to a host
of lawsuits for breach of contract. This explanation, however, is easily obviated. Buyers should not reasonably
expect a seller to have an inexhaustible supply of the advertised product. Another common statement in cases
holding advertisements not to be offers is that they are not sufficiently definite. Many advertisements, however,
are sufficiently detailed to meet the definiteness requirement of offers, but they are still not held to be offers.
Courts often fail to focus on the absence of the fundamental manifestation of commitment that is missing in the
typical advertisement. The typical ad, even in great detail, does not contain a promise or commitment to sell a
product or service. In effect, it states, “We have this product for sale at this price.” The product displayed in a
store window is announcing the same availability and, like the typical advertisement, it is inviting parties to
make offers. To understand the essential rationale, it is important to consider the exceptional advertisement
that constitutes an offer.
[2] An Offer May Be Found When There Is a Promise or Commitment to Sell a Product
In a well-known case, a store advertised one black lapin stole “worth $139.50” for $1 dollar “First Come, First
Served.” While the ad was otherwise sufficiently definite, it was the phrase “First Come, First Served” that
constituted the indispensable commitment—the promise to sell the product—as contrasted with the typical ad
that contains no commitment. In effect, the advertisement stated that the store will sell an item worth a
considerable sum to the first buyer who presents one dollar to the store. The terms are sufficiently definite: the
party to whom the offer was addressed was identifiable as the first person who arrives and who tenders one
dollar, the value of the product was stated, and, most important, the whole tenor of the transaction manifested a
commitment by the store to deliver the valuable commodity to the first buyer at the nominal sum of one dollar.
Lefkowitz v. Great Minneapolis Surplus Store, Inc., 86 N.W.2d 689 (Minn. 1957). A service station
advertisement stating that the purchase of 10 gallons of gasoline would entitle the purchaser to a free ski lift
ticket was a clear offer for a unilateral contract which plaintiffs could accept by purchasing the gas. Kearney v.
Equilon Enterprises, LLC, 2014 U.S. Dist. LEXIS 166350 (D. Or. 2014).
The language of promise or commitment was the dominant characteristic creating an offer in what may be the
most famous advertisement case in common law history. It stated that 100£ “will be paid” by the Carbolic
Smoke Ball Company to any person who used the Smoke Ball in accordance with directions and contracts the
“increasing epidemic influenza.” Mrs. Carlill used the product as directed but contracted influenza and the court
held that advertisements promising rewards are offers. The company stated that it “will” pay 100£. There was
no limitation on the number of offerees. Any person who was aware of the advertisement was an offeree. To
Page 2 of 2
accept the offer, it was necessary to use the Smoke Ball in accordance with directions. Upon completion of that
use, the offeree had fully performed and a contract with that offeree was formed, creating a duty in the
company and a correlative right in the user. The company’s duty, however, was conditioned on the user
contracting influenza, which is not a voluntary act and could not, therefore, constitute part of the act of
acceptance. For Smoke Ball users who did not contract influenza, the duty to pay them 100£ that was created
when they used the product properly was never activated because the condition to the duty never occurred.
Carlill v. Carbolic Smoke Ball Co., 1 Q.B. 256 (1893).
Practice Resource:
• Corbin § 2. (offer by publication or advertisement).

End of Document
§ 2.04 Quotation of Prices and Estimates
[1] A Price “Quotation” May Contain Language of Promise or Commitment That Will Constitute an
Offer
If Ames seeks a price of a particular product or service from Barnes who replies, “$3,000,” the response is not
an offer. It may be viewed as a statement of price—a quotation or an “estimate”—but it is not an offer. Having
heard “$3,000,” Ames is invited to communicate an offer, a commitment to pay Barnes $3,000 in exchange for
the product or service. The offer would then have to be accepted by Barnes to form a contract. It is not,
however, safe to state that price quotations are not offers. While the term “quote” may suggest a preliminary
statement with no legal effect, a document labeled “quotation” may contain language of promise or commitment
that would constitute an offer. Dumont Tel. Co. v. Power & Tel. Supply Co., 962 F. Supp. 2d 1064, 1074 (N.D.
Iowa 2013).
In a classic case, a party sent a message stating, “Please advise us the lowest price you can make us on our
order for ten carloads of Mason green jars,” the reply stated different prices for different sized jars if purchased
in 10 carload quantities and ended with, “for immediate acceptance.” The buyer replied, “Enter our ten carloads
as per your quotation. Specifications mailed.” The seller’s response would have clearly been a mere price
quotation except for the three words, “for immediate acceptance,” which converted a price quotation into an
offer. The court stated:
We can hardly understand what was meant by the words “for immediate acceptance,” unless the latter was
intended as a proposition to sell at these prices if accepted immediately. In construing every contract, the
aim of the court is to arrive at the intention of the parties. In none of the cases to which we have been
referred on behalf of appellant was there on the face of the correspondence any such expression of
intention to make an offer to sell on the terms indicated.
Fairmount Glass Works v. Grunden-Martin Woodenware Co., 106 Ky. 659, 664, 51 S.W. 196, 197 (1899).
The three words evidenced a “proposition” that was a commitment by the seller to ship 10 carloads of jars at a
price based on the size of jars the buyer would specify. The phrase, “for immediate acceptance” meant, “The
seller promises to sell ten carloads of these jars at these prices if you immediately accept our offer.”
[2] An Estimate Is Not an Offer: It Is a Price Approximation

A true “estimate” is not reasonably understood as an offer because it is only an approximation of the price
which eliminates the very concept of commitment. A typical estimate includes an implied denial that the
estimator has promised to perform at that price. Again, however, there is no particular form of language that a
party must use to make an offer. If the term “estimate” is misused in such a fashion as to assure the other party
that a service will be performed at that price, the “estimate” could be interpreted as a commitment to perform at
that price. Again, there is no escape from an interpretation of the parties’ language and conduct under all of the
surrounding circumstances.
Practice Resource:
• Corbin § 2. (quotation of prices; estimates).

Page 2 of 2
End of Document
§ 2.05 Self-Service Transactions
[1] Application of Offer and Acceptance Law to Self-Service Transactions

The self-service transaction dominates the retail purchase of goods and has made considerable inroads in
other transactions. The application of offer and acceptance law to these transactions has raised several
interesting questions. An English case dealt with a self-service drug store that carried certain drugs that could
only be sold under the supervision of a registered pharmacist without violating a criminal statute. The issue was
whether a contract was formed when the customer removed such a product from the shelf, or at the point that
the customer arrived at the checkout counter and paid for it. The pharmacist was located at the checkout
counter where the sale could be deemed “supervised” in compliance with the statute. The court held that no
contract was made until the customer paid for the product at the checkout, thereby precluding a criminal
violation that would have occurred had the court decided the contract was formed when the customer removed
the drug from the shelf. Pharmaceutical Society of Great Britain v. Boots, (1953) 1 Q.B.D. 401, aff’g (1952) 2
Q.B. 795.
Under this analysis however, by removing a product from the shelves, a self-service customer has no right to
the product in his or her possession. It could be reclaimed by the store at any moment. There is even another
possibility under this analysis not involving the store. If customer Ames leaves her shopping cart to view other
products, she might return to discover that a product from her cart is missing because customer Barnes had
removed the product after finding the store’s supply of that product was exhausted.
[2] A Store’s Display May Constitute an Offer

The other view as to the time and place of contracting in a self-service store is found in more recent American
cases. In the process of removing a package of soda from the shelves, a customer was injured when bottles
exploded. In an action for breach of the implied warranty of merchantability, the critical issue was whether, by
simply removing the product from the shelf, the customer had entered into a contract of sale with the store, as
required under UCC § 2- 1 1 . Only if the court found a contract at the moment a buyer takes possession of a
product to remove it from the shelf would the implied warranty attach. The court held that a contract was formed
at that time. Barker v. Allied Supermarket, 596 P.2d 870 (Okla. 1979). That theory, however, raises another
issue.
It is common practice on the part of customers to change their minds and return items to the shelves. If they
have already formed a contract by removing the product, are they breaching the contract in returning it? In the
exploding bottle cases, American courts have concluded that a contract is formed upon taking the item from the
shelf since the display of the items on the store’s shelves is deemed to constitute an offer to sell those items.
The same courts justify the practice of allowing customers to return items as an exercise of an implied power of
termination, which allows a party to terminate a contract for reasons other than breach. See, e.g., Barker v.
Allied Supermarket, 596 P.2d 870 (Okla. 1979) (in which the court cited the definition of “termination” in UCC
§ 2-10 .
An “intellectually satisfying” theory would treat the removal of the product from the shelves as creating an
implied option contract, making the store’s offer to sell irrevocable until the buyer decided to finally purchase the
product at the checkout counter. The constructed consideration to support such an option contract would be the
seller’s invitation to shop at its store rather than the store of a competitor. The trade usage or course of dealing
could insert the option contract terms.
Page 2 of 2
A new theory concerning the time of contract formation is troublesome for many reasons, not the least of which
is its suggestion that a self-service contract is not completely formed until after a purchaser of goods has
opened the package to discover contract terms inside. Under this “rolling” or “layered” contract theory, the
purchaser will be bound by such terms unless she objected to them within the time allowed by the seller.
ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). There is no general agreement with this analysis of
self-service contract formation. The theory is analyzed in § .10 infra.
Practice Resource:
• Corbin § 2. (offers at the supermarket or self-service shop).

End of Document
§ 2.06 Agreements to Agree: Intent to Be Bound and Definiteness of Terms
[1] The More Indefinite the Agreement, the Less Likely There Is an Intention to Be Bound
Parties sometimes agree on certain terms, but leave other terms to be agreed upon later. One of the more
difficult questions in contract formation is whether such an agreement is binding when made or only after the
parties later agree on the missing term. The analysis of these cases involves issues of indefiniteness and
intention to be bound. The terms of the agreement may be sufficiently definite to enforce, but there may not be
a sufficient manifestation of intention to be bound at the incomplete stage. On the other hand, the parties may
have manifested an intention to be bound, but their terms may be so indefinite that a court would not have a
sufficient basis to provide a remedy in the event of a breach. Thus, where parties agreed that the price of
property to be purchased and sold would be “mutually agreed upon,” the court found no binding contract in
what it called a classic example of an “agreement to agree.” Huber v. Calloway, 2007 Tenn. App. LEXIS 435
(July 12, 2007). Where the parties negotiated a final price each year for the use of a facility, the court concluded
that their agreement lacked a material term which precluded recognition of a contract. J.A.M. Promotions, Inc.
v. Tunica County Arena & Exposition Ctr., Inc., 2012 U.S. App. LEXIS 4785 (5th Cir. Mar. 7, 2012). The more
indefinite the agreement, the less likely is the intention to be bound.
It is certainly possible for parties to make an enforceable contract to prepare and execute a final agreement. An
agreement to agree is enforceable if its terms are reasonably certain and definite. Holbach v. Holbach, 2010
ND 116, 784 N.W.2d 472. If, however, their agreement does not manifest assent to a material term that
remains to be agreed upon, there is no binding contract. Boyd v. Cambridge Speakers Series, Inc., 2010 U.S.
Dist. LEXIS 61234 (E.D. Pa. June 18, 2010). If a material term is yet to be agreed upon, it is a “contract to
make a contract,” which is not a contract. Izynski v. Chi. Title Ins. Co., 963 N.E.2d 592 (Ind. Ct. App. 2012).
[2] The Law May Imply Missing Terms

While older cases commonly suggested that any “agreement to agree” was not a contract, modern contract law
recognizes that parties may intend to be bound even though one or more terms are missing in their agreement.
Even earlier courts were willing to imply certain terms. An offer without an expressed time limit would be open
for a reasonable time. If the parties had formed a contract without a time for delivery, courts would imply a
reasonable time. e must not jump too readily to the conclusion that a contract has not been made from the
fact of apparent incompleteness. … A transaction is complete when the parties mean it to be complete. It is a
mere matter of interpretation of their expressions to each other, a question of ct. In re Tyson Estate, 2015
Mich. App. LEXIS 2428 (Mich. Ct. App. Dec. 22, 2015).
The UCC, however, allows for the implication of many more terms where the parties have failed to express
them. Even a missing price term will not make an agreement fatally indefinite assuming the parties manifested
an intention to be bound. UCC § 2- 0 . See Medallion Int’l Corp. v. Sylva, 2004 Tex. App. LEXIS 4974 (June 2,
2004), referring to § 2- 0 though the contract was not for the sale of goods. The court referred to the
analogous application set forth in the Restatement (Second) of Contracts § cmt. e. The parties may have
said nothing about price, they may have agreed to fix the price in the future and then failed to agree, or they
may have established an objective market index that would identify the price that ceased to exist. In any of
these situations, the court will imply a reasonable price. UCC § 2- 0 1 (b), and (c).
If there is no specified term for the place of delivery, UCC § 2- 0 implies the seller’s place of business. The
absence of specific time provisions is filled with a “reasonable time” as provided for in UCC § 2- 0 . In the
Page 2 of 4
absence of express terms, the time and place for the buyer to pay for goods is found in UCC § 2- 10 (the time
and place the buyer is to receive the goods).
When a buyer agrees to purchase all of its requirements for a certain product for a certain time from the seller,
or when a seller agrees to sell its entire production output for a certain period to one buyer, such a
“requirements” or “output” contract could be viewed as fatally indefinite because it fails to establish a definite
quantity term. Any such view, however, has been emasculated under the UCC, which recognizes the benefits
of such agreements to buyers and sellers and resolves any uncertainty as to quantity terms on the basis of
good faith and fair dealing. See UCC § 2- 0 1 (stating that the quantity is to be measured by such actual
outputs or requirements as may occur in good faith).
A contract that is otherwise definite may allow a buyer to make a selection among different sizes or models of
products. When the buyer refuses to choose, some earlier decisions found the contract fatally indefinite. UCC
§ 2- 11 states that providing a party with the power to make such selections does not invalidate it. These
sections of the UCC and others that fill gaps are further evidence of the underlying philosophy of the UCC’s
chief architect and principal draftsman of Article 2: when the parties intend to make a contract, former technical
rules of contract law should not undermine the parties’ factual bargain. Where the UCC did not apply, the court
still recognized that certain terms may be subject to a subsequent choice, as noted in § cmt. a, of the
Restatement (Second) of Contracts. The court, however, noted that, the more important the choice, the more is
it likely that the parties did not intend to be bound until the choice is made. Cooper v. SEPTA, 2011 U.S. Dist.
LEXIS 105469 (E.D. Pa. Sept. 6, 2011).
While courts can supply missing terms not expressly agreed upon (e.g., time for performance), they may not
find a contract where the parties have left open for future agreement an essential term, including price or the
rental amount in a lease contract. “Without a definite agreement as to the amount of rental, there can be no
binding lease contract.” Intrepid, Inc. v. Bennett, 176 So. 3d 775, 2015 Miss. LEXIS 451 (Miss. 2015). See also,
FirstMerit Bank, N.A. v. Ferrari, 2015 U.S. Dist. LEXIS 26103 (N.D. Ill. 2015).
Likewise, where the parties have agreed that one party is entitled to payments for medical devices listed in an
addendum to their agreement, but the addendum was never created, the addendum would not have been “a
mere memorial of the agreement already reached.” In that case, the parties have not agreed on a legally
operative contract. Sasso v. Warsaw Orthopedic, Inc., 2015 Ind. App. LEXIS 702 (Ind. Ct. App. Nov. 6, 2015).
[3] Preliminary Agreements and Letters of Intent

A letter of intent is an example of a preliminary agreement, and preliminary agreements can take many forms,
have many different names, and serve many different purposes.
“Properly used, the letter of intent is the outline of a not yet finalized agreement, a road-map leading
perhaps to a contract. Once executed, each party can be relatively certain that the other has a good faith
desire to continue negotiations to achieve goals stated m the letter. It is not a useless document, but it is
not, in principle, a contract, except perhaps a contract to continue bargaining in good faith. Nonetheless,
there are times when letters of intent are signed with the belief that they are letters of commitment. If this
belief is shared, or if one party is aware of the other’s belief, the letter is a memorial of a contract.”
Willis Pool Co., LLC v. Maurath, 2014 Conn. Super. LEXIS 3138 (Conn. Super. Ct. Dec. 2, 2014) (quoting
Corbin on Contracts).
A much litigated issue is whether a preliminary agreement in a given case is, in fact, a legally binding contract
that reaches the parties’ ultimate contractual objective. The answer depends on the content of the document
and context of its formation, less important are labels such as “letter of intent.”
Negotiations in anticipation of forming a contract often require discussions of many aspects of a potential
agreement. As each matter is agreed upon, it is efficient to have a record of that agreement to facilitate the
negotiations by avoiding repetition and faulty recollections of prior discussions. A popular method to achieve
these benefits is for the parties to enter into a letter of intent with the understanding that they will not be bound
until they execute a separate formal document. A typical letter of intent will include a clause expressing that
intention. Notwithstanding such an express reservation, if the parties have reached agreement on all essential
terms, the question is whether they anticipated the formal document as an essential ingredient without which
they had no intention of being bound, or as a mere memorial or formal recognition of an existing agreement.
Absent a positive agreement that the parties intend not to be bound until a final writing is executed, the mere
Page 3 of 4
statement of an intended writing does not preclude the formation of the contract where all of the essential terms
have been agreed upon. Ghassemi-Tary v. Hami, 2012 Mass. Super. LEXIS 304 (Nov. 9, 2012).
Sometimes parties reach agreement on all the essential terms of their ultimate contractual objective but intend
to draft and sign a more formal memorial of their agreement. What happens if, for any number of reasons, such
formal document is never signed? Even if the parties plan on executing a formal memorial of their agreement,
before that occurs, their preliminary agreement—regardless of its label—may be regarded as a legally
operative contract on the parties’ ultimate contractual objective. If a legally operative contract is formed under
those circumstances, the parties’ subsequent failure to execute the more formal memorial of their deal that they
intended to sign does not undo the binding agreement they had already agreed to. Even when parties intend to
put their deal in a more formal written memorial, courts are inclined to find a binding contract if the parties have
agreed on all the essential terms of the deal and have not conditioned contract formation on any subsequent
event, such as signing off on a more formal memorial of their deal, agreeing on one or more unresolved points,
or obtaining approval from someone else (for example, the proverbial “home office”). See, e.g., Mims v. Bogan,
2015 U.S. Dist. LEXIS 99255 (M.D. Ala. 2015) (finding contract on preliminary agreement despite parties’ intent
to draft more formal memorial); Falls Garden Condo. Ass’n v. Falls Homeowners Ass’n, 2015 Md. LEXIS 10
(2015) (letter of Intent may be enforceable contract even though it explicitly contemplates future agreements);
Padula v. Wagner, 2015-Ohio-2374 (Ohio App. 2015) (finding no contract on preliminary agreement where
parties manifested their intent that there would be no contract until the more formal memorial was executed).
Where a party acknowledges that the other party would not be legally bound to a contract in the absence of a
more formal writing, such acknowledgment is strong evidence that no binding contract has been created. Balk
v. New York Inst. of Tech., 2015 U.S. Dist. LEXIS 123833 (E.D.N.Y. Sept. 16, 2015). Where litigants agreed
upon all “material terms” of a settlement agreement on the record in court, “[t]he fact that a written settlement
agreement was envisioned but has not been signed is immaterial.” Zong v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 2014 U.S. Dist. LEXIS 134390 (E.D. Pa. 2014).
In Falls Garden Condo. Ass’n v. Falls Homeowners Ass’n, 2015 Md. LEXIS 10 (2015), the court explained that
“the iconic Corbin” had grouped letters of intent cases into four distinct categories—“[a] valid contract generally
has been made if a letter of intent properly falls within either the third or the fourth category”:
(1) At one extreme, the parties may say specifically that they intend not to be bound until the formal writing
is executed, or one of the parties has announced to the other such an intention. (2) Next, there are cases
in which they clearly point out one or more specific matters on which they must yet agree before
negotiations are concluded. (3) There are many cases in which the parties express definite agreement on
all necessary terms, and say nothing as to other relevant matters that are not essential, but that other
people often include in similar contracts. (4) At the opposite extreme are cases like those of the third class,
with the addition that the parties expressly state that they intend their present expressions to be a binding
agreement or contract; such an express statement should be conclusive on the question of their ‘intention.’
While there are numerous cases dealing with letters of intent that reach different results on this question, they
should not be viewed as irreconcilable since the issue is a question of fact. The language of the letter of intent
itself is a critical ingredient in this determination, but it is certainly not the only factor. Subsequent to the letter of
intent but prior to the time they would have executed the formal document, the parties may have made
statements or otherwise conducted themselves in such a fashion as to indicate they intended to be bound
before any formal document has been executed.
In Arnold Palmer Golf Co. v. Fuqua Industries, Inc., 541 F.2d 584, 588 (6th Cir. 1976), the parties had
executed a detailed memorandum containing the essential terms of their merger agreement that was expressly
conditioned on the approval of a definitive agreement satisfactory to the parties. Nonetheless, Fuqua issued a
press release stating that Fuqua Industries and the Arnold Palmer Golf Company had agreed to cooperate in
an enterprise to serve the golfing industry. Subsequently, however, Fuqua announced that it was terminating
the transaction. The trial court granted summary judgment for Fuqua on the language of the memorandum
alone. Citing Corbin on Contracts, the appellate court quoted from an earlier case: “At bottom, the question
whether the parties intended a contract is a factual one, not a legal one, and, except in the clearest cases, the
question is one for the fact finder to resolve.” The case was remanded for a determination of the fact question.
Other courts have noted the importance of the subsequent conduct of the parties in determining whether a
contract was made. Cannon Rd. Llc v. Psc Metals, 2002-Ohio-6050, 2002 Ohio App. LEXIS 5876 (Ohio Ct.
App., Cuyahoga County Nov. 7, 2002). See also Trowbridge v. McCaigue, 992 A.2d 199, 2010 PA Super. 50.
Page 4 of 4
Courts will overlook the absence of a signature when the parties’ conduct otherwise manifests their intent to
abide by the document’s terms. Where it is reasonable to regard a party’s communication in sending a
document as an offer to enter into a contract that can be accepted merely by signing and returning it, if the
offeree signs and returns the document and the offeror does not object to it, a court will be inclined to regard it
as a contract even though the offeror does not sign it. 1 Oak Private Equity Venture Capital Ltd. v. Twitter, Inc.,
2015 Del. Super. LEXIS 978 (2015). The court in Wright v. Hernandez, 2015 Tex. App. LEXIS 7430 (2015)
noted that under traditional contract law, “the presence or absence of a party’s signature on a written contract is
relevant to determining whether there was an intent for an agreement to be binding,” and a signature “creates a
‘strong presumption’ that the party has assented to the terms of an agreement.” However, the absence of a
signature is not dispositive of the issue. “… when the terms of the contract make it clear that a signature is
required, a party’s failure to sign the agreement will render the agreement unenforceable,” but the court that
where the parties do not intend for a signature to be a condition precedent to the formation of an agreement,
“then a party’s failure to sign the agreement does not render the agreement unenforceable, as long as it
appears that the parties otherwise gave their consent to the terms of the agreement.” THI of Pa. at
Mountainview, LLC v. McLaughlin, 2015 U.S. Dist. LEXIS 59557 (W.D. Pa. 2015) (same). In Compliance
Solutions Occupational Trainers, Inc. v. United States, 118 Fed. Cl. 402, 2014 U.S. Claims LEXIS 967, 24
OSHC (BNA) 1989 (Fed. Cl. 2014), OSHA sent plaintiff an agreement to be signed and returned. The
agreement stated it was effective once both parties had signed. Plaintiff executed the agreement, but no one
executed it on behalf of OSHA. The court held no contract was formed. Citing the Corbin treatise, the court
explained that a manifestation of willingness to enter a bargain is not an offer if the other party knows or has
reason to know the person making the purported offer does not intend to conclude the bargain until after he or
she has given further manifestation of assent. See also, Lujan v. Alorica, 445 S.W.3d 443; 2014 Tex. App.
LEXIS 10534 (Tex. App. 2014) (signature was pre-condition to contract formation).
[4] “Agreements to Negotiate” Are Contracts

Negotiations in complex transactions such as mergers and acquisitions require a considerable allocation of time
and expense. Experts are often required to value the business that will be merged and various legal and
accounting expenses must be defrayed. Parties may, therefore, be wary of entering into prolonged negotiations
without assurance that they will be carried out in good faith. A potential buyer may seek an agreement that the
seller of a business will not solicit or negotiate with other potential buyers of the business while the negotiations
proceed. Whether such agreements arise out of letters of intent or are more directly understood as agreements
to negotiate in good faith, they are enforceable. See Venture Assocs. Corp. v. Zenith Data Sys. Corp., 96 F.3d
275 (7th Cir. 1996). An agreement to negotiate in good faith is itself a contract. While the standard of “good
faith” may appear elusive, like other statements of legal principles, it continues to be adumbrated on a case-by-
case basis.
Practice Resources:
• Corbin § 2. (partial agreements—agreements to agree and agreements to
negotiate); § 2. (formal document contemplated by the parties).

End of Document
§ 2.0 Understanding the Meaning of “Written Contract”
[1] Absent a Statutory Requirement, Parties May Form a Contract Without a Writing
The term “written contract” has no uniform meaning. Like so many other terms, its meaning can only be
discerned in the context of its use and it is used in a variety of circumstances. Regardless of how it is used,
however, it should be understood in terms of its purpose, which is essentially evidentiary. While there are
statutes requiring written evidence of certain types of contracts, the common law had no requirement that the
typical informal contract had to be in writing. Absent a statutory requirement, parties may still form a contract
without any writing.
[2] State Statutes May Require Certain Contracts to Be in Writing

The statute that is best known for requiring evidence of the contract in writing is the statute of frauds. The
traditional types of contracts that a state statute of frauds typically requires to be evidenced by a writing to make
the contract enforceable replicates the original English sixteenth century version: promises by an executor or
administrator to answer for the debts of the decedent; promises to answer for the debt of another; promises in
consideration of marriage; contracts that cannot be performed within one year from the time they are made;
contracts for the sale of land or an interest in land; and contracts for the sale of goods with a price of $500 or
more. A state statute of frauds may require other kinds of contracts to be evidenced by a writing, such as a
contract between a real estate broker and owner of property for the broker’s commission on a sale.
One of the interesting issues concerning the statute of frauds arises where the writing evidencing an alleged
contract for the sale of goods with a price of $500 or more is a purchase order, the typical standard form used
by buyers in commercial transactions. A buyer may send a purchase order as an offer or it may send the same
purchase order as a confirmation of an oral contract previously made with the seller. If the purchase order
merely evidences an offer, it will not satisfy the requirement of the statute of frauds to evidence that “a contract
for sale has been made.” See UCC § 2-201 1 (emphasis supplied).
Some statutes of limitations may provide a longer period for bringing an action on a “written contract” than an
oral contract. A writing constitutes a permanent record, not subject to faulty recollection. A statute such as the
Automobile Dealers’ Day in Court Act requires a written contract for its provisions to protect a franchised auto
dealer. See 15 U.S.C.S. § 1221. Statutes in a few jurisdictions make a promise enforceable if it is in writing
though it would not otherwise be an enforceable contract. Pennsylvania enacted the Model Written Obligations
Act, which makes a promise enforceable if it is in writing and states that the promisor intends to be legally
bound. 33 P.S. § . But the act has its limitations. In Socko v. Mid-Atlantic Sys. of CPA, Inc., 2015 Pa. LEXIS
2672, 126 A.3d 1266, 40 I.E.R. Cas. (BNA) 1568, 166 Lab. Cas. (CCH) P61,652 (Pa. 2015), Mid-Atlantic had
its employee Socko sign an agreement entitled “the Non-Competition Agreement” during the course of his
employment. The agreement provided that Socko was not permitted to compete with Mid-Atlantic in various
states for two years after the termination of his employment, and it contained the language required under the
Model Written Obligations Act. Importantly, Socko did not receive any benefit or any change in his existing
employment status in exchange for signing the Agreement. Socko later challenged the validity of the agreement
on the basis of lack of consideration. The Pennsylvania Supreme Court held that the contractual language
satisfying the Model Written Obligations Act did not prevent Socko from challenging the agreement on the basis
of a lack of consideration. An agreement in restraint of trade requires something more than the words of the Act
or a seal.
Page 2 of 3
There are statutes in other jurisdictions making isolated types of promises enforceable if they are in writing. A
written contract may exclude evidence of alleged agreements between the parties prior to the writing under the
parol evidence rule. See Chapter 26 below.
Just because a “written contract” is unsigned does not negate its effect unless the parties intend their
agreement to be conditioned on a signed writing. New York Party Shuttle, LLC v. Bilello, 414 S.W.3d 206 (Tex.
App. 2013). Similarly, a memorandum of agreement signed by one party and acted upon by another binds both
parties to its written terms. If what is signed is merely a written offer, however, no matter how detailed, there is
no contract until the offer is accepted.
[3] Electronic Records May Be “Writings”

In recent years, the use of electronic records instead of traditional writings has induced new judicial approaches
as well as legislation. When Charles D’Arrigo filed a claim for lost luggage with Alitalia Airlines, he filed it on a
computer. The airline denied the claim because it was not in “writing,” as required by the Warsaw Convention,
the international treaty governing such claims. Since the Convention did not define the term “writing,” the court
considered local law and found a definition of “writing” in a legal dictionary: “the expression of ideas by letters
visible to the eye.” The court found this definition compatible with words appearing on a computer screen. It
also referred to the definition of “written” or “writing” under the UCC, which includes “printing, typewriting or any
other reduction to tangible form.” Finally, the court noted the enactment in New York of a new statute
recognizing electronic records as equivalent to writings and concluded that D’Arrigo had met the “writing”
requirement of the Warsaw Convention. D’Arrigo v. Alitalia, 192 Misc. 2d 188, 745 N.Y.S.2d 816 (Civ. Ct.
2002).
Several other courts have held that electronic records and electronic signatures are the equivalent of traditional
writings or traditional signatures. See, e.g., In re RealNetworks, Inc. Privacy Litig., 2000 U.S. Dist. LEXIS 6584
(N.D. Ill. May 11, 2000); Cloud Corp. v. Hasbro, Inc., 314 F.3d 289 (7th Cir. 2002).
Nonetheless, awaiting judicial decisions to determine whether electronic signatures and records would meet
requirements that a contract or signature be “written” would hamper commercial transactions, particularly,
international transactions. Congress therefore enacted the Electronic Signatures in Global and National
Commerce Act (“E-Sign”). See 15 U.S.C. § 001 et seq.
In the meantime, the National Conference of Commissioners on Uniform State Laws (NCCUSL) had created
the 1999 Uniform Electronic Transactions Act (UETA) with virtually identical language to “E-Sign,” though it is
somewhat broader in scope. At the time of this writing, UETA has been enacted in 48 jurisdictions. Both
statutes are designed to recognize electronic records (defined in 15 U.S.C. § 00 as, “information that is
inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in
perceivable form”) and electronic signatures as the equivalents of traditional writings and signatures. Enactment
of UETA will automatically assure compliance with the “E-Sign” law. See 15 U.S.C. § 002 1.
A contract evidenced by e-mail will be effective assuming that the parties manifest consent to that form of
electronic record, and such consent is rather easily assumed. A message left on an answering device could be
an offer or an acceptance of an offer. “Electronic agents” are computer programs that may make contracts with
each other with no human intervention or with humans, as often occurs in internet transactions. See 15 U.S.C.
§ 00 . With the exception of wills, trusts, and codicils, or statutes that have their own recognition of
electronic records, an electronic record or electronic signature will be as effective as a traditional writing or
signature.
[4] Delivery Is a Common Manifestation of Assent

It is commonly said that a necessary requirement of an enforceable contract under seal is delivery of the sealed
document, the physical transfer of the instrument to the obligee. “Delivery,” however, is simply evidence of the
obligor’s assent to the sealed promise. Absent such delivery, the obligor does not appear to be bound. It is
possible to manifest assent to a sealed contract absent delivery in the physical sense of that term where the
obligor intends the instrument to become effective.
A manifestation of assent is required, but there is no requirement that such a manifestation of assent occur
through delivery of a writing, although such a delivery could constitute sufficient evidence of assent. If the
parties manifest their intention not to be bound absent a writing, there must be assent to the writing, which
Page 3 of 3
commonly consists of signing the writing and delivering it. There are cases, therefore, stating that the writing
must be delivered. Again, however, while delivery is a common manifestation of assent, it is possible for parties
to assent to a writing without delivery. If Ames signs a writing and hands it to Barnes with the understanding
that Barnes will retain it, both parties become bound to a contract though Ames delivered the writing before she
was bound while Barnes became bound without any delivery simply by retaining the writing.
Practice Resources:
• Corbin § 2.10 (what constitutes a written contract); § 2.11 (delivery of a
document as final expression of assent); § 10. (contracts under seal).

End of Document
§ 2.0 Effectiveness of Terms That Are Not Contained in the Central Portions
of the Contract
[1] Clauses Purporting to Limit the Liability of a Supplier of Goods or Services May Be Operative if
They Are Sufficiently Conspicuous
The overwhelming majority of contracts made on any given day are evidenced by one or more printed forms.
Contracts for the sale of goods are often evidenced by a printed purchase order form sent by a buyer to a seller
who responds with its printed acknowledgment form. Each of the forms contains clauses attempting to provide
maximum protection to the respective parties. The terms occupying the parties’ attention such as the subject
matter, the price and quantity, and other often negotiated terms are typically identical on both forms. The
parties’ printed “standard terms and conditions” that often appear on the reverse sides of their forms, however,
are frequently in conflict and are just as often ignored.
Clauses on billheads, letterheads, receipts, and other documents are common. Various clauses limiting the
liability of a supplier of goods or services may appear on these documents. Whether such a clause will be
operative typically depends on whether it is sufficiently conspicuous or otherwise called to the attention of the
party against whom it is designed to operate. If a reasonable party would not view such a document as a
contract, it will not have the effect of a contract. Thus, when a “pickup ticket” signed as a receipt contained an
indemnity clause to save the other party harmless from liability, the court held that there was no inference of
assent when the writing purports to be used for a purpose other than a contract. This pickup ticket was not
contractual in form nor did it give any conspicuous notice of proposed additional terms. Magliozzi v. P&T
Container Serv. Co., 34 Mass. App. Ct. 591, 594, 614 N.E.2d 690, 692 (1993) (citing Restatement (Second) of
Contracts § 211 cmt. d and illus. 3). A well-known case determined that a limitation of liability clause on a
parcel check may not be effective because the bailor would not view the check as contractual and may not be
expected to notice such a provision. Klar v. H. & M. Parcel Room, Inc., 296 N.Y. 1044, 73 N.E.2d 912 (1947).
[2] A Seller’s “Sales Order” May Be a Document Evidencing the Buyer’s Offer
A “sales order” that the seller’s representative asks the customer to sign may include a clause stating that the
agent has no power to bind the principal or it may state the seller will not be bound until the form is signed by
an authorized official at the home office. Such clauses may be effective to convert what the signing buyer
believes to be a writing evidencing a contract into a document evidencing the buyer’s offer (on the seller’s
standard terms), which the seller will have to accept to form the contract.
Practice Resource:
• Corbin § 2.12 (printed terms on letterheads and receipts).

End of Document
§ 2.0 Intention to Affect Legal Relations
[1] Social Agreements Are Not Legally Enforceable Absent Evidence of the Parties’ Intention to Be
Bound
Since parties to social agreements do not expect to be legally bound by them, they are not legally enforceable
absent evidence of the parties’ intention that they will have binding effect. Commercial agreements, however,
are reasonably understood to be legally binding and will, therefore, be binding unless the parties otherwise
agree. Courts recognize the parties’ right to include a provision in their contract document that no legally
binding effect will attend the agreement. It is not uncommon to discover such a statement in employee
handbooks which otherwise may be viewed as contractual documents. In Johnson v. Vatterott Educ. Ctrs., Inc.,
410 S.W.3d 735 (Mo. Ct. App. 2013), each employee received a copy of the handbook that stated, “I
understand the Employee Handbook is not a contract of employment” and “the policies, rules and benefits in it
are subject to change at any time in the sole discretion of Vatterot.” Several pages of the handbook, however,
were devoted to an “At Will and Binding Arbitration Agreement” that stated it was legally binding. Though the
employee had signed that form, the court held that it was not a binding arbitration agreement since it was
surrounded by statements that nothing in the handbook was legally binding.
In some cases, however, courts have refused to accord such “non-binding” provisions effect since the other
party had justifiably relied on the agreement or had partially performed it. A court may view the provision as
unconscionable or it may be deemed unenforceable as giving rise to a penalty or forfeiture on the part of one
party while unjustly enriching the other party. The essential inquiry is whether a reasonable party against whom
enforcement is sought would view the document as manifesting an intention to be legally bound.
Some arrangements, though not social engagements, are not uniformly regarded by the courts as entitled to
the same deference as contracts entered into in commercial settings. An example of this is found in college
student handbooks and other publications issued to students by institutions of higher learning. Courts often
recognize, expressly or impliedly, that these documents have contractual significance. See, e.g., Doe v.
Brandeis Univ., 2016 U.S. Dist. LEXIS 43499 (D. Mass. Mar. 31, 2016); Doe v. Brown Univ., 2016 U.S. Dist.
LEXIS 21027 (D.R.I. Feb. 22, 2016); Tsuruta v. Augustana Univ., 2015 U.S. Dist. LEXIS 136796 (D. S.D.
2015); Faiaz v. Colgate Univ., 2014 U.S. Dist. LEXIS 164168 (N.D. N.Y. 2014); Dempsey v. Bucknell Univ.,
2015 U.S. Dist. LEXIS 349 (M.D. Pa. 2015); Pierre v. Univ. of Dayton, 2015 U.S. Dist. LEXIS 166334 (S.D.
Ohio Dec. 11, 2015); Harris v. St. Joseph’s Univ., 2014 U.S. Dist. LEXIS 65452 (E.D. Pa. 2014). While some
courts treat handbooks as traditional contracts made in strictly commercial settings, Doe v. Brown Univ., supra,
other courts do not. See Knelman v. Middlebury College, 570 Fed. Appx. 66 (2d Cir. 2014) [c o ts should be
wary of the wholesale application of commercial contract principles in the academic co te t. King v. Depauw
Univ., 2014 U.S. Dist. LEXIS 117075 (S.D. Ind. 2014) i the area of academic services, our approach has
been akin to the one used in the case of contracts conditioned upon the satisfaction of one ty and the
plaintiff must show that the school acted arbitrarily or in bad faith); Faiaz v. Colgate Univ., 2014 U.S. Dist.
LEXIS 164168 (N.D. N.Y. 2014) (institution need only ct in good faith in its dealing with its st e ts. When
a disciplinary problem arises, judicial review of the institution’s actions is limited “to whether the [institution]
acted arbitrarily or whether it substantially complied with its own rules and regulations.”); Harris v. St. Joseph’s
Univ., 2014 U.S. Dist. LEXIS 65452 (E.D. Pa. 2014) (college handbook provisions that reposes in the school
final discretion as to discipline are “adequate to insulate the merits of [the University’s] decision from intensive
review.”) Thus, in critical respects, colleges sometimes are given greater leeway in the interpretation and
performance of their obligations under these documents than are parties in strictly contractual settings.
Page 2 of 2
[2] Promises Intended as Jests Are Not Operative if a Reasonable Person Would Understand Such
Promises to Be Jests
If Ames refuses to perform an agreement with Barnes on the footing that Ames’s offer or acceptance of an offer
was intended only as a joke, the test is whether, under all of the surrounding circumstances, Barnes was
reasonable in understanding Ames’s expressions or conduct as serious or whether a reasonable person would
have understood Ames as joking. See Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116 (S.D.N.Y. 1999). If a
record of an agreement superficially appears to be genuine but the surrounding circumstances and other
evidence demonstrate that the record is a sham, no contract will be found since the objective evidence
demonstrated that no contract was intended.
A lawyer representing a client accused of murder appeared on a television program and challenged the
prosecution’s theory that his client traveled from Atlanta to Orlando, then back to Atlanta within the relevant
time period. The program edited the interview and aired the attorney stating: “I challenge anybody to show
me—I’ll pay them a million dollars if they can do it.” A law student set out to disprove the attorney, then
requested payment. The attorney refused to pay, and in the ensuing litigation, the court held the attorney’s
statement was merely a figure of speech. A reasonable, objective person would not have understood it to be an
invitation to contract. The court added:
However, unenforceable is not quite the same as “unlitigable,” since some people might still take such a
challenge literally. For example, Donald Trump recently sued Bill Maher for breach of contract after Maher
stated on national television that he would offer five million dollars to Trump, donatable to the charity of
Trump’s choice, if Trump proved that he was not the spawn of an orangutan. . Trump claimed to accept
this offer by providing a copy of his birth certificate as proof of his non-orangutan origin, filing suit when
Maher did not respond to his demand for payment. Trump later voluntarily dismissed the suit.
Kolodziej v. Mason, 774 F.3d 736, 2014 U.S. App. LEXIS 23816 (11th Cir. 2014).
Practice Resource:
• Corbin § 2.1 (intention to affect legal relations—social agreements, jests and
sham agreements).

End of Document
§ 2.10 Duration of Power of Acceptance
[1] At the Time of Making the Offer, the Offeror Has Full Control Over the Length of Time During Which
the Power of Acceptance Will Last
The expression “duration of an offer” actually refers to the duration of the power of acceptance created by the
offer. The question is, how long does the offeree have to exercise its power of acceptance? The offeror is the
master of the offer. A person may choose to make no offer, and if the person makes an offer, he or she may
limit it as he or she chooses. Whatever time is specified in the offer, the power of acceptance expires at the end
of that period. See Williams v. Bank of Am., N.A., 602 Fed. Appx. 187 (5th Cir. 2015); Senior Settlements, LLC
v. Growth Trust Fund, 2010 U.S. App. LEXIS 7232 (3d Cir. Apr. 8, 2010). An attempt to accept beyond the
deadline stated in the offer, however, may operate as a counter offer. Starlite L.P. v. Landry’s Seafood Rests.,
Inc., 780 N.W.2d 396 (Minn. Ct. App. 2010).
What appears to be a definite time limit on the power of acceptance may still require interpretation. Thus, in a
well-known case, the offer was in a letter stating that the offeror “will give you [offeree] eight days” in which to
accept or reject the offer. Is the eight days measured from the dispatch of the offer or from the time the offer is
received, assuming it is received in the ordinary course of mail deliveries? The court held that the offer had no
legal existence before it came to the knowledge of the offeree. From that premise, it can be concluded that the
eight days began to run from the time the letter was received rather than from the time it was dispatched.
Caldwell v. Cline, 109 W. Va. 553, 156 S.E. 55 (1930).
An opposite rationale would suggest that the offeree should understand that the offeror is limiting the time for
acceptance for the offeror’s benefit, which might point to measurement from the time of dispatch. While the
rationale should focus on the reasonable understanding of the offeree, in case of doubt the construction should
be against the party drafting the offer. Thus, the eight days would be counted upon receipt of the offer.
In contracts for the international sale of goods governed by United Nations Convention on Contracts for the
International Sale of Goods (CISG), the eight days would begin to run from the date of the letter or, absent such
a date in the letter itself, from the date shown on the envelope. CISG Article 20(1).
[2] If an Offeree Neither Knows nor Should Know That the Offer Has Been Delayed, the Power of
Acceptance Remains
Since there is no power of acceptance until the offer reaches the offeree, suppose the transmission of the offer
has been delayed? If, notwithstanding the delay, the offer can still be accepted within the time prescribed by the
offeror, the power of acceptance remains in the offeree. If, however, the offer is not received until after the
offeree knows or should know that the prescribed or reasonable time for acceptance has past, there is no
power of acceptance to be exercised. Where an offeree neither knows nor should know that the offer has been
delayed, the power of acceptance remains.
An offeror faxed his attorney with directions to deliver a settlement offer through a mediator. The attorney
transmitted the offer but failed to inform the mediator of a deadline in the offer of five calendar days (three
working days) for the offeree to exercise the power of acceptance. The mediator did not communicate the offer
to the offeree until the 6th day, the day after the offer would have normally expired. The offeree was unaware of
any delay in the offer. The court adopted § of the Restatement (Second) of Contracts, stating that, where the
delay is due to the fault of the offeror or to the means of transmission chosen by the offeror, an innocent offeree
has the same time to accept that he would have had if the offer had been dispatched when its arrival seemed to
indicate. Thus, the offeree had five calendar days and three working days to accept from the time he received
Page 2 of 3
the offer without awareness of any delay. He accepted two working days after receiving the offer and the court
held that the acceptance was effective. Perry v. Ronan, 225 Ariz. 49, 234 P.3d 617 (Ct. App. 2010).
[3] An Offer That Expresses No Time Limit Will Remain Open for a “Reasonable Time”
An offer that expresses no time limit will not endure in perpetuity but is open only for a reasonable time.
Burbank v. HRI Props., 2015 U.S. Dist. LEXIS 71788 (E.D. La. June 2, 2015). The underlying assumption is
that the offeror did not intend the offer to remain open beyond a reasonable time. An offeror would be unfairly
surprised to be informed of the acceptance of an offer many years after it had been forgotten. What is a
reasonable time will depend upon the apparent purpose of the offer, the nature of the transaction, the means of
communication, and all of the surrounding circumstances. The subject matter of the contract may provide
strong evidence that the power of acceptance should be immediate, such as in a situation involving the
purchase and sale of securities traded on a public exchange. An offer to buy or sell land typically suggests a
considerably longer duration.
When a defendant offered to settle a personal injury action, but the plaintiff proceeded to arbitration of the
dispute resulting in an award less than the defendant’s settlement offer, the plaintiff then sought to accept the
settlement offer. Citing the Restatement (Second) of Contracts § 1 the court repeated the maxim that an offer
without a stated duration of the power of acceptance is open for a reasonable time, which is usually a question
of fact. When, however, there is no dispute in the facts, a court could decide the length of a reasonable time.
The court noted that the purpose of the offer that should be known by the offeree as well as the nature of the
transaction are important factors in determining a reasonable time. The purpose of an offer to settle a personal
injury suit is to substitute a known risk to avoid the risk of an unknown liability in litigation, whether in a court or
arbitration. The offeror does not assume the risk that the offer will remain open after a verdict or award in an
amount less than his offer. Sherrod v. Kidd, 138 Wn. App. 73, 155 P.3d 976 (2007).
When, however, a settlement offer was made and the offeree sought to exercise the power of acceptance after
the personal injury statute of limitations had expired, the court found no merit in the assumption that such offers
automatically terminate upon the expiration of the relevant statute of limitations. Vaskie v. West American Ins.
Co., 383 Pa. Super. 76, 556 A.2d 436 (1989). Again, the critical determination is the reasonable understanding
of the offeree.
Where the parties are in each other’s presence, there is an inference that the power of acceptance must be
immediate. Similarly, absent other manifestations of intention, an offer by telephone creates a power of
acceptance that ends with the closing of the telephone call. An offer to buy or sell subject matter of highly
fluctuating value such as stocks or commodities will necessarily be very short and require an immediate
acceptance. Absent a land boom or other circumstances causing real property to fluctuate in value, a
reasonable time to accept an offer to buy or sell land would be considerably longer.
The medium of acceptance may be important in stock and commodities transactions. A letter offering stock for
sale may allow a letter of acceptance to be mailed shortly after the offer is received. Though an email or other
rapid communication sent later would arrive at the same time as a letter, it would not be an acceptance since
the offeree may not enjoy additional time to speculate at the offeror’s expense. Restatement (Second) of
Contracts § 1 illus. 8. The purpose of the reasonable time limitation to protect the offeror is manifested by an
unusual but well-known case of an offer sent on December 17, which the offeree attempted to accept on March
31. On its face, it appeared that a reasonable time had ended well before March 31. The offeror, had mailed
letters to the offeree stating that the offer remained open but these letters, were never received. Nonetheless,
the court held that a contract had been formed. It was not necessary to protect the offeror by limiting the time
for acceptance to the original reasonable time because the offeror manifested an intention that the power of
acceptance should continue in the offeree beyond that time. Mactier’s Administrators, Appellants, & Frith, 6
Wend. 103, 21 Am. Dec. 262 (N.Y. 1830).
[4] An Expiration Date in an Option Contract Is Strictly Construed

The sole purpose of an option contract is to create an irrevocable power of acceptance for the time stated in the
option. When the option contract contains an expiration date, it is strictly construed since time is of the essence
in such contracts (e.g., stock options traded on major exchanges). There is no forfeiture in the strict
construction of an expiration date since the offeree has received an irrevocable power of acceptance for the
Page 3 of 3
time specified in exchange for the consideration it paid for that period in which to decide whether to exercise the
power.
If the option is part of a more complex transaction, such as an option to renew a lease, or is part of another
continuous relationship, some courts have been willing to consider equitable considerations to relax specified
deadlines. Thus, if a lessee has been guilty of only a slight delay in notifying the lessor of renewal, and the
delay has not prejudiced the lessor and the failure to grant relief would constitute an unconscionable hardship
or forfeiture by the lessee, some courts would grant equitable relief to the lessee. In Commercial Res. Group,
LLC v. J.M. Smucker Co., 753 F.3d 790 (8th Cir. 2014), the court stated three requirements that must be met:
(1) the delay must be slight, (2) without prejudice to the other party and (3) literal enforcement of the time
provision would be unconscionable. Another court suggests the criteria of material breach under the
Restatement (Second) of Contracts § 2 1 may be appropriate to determine whether the delay should be
excused. Molnar v. Castle Bail Bonds, Inc., 2005-Ohio-6643, 2005 Ohio App. LEXIS 5971 (4th Dist.).
[5] A Right of First Refusal in a Lease Becomes an Option Contract When the Lessor Has Received an
Offer to Purchase the Property from a Third Party
A right of first refusal in a lease becomes an option contract when the owner-lessor has received an offer to
purchase the property from a third party. When a lessee was notified in mid-January that such an offer had
been received, the lessee had not paid the rent for December or January on time. Since no time was specified
for the exercise of the right of first refusal, the lessee was entitled to a reasonable time. When the lessee was
again notified in early February that the property would be sold unless he arranged for its purchase, he
informed the owner that his effort to obtain financing had been unsuccessful. On February 10, the owner
agreed to sell the property to the third party. A month later, the lessee notified the owner that he had secured
the purchase money and sought to exercise his option. The court held that, under these circumstances, the
owner had allowed the lessee a reasonable time to purchase, which expired on February 10 after the owner
learned of the lessee’s unsuccessful effort to secure financing on the heels of his failure to pay the December
and January rents on time. Orlowski v. Moore, 198 Pa. Super. 360, 181 A.2d 692 (1962).
Practice Resources:
• Corbin § 2.1 (duration of power of acceptance created by offer); § 2.1 (missed
deadlines in option contracts); § 2.1 (reasonable time for acceptance); § 2.1
(effect of delay in delivery of offer).

End of Document
§ 2.11 Understanding Revocation
[1] Offers Are Usually Revocable

Although an offer creates a power of acceptance in the offeree, the offeror retains a power to revoke that offer
unless the offer has become irrevocable. The power is exercised by notice to the offeree and it has the effect of
terminating the power of acceptance. Once the offer has been accepted, the offeror has no power to revoke.
Both parties are bound by the contract formed by the offeree’s exercise of the power of acceptance. The offeror
may revoke the offer at any time prior to its acceptance even if the offer stated a duration of the power of
acceptance. Under the common law, a statement of duration simply places a limit on the time in which the
power of acceptance may be exercised. It does not preclude revocation prior to that time. The power of
acceptance created by an offer may also be terminated by a rejection of the offer including counter offers that
typically have the effect of rejecting offers. Rejections and counter offers are explored in the next chapter. This
section focuses on revocation of offers.
[2] The Death of the Offeror Revokes the Power of Acceptance

The death of the offeror revokes the power of acceptance even where the offeree is unaware of the offeror’s
death and attempts to accept the offer. Though the rule is viewed as emanating from the obsolete notion that a
contract requires a subjective “meeting of the minds,” it is “grudgingly” continued. Restatement (Second) of
Contracts § cmt. a. While there are some cases that refused to apply the rule where performance occurred
after the offeror died, the rule has generally been followed. Beall v. Beall, 291 Md. 224, 434 A.2d 1015 (1981). It
is also applied when the offeree has died; only the offeree had the power of acceptance, which could not be
exercised by the offeree’s representative.
Supervening insanity of the offeror will also revoke the offer since the offeror no longer has the capacity to
make a contract. Since “insanity” can take varying forms and can be far less determinable than death, the
criticism of the rule induced at least one court to hold that, in the particular circumstances of the case, a
promise of guaranty was not revoked by insanity unless the offeree knew or should have known of it. Swift &
Co. v. Smigel, 115 N.J. Super. 391, 279 A.2d 895 (1971), aff’d, 60 N.J. 348, 289 A.2d 793 (1972).
[3] Notice of Revocation Is Required

Unless the offer is made irrevocable in one of the ways discussed in § 2.12 below, or the offer has been
accepted, the offer must be revoked by notification to the offeree. The notification need not be in writing. The
offeror may terminate the entire power of acceptance or may issue a revocation concerning the manner or time
or acceptance. If, for example, the offer allowed acceptance within 10 days, the offeror may notify the offeree
that the acceptance must be immediate. The offeror may change the offer to require a particular form of
acceptance, delivery to a specific address, or other changes. The offeror may change the substantive terms of
the offer—subject matter, price, or the quantity term. These changes are revocations of the original offer and
the substitution of new terms that create a new power of acceptance on such terms. An offer that attempts to
reserve a power to revoke even after it has been accepted, however, is not an offer because it creates no
power of acceptance in the offeree. Moreover, if the “acceptance” of an offer is interpreted as requiring an act of
the offeror that the offeror is free to either perform or not perform, the so-called offer does not exist because the
power of acceptance resided in the so-called “offeror.”
In a famous case, an offer was made to accept a discount on a mortgage loan if the loan was paid early. The
debtor appeared at the home of the creditor, knocked at the door, and identified himself as the debtor saying, “I
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have arrived to pay off the mortgage.” The creditor answered that the mortgage had been sold. The court
treated the offer as having been revoked since the performance required to accept the offer was “payment” and
there had been no tender of payment. Rather, the debtor had simply announced his presence to make such a
tender. While recognizing that the court was not required to consider the legal effect of a tender of the payment
by the debtor since no tender had occurred, writing for the majority Justice Kellogg stated his “individual view”
that the result would not have changed had a tender been made since the act requested was “the completed
act of payment” which would have been incapable of performance absent the assent of the creditor. Petterson
v. Pattberg, 248 N.Y. 86, 161 N.E. 428 (1928).
The view of Justice Kellogg is analytically unsound. Justice Kellogg regarded the creditor as an offeror, but if
the contract could not be formed absent the assent of the creditor, the creditor had become an offeree since
only an offeree has a power of acceptance. A tender would have exercised the debtor/offeree’s power of
acceptance because such an act is the only complete act of which the offeree was capable. He could not insist
that the offeror accept the payment.
Merely dispatching a revocation by mail or by another medium to an offeree is not effective. The revocation
must be received to be effective. If the revocation is received after the offeree has accepted the offer though the
offeror is not consciously aware of the acceptance, the offer has been accepted, a contract has been formed,
and the revocation is ineffective. There is no requirement of subjective mutual assent. A contract is formed
upon acceptance even though, at the moment of formation, the offeror has sent a revocation of the offer to the
offeree that was not received prior to the offeree’s acceptance. A revocation must be received at the offeree’s
appropriate address. It need not be read by the offeree to be effective. Restatement (Second) of Contracts § .
[4] Power of Acceptance Can Be Terminated Otherwise than By Direct Notice

If an offeree knows or has reason to know that the offeror no longer desires to enter into a contract, the offer is
revoked. When, for example, an offeror stated, “Well, I don’t know if we’re ready. We have not decided, we may
not want to go through with it,” the court held that the offer was revoked. Hoover Motor Express Co. v.
Clements Paper Co., 241 S.W.2d 851 (Tenn. 1951).
If an offeree simply learns of facts inconsistent with a continuation of the offer, the offer is revoked. In a well-
known case, Dodds made an offer to sell his property to Dickinson for £800, stating that the offer was open until
the following Friday at 9 a.m. On Thursday, Dickinson learned from his own agent (Berry) that Dodds was
“offering or agreeing” to sell the property to Allan. Dickinson immediately left a written acceptance with Dodds’s
mother-in-law and, prior to 9 a.m. Friday, Berry handed a written acceptance to Dodds. The court held that the
offer was revoked because, before his attempted acceptance, Dickinson had been informed that Dodds was no
longer interested in selling the property to him. Dickinson v. Dodds, 2 Ch.D. 463 (1876).
This case has been justly criticized on the footing that the court failed to distinguish a sale to a third party
(Allan) from a mere offer to sell. Dodds could have made an offer to sell the property to Allan conditioned on
Dickinson not accepting Dodds’s offer by 9 a.m. on Friday. If the information relayed by Berry, an apparently
reliable source, was that Dodds had contracted to sell the property to Allan and that information turned out to be
correct, there would have been an effective indirect revocation of the offer. Both a reliable source and correct
information are essential to effect such an indirect revocation. If either is missing, there is no revocation. A
modern illustration of the indirect or “implied” revocation concept is found in Kidwill v. Werner, 2006 Tex. App.
LEXIS 10659 (Dec. 13, 2006).
When a second, or subsequent, offer is made that does not expressly incorporate the terms of a prior offer, the
prior offer is considered revoked, and “any terms and conditions that were part of the previous offer are no
longer considered part of the new offer unless included therein or expressly incorporated by reference.” An
offeror made an offer on December 7, but it was neither accepted nor expressly revoked. Then, on January 28,
the offeror made a subsequent offer that contained different terms. The January 28th offer not only created a
new power of acceptance, it revoked the earlier offer. Beemac Trucking, LLC v. CNG Concepts, LLC, 2016 PA
Super 32, 2016 Pa. Super. LEXIS 100 (Pa. Super. Ct. 2016).
[5] A General Offer May Be Revoked By Publication

Offers may be made through general publications to an unlimited number of unidentified persons. For example,
an offer of reward may be found in a newspaper or posted on a bulletin board or on a website. How can such
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an offer be revoked? Since the offerees cannot be identified, the most equitable solution is to require
publication in the same manner and with the same conspicuousness as the original offer.
Practice Resources:
• Corbin § 2.1 (offers are usually revocable); § 2.1 (notice of revocation
necessary); § 2.20 (revocation other than by direct notice): § 2.21 (revocation of
general offer by publication); § 2. (effect of death or insanity on power of
acceptance).

End of Document
§ 2.12 Understanding Irrevocable Offers
[1] Option Contracts Are Used to Make Offers Irrevocable

There are several ways in which an offer may be made irrevocable. The classic device is the option contract,
which can take two forms. Where the seal is still effective, a promise under seal to sell Blueacre for $500,000 at
any time within the next 30 days created an option contract that gave the promisee an irrevocable power of
acceptance for 30 days. Sealed promises are enforceable absent any consideration. If the seal is no longer
effective, a return promise of $100 or even less would have been the same effect since it would be viewed as
providing consideration though its nominal character would hardly conceal the absence of a true bargain.
In 2004, the Supreme Judicial Court of Massachusetts abolished the presumption of consideration for option
contracts under seal. At the same time, the court adopted the concept of a formal contract without seal under
§ of the Restatement (Second) of Contracts. Knott v. Racicot, 442 Mass. 314, 812 N.E.2d 1207 (2004). The
practice of recognizing agreements reciting nominal consideration as enforceable option contracts lead the
drafters of the Second Restatement to conclude that even where the recital of “ten dollars in hand paid” or the
like was false, the option contract should still be enforceable since the recital satisfied “the desiderata of form.”
§ cmt. b). This Restatement thrust has not been generally accepted at the time of this writing.
The classic option contract is created by a separate contract to keep an offer open. If Ames offered to sell
Blueacre to Barnes for $500,000, limiting the duration of the power of acceptance to 30 days, the offer could be
revoked. If, however, the parties agreed in a separate contract that, in exchange for $100, Ames would not
revoke the offer for 30 days, an option contract would be formed.
The latter type of option contract eliminates the offeror’s power of revocation. Any attempt at revocation would
be a nullity. If, in violation of the option contract, Ames sold the property to Carr who had notice of Barnes’s
rights, Barnes could still exercise his right within the 30 days to accept the offer and secure specific
performance of the contract with Ames.
An exception is based on the principle of mitigating damages in cases in which the offeree has an irrevocable
power of acceptance to perform an act. If the offeror repudiates the option contract, the offeree could not
recover damages for performance after notice of repudiation under the principle of avoidable consequences.
An option contract has a limited scope. Claassen v. City of Newton, 2015 Kan. App. Unpub. LEXIS 528 (2015)
explained that an option “is an irrevocable offer to sell property for a stated price during a stated time period
that the option holder may chose to accept. But that’s all it is.” It is not a sale of land, and it does not create a
vested interest in the land itself.
[2] Offers May Be Made Irrevocable by Statute and Public Policy

By statute or regulation, a government contract may make offers by suppliers of goods or services irrevocable.
In private contracts, the UCC states that an offer to buy or sell goods in a writing signed by a merchant giving
assurance that it will be held open for a period not exceeding three months is a “firm offer” that will be
irrevocable for that period of time though there is no option contract since the offeree paid no consideration or
otherwise relied on the assurance that the offer would not be revoked. See UCC § 2-20 .
The last portion of UCC § 2-20 states that if the assurance that the offer will remain open is part of a form
supplied by the offeree, this provision must be separately signed by the offeror. This saving provision seeks to
protect a party who is presented with the other party’s form containing considerable boilerplate. The signing
party may not recognize that he is making an offer rather than forming a contract. To protect such a party from
unwittingly making a “firm offer” under UCC § 2-20 the statute requires separate authentication of the firm
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offer clause. See 2949 Inc. v. McCorkle, 2005 Wash. App. LEXIS 1167 (May 23, 2005) (involving the
companion lease section, 2A-2-205).
Irrevocable offers are more common in civil law systems. In that tradition, the United Nations Convention on
Contracts for the International Sale of Goods (CISG), which applies in the United States and 74 other nations,
contains a clause stating that an offer cannot be revoked (a) if it indicates, whether by stating a fixed time for
acceptance or otherwise, that it is irrevocable, or (b) if it was reasonable for the offeree to rely on the offer being
irrevocable and the offeree has acted in reliance thereon. CISG Article 16.
Merely stating a fixed time for acceptance (e.g., an offer with a duration of the power of acceptance of 30 days)
would not constitute an irrevocable offer under the common law or the UCC § 2-20 that requires written
“assurance” that the offer was intended to be irrevocable for no more than three months. Merely stating the
duration of an offer under CISG, however, will make that offer irrevocable and there is no maximum duration.
This is not remarkable when it is recognized that the concept of consideration is not found in the civil law. The
much more flexible concept of “causa” (cause) provides a very limited restriction on the enforceability of
promises.
[3] Deposits or Prepayments Do Not Make an Offer Irrevocable

An offer to buy or sell may be accompanied by a deposit or even prepayment of the purchase price. Such a
deposit or payment, however, does not create an irrevocable offer. The offer may be revoked and the offeror is
typically entitled to return of its deposit to avoid the unjust enrichment of the offeree. In an invitation for bids,
particularly in public construction contracts, it is sometimes provided that no bid will be considered absent a
deposit that will be forfeited if the bidder revokes its bid (offer). Such a deposit does not make the offer
irrevocable absent a statutory mandate. If the bid is revoked, however, courts will typically permit the offeree to
keep the deposit.
[4] If an Offer Can Be Accepted Only by Performance, Acceptance Requires Complete Performance—
The Effect of Part Performance, Restatement § 45
If an offer can be accepted only by performance, a contract will be formed only upon the completion of
performance, creating a unilateral contract. The offer did not create a power of acceptance that could be
exercised by performing only part of the required act. The general rule that offers are revocable may result in
considerable injustice, however, if the offeror revokes after the offeree has begun to perform, thereby depriving
the offeree of an opportunity to complete performance, which would accept the offer and form the contract. The
offeree’s part performance would have no legal effect. On the other hand, since the offeree did not commit to
completing performance, the offeree is not bound to complete it. Consequently, if the offeror was somehow said
to be bound by the offeree’s part performance to allow an opportunity to complete that performance, another
purported violation of the common law is encountered under the axiom that either both parties are bound or
neither is bound.
The solution to this conundrum in the First Restatement of Contracts was the creation of a fiction that a contract
was formed when the offeree began to perform, but the duty of the offeror was conditioned on the offeree’s
completion of performance. Restatement (Second) of Contracts § arrives at the same result by constructing
another fiction-an option contract upon the offeree’s part performance. Where a father promised to devise
property to his three sons if they would make valuable improvements to the property, the sons did not complete
performance before the father’s death. The court held the option contract theory of the Restatement (Second)
made the offer irrevocable via the sons’ part performance. Eaton v. Eaton, 2005 Del. Ch. LEXIS 202 (Dec. 19,
2005).
In Evers v. Safety-Kleen Sys., 2012 U.S. Dist. LEXIS 36227 (D. Ariz. Mar. 19, 2012), the plaintiff, a terminable-
at-will employee, was working under a 2009 compensation plan that the employer replaced with a lower
compensation 2010 plan that was not announced until the end of January 2010 after the plaintiff had worked
during that period with no knowledge of the new plan. The plaintiff claimed compensation under the 2009 plan.
The court found that the plaintiff had a reasonable expectation of compensation at 2009 rates since the
employer did not change compensate rates annually. The court noted that in the unilateral (“at-will”) context,
once an offer of compensation is accepted by commencement of performance, the terms cannot be changed. If
an employer offers a certain wage for a day’s work, the employer cannot reduce that wage after the work has
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begun (citing Restatement (Second) of Contracts § . The principle attaches when the employee begins
performance so long as he completes the performance according to the terms of the offer.
In Poage v. Computer Scis. Corp., 2015 U.S. Dist. LEXIS 167545 (D. Ariz. Dec. 14, 2015), Poage was account
general manager for CSC. CSC sent an email to all of its employees detailing a new compensation incentive
opportunity called the Million Dollar Challenge (“MDC”) that gave employees additional income based on
revenue generated for the company pursuant to a formula spelled out in the MDC. The incentive bonus was to
be calculated and paid on March 28, 2014. Under the MDC, based on his performance, Poage was to receive
approximately $250,000 in incentive payments. In April 2014, Poage resigned at CSC’s insistence, and CSC
did not pay him the monies due under the MDC. Poage filed an action for, inter alia, breach of contract. The
court granted Poage’s motion for summary judgment and held that the MDC email constituted an offer for a
unilateral contract, which Poage accepted by generating approximately $17 million in additional revenue above
his normal forecast, entitling him to an incentive payment of roughly $250,000.
It should be emphasized that the § analysis applies only where an offer can only be accepted by
performance. Thus, the offeree is not bound by any promise to perform nor would the offeree’s promise form a
contract. The typical offer, however, is indifferent as to the manner of acceptance. In response to such an offer,
the offeree may choose to accept either by promising or performing. Where, in response to such an offer, the
offeree chooses to accept by performing, the start of performance constitutes an implied promise to complete
performance and would be properly viewed as a “bilateral” contract. Restatement (Second) of Contracts § 2.
A number of cases have applied the unilateral contract analysis to employees operating under typical
“terminable-at-will” employment contracts. Employers may issue employee manuals to such employees that
contain employment policies including promises or commitments by the employer. The employee’s continued
performance after receiving such a manual may make such commitments enforceable under a unilateral
contract analysis. These cases are analyzed in Chapter 4 below.
Another major theme in contract law is the enforcement of promises upon which a promisee reasonably relies
by changing his or her position to his or her detriment. Though such promises lack consideration, they may be
enforced under the doctrine of promissory estoppel. See Chapter 8 below.
[5] An Offer May Be Irrevocable if an Offeror Should Know that the Offeree Intends to Rely In Preparing
to Perform
If an offer is made irrevocable because the offeree has begun to perform under a contract for which only a
performance acceptance is ordained, it is often said that the performance must be part of that which the offeror
desired in exchange for its promise. In a classic illustration, an offer to pay $100 if the offeree will walk across a
bridge is not made for the offeree to make preparations to walk across the bridge. Unless the act of walking
across the bridge has begun, there is no part performance. A more modern view, however, would suggest that
if the offeror knows or should know that the offeree intends to rely substantially in preparing to perform, the offer
may be deemed irrevocable. Typically, however, offerors have no reason to foresee that the offeree will take
any action or inaction in reliance on the offer.
[6] Reliance to Make Offers Irrevocable—Bids by Subcontractors Are Used by General Contractors
Reliance on offers that does not constitute part of the agreed exchange that is not reasonably foreseeable by
the offeror does not make offers irrevocable Reasonable and foreseeable reliance by an offeree, however, can
make an offer irrevocable. Section 87(2) of the Restatement (Second) of Contracts suggests a promissory
estoppel analysis converting an offer into an option via reliance. The paradigm involves bids (offers) by
subcontractors that are used by general contractors in submitting the general bid for major construction
projects. A general contractor cannot accept a subcontractor’s bid prior to the general being awarded the
contract on the entire project. The general’s bid, consisting largely of the bids of subcontractors, will be
irrevocable by agreement or otherwise. Subcontractors not only foresee that the general will rely on their bids,
they desire the general to do so because the general’s use of a subcontractor’s bid will probably result in the
general awarding that subcontractor that portion of the work. If the general is awarded the contract, its reliance
on the subcontractors’ bids is palpable. If the subcontractors revoked their offers before the relying general had
a reasonable opportunity to accept their bids, the negative effect on the general may be quite substantial. The
general contractor’s use of the bid does not accept the subcontractor’s offer because the general necessarily
Page 4 of 4
uses the subcontractor’s bid without assurance that it will win the award of a contract on the entire project.
Since the general is, therefore, free to contract with a different subcontractor, the irrevocability of the
subcontractor’s bid again raises the specter of one party being bound while the other party is not bound.
To meet the reasonable needs of a relying general contractor while treating the subcontractor fairly, courts have
limited the general contractor’s time for acceptance of the subcontractor’s bid to a reasonable time after the
general is awarded the contract on the entire project. Upon the expiration of that reasonable time, the general
has no power of acceptance. Even within the reasonable time, if the general seeks to lower the price in the
subcontractor’s irrevocable offer or pursue agreements with other subcontractors, the general may be
demonstrating that it is no longer relying on the subcontractor’s bid, which would make the subcontractor’s offer
revocable. See Complete Gen. Constr. Co. v. Kard Welding, Inc., 182 Ohio App. 3d 119, 2009-Ohio-1861, 911
N.E.2d 959. If the general’s “bid chiseling” amounted to an insistence on a lower subcontractor’s bid, it would
constitute a counter-offer, rejecting the subcontractor’s offer, which would relieve the subcontractor from any
further contractual liability to the general.
What rights does the bidding party have against the party soliciting bids? “… a bidder’s reasonable reliance on
a public entity’s promise to award a contract to the lowest responsible bidder that submits required information
by the stated deadline may entitle a bidder to damages under a theory of promissory esto e . A
disappointed bidder asserting a promissory estoppel claim is generally limited to damages sustained by
justifiable reliance on the promise to conduct a fair bidding ocess. . Only if a disappointed low bidder
complies with all requirements of the bid instructions, but is deprived of the contract through some conduct of
the awarding authority tantamount to bad faith, may the bidder recover lost profits.” XTL-NH, Inc. v. N.H. State
Liquor Comm’n, 2015 N.H. Super. LEXIS 5 (2015).
Practice Resources:
• Corbin § 2.22 (irrevocable offers); § 2.2 (options created by a conditional
contract); § 2.2 (contract to keep offer open); § 2.2 (effect of the rule against
enhancement of damages); § 2.2 (offers made irrevocable by statute and public
policy); § 2.2 (deposits forfeited in case of revocation); § 2.2 (irrevocable offers
under seal); § 2.2 (revocation after part performance or tender by offeree);
§ 2. 1 (effect of action in reliance that is not part performance); § 2. 2 (part
performance and indifferent offers); § . (acceptance by beginning
performance).

End of Document
§ 2.13 Irrevocable Offers in Real Estate Brokerage and Other Agency Cases
[1] An Owner Who Merely Lists Property with a Real Estate Broker May Not Have Made an Offer
When an owner of real estate and a real estate agent form a contract under which the broker will receive a
stated commission upon producing a buyer willing and able to pay a certain price for the property, the contract
is bilateral, the terms are clear, and litigation is typically avoided. Agreements between owners and real estate
or other agents, however, are often less than complete. Thus, an owner who puts land for sale in the hands of a
broker may promise to pay a commission, but the broker may not expressly promise to make a diligent effort to
secure a buyer though such a promise may easily be implied. If the broker has an exclusive agency, the
implication is even more obvious. Where, however, the owner promises to pay only for the broker’s service in
producing an able and willing buyer, the offer is not accepted by an express or implied promise. In such cases,
has the owner made an offer at all? If an offer is made, when and how may it become irrevocable?
An owner who merely lists property with a real estate broker may have made no offer at all. The owner may
have simply invited prospective buyers to make offers which the owner may accept or reject. If an offer to buy is
made, the owner may reject it and has no duty to pay any commission to the broker. If, however, the broker
produces a buyer whose offer is accepted by the owner, the owner has a duty to pay the broker’s commission.
[2] A Unilateral Contract May Involve a Promise for Service

The common case involves an owner who promises to pay a specified commission for the broker’s service of
finding a purchaser able and willing to buy the property on terms stated in advance by the owner. Upon
completion of that service, the broker is entitled to the agreed commission. See, e.g., Mapes v. City Council of
Walsenburg, 151 P.3d 574 (Colo. Ct. App. 2006). There are, however, numerous cases where, after the broker
produces such a buyer, the owner refuses to convey the property and claims that no commission is owed to the
broker. This is not an attempted revocation of an offer. A unilateral contract was formed when the broker
completed the designated services. The owner has breached that contract.
If the owner’s promise to pay the commission is conditioned on “closing of the deal,” “settlement with the
purchaser,” or similar conditional statements, the event constituting the condition is not part of the broker’s
services but is viewed as a condition precedent to the owner’s duty and the broker’s correlative right to the
commission. Benchmark Group, Inc. v. Penn Tank Lines, Inc., 612 F. Supp. 2d 562 (E.D. Pa. 2009). If the
owner prevents the fulfillment of the condition, the condition is excused and the duty to pay the commission is
activated. If the owner is unable to convey the title to the property, it is generally held that the condition is
excused since there is an implied warranty that the owner would be able to convey marketable title.
[3] An Owner’s Offer May Become Irrevocable if the Broker Has Begun to Perform
When the broker has begun to perform the service of finding a buyer through advertising, soliciting buyers,
showing the property, or the like, a number of cases hold that the owner’s offer becomes irrevocable. When,
however, the broker is aware that the owner has listed the property with other brokers, such efforts are not
deemed to create an irrevocable offer. In the absence of a specified duration, if the offer has been open for a
reasonable time and the broker has not produced a willing and able buyer, the offer becomes revocable. If the
broker’s service has reached the point where success is probable, courts may treat the owner’s attempt to
revoke the offer as acting in bad faith, which wrongfully prevented the sale of the property. It should always be
remembered, however, that even where the owner’s promise to pay a commission has become irrevocable, the
Page 2 of 3
owner’s authority to terminate the agent’s power to create a binding contract with third persons in the owner’s
name remains, even though such termination will constitute a breach of contract.
[4] Determining the Amount Recoverable For Wrongful Termination

When the owner wrongfully terminates the broker but proceeds to sell the property to the buyer found by the
broker, there is no question that the broker deserves the full commission on the sale. The evidence, however,
must demonstrate that a successful sale was highly probable. The broker’s contract may provide for liquidated
damages.
In one case, a broker was given a one-year exclusive agency to sell 17 condominium units and a provision
provided for the payment of the full 5 percent commission on the asking prices if the broker’s authority was
revoked prior to the expiration of the one-year term. Five and a half months into the term, the broker had sold
four of the units, at which point the defendant terminated the agreement. The defendant claimed that the
enforcement of the clause would assume that the plaintiff would have sold all of the units by the end of the year
and would, therefore, constitute a potential “windfall” to the plaintiff. The court disagreed, noting that the
defendant’s “windfall” argument unwittingly supported the validity of the clause by demonstrating the uncertainty
in calculating damages at the time the contract was formed, which is one of the classic requirements to uphold
a liquidated damages clause. Jameson Realty Group v. Kostner, 351 Ill. App. 3d 416, 813 N.E.2d 1124, 286 Ill.
Dec. 431 (2004).
[5] Application of the Ellsworth Dobbs Doctrine

If a broker produces a buyer that appears ready, willing, and able to purchase the property on the owner’s
terms, the broker appears to have completed its service, thereby forming a unilateral contract. When, however,
the buyer was unable to complete the sale with the owner because of financial problems, the New Jersey
Supreme Court overturned precedent in holding that the final consummation of the sale by such a purchaser
was a condition precedent to the duty of the seller to pay the commission. Ellsworth Dobbs, Inc. v. Johnson, 50
N.J. 528, 236 A.2d 843 (1967). Other courts have arrived at the same analysis.
[6] “Exclusive Agency” Differs from “Exclusive Right to Sell”

Even though an owner has given a broker an “exclusive agency,” the understanding of the parties and the
usages of business may allow the owner the privilege of finding a purchaser on its own. The privilege, however,
allows the owner to exercise a power of terminating the contract with the broker only by making an independent
sale and notifying the broker. Merely refusing to consummate a sale or, certainly, withdrawing the property from
the market within the time stipulated for the exclusive agency would constitute a breach by the owner.
If the owner promised the broker an exclusive agency, a sale through another agency would be a breach of that
promise, but a sale negotiated by the owner without the aid of another agent would not be a breach. A promise
that the broker shall have the “exclusive right to sell” or the “exclusive sale,” however, usually means that the
owner is not privileged to make any sale without paying a commission to the broker.
One owner listed property with the plaintiff broker with “the exclusive and irrevocable right to sell for $300,000,”
and a promise to pay a 5 percent commission if “the said property be sold by said broker or by me or by
another broker.” The broker promised to pursue diligence in procuring a purchaser. After considerable effort by
the broker and before the duration of the “exclusive right to sell” expired, the owner notified the broker that she
had sold the property herself. The court held that the sale was not a breach of the contract with the broker.
Rather, a condition to the broker’s right to collect the $15,000 commission was the sale of the property by the
owner or broker. That condition had occurred, thereby activating the duty of the owner to pay the commission.
Baumgartner v. Meek, 126 Cal. App. 2d 505, 272 P.2d 552 (1954).
Practice Resource:
• Corbin § 2. 0 (real estate brokers and other agency cases).

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End of Document
Corbin on Contracts Desk Edition > CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER
CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER

the subject matter.

End of Document
§ 3.01 Power of Acceptance Lies in the Offeree
[1] A Promisor and a Promisee Are Necessary Parties for a Contract

A contract must have at least two parties who enter into a bargain with either one or two promisors. The typical
“bilateral” contract involves two promisors and two promisees, each promising a performance to the other in
exchange for the other’s promise of a desired performance. At the moment of formation, there are two rights
and two correlative duties. If an offer can only be accepted by performing, the contract will have one promisor
and one promisee. Upon the completion of the performance required by the offer, a “unilateral” contract is
formed with one right in the promisee who has performed and one correlative duty in the promisor.
If a contract must have at least two parties, it would appear obvious that a party may not contract with itself.
Like other generalizations, however, this statement is not accurate. A party in one capacity may contract with
another party in which the first party is involved in a different capacity. Thus, a party in his or her individual
capacity may contract with a partnership in which he or she is a partner. See Restatement (Second) of
Contracts § 11. It is a matter of recognizing the other party as a separate legal entity. If Ames and Barnes are
co-trustees, the trust can make a contract with either Ames or Barnes individually. A corporation can contract
with its wholly-owned subsidiary or even a “division” of the corporation. Even when the other entity is a mere
unincorporated association, an individual who is a member of that association may contract with the
association.
But where a company’s sole director purported to enter into an employment contract with himself to serve as
the company’s CEO—and this contract was formed by talking to himself—the court refused to recognize the
contract’s validity. A legally operative contract requires the assent of at least two separate, independent minds.
It is not enough that this individual was acting in different capacities—on the one hand, as a director acting for
the company, and on the other, as an individual. It is still a legal impossibility. A “contract” entered into by
talking to oneself “is literally the opposite of an arm’s-length transaction—the only arms in this purported
agreement belonged to” the individual who supposedly contracted with himself. Austin v. Preferred Commun.
Sys., Inc., 2015 U.S. Dist. LEXIS 170345 (C.D. Cal. Dec. 18, 2015). This holding is consistent with Restatement
(Second) of Contracts § 11 “A contract may be formed between two or more persons acting as a unit and one
or more but fewer than all of these persons, acting either singly or with other persons.”
[2] Power of Acceptance Resides Exclusively in the Identified Offeree—Effect of Option Contracts
The offeror is the master of the offer who creates the power of acceptance exclusively in the person or persons
to whom the offer is made. Once an offeree accepts an offer, the offeror has no power to “change his mind” and
withdraw the offer. Daniels v. City of New York, 2014 U.S. Dist. LEXIS 149259 (S.D.N.Y. Oct. 20, 2014). If
Ames makes an offer to Barnes, only Barnes has the power of acceptance and Barnes may not transfer
(assign) that power to Carr even if Carr is more financially responsible than Barnes and the offer requires no
personal performance.
Where a casino banned the plaintiff from entering the casino based on past acts, the plaintiff disregarded the
ban, gambled at the casino and won $9,387. The casino refused to pay. The court viewed the casino as an
offeror, promising to pay a wager on condition that the wagerer won. As master of the offer, however, the
casino could preclude parties from becoming offerees. Since the plaintiff was clearly notified that he was
permanently denied access to the casino, the plaintiff had no power of acceptance to form a contract. His action
for the alleged conversion of his winnings by the casino failed. Blackford v. Prairie Meadows Racetrack &
Casino, Inc., 778 N.W.2d 184 (Iowa 2010).
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If Ames offers to sell her land to Barnes knowing that Barnes is the agent for an undisclosed principal (Carr),
Barnes’s acceptance of that offer will bind his principal, Carr. If, however, Barnes’s identity as an agent is not
disclosed, Carr would have no power of acceptance even though Carr could enforce the contract made by
Barnes. Ames would have the benefit of any defense good against Barnes as well as Barnes’s personal
responsibility under the contract.
As seen in the previous chapter, option contracts create irrevocable powers of acceptance. There is an
irrevocable contract right in the offeree to exercise a specific power of acceptance. If Barnes pays Ames $100
for an option to purchase Ames’s land for $100,000, Barnes has a contract right to accept the offer for the time
stated in the option contract. If Barnes decides to assign his contract right to Carr, what is being assigned is an
irrevocable power of acceptance. Absent an enforceable provision against assignability in the option contract, it
should make no difference to Ames if she receives $100,000 from Barnes or Carr for the property. If, however,
the consideration Ames is to receive from Barnes for the option is a portrait of Ames’s daughter by Barnes,
Barnes could still assign the option to Carr, but Carr’s right to a conveyance of the property for $100,000 will be
conditioned on the receipt of Barnes’s painting.
Practice Resources:
• Corbin § .1 (two parties necessary to a contract, promisor and promisee); § .2
(in a bargaining transaction, only the offeree has power to accept); § .
(assignment of power by option holder—irrevocable offers).

End of Document
§ 3.02 Knowledge and Motivation of Offeree
[1] Communication of an Offer Is Generally Required

There are a number of cases stating that it is necessary to communicate an offer since an offeree must be
aware of an offer before it can be accepted to meet the requirements of mutual assent. The requirement of
mutual assent, however, is measured by an objective test. If a party appears to manifest acceptance of an offer,
it will be held to the contract by its apparent manifestation of assent. The evolution of common law rules of
assent are also viewed through a traditional offer and acceptance lens that suggests the offeror’s creation of
the power of acceptance and the offeree’s exercise of that power.
Communication of the offer is necessary when the offer may be accepted by a promise (bilateral) or when it
may be accepted by performance (unilateral); the offeree who performs the requested act must be aware of the
offer. When a party without knowledge of the reward performs the act required by the offer, such as providing
information that leads to the arrest and conviction of the criminal, there are numerous decisions holding that the
party has not accepted the offer because it was unaware of it when it completed the act required by the offer.
Such a view, however, has been subject to criticism since the party offering the reward has received the very
benefit sought in the offer. Thus, there are holdings, usually involving rewards made by governmental entities,
that a reward would have to be paid regardless of the performing party’s ignorance of the offer. Such a view is
irreconcilable with contract theory, but it is possible to decide whether a previously-announced reward should
be granted by a governmental authority without resort to contract theory.
Even when an offer is communicated, an offeree may manifest assent to the offer without conscious awareness
of many of the terms in the offer. Consumers are rarely aware of the boilerplate terms in contract documents to
which they manifest their assent, and the same may be said of many merchants who manifest agreement to the
“standard terms and conditions” of other merchants. The Comcast Corporation demonstrated its consistent
practice of sending a subscription agreement containing an arbitration clause to all new customers. When a
customer sued and Comcast moved to compel arbitration, the court denied the Comcast motion on the
customer’s claim that he had not received the agreement and the burden was on Comcast to prove an
arbitration agreement. On appeal, the Circuit Court reversed, based on Comcast’s proof of its consistent
practice of sending such agreements to all customers which was prima facie evidence that the plaintiff had
received the agreement to which the customer offered no contrary evidence. Quoting from § 2 comment b, of
the Restatement (Second) of Contracts, the court noted that a party may assent to a written offer without
reading the offer and bind itself to a contract based on the terms of the offer without knowing the terms. The
plaintiff could not accept Comcast’s services that were tendered on the basis of the agreement without being
bound by the terms of the agreement. Schwartz v. Comcast Corp., 2007 U.S. App. LEXIS 27617 (3d Cir. Nov.
30, 2007).
One of the more interesting issues was raised when an at-will employee was terminated by an employer that
failed to follow the disciplinary procedures that appeared in a handbook distributed to all employees. By
continuing to work after receiving the manual, the terminated employee claimed that he had accepted the
promises of the employer to adhere to the announced disciplinary procedures though he had not previously
read those terms and was, therefore, unaware of the employer’s promises. The court recognized that a party
must be aware of an offer to accept it, but it announced an exception on the footing that the employee
handbook was a standardized agreement that should be interpreted as treating all recipients alike without
regard to their understanding of the standard terms. The court, however, also upheld a provision disclaiming the
enforceability of the handbook promises to which the employee was bound though he was equally unaware of
the disclaimer. Anderson v. Douglas & Lomason Co., 540 N.W.2d 277 (Iowa 1995). Another court treated the
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Anderson exception as relegated to unilateral contracts. Owen v. MBPXLl Corp., 173 F. Supp. 2d 905 (N.D.
Iowa 2001). The traditional rule applies in bilateral contracts.
If a party becomes aware of a reward offer only after performing part of the act required to accept the offer,
does completion of the act with knowledge of the offer constitute acceptance of the offer? First Restatement of
Contracts § stated, “The whole consideration must be given after the offeree knows of the offer.” The
Restatement (Second) of Contracts, however, arrives at the opposite conclusion on the footing that the reward
offer, though not inducing the initial performance since it was unknown, may still induce the completion of
performance. Restatement (Second) of Contracts § 1 and cmt. b. Corbin on Contracts has always taken this
position, with all due respect to the opposite view espoused by the Reporter for the First Restatement of
Contracts, Professor Williston.
[2] An Offeree May Have Mixed Motivation in Performing an Act Required by the Offer
When a party with knowledge of an offer performs the act required by the offer, there is an apparent intention
that the act was performed with a motivation to accept the offer. It would certainly be possible for such a party
to perform the act with no desire to accept the offer. It is also possible for a party to act with a mixed motivation.
Thus, good citizenship may induce providing information required by an award, but even if that motivation is
dominant, a subsidiary motivation to accept the offer may also be present.
One of the better illustrations of mixed motivation is found in an offer by a company to pay $25,000 to any
person who would catch a rock fish tagged “Diamond Jim III,” and present the fish and the tag to the company
along with an affidavit that it was caught on hook and line. Simmons went fishing with knowledge of the offer.
He managed to catch Diamond Jim III and presented the tag and affidavit. He received his reward of $25,000
on which the Internal Revenue Service claimed $5,230 as taxable income. Simmons claimed that the reward
was a “gift,” but the court insisted that it was a unilateral contract in which Simmons was induced to suffer the
detriment of fishing for Diamond Jim III in exchange for the company’s promise to pay the reward. Simmons v.
United States, 308 F.2d 160 (4th Cir. 1962). His chances of catching that particular rock fish among millions
were remote. Moreover, he may have given no conscious thought to the prize when he went fishing on that
particular day although, again, he was aware of the offer. Whether Simmons was motivated by the company’s
offer to go fishing relates to the issue of an offeree’s intention to accept the offer.
The First Restatement of Contracts § stated that an “act or forbearance required by an offer must be given
with the intent of accepting the offer.” The Restatement (Second) of Contracts § however, states: “[T]he
rendering of the invited performance does not constitute an acceptance if before the offeror performs his
promise the offeree manifests an intention not to accept.” Courts accepting the Restatement (Second) view
have created what amounts to an assumption that, absent a disclaimer, a party who performs the requested act
or forbearance with knowledge of the offer has met the requirement, even though the motivation underlying the
intention to accept need not be the dominant motivation to accept the offer. Simmons would likely have gone
fishing on the day he caught Diamond Jim III even if he had been unaware of the offer. He was aware of the
offer, however, and the assumption is that he intended to accept it even though the offer was not the dominant
motivation inducing his decision to fish.
Practice Resources:
• Corbin § . (motive with which offeree renders performance); § . (knowledge
of offer as a pre-requisite to acceptance); § . (knowledge of offer after part
performance already rendered).

End of Document
§ 3.03 Manner of Acceptance
[1] Offer May Dictate Manner of Acceptance

While offers that expressly require a particular manner of acceptance are unusual, the offeror may require any
manner of acceptance he or she desires. If the offer states that it may only be accepted in a particular manner,
the power of acceptance is so limited. Thus, if Ames makes an offer to sell her property to Barnes for $100,000,
which must be accepted by Barnes’ promise delivered to Ames no later than 3 p.m. the following day, the
manner of acceptance has been prescribed by the offeror and must be met to exercise that power. In Vesterhalt
v. City of New York, 667 F. Supp. 2d 292 (S.D.N.Y. 2009), the offer required the offeree to execute documents
and deliver them. Signing the documents was not a sufficient manifestation of acceptance absent delivery.
Ames could require Barnes to manifest acceptance by hanging a flag displaying the Union Jack on a specific
flag pole, an overt act, to manifest acceptance. Such a manner of acceptance is promissory since the display of
the flag operates as a manifestation of Barnes’s promise to pay $100,000 for the property.
If the offer clearly requires a performance acceptance instead of a promissory acceptance, the power of
acceptance is so limited. In a celebrated case, to accept an offer of £100, it was necessary to use a flu-
preventing product called the Carbolic Smoke Ball in accordance with directions. While the duty to pay the £100
was conditioned on the user contracting influenza, the power of acceptance could only be exercised by
performing the required act of using the Smoke Ball as directed. Carlill v. Carbolic Smoke Ball Co., 1 Q.B. 256
(C. A. 1893). This case is also discussed in § 2.0 .
A party’s conduct does not constitute acceptance of an offer unless the party knows or has reason to know that
the offeror may infer assent from such conduct (Restatement (Second) of Contracts § 1 . Where the plaintiff’s
website included a link to the plaintiff’s “terms of service” that prohibited users from using or copying the content
of the website for commercial purposes, the court held that the defendant’s use of the website would constitute
assent only if a party would know or would have reason to know that such use would be reasonably interpreted
to constitute assent to such terms. Be In, Inc. v. Google Inc., 2013 U.S. Dist. LEXIS 147047 (N.D. Cal. Oct. 9,
2013).
The typical offer does not require a particular manner of acceptance. It is indifferent as to how the offeree
chooses to accept it. UCC § 2-20 1 states that an offer invites acceptance in any reasonable manner,
“[u]nless otherwise unambiguously indicated by the language or circumstances.” The Restatement (Second) of
Contracts § 0 2 replicates this view. The “circumstances” that would indicate a particular manner of
acceptance would include reward offers, which typically do not expressly limit acceptance to performance,
although the nature of the offer clearly indicates that only a performance acceptance is contemplated.
In a contract for the sale of goods, an indifferent offer may be accepted by a prompt promise to ship the goods
or by the prompt shipment of conforming or nonconforming goods. UCC § 2-20 1 . A shipment of
nonconforming goods is not only an acceptance, but a simultaneous breach of the contract. UCC § 2-20 cmt.
4. Under UCC § 2-20 1 such a breach may be eliminated by sending a notice within a reasonable time
that the nonconforming goods were shipped as an accommodation to the buyer. See Corinthian
Pharmaceutical Systems, Inc. v. Lederle Laboratories, 724 F. Supp. 605 (S.D. Ind. 1989).
[2] Notice of Acceptance May Be Required for the Creation of a Contract

In the typical bilateral contract in which an exchange of promises creates a contract, an offeror reasonably
expects a notice of acceptance from the offeree. Thus, when Ames offers to sell property to Barnes for
$100,000, Ames would expect Barnes to communicate his acceptance by promising to pay Ames $100,000. If,
however, Barnes appears at Ames’s location and tenders $100,000 to Ames, the tender is a non-promissory
Page 2 of 3
acceptance that forms a contract. Ames’s refusal to accept the tender would constitute a breach of that
contract. While such a tender is non-promissory, it clearly notified Barnes’s intention to contract for the
purchase of the property.
A college issued a “certificate of administrative appointment” to Ralph Wiseman, who wrote “accepted” and
signed the certificate but did not return it. The court held that no contract was created because of Wiseman’s
failure to notify the college of his acceptance. Wiseman v. Junior College, 916 S.W.2d 267 (Mo. 1995).
Pursuant to a letter of intent, a defendant received printed real estate contract forms which she signed but did
not return to the plaintiff buyers. The court held that even if the defendant’s signature on the forms was
intended to accept the offer, such an intention could not be effected absent their transmittal to the buyers.
Norkunas v. Cochran, 168 Md. App. 192, 895 A.2d 1101 (2006).
A vote of a board of directors recorded in the minutes of the board meeting will not form a contract absent
notification of such action as an acceptance of the other party’s offer.
If the offer must be or can be accepted by performance and requires notification of the completion of the act of
performance, notice is a necessary part of the acceptance to form the contract. On the other hand, the offeror
can dispense with notice of acceptance. See Restatement (Second) of Contracts § 2 c . If, however, the
offer does not expressly require notice and can be accepted by performance, the performance constitutes
acceptance of the offer, but notice of such a performance must be sent by an offeree who has reason to know
that the offeror has no adequate means of learning of the performance with reasonable promptness.
The classic case in support of this analysis is Bishop v. Eaton, 161 Mass. 496, 37 N. E. 665 (1894). Frank
Eaton in Nova Scotia wrote to Charles Bishop in Illinois, “If Harry [Frank’s brother] needs more money, let him
have it, or assist him to get it, and I will see that it is paid.” In reliance on this request, Bishop indorsed Harry’s
note to Stark, which operated as a performance-acceptance of Frank’s offer, forming a unilateral contract.
Since Frank in Nova Scotia would not learn of Bishop’s performance acceptance within a reasonable time,
notice of Bishop’s act would be necessary, not as part of the acceptance of the offer, but as a condition to
Frank’s duty as guarantor of his brother’s debts. Absent a requirement in the offer that notice of such a
performance-acceptance must be received, the offeree need only exercise reasonable diligence to notify the
offeror of the acceptance. See Restatement (Second) of Contracts § 2 UCC § 1-202 .
[3] UCC Notice Requirement

If the offeree begins to perform in response to an indifferent offer, the beginning of performance is treated as an
implied promise to complete performance. The statutory language of the UCC, however, adds a confusing
element:
“Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is
not notified of acceptance within a reasonable time may treat the offer as having lapsed before
acceptance.”
UCC § 2-20 2 .
The statutory language may be read to suggest that the drafters intended notice to be part of the acceptance
and comment language appears to reinforce that interpretation. “For the protection of both parties it is essential
that notice follow in due course to constitute acceptance.” UCC § 2-20 2 cmt. 3.
This is a particularly difficult analysis to justify. The better view is that notice is not part of the acceptance. The
Bishop v. Eaton analysis would suggest that, when the offeree has reason to know that the offeror will not
become aware of the performance-acceptance within a reasonable time, a condition of notice of such
performance may be constructed. Unless the failure to notify caused a loss, however, the construction of such a
condition would be unnecessary.
UCC § 2- 0 includes prompt notification of shipment as a requirement in a contract where the seller is
required or authorized to send the goods to the buyer, but the last sentence of that section states that failure to
notify is a ground for rejection of a shipment only where material delay or loss ensues. For an analysis of UCC
§ 2-20 and the changes it effected over the common law, see J. Murray, A New Design for the Agreement
Process, 53 Cornell L. Rev. 785 (1968).
Practice Resources:
Page 3 of 3
• Corbin § . (acceptance by overt act); § .1 (when notice of acceptance is

necessary), § .1 (notice as a requisite of guaranty and letters of credit), § .1
(notice as a condition distinguished from notice as an acceptance).

End of Document
§ 3.04 Acceptance by Performance
[1] An Offer of a Reward Is Almost Always an Offer That Can Be Accepted Only by Performance
A published offer of a reward or a prize contest is almost always an offer that can be accepted only by
performance forming a unilateral contract. The language used in such offers often creates interpretation issues.
A reward offer may require the “arrest and conviction” of the person who committed the crime, but the offeree
will typically not be required to make the physical arrest. Rather, the interpretation will be that information
supplied by the offeree will lead to the arrest and conviction. Whether the “information” is sufficient will often be
controversial. If it does not amount to the cause, indeed the “proximate cause” of the arrest and conviction, it is
likely to be deemed insufficient.
Offers of prizes in contests manifest similar problems. David Mears was one of 185 Nationwide employees who
received an announcement of a contest to create a theme for a convention that stated, “Here’s what you could
win: His and Her Mercedes.” Mears submitted a theme that was used at the convention, but Nationwide refused
his demand for two Mercedes automobiles. Over a jury verdict for Mears, the district court granted judgment as
a matter of law for Nationwide, finding the announcement too indefinite to create an offer, particularly since
there was no specification in the announcement of the type of Mercedes, which have a wide range of values.
The appellate court, however, reinstated the jury verdict for the value of two of the least expensive automobiles
of that manufacturer. Mears v. Nationwide Mut. Ins. Co., 91 F.3d 1118 (8th Cir. 1996).
When several offerees claim the offered reward, if they have acted as a joint enterprise, they would be jointly
entitled to the reward. If, however, the offerees have not acted in collaboration and each has provided a piece
of information which, when assembled from the pieces, meets the requirements of the offer, several cases have
held that no individual offeree is entitled to the reward. There are cases to the contrary, however, when the
reward is divided among the parties in proportion to the services they rendered. An offer of reward for lost
property where only part of the property is found may be binding for a pro tanto share of the reward. A police
officer or other public officer is not entitled to a reward because of a pre-existing duty to provide any such
information in pursuit of the criminal, but a private detective may collect it. An attorney who provides the
necessary reward information provided by a client is not entitled to the reward.
[2] Words of Acceptance May Be Ineffective in Some Situations

The typical reward offer or other offer to the public may not be accepted by stating, “I accept your offer”
because the offer seeks only performance and not a promise. What may be called a “standing offer” to supply
goods at certain prices for a specified period in such quantities as the offeree may order is not accepted by
stating, “I accept your offer.” The offer contemplates an acceptance of a particular quantity at a particular time
within the specified period. If an employer offers employment at specified wages under a terminable-at-will
contract, prompting the statement, “I accept your offer,” there is no contract formed by such a statement. The
performance by the employer is subject to the employer’s will. If, however, the employee proceeds to perform,
the performance constitutes an acceptance forming a contract to the extent of and for the duration of such
performance so long as the employer has not terminated the employment.
[3] Forbearance May Constitute Acceptance

An offer may be made in exchange of forbearance to act instead of acting. Thus, if a creditor threatens to
foreclose on an outstanding debt, a promise by a third party to become a guarantor may induce the creditor to
forbear from such action. An offer to induce an offeree to forbear from commencing litigation is a common
agreement that is accepted by the offeree’s forbearance. While there are cases holding that the absence of the
Page 2 of 2
offeree’s promise to forbear precludes a valid contract because there is no mutuality of obligation, this view
should be rejected.
Practice Resources:
• Corbin § .10 (acceptance of a published offer of a reward for action or contest
prize); § .11 (when the words “I accept your offer” would be ineffective); § .12
(acceptance by forbearance from action).

End of Document
§ 3.05 Acceptance by Performance
[1] A Unilateral Contract Is Formed Only upon Complete Performance of the Act Requested in the Offer
There is an assumption in modern contract law that the typical offer is “indifferent” as to the manner of
acceptance and may, therefore, be accepted in any reasonable manner. Absent a manifestation of contrary
intention by the offeror, an offer to buy goods may be accepted by promising to ship the goods or by
performance—shipping the goods. If an offer may be accepted by either promising to perform or performance,
recall that the beginning of performance operates as an implied promise to complete performance, forming a
bilateral contract. When, however, an offer may be accepted only by performance, either because the offer is
limited to that manner of performance expressly by the offeror or impliedly by the nature of the offer, the
beginning of performance does not operate as a promise binding the offeree to complete performance. Rather,
such a start of performance is deemed to form an option contract making the offer irrevocable for a reasonable
time to allow the offeree to complete performance and form a unilateral contract.
A unilateral contract is formed only upon complete performance of the act requested in the offer, resulting in
one right in the offeree who has already performed and one correlative duty in the offeror who must now pay
the consideration promised for the performance received. A unilateral contract also differs from a bilateral
contract insofar as there is only one promisor and one promisee. The offeror promises to pay money or provide
other consideration in exchange for the act or forbearance from an action the offeree has a right to perform.
[2] A Non-Promissory Offer Occurs When the Offeror’s Performance Precedes a Promise by the
Offeree to Perform in Accordance with the Offer
It is possible for a court to recognize a unilateral contract when the only promise is made by the offeree. A non-
promissory offer occurs when the offeror’s performance precedes a promise by the offeree to perform in
accordance with the offer, forming the contract. Thus, where an offer to loan money is coupled with a delivery of
the money requiring the offeree to promise to repay the loan with a certain interest, the promise by the offeree
forms the contract. The offer is viewed as non-promissory because the offeror’s performance is complete when
the offeree’s promise is made. The offeror’s performance, therefore, lacks “the element of futurity required by
the definition of omise. “Restatement (Second) of Contracts § cmt. b. Similarly, if Barnes has possession
of Ames’s book, which Ames offers to allow Barnes to keep in exchange for a promise of $10, Barnes’s promise
forms a unilateral contract in which the offeree has made the promise. This is sometimes called a “reverse
unilateral” contract.
There are numerous situations in which an offeree accepts a benefit with the understanding that the offeror
expects compensation. In such a case, a court may recognize a quasi contract to achieve restitution of the
reasonable value of the benefit conferred. It may, however, be more accurate to imply a promise by the offeree
to pay the reasonable value of the benefit conferred. See Restatement (Second) of Contracts § 1 and
cmt. b.
Practice Resources:
• Corbin § .1 (offer of a promise, requesting non-promissory action in return);
§ .1 (offer of an “act” for a promise).

Page 2 of 2
End of Document
§ 3.0 Medium of Acceptance
[1] Any Reasonable Medium May Be Used to Accept
[a] Use of the Mail Has Been the Most Common Medium of Offer and Acceptance
The manner of acceptance refers to the way in which an offer may be accepted—by promising or by
performing. The medium of acceptance refers to the means used to communicate the acceptance. Just as
the offeror may limit the manner of acceptance, he or she may also limit the medium of acceptance. The
offeror may require the acceptance to be by letter sent through the U.S. Postal Service. The offeror may
require the letter to be postmarked no later than a certain date. The offeror may require certified mail,
Federal Express, Fax (facsimile), e-mail, or even a recorded message on a telephone answering service.
When telegrams were widely used, an offer could require that medium. Like the manner of acceptance,
however, offerors typically do not require the use of a particular medium to accept the offer. Absent such
limitations in the offer, any reasonable medium will be effective.
Until relatively recently, use of the mail was the most common form of communication of an offer and
acceptance between distant parties. While other media, especially electronic media, have become a
popular means of communication over the last several decades, offer and acceptance by mail continue to
be widely used. Acceptance must be communicated. A written acceptance that is never mailed or otherwise
dispatched is ineffective.
There is a risk of transmission in the use of any medium of communication. If an acceptance is not effective
until it is received by the offeror, the offeree may change his or her position in reliance on the fact that he or
she mailed the acceptance. If the acceptance was never received, the offeree would suffer that loss. If
acceptance is effective upon mailing, however, it is the offeror who will suffer loss if, not having received the
lost acceptance, he or she assumes the offer was not accepted and makes a contract with another party on
that assumption.
[b] The “Mailbox Rule” States That Acceptance Is Effective upon Posting of the Letter
Early on, a famous case presented this conundrum: if the offeror was not bound until the acceptance was
received, the offeree ought not to be bound until it received notification that the offeror had received the
acceptance, which would require the offeree to notify the offeror that it had received such notification and
so on, ad infinitum. In the interest of finality, therefore, the court concluded that the acceptance should be
effective upon dispatch. And the “mailbox rule” was born. Adams v. Lindsell, 1 Barn. & Ald. 691, 106 Eng.
Rep. 250 (K.B. 1818).
Myriad justifications for the “mailbox rule” include the offeree’s loss of control of the acceptance once it is
mailed. For many years, however, postal regulations have made it possible for the sender of a letter to
intercept it and prevent its delivery to the addressee. See Morrison v. Thoelke, 155 So. 2d 889 (Fla. Dist.
Ct. App. 1963).
Another early attempt at justification suggested that, by choosing the mail to send an offer, the offeror has
made the postal service its authorized agent, allowing the offeree to treat the post as its agent. The postal
service, however, is not the agent of anyone using it and the letter box is not a person, much less an agent.
A more effective rationale is necessary.
A simple rationale is that one of the parties, either the offeror or offeree, must assume the risk of
transmission and, in the interest of finality and certainty, one must be chosen. Hogan v. Pat’s Peak Skiing,
LLC, 2015 N.H. LEXIS 74 (2015) (citing the Corbin treatise). There is a slight justification for placing the risk
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on the offeror since only the offeror could have controlled that risk by expressly requiring receipt of the
acceptance to form the contract. When the offer does not require the acceptance to be received, the offeror
is assuming the risk that a mailed acceptance will be received.
A better rationale, however, is based on the common law view that, unless supported by an option contract,
by reliance, or by statutory requirement, offers are revocable until they are accepted. Revocations of offers
must be received by the offeree to be effective. If, however, an offeree who deposits an acceptance in a
U.S. Postal Service mailbox is subject to receiving a subsequent revocation of the offer before its mailed
acceptance is received by the offeror, the offeree has no dependable basis for its decision whether to
accept unless the acceptance is deemed effective upon mailing. Restatement (Second) of Contracts §
cmt. a.
Depositing a letter in one’s own office mailbox or mail service, as opposed to the U.S. Postal Service, is not
effective as an acceptance. See, e.g., Gibbs v. American Savings & Loan Assn., 217 Cal. App. 3d 1372,
266 Cal. Rptr. 517 (1990).
Other legal systems require an acceptance to be received, but they tend to treat offers as irrevocable.
Under the United Nations Convention on Contracts for the International Sale of Goods (CISG) Article 18(2),
an acceptance must be received within the time required by the offer to be effective, but under Article 16(1)
the offer becomes irrevocable upon the dispatch of the acceptance. Moreover, an offer merely setting forth
a duration of the power of acceptance is irrevocable. CISG Article 16(2)(a). CISG also allows an
acceptance to be withdrawn if the withdrawal reaches the offeror before or at the same time as the
acceptance. CISG Article 22.
Since the offeror can eliminate the mailbox rule by expressly requiring an acceptance to be received,
questions of interpretation arise. If the offer states that notice of acceptance must be given within 30 days, a
court may conclude that notice of acceptance must be received within that time. If an offer merely states,
“Please reply by return post,” it does not make receipt necessary.
[c] In the Case of an Option Contract, the Offeree Does Not Need the Protection of the Mailbox Rule
Unlike the offeree who is subject to the offer’s power of revocation before the offer is accepted, when the
offeror has surrendered the power to revoke the offer in exchange for consideration under an option
contract, the offeree possessing such an irrevocable power of acceptance does not require the protection of
the mailbox rule. Such an acceptance, therefore, must be received within the time stated in the option
contract to be effective. See Romain v. A. Howard Wholesale Co., 506 N.E.2d 1124, 1128 (Ind. Ct. App.
1987); Restatement (Second) of Contracts § cmt. f.
[d] Defects in the Normal Operation of the Mailbox Rule

The mailbox rule assumes that the offeree has properly addressed the letter of acceptance and paid the
correct postage. Otherwise, the offeree loses the advantage of the mailbox rule. Restatement (Second) of
Contracts § .
If an offeree sends a notice of rejection to the offeror but then changes his or her mind and mails an
acceptance of the offer, the rejection must be received to be effective. If the acceptance was mailed before
the offeror received the rejection and was effective upon mailing, the mechanical application of these rules
would hold the offeror to a contract notwithstanding its probable reliance on the received rejection. Thus, an
acceptance mailed after the sending of a rejection will constitute a counter-offer unless the acceptance is
received before the rejection. The offeree lost the advantage of the mailbox rule by first sending the
rejection. Restatement (Second) of Contracts § 0 and cmt. b.
If the offeree posted a letter of acceptance and then changed his or her mind and withdrew the offer from
the mail under U.S. Postal regulations, if the offeror can prove the acceptance was mailed, a contract was
formed. Instead of withdrawing the acceptance from the mail, if an offeree mails an acceptance and then
sends an overtaking communication of rejection, a contract will be said to have been formed upon the
mailing of the letter of acceptance. Again, however, the innocent offeror must be protected, here by
estopping the offeree from enforcing the contract against an offeror who relied on the rejection. Absent the
offeror’s reliance, the contract was formed upon the mailing of the acceptance. Such an attempt to reject
the offer could be interpreted as a repudiation of the contract the offeree made upon posting its acceptance
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or it could be viewed as an offer to rescind that contract. If the offeror accepts such an offer of rescission,
the contract is discharged.
[e] The Mailbox Rule Applied to Telegrams

When telegrams were commonly used, cases held that the mailbox rule applied to telegram acceptances of
offers that were made by telegram. The offeror’s use of the telegram implied that it would be a reasonable
medium of acceptance. When the offer was not by telegram and otherwise said nothing about the medium
of acceptance, courts viewed the telegram as a reasonable medium allowing the acceptance of an offer to
be effective upon dispatch.
[2] Acceptance by Telephone, Fax, or Other Electronic Means

When the parties are in the presence of each other, the offeree has a dependable basis for accepting an offer
without concern over knowledge that the offer has been revoked. Similarly, when the parties are physically
apart but are communicating with each other without any substantial lapse of time, there is little concern about
possible revocations of an offer. This rationale suggests that in such “presence” situations, the acceptance
would be effective when received (heard) and not when spoken. Though a leading case described this analysis
as a “sound theoretical view,” the court held that a contract by telephone was formed where the acceptance
was spoken rather than where it was heard and this view has been generally adopted. Linn v. Employers
Reinsurance Corp., 392 Pa. 58, 139 A.2d 638 (1958). In Poor Boy Tree Serv. v. Dixie Elec. Mbrshp. Corp.,
2013 Mo. App. LEXIS 163 (Feb. 5, 2013), the court cited the Corbin treatise in holding that the acceptance
occurs where “the acceptor speaks into the phone.”
While the case law is scant concerning the use of facsimile or email messages, there appears to be an effort to
distinguish instantaneous communications (for instance, when the offeror and offeree are in a computer chat
room involving virtually instantaneous communications with a transmission time of less than a minute), from
other electronic media that require more than a minute. Thus, e-mail communications, outside of chat rooms,
would not be sufficiently instantaneous for the “presence” rule. The acceptance would be effective upon
dispatch. A fortiori, this would be true of an even slower medium such as a fax message, which would,
therefore, be effective when it was sent. In Trinity Homes, L.L.C. v. Fang, 63 Va. Cir. 409 (2003), the court
analyzed recent scholarship and Restatement (Second) of Contracts § in stating this analysis. The court also
relied on Osprey L.L.C. v. Kelly-Moore Paint Co., 1999 OK 50, 984 P.2d 194, which held that the mailbox rule
applied to a fax communication.
Practice Resources:
• Corbin § .2 (alternative modes of acceptance); § .2 (acceptance by post);
§ .2 (acceptance by telephone or other electronic means); § .2 (withdrawal
of letter of acceptance from the mails); § .2 (acceptance by telegraph); § . 1
(effect of rejection of an offer).

End of Document
§ 3.06 Silence Generally Does Not Manifest Acceptance
[1] An Offeror Can Not Thrust a Duty to Speak on an Offeree

Absent other evidence, silence by an offeree does not manifest acceptance of an offer. Any other rule would be
absurd since otherwise an offeree would be required to manifest a rejection of the offer. An offeror should not
be allowed to thrust a duty to speak on an offeree. An offeree certainly has the right to ignore any offer. Music
City proposed a modification to reduce its lease payments to E & A under a letter that Music City designed as
an offer where silence would constitute acceptance. The court cited Corbin on Contracts in holding that an
offeror cannot, merely by saying that the offeree’s silence will be taken as an acceptance, cause it to be
operative as such. E & A Northeast L.P. v. Music City Record Distribs., 2007 Tenn. App. LEXIS 145 (Mar. 21,
2007). When an offeror sends letters stating that a failure to respond constitutes an acceptance, if there is no
response, no contract is formed. An offeree need not respond to an offer, and the resulting silence will not be
construed as an acceptance of the offer. In re Thompkins, 2016 Bankr. LEXIS 442 (Bankr. N.D. Ga. Jan. 4,
2016). From 2009-2011, UFP purchased high-density polyethylene from Viking. Viking claimed it sent its
standard terms and conditions to UFP with each order that limited UFP’s remedy to repair or replace and that
UFP failed to object to them. When a dispute arose over the quality of the product, the court held Viking was
unable to show that UFP accepted the terms and conditions. The terms and conditions stated that failure to
object to them within 10 days after receipt constitutes agreement with them, but the court held that this, in itself,
was insufficient to show that UFP accepted them. Under Wisconsin law, the court noted, silence generally does
not constitute acceptance of a contract. UFP Ventures II, Inc. v. Viking Polymers, LLC, 2014 U.S. Dist. LEXIS
162168 (W.D. Wis. Nov. 18, 2014). See also, Bartel v. Univ. of Miami, 2015 U.S. Dist. LEXIS 59087 (E.D. Pa.
2015) (uncommunicated intention does not satisfy acceptance element of contract formation).
GTL’s telecommunications services at New Jersey state and local correctional facilities could be accessed by
users telephonically through an interactive voice response (“IVR”) system using scripts and prompts, but users
were not shown a copy of GTL’s Terms of Use (“TOU”) that purportedly governed the transaction, nor were
they required to click a button labeled “Accept” in order to complete the account creation process. They
received the following notice over the phone: “Please note that your account, and any transactions you
complete … are governed by the terms of use and the privacy statement posted at
www.offenderconnect.com. . The TOU contained an arbitration agreement. Plaintiffs brought the instant
putative class action over fees charged by GTL, and GTL filed a motion to compel arbitration in accordance
with the arbitration agreement in the TOU. The court considered whether the inmates’ use of the IVR system
created a legally operative contract given that “[s]ilence does not ordinarily manifest assent . The court
explained: “Courts in New Jersey (both state and federal) have extended the principle of assent through silence
to ‘use,’ finding assent where the offeree was given notice of terms and proceeded to use the services of the
offeror.” Citing the Restatement (Second) of Contracts § 69, the court held that the offeror must “give[ ] the
offeree reason to understand that assent may be manifested” in such a way. The court wrote: “Here, users
were given notice that GTL’s service was ‘governed by the terms of use.’ But, the IVR notification did not inform
them that use of the service alone constituted an acceptance of these terms.” And: “Without being put on notice
that their use would be interpreted as agreement, a reasonably prudent user of the IVR service had neither the
knowledge nor intent necessary to provide ‘unqualified cce t ce. . Consequently, there was no legally
enforceable arbitration agreement between GTL and the plaintiffs. James v. Global Tel*Link Corp., 2016 U.S.
Dist. LEXIS 17099 (D.N.J. Feb. 11, 2016).
[2] Silence May Manifest Acceptance if the Offeree So Intends

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There are situations in which silence will constitute acceptance of an offer. If an offeree intended his or her
silence to manifest acceptance, the better view is that such silence constitutes acceptance. The offeror may
argue that he or she should not be held to an acceptance by silence claimed by the offeree since the offeree
could not be held to such a contract claimed by the offeror. The simple but effective response is that the offeror
has no one to blame but the offeror for making such an offer. Silence is ambiguous and will constitute
acceptance only if the offeree intended it to operate as an acceptance. The evidence of that intention can
typically be determined only by the offeree’s statement of his or her intention, a risk expressly assumed by the
offeror in creating an offer empowering acceptance by silence.
In Kruger v. Credit Int’l Corp., 2012 U.S. Dist. LEXIS 60278 (W.D. Wash. Apr. 30, 2012), the defendant’s
August 12 offer of settlement invoked the plaintiff’s August 30 response indicating an agreement conditioned on
the inclusion of an offer of judgment or a release of the debt. The defendant responded on September 8 with an
e-mail stating, “We have a deal” and “I can prepare a draft settlement for your review in the morning.” The draft
document was sent on September 16. Not hearing from the plaintiff, the defendant withdrew the settlement on
December 19. The plaintiff claimed the draft had been signed on December 14 but not mailed until January 2.
The defendant claimed that a valid settlement was never consummated, but the plaintiff argued that the parties
had made a contract of settlement. The court found the August 12 communication to be an offer while the
August 30 response was a counter offer that was accepted by the September 8 e-mail forming the contract.
The parties had agreed to the material terms of the settlement agreement in their communications and the draft
submitted by the defendant’s attorney was nothing more than a memorialization of a previously formed
contract.
Evidence of additional circumstances may allow silence to operate as an acceptance. Certain plaintiffs had
leased farm land for 10 years and had signed an annual lease of the land for the last five years. In 2007, the
lease was not sent by the usual time of receipt for such a lease (January or February). Since the defendant
could not be contracted by phone, the plaintiffs wrote a letter to the defendant seeking a reply. There was no
reply to the letter nor to a down payment by the lessee plaintiffs. The plaintiffs fertilized the land and planted a
crop. On May 1, the defendant notified the plaintiffs that he had leased the land to another party pursuant to a
lease he had signed in January. The court held that the parties’ prior relationship made it reasonable for the
plaintiffs to expect a reply to their February letter and other communications. The defendant’s delay in failing to
promptly return the plaintiffs’ payment and the delay in notifying the plaintiffs of the lease with the third party
were not effective notifications. The court affirmed a trial court’s award of damages for the plaintiffs. Blad v.
Parris, 2010 Minn. App. Unpub. LEXIS 417 (May 11, 2010).
Where a long term fee division dispute among groups of lawyers finally appeared to be resolved when one of
the groups that had consistently indicated objections to prior drafts was silent but later refused to sign the
agreement that the other groups had signed, the court held that it was reasonable to view such silence as
acceptance. Bauer v. Qwest Communs. Co., LLC, 743 F.3d 221 (7th Cir. 2014) (Restatement (Second) of
Contracts § 1 c . If a supplier of goods has formed an ongoing commercial relationship with a buyer by
shipping goods, the supplier’s silence in response to the latest order may be viewed as an acceptance of that
order absent prompt notice of its rejection. See, e.g., Ammons v. Wilson & Co., 176 Miss. 645, 170 So. 227
(1936). If, however, unsolicited goods are delivered to the buyer, silence does not constitute acceptance unless
the buyer uses such goods with reason to know that they were not sent as a gratuity. The practice of sending
unsolicited merchandise through the mail and then claiming payment led to legislation designed to curtail such
abuses. 39 U.S.C. § 00 permits recipients to treat unordered merchandise as a gift.
An offeree who takes offered services or other benefits with reason to know that the offeror expects
compensation will be said to have accepted the offer by silence. In a classic case, a party saw a neighbor
building a wall with reason to know that the neighbor expected reimbursement for one-half the cost. Both
parties would benefit from the use of the wall. These additional circumstances allowed the court to find a
contract where silence alone would not have been sufficient. Day v. Caton, 119 Mass. 513 (1876); Restatement
(Second) of Contracts § 1 . See Certain Interested Underwriters at Lloyd’s, London v. Halikoytakis, 2014
U.S. App. LEXIS 9530 (11th Cir. May 20, 2014).
Lender offered borrower a modification of his loan, and the terms of the offer required the borrower to accept it
by a certain day. Borrower executed the agreement, but he returned the agreement, and the first—and the next
eight—modified payments late. The lender accepted and deposited all the payments. Only then did lender
advise it was not accepting the modification. Lender filed suit, and the court held that even though borrower’s
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late acceptance of the modification did not meet the terms of the original offer, it operated as a counteroffer,
which the lender accepted by many months of silence and its acceptance of nine monthly payments in the
amount specified in the modification agreement. Kuehlman v. Bank of Am., N.A., 177 So. 3d 1282, 2015 Fla.
App. LEXIS 16187, 40 Fla. L. Weekly D 2450 (Fla. Dist. Ct. App. 5th Dist. 2015).
It is important to emphasize that the offeree must have a reasonable opportunity to reject the offered services.
See, e.g., SmartText Corp. v. Interland, Inc., 296 F. Supp. 2d 1257 (D. Kan. 2003) (in which the court found
material issues of fact as to whether the offeree had a reasonable opportunity to reject website hosting
services). Similarly, if a party is at home when painters arrive and the homeowner could easily notify the
painters that they are making a mistake in painting the wrong house but chooses to remain silent, the
homeowner will be obligated to pay the reasonable value of that service in a quasi contract action. If, however,
the party arrives from work and finds that his or her house has been painted by mistake, that party is not
unjustly enriched.
Practice Resources:
• Corbin § .1 (silence as acceptance); § .1 (can offeror make silence operate
as an acceptance?); § .20 (belated or conditional acceptance followed by
offeror’s silence); § .21 (silence plus additional circumstances).

End of Document
§ 3.0 Acceptances Must Be Unconditional
[1] Whether an Acceptance Is Conditional May Be a Question of Interpretation

An offer creates a power of acceptance that can only be exercised by the party to whom the offer is made. To
accept, the offeree must manifest assent to the terms of the offer. If Ames offers to sell property called Blueacre
to Barnes for $100,000, to which Barnes replies, “I will consider your offer,” there is no manifestation of assent,
no acceptance, and no contract. If Barnes’s brother notifies Ames that the brother will accept the offer in his
own name, there is no contract because the brother has no power of acceptance. The power of acceptance is
limited to the offeree identified in the offer and to the terms of the offer. Barnes does not exercise the power of
acceptance conferred upon him by Ames’s offer by notifying Ames that he will buy Ames’s property known as
Whiteacre for $100,000. Nor does Barnes have a power to create a contract to purchase Blueacre for $90,000.
If Barnes responded to Ames’s offer in either of these ways, he would be making a counter-offer that rejects
Ames’s offer to sell Blueacre for $100,000.
If Barnes responds to Ames’s offer by stating, “I accept your offer to purchase Blueacre for $100,000, but only
on the condition that I am a beneficiary of my uncle’s will in an amount of at least $100,000 to be determined
within 10 days,” Barnes has inserted a condition in his purported acceptance. His response to the offer has
changed its terms. It is sometimes called a “conditional acceptance,” but that terminology could be
misunderstood to suggest that it is an acceptance subject to a condition. It is not an acceptance; it is a counter-
offer that creates a new power of acceptance in Ames. Ames is not bound to sell Blueacre to Barnes.
Suppose Barnes offers to purchase Ames’s Blueacre for $100,000 conditioned on Barnes being notified that he
is a beneficiary of his uncle’s will in an amount of at least $100,000 to be determined within 10 days. Ames
accepts this offer. Notice that Barnes has promised to perform a duty subject to a condition and Ames has
unconditionally accepted that offer. A contract is formed even though the condition in the offer must occur for
Barnes’s duty to be activated. The condition was part of the offer and Ames agreed that her right to the
$100,000 would be subject to that event. Ames may not sell the property to another. If Barnes is a beneficiary
of the will for at least $100,000, he has a contractual duty to purchase Blueacre.
Whether an acceptance is conditional is often a question of interpretation. If the offeree’s restatement of the
offer contains additional terms, they may change the terms of the offer, perhaps unwittingly.
Where defendant’s counsel forwards plaintiff’s counsel a draft settlement agreement to end their litigation,
defendant signed it and her counsel returned it to plaintiff. Later, plaintiff tried to “revoke” her acceptance on the
basis that defendant had not signed it. The court held that when plaintiff’s counsel returned the signed
agreement to defendant’s counsel, she accepted defendant’s offer to settle. Howell v. Kelly Servs., 2015 U.S.
Dist. LEXIS 57604 (E.D. Va. May 1, 2015). An attorney for the buyer of property returned a signed sales
agreement with a letter stating that his client was “concerned” that certain fixtures and furniture remain with the
real estate and he “would appreciate your confirming that these items are part of the transaction, as they would
be difficult to replace.” The sellers refused to convey the property claiming that the buyer’s response constituted
a counter-offer that rejected their offer. The court noted that the language used in the buyer’s reply precluded a
finding that it constituted the necessary absolute acceptance of the offer. Ardente v. Horan, 366 A.2d 162 (R.I.
1976). In response to an offer to settle a lawsuit, the plaintiff stated agreement with the addition of a non-
disparagement clause. The defendant stated that it would agree with such a clause if it was mutual. When the
defendant later attempted to enforce the clause, the court stated that the requirement that the plaintiff never
expressed agreement to a “mutual” non-disparagement clause which, the court stated, constituted a counter
offer rather than an acceptance. Pampered Chef v. Alexanian, 2011 U.S. Dist. LEXIS 117520 (N.D. Ill. Oct. 5,
2011). Since at no point during the parties’ extended negotiations and exchanges of contract drafts did the
prospective buyer of a custom expedition vehicle recognize the existence of a binding contract, the court
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rejected its position that the parties entered into a binding contract. LoRoad, LLC v. Global Expedition Vehicles,
LLC, 787 F.3d 923, 2015 U.S. App. LEXIS 9029 (8th Cir. Mo. 2015).
A mere request that the fixtures and other property be included would not be a conditional acceptance if it were
clear that the offeror was free to reject any such request with no effect on the contract formed by the
acceptance. In response to an offer to purchase real estate, the seller’s e-mail stated, “Your offer has been
accepted. I need to get a few things out of the way, then I will send you addendums and instructions, thanks.”
Since there was no indication that the acceptance was conditional on the buyer’s agreement to any addendums
or instructions, the court held that the acceptance was unconditional and formed a contract. Bergey v. HSBC
Bank USA, 2010-Ohio-2736, 2010 Ohio App. LEXIS 2257 (9th Dist.). In Camara v. Camara, 188 Vt. 566, 998
A.2d 1058, 2010 VT 53, a husband claimed that a wife’s response to a settlement offer in a divorce proceeding
was conditioned on the inclusion of an indemnification provision. The court, however, found that the wife had
unconditionally accepted the offer. Citing § 1 of the Restatement (Second) of Contracts, the court noted that
merely requesting a change or addition to the terms of an offer does not invalidate the acceptance unless the
acceptance is made to depend on assent to the change or added terms.
[2] A Subsequent Disagreement About the Proper Interpretation Will Have No Effect on the Formation
of the Contract
An acceptance of an offer that is accompanied by a complaint such as, “You drive a very hard bargain,” or “I am
signing this agreement under protest,” is still an acceptance even though the offeree is “grumbling” about the
bargain and suggesting that it is not fair. See Dennis v. Kaskel, 2012 Mass. Super. LEXIS 52 (Mar. 30, 2012). If
the “grumble” goes so far as to make it doubtful that the offeree’s expression is manifesting assent to the offer,
there is no acceptance. After a contract is formed, the parties may disagree on its proper interpretation, but
such a subsequent disagreement will have no effect on the formation of the contract. If one party insists on an
incorrect interpretation and refuses to perform, there will be a breach of that contract.
In Bergenline Prop. Grp., LLC v. Coto, 2015 N.J. Super. Unpub. LEXIS 2775 (2015), Coto was a long-term
tenant on premises owned by Bergenline. Bergenline insisted that Coto sign a written lease or she would have
to vacate the premises. Coto refused, and Bergenline initiated a legal action. The lower court required Coto to
sign the lease and pay a security deposit. Coto initially flouted the court’s order, but eventually Coto signed, but
directly below Coto’s signature, Coto wrote the words “signing under protest.” Bergenline’s counsel objected to
Coto’s language. On Bergenline’s motion, the court entered a judgment of possession against Coto. Coto’s
“notation [was] an explicit representation of dissatisfaction with the contract. The Court shall not accept [Coto’s]
signature.” The appellate court affirmed, and it rejected Coto’s argument that hers was a “grumbling
acceptance.” Citing the Corbin treatise, the court explained that a “grumbling acceptance” requires unqualified
assent, which was not present here given Coto’s “history of refusal to agree to the modified lease and her
repeated defiance of the trial court’s order.”
[3] A Response to an Offer That Merely Repeats Terms That Are Implied in the Offer Is Not a Variation
of the Offer
If an acceptance of an offer is intended, the offeree must be careful in restating the terms of the offer. Such a
restatement must be accurate. A response to an offer that merely repeats terms that are implied in the offer is
not a variation of the offer. Thus, an acceptance of an offer to sell land is not made conditional by the offeree’s
inclusion of a provision for “marketable title,” since such a term is implied in an offer to sell real property. An
acceptance of such an offer “subject to the approval of the buyer’s attorney,” however, inserts a new term that
is materially different from the terms of the offer. An acceptance that suggests a reasonable time and place for
performance or a reasonable method of payment in the absence of such terms in the offer will not make the
response conditional because the offeree is not insisting on such terms.
There is no requirement that an offeree restate all of the terms of an offer. Merely stating “I accept” will be
sufficient. A book publisher offered to pay $200 for the right to publish “a print run of 40,000 copies” of the
offeree’s copyrighted painting. The offeree’s reply was in a document captioned “invoice” stating, “Rights are
granted to reproduce” the work for a “reproduction fee of $200.” When the offeree later learned that the offeror
had reproduced the painting in over a million copies of a textbook, the court held that the “invoice” was an
unconditional acceptance of the offer creating a contract breached by the book publisher. The absence of other
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terms in the acceptance concerning the number of reproductions manifested an intent to accept the offer as
limited to the use of the painting in up to 40,000 copies. Moreover, the court noted that common sense would
indicate that the offeree was not about to agree to an unlimited reproduction of the painting for the same $200
price that the offeror was agreeing to pay for a run of only 40,000 copies. Bergt v. McDougal Littell, 2006 U.S.
Dist. LEXIS 93046 (N.D. Ill. Dec. 21, 2006).
[4] The Offeror Can Insist upon a Particular Manner of Acceptance

Offers not only describe the promised performance of the offeror, they necessarily describe what the offeree
must perform or promise to perform to accept the offer. If the offeree’s promise or performance are, in any
material fashion, different from what is required by the offer, there is no acceptance. Since the offeror creates
the power of acceptance, the offeror controls it. An offer may require a mode of acceptance that appears
unreasonable or difficult, but if the offer clearly requires that acceptance, it is the exclusive way to accept the
offer. There is no compulsion on an offeree to accept an offer. Where an insurance company sent pricing letters
to suppliers of auto glass promising to pay specified amounts for auto glass supplied to its insureds, the
suppliers provided the glass but sent invoices to the insurer for higher prices. The court held that, to accept the
insurer’s offer, it was essential for the suppliers not only to supply the glass to the insureds, but to submit
invoices to the insurer that conformed to the specified amounts in the pricing letters. Auto Glass Express, Inc. v.
Hanover Ins. Co., 293 Conn. 218, 975 A.2d 1266 (2009).
Often a sales representative will provide a printed form to a prospective customer stating that no contract will be
formed until there is a manifestation of assent by some officer or representative “at the home office” of the seller
company. If the form clearly states that no contract will be formed until such a person signs it, the sales
representative is not making an offer; he or she is soliciting an offer. If the customer signs the form, the
customer is making the offer and has, perhaps unwittingly, prescribed an exclusive manner of acceptance-the
signature of an officer of the seller company at the home office-that may not have to be communicated to the
customer.
UCC § 2-20 1 expressly recognizes the right of an offeror to insist upon a particular manner of acceptance by
stating that, “[u]nless otherwise unambiguously indicated by the language or circumstances,” an offer may be
accepted in any manner. The president of Empire Machinery Co. signed a printed form submitted by Litton
Business Telephone Systems (BTS) to purchase a “Superplex” telephone system. The form contained a clause
stating: “This agreement shall become effective and binding upon the Purchaser and BTS … only upon
approval, acceptance, and execution hereof by BTS at its home office.”
At the bottom of the front page, a clause read: “Approved and Accepted by Litton Business Telephone, Division
of Litton Systems Inc. (Seller)” followed by lines for the name, signature, and title of the Litton official. Empire’s
president signed the form and delivered a down payment. Empire authorized a Litton employee to act as
Empire’s representative for the purpose of installing the system. Another Litton employee advised the local
telephone company that Litton BTS had contracted with Empire to provide a telephone system. At Litton’s
request, Empire purchased $12,000 of electrical equipment to facilitate the installation. When Litton discovered
that it would not be able to deliver the “Superplex” system it had promised Empire, it tendered back Empire’s
down payment and defended Empire’s breach of contract claim on the footing that Litton was not bound to any
contract since no Litton officer had signed the form.
Though the form was prepared by Litton, the court recognized Empire as the offeror and, whether or not it was
aware of the legal effect of signing the form, Empire as offeror unambiguously required an exclusive manner of
acceptance, to wit, the signature of a home office Litton officer, which had not occurred. Litton argued that no
contract was ever formed. The court avoided what could have been an unjust result by noting that an offeror
who has required a particular manner of acceptance may waive that requirement. Empire had manifested its
waiver by its action of making a down payment, purchasing equipment at Litton’s request, and otherwise
manifesting the fact of a contract with Litton. Litton had accepted Empire’s down payment and two of its
representatives with apparent authority had recognized and pursued a contract formed in this manner. Empire
Mach. Co. v. Litton Business Tel. Sys., 115 Ariz. 568, 566 P.2d 1044 (Ct. App. 1977).
While an offeror may prescribe the manner of acceptance, the offeror may waive the requirements imposed in
the offer, and the offeror will be bound to abide by such waiver if the offeree accepts after the waiver. Monahan
v. Finlandia Univ., 69 F. Supp. 3d 681, 2014 U.S. Dist. LEXIS 165122 (W.D. Mich. 2014).
Page 4 of 4
Practice Resources:
• Corbin § .2 (acceptance must manifest assent and be unconditional); § .2
(acceptance may be unconditional even though acceptor makes a conditional
promise); § . 0 (acceptance not conditional, even though grumbling or
accompanied by a request or by a new offer); § . 1 (subsequent erroneous
interpretation does not make an acceptance conditional); § . 2 (attempts by the
offeree to restate in the acceptance the terms of the offer); § . (attempts by
offeree to state legal operation of the agreement); § . (mode of acceptance
can be prescribed by the offeror).

End of Document
§ 3.0 Effects of Counter-Offers and Rejections
[1] Rejections and Counter-Offers Normally Terminate the Original Offer

A counter-offer may be described very simply as an offer with different terms made by the original offeree to the
original offeror. A “conditional acceptance” typically manifests the same qualities as a counter-offer and has the
same effect. A counter-offer must qualify as an offer, manifesting a commitment to future action or forbearance,
and it must be received to be effective. The typical counter-offer has the effect of rejecting the original offer. A
rejection is the offeree’s manifestation of intention not to accept the offer. Restatement (Second) of Contracts
§ . If the original offeror-who has become an offeree-manifests assent to a counter-offer, a contract has been
formed. Such assent may be evidenced by conduct. If Bart offers to cut Charlie’s lawn for $50 but Charlie
replies, “I’ll pay you $40,” this statement rejects Bart’s offer, terminating Charlie’s power of acceptance. If Bart
then proceeds to cut the lawn, he has accepted Charlie’s counter-offer and is entitled to $40 from Charlie.
Rejections and counter-offers normally terminate the original offer. Peartree Props., LLC v. Brandau, 2014
Conn. Super. LEXIS 2593 (Conn. Super. Ct. Oct. 9, 2014). Each must be received to be effective. Where an
employee was offered a “retirement arrangement” which included three months base pay and benefits, he
refused to sign the document evidencing the arrangement, stating, “I didn’t retire.” Subsequently, he attempted
to accept the offer. The court held that a reasonable factfinder could only conclude that the employee had
rejected the offer, terminating the power of acceptance. The court noted that, even if the employee’s refusal to
sign the letter was not deemed an outright rejection but a counteroffer, such a counteroffer normally operates
as a rejection of the offer. Houghton v. Sunnen Prods. Co., 2010 U.S. Dist. LEXIS 43284 (D.N.J. May 4, 2010).
While a counter-offer differs from a simple rejection in that it creates a new power of acceptance in the original
offeror, the typical counter-offer still terminates the original power of acceptance. Where an offeror failed to note
a changed term in the response to its offer that made the response a counteroffer rather than an acceptance,
the counteroffer rejected the terms of the original offer and beginning of performance constituted an acceptance
of the counter offer terms. L & L Builders Co. v. Quirk, 2010 Iowa App. LEXIS 250 (Mar. 24, 2010). Plaintiff
offered to settle a case for $18,000 but the defendant insurer offered $12,000. Plaintiff’s attorney wrote to
defendant: “We are withdrawing past demand” for $18,000 and would settle only if defendant paid plaintiff “the
limits of your insured’s policy.” It further stated: “This will be the only correspondence that you will receive prior
to us filing suit.” Plaintiff’s communication served to reject the original offer and render it legally inoperative.
Davis v. Tex. Farm Bureau Ins., 2015 Tex. App. LEXIS 6818 (Tex. App. 2015).
It is, however, possible to discover a rejection or a counter-offer that does not terminate the offer. The rule that
a rejection or counter-offer terminates the power of acceptance is designed to protect the offeror who may rely
on such a response from the offeree. No further action or communication by the offeror is necessary to assure
that the power of acceptance no longer exists. Suppose, however, an offer states that the offer is open for 30
days, regardless of any rejection or counter-offer during that period. A rejection or counter-offer will not
preclude a later acceptance within the 30-day period because the offeror-the master of the offer-has created a
power of acceptance that, in effect, waives the protection of the rule that a rejection of counter-offer terminates
the offer.
Similarly, an offeree may make a counter-offer that does not terminate the original power of acceptance.
Assume that Ames offers to sell Blueacre to Barnes for $100,000, the offer to last for 30 days. Barnes replies,
“Your offer is interesting and I want to consider it. I’ll pay you $90,000 right now for Blueacre.” Such a reply
preserves Barnes’s power of acceptance at $100,000 though it is also a counter offer creating an immediate
power of acceptance in Ames at $90,000. In December 2002, an employer announced a new dispute resolution
program (DRP) that included arbitration, which employees could voluntarily accept, but as of March 1, 2003, all
employees would be subject to the DRP. Hardin was a terminable-at-will employee who notified the employer
Page 2 of 2
that she would not consent to the DRP. In early 2003, the employer posted a notice alerting employees to the
mandatory nature of the DRP as of March 1. There was no further discussion of the plan between Hardin and
the employer. In December 2003, Hardin was fired and she sued. The employer sought to compel arbitration
under the DRP. The district court held that Hardin’s refusal constituted a counter-offer that the employer
accepted after March 1 by not firing her. The appellate court, however, found that, while Hardin had rejected the
original offer by her counter-offer to continue to work not subject to the DRP, her counter-offer did not have the
effect of terminating the employer’s continuing offer of employment that would be subject to the DRP after
March 1. Hardin’s decision to continue to work for this employer after March 1 was an acceptance of that offer,
making her subject to arbitration under the DRP. Hardin v. First Cash Fin. Servs., 465 F.3d 470 (10th Cir.
2006).
A Fed. R. Civ. P. 68(a) offer of judgment does not contemplate counteroffers or rejections. It allows 14 days to
accept an offer, and during that period, the offeree’s power of acceptance may not be terminated by a rejection
or a counteroffer. Garayalde-Rijos v. Municipality of Carolina, 2015 U.S. App. LEXIS 14719 (1st Cir. 2015).
[2] A Mere Request or Suggestion in Response to an Offer Is Not a Counter-Offer

It is necessary to distinguish mere inquiries or requests and separate offers from counter-offers. As suggested
earlier in this chapter, a mere request or suggestion in response to an offer is not a counter-offer. A response to
an offer that maintains the power of acceptance but makes a new offer dealing with a separate subject matter is
not a counter-offer. Where a depositor signed an agreement enabling his bank to advance up to $500 to his
checking account if the account had insufficient funds to pay a check, he added the phrase “Call if I bounce a
check” to his signature on the agreement. When a check bounced, the bank advanced the funds but did not call
him. The depositor claimed the bank had breached the contract. The court held that the quoted phrase was a
mere request. It did not constitute a counter offer because it did not expressly condition the customer’s
acceptance of the bank’s offer on the bank’s agreement to call him if a check bounced. APS v. US Bank, 2009
U.S. Dist. LEXIS 112298 (D. Minn. Dec. 2, 2009).
Practice Resources:
• Corbin § . (counter-offers and their effect); § . (power to accept is
terminated by counter-offer or conditional acceptance); § . (counter-offer by
one who has a “binding option” or an irrevocable offer does not terminate the
power of acceptance); § . (power of acceptance not terminated by counter-
offer if either offeror or offeree so prescribes); § . 0 (inquires distinguished from
counter-offers); § . 1 (effect of rejection of an offer).

End of Document
§ 3.10 Effect of Different or Additional Terms
[1] The “Matching Acceptance” Rule Requires the Acceptance to Be a Mirror Image of the Offer
To this point, there has been a considerable emphasis upon the rule precluding a “conditional acceptance” from
operating as true acceptance because it is really a counter-offer. A positive version of the same rule is the
common law rubric that the acceptance must match the offer exactly—the “matching acceptance” rule that is
often expressed as requiring the acceptance to be the “mirror image” of the offer. The inexorable logic of the
rule seemed to remove any doubt. How could a response to an offer with different or additional terms possibly
operate as an acceptance of the offer? The terms of the offer limit the power of acceptance to those precise
terms. Otherwise, the offeror would be oppressed with a contract he or she never offered to make. Consider a
simple contract for the sale of goods.
The Carr Corporation sends a purchase order to the Davis Corporation in which Carr offers to purchase a Davis
model X-35 imaging device at a price of $230,000 to be delivered within 60 days. Davis responds by sending its
acknowledgment form stating that Davis will sell the X-35 to Carr for $230,000 and will deliver the equipment
within 60 days-a “matching acceptance” forming a contract. If Davis had promised to ship an X-42 model device
at $230,000 delivered within 60 days, the reply would clearly constitute a counter-offer. If the reply promised an
X-35 shipped within 60 days at $245,000, again, the response would be a counter-offer. If Davis promised to
ship an X-35 at $230,000 within six months, the same counter-offer result would follow. In each of these
examples, the matching acceptance (mirror image) rule has been violated and no contract would be formed.
There has never been any doubt about this analysis or result and in the twenty-first century, the same result
would follow.
The terms that were changed in the foregoing illustrations and converted the response into a counter-offer were
what the chief architect of the UCC and principal draftsman of Article 2, Karl Llewellyn, called “dickered” terms-
terms that were consciously considered by the parties and were often the subject of bargaining. Suppose,
however, that the dickered terms match-the subject matter (X-35), price ($230,000), and delivery time (60 days)
are identical, but Davis’s form contains other prefabricated standard terms, often referred to as “boilerplate”
clauses. Such terms include a disclaimer of implied warranties and normal UCC remedies, a substituted
exclusive remedy providing that Davis will repair or replace any defective part for only 90 days after the X-35 is
delivered, and an arbitration clause stating that in any dispute under the contract the parties agree to submit
their dispute to arbitration, which will preclude either party from suing in a court of law. Such “standard” terms
have become common on many printed forms and are very often ignored by the parties. If, however, a dispute
occurs, the purchase order and acknowledgment forms the parties exchanged are the written evidence of their
contract. Suppose Davis insists that the dispute must be submitted to arbitration pursuant to the clause in its
form. The Carr Corporation resists arbitration, preferring a court of law to adjudicate the dispute, and argues
that it never agreed to arbitration. There is nothing in the purchase order concerning arbitration.
The common law reaction would find no contract formed upon the exchange of forms. Though the dickered
terms match, the common law would still regard the additional or different boilerplate clauses as violating the
matching acceptance rule. Davis’s acknowledgment, therefore, would be construed at common law as a
counter-offer that terminated Carr’s offer. Though no contract resulted from the exchange of forms, Davis would
still ship the X-35, perhaps because Davis mistakenly thought a contract had been formed ignoring its own
boilerplate terms. Carr, which also ignored the boilerplate, would accept the X-35. There would be no contract
via the exchange of forms. For the first time, the parties would have a contract by their conduct in shipping and
accepting the equipment. Since Davis’s acknowledgment constituted a counter-offer, by accepting the
equipment after receiving the Davis counter-offer, Carr’s conduct would be deemed an acceptance of Davis’s
Page 2 of 6
boilerplate terms, including the arbitration clause. Davis would win the “battle of the forms” simply because it
fired the last shot in the battle; this is known as the “last shot” principle.
[2] UCC § 2 20 and the “Battle of the Forms”
[a] UCC § 2 20 Modifies the Matching Acceptance Rule

To avoid unjust results emanating from a mechanical application of common law offer and acceptance
rules, Professor Llewellyn and his colleagues inserted a provision in UCC Article 2 that applies only to
contracts for the sale of goods. This provision is often viewed as the most controversial section in Article 2,
if not the entire Code. It reads:
Additional Terms in Acceptance or Confirmation.
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a
reasonable time operates as an acceptance even though it states terms additional to or different
from those offered or agreed upon, unless acceptance is expressly made conditional on assent to
the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between
merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has 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.
UCC § 2-20 .
The recognition of a “definite and seasonable expression of acceptance” notwithstanding different or
additional terms was confusing to those who had assimilated the unassailable logic of the matching
acceptance rule for so long. The new diction, however, did not emasculate the classic rule; it simply
modified it, although it certainly was a major modification. A response to an offer changing dickered terms
will still violate the matching acceptance rule, but an acceptance with matching dickered terms will be a
“definite expression of acceptance” notwithstanding boilerplate terms inserted by the seller’s lawyer, which
are typically ignored. A difference in dickered terms will immediately signal the inapplicability of UCC § 2-
207 because the requirement of its opening paragraph has not been met.
The Restatement (Second) of Contracts refers to UCC § 2-20 particularly in Sections 59 and 61. Neither
of these sections suggests that a UCC § 2-20 analysis applies beyond the UCC. Both are consonant with
the common law views that different or additional terms will constitute a counter-offer.
[b] UCC § 2 20 1 Permits an Offeree to Make a Counter-Offer

If a seller wishes to insist on its terms, the seller may still make a counter-offer. The last phrase of UCC § 2-
207(1), “unless acceptance is expressly made conditional on assent to the different or additional terms,”
expressly permits the offeree to make a counter-offer. Sellers often used the very language of that provision
to ascertain that their “acceptances” would be counter-offers. No contract is formed via the exchange of
forms. Mark Andy, Inc. v. Heat Techs., 2015 U.S. Dist. LEXIS 44008 (E.D. Mo. Apr. 3, 2015) (“Here, Mark
Andy’s Purchase Order [in response to Heat Technologies’ offer] tracks the statutory language and states
that ‘acceptance of this Order is expressly made conditional on assent to the terms, provisions and
conditions of this Order . Accordingly, it was not a valid acceptance of Heat Technologies’ offer.” Rather,
it was a counter-offer, but because it expressly conditioned its acceptance on Heat Technologies’ assent to
the proposed terms in the Purchase Order, a contract on Mark Andy’s terms resulted only if Heat
Page 3 of 6
Technologies assented. The court explained: “Mere performance does not constitute acceptance of all the
terms in the counter-offer.”) Nonetheless, the seller ships the ordered goods and the buyer not only
receives the goods but accepts the goods (in the ways prescribed in UCC § 2- 0 . The seller often claims
that this acceptance of the goods constitutes an acceptance of the seller’s terms, including its boilerplate
clauses favoring the seller. Recognizing that such a construction of the statute would embrace the “last
shot” principle that the statute was designed to overcome, courts hold that the mere acceptance of the
goods in response to a UCC § 2-20 counter-offer is not an acceptance of the seller’s standard terms in its
form. The buyer is bound to such terms only by the buyer’s express assent to them which, as a practical
matter, would not occur since the buyer would continue to ignore such terms. See C. Itoh & Co. v. Jordan
International Co., 552 F.2d 1228 (7th Cir. 1977).
[c] A Contract May Be Formed by Conduct

If a seller’s form contains counter-offer language in accordance with the last proviso of UCC § 2-20 1
such a counter-offer rejects the buyer’s offer. There is no contract via the exchange of forms. There is,
however, a contract by conduct—the shipping of the goods and the acceptance of them by the purchaser.
Section 2-207(3) recognizes this contract by conduct and also directs the discovery of the terms of such a
contract by conduct. While offers that have been rejected by counter-offers typically have no operative
effect, in ascertaining the terms of a § 2-20 contract by conduct, a court must consider both of the
exchanged forms and which matching terms will be operative. Typically, these will be the dickered terms—
the matching subject matter, price, and perhaps other terms, such as the time of delivery. Non-matching
terms will be excised: the seller’s clause disclaiming the buyer’s implied warranties limiting the buyer’s
remedies, as well as the arbitration clause that attempts to remove the buyer’s right to sue in a court of law.
The gaps left by the excised terms are “supplemented” by implied or “default” terms under the UCC. Thus,
implied warranties, buyer’s remedies, and adjudication in a court of law—terms either expressly or impliedly
assumed by Article 2—would be inserted in the “gaps” left after non-matching boilerplate terms were
excised. See Sanmina-Sci Corp. v. Pace United States, 2015 Cal. App. Unpub. LEXIS 4765 (Cal. App. 6th
Dist. July 7, 2015) (2-207(3) limits the contract to the terms on which their writings expressly agree, along
with gap-filler provisions from the Commercial Code).
It is important to note that § 2-20 becomes applicable only if the parties have failed to form a contract
via an exchange of forms—typically, a counter-offer from the offeree. It has no application when the parties
have formed a contract by their forms under § 2-20 1 notwithstanding different or additional (non-
dickered) boilerplate terms in those forms.
[d] Definite Expression of Acceptance Under § 2 20 1 —Confirmations

If there is a definite expression of acceptance notwithstanding different or additional non-dickered terms in
the response to the offer, there is a contract. Similarly, if the parties had formed an oral contract and one or
both had sent a confirmation of that contract, the confirmation would operate as an acceptance under § 2-
207(1) (the statute pretends that the confirmation is an acceptance) even though the confirmation contains
non-dickered terms different from or additional to the terms of the prior oral contract. It is, however,
important to distinguish confirmations from other writings sent by the seller to the buyer after the contract is
formed. An invoice sent after the buyer’s offer has been accepted by the seller’s performance is not a
confirmation. Thus, where an invoice contained a forum-selection clause, the court distinguished an invoice
from a “confirmation,” which it characterized as a formal writing containing terms already agreed to and,
perhaps, terms not previously discussed. The forum-selection clause, therefore, did not activate § 2-20
and did not become part of the contract. Int’l Metal Sales, Inc. v. Global Steel Corp., 2010 Tex. App. LEXIS
2201 (Mar. 24, 2010).
The same court addressed the related issue of whether a term appearing in successive post-formation
documents such as the forum-selection clause in the Global standard invoice terms may become part of a
contract if the practice of sending such forms would constitute a “course of dealing” under UCC § 1- 0 .
The court concluded that the mere sending and receipt of such an invoice with no objection to its printed
terms from the other party does not constitute an implied agreement incorporating that term in the contract.
Id.
Page 4 of 6
It is particularly important to emphasize that the popular phrase describing § 2-20 as the “battle of the
forms” is inaccurate and misleading. Both the statutory language and Comment 1 to § 2-20 clearly
recognize that it applies in situations involving “a [singular] confirmation.” Comment 1 clearly states that it
applies where only one party sends a confirmation as well as where both parties send conflicting
confirmations. See Dorton v. Collins & Aikman Corp., 453 F.2d 1161 (6th Cir. 1972).
[e] “Different” or “Additional” Terms Under § 2 20 2

Section 2-207(1) recognizes the operative effect of a definite expression of acceptance notwithstanding
“different” or “additional” terms. The generally infelicitous language of § 2-20 becomes particularly
frustrating in § 2-20 2 which refers exclusively to “additional” terms. “Different” terms are not mentioned
in that subsection nor elsewhere in § 2-20 nor in any other part of the UCC. There are comments to § 2-
207 that clearly assume the section is referring to both different and additional terms. Although there is
some judicial sympathy for that view as the “most sensible,” it has not carried the day. See Northrop Corp.
v. Litronic Indus., 29 F.3d 1173, 1175 (7th Cir. 1994) (Posner, J.). That case cites John E. Murray, Jr., The
Chaos of the Battle of the Forms: Solutions, 39 Vand. 1307 (1986), which advocates this interpretation and
construction.
What has been christened the “knockout” view reads § 2-20 2 literally and advances a comment to that
section in support of the notion that it does not apply where there are expressly “different” terms in the
exchange forms. Both different terms will be excised. This view has been generally accepted. See Flender
Corp. v. Tippins Int’l, Inc., 830 A.2d 1279, 2003 PA Super. 300 (adopting the view in Pennsylvania after
reviewing the prevailing case law elsewhere).
The curiosity is that the “knockout” view applies only where there are expressly conflicting terms in both
forms. If a purchase order expressly states that disputes will be resolved exclusively in a court of law while
the acknowledgment form expressly states that disputes will be submitted to arbitration, the knockout view
will excise both, leaving a gap to be filled with the UCC assumption that adjudication will be in a court of
law. If, however, the purchase order is silent concerning dispute resolution and the acknowledgment form
contains an arbitration clause, the knockout rule will not apply. Rather, § 2-20 2 will become operative.
[f] Proposals “Between Merchants” Become Part of the Contract Unless an Exception Applies
The first sentence of § 2-20 2 states that “additional terms are to be construed as proposals for addition
to the contract.” If it ended at that point, like any other “proposal,” the offeror would have to agree to such a
term to make it part of the contract. The second sentence, however, states that if the contract is “between
merchants,” additional terms “become part of the contract unless” one of the exceptions following this
prescription occurs. Since the term “merchant” is used in § 2-20 in the broad sense of that term to refer to
businesses contracting with each other, it is rare to discover a § 2-20 application involving a non-
merchant. Thus, the challenge is to determine whether one of the exceptions under § 2-20 2 will preclude
the additional term from becoming part of the contract.
Emphasizing that the offeror is the master of the offer, § 2-20 2 allows a clause to expressly limit
acceptance to the terms of the offer, regardless of whether the additional term in the acceptance is material
or immaterial.
Under § 2-20 2 c the offeror may notify the offeree in the offer itself, or within a reasonable time after the
response with variant terms is received, of the offeror’s objection to such terms, which will preclude the
terms from becoming part of the contract.
Section 2-207(2)(b) addresses material alterations. If the offer neither expressly limits acceptance to its
term nor objects to additional terms, the additional term will become part of the contract between merchants
unless the term “materially alters” the offer. There are certain terms that will clearly be characterized as
material alterations, such as terms disclaiming implied warranties. See UCC § 2-20 cmt. 4. Terms in a
seller’s form limiting remedies and excluding consequential damages were often regarded as material in
earlier cases; more recent cases suggest that they may be immaterial alterations allowing them to become
part of the contract.
[g] “Material” vs. “Immaterial” Terms

Page 5 of 6
An additional term suggesting reasonable finance charges for late payment will become part of the contract
as an immaterial term (UCC § 2-20 cmt. 5), but an additional term requiring the payment of attorney’s
fees has been held to be a material term that does not become part of the contract under UCC § 2-
207(2)(b). A. E. Robinson Oil Co. v. County Forest Prods., 2012 ME 29, 40 A.3d 20. A warranty disclaimer
has been held to materially alter the terms of the contract since, a buyer of cranes contended, its
reasonable expectation, per industry standards, was that the cranes would be ready for immediate and safe
use. Imperial Crane Servs. v. Cloverdale Equip. Co., 2015 U.S. Dist. LEXIS 104983 (N.D. Ill. 2015).
Arbitration clauses were often deemed to be material alterations, but the growing use of arbitration to
resolve disputes has led courts to focus on whether such clauses manifest “surprise” and “hardship” to the
other party, a test suggested by comment language to § 2-20 . See S. Ill. Riverboat Casino Cruises, Inc. v.
Triangle Insulation & Sheet Metal Co., 302 F.3d 667 (7th Cir. 2002). If arbitration has become so pervasive
in a given industry as to amount to trade usage, the inclusion of an arbitration provision in one of the
parties’ forms would not constitute an additional term. Rather, it would simply express a term that already
exists in the contract by trade usage. Atl. Textiles v. Avondale Inc. (In re Cotton Yarn Antitrust Litig.), 505
F.3d 274 (4th Cir. 2007). Comment 5 indicates that a clause fixing a customary time for complaints within
reasonable limits is not a material alteration under § 2-20 2 while comment 4 states that a clause
requiring complaints be made in a time shorter than customary or reasonable would be a material alteration
that would not become part of the contract. While recognizing that the terms, “customary” and “reasonable”
may overlap in these illustrations, a court concluded that neither term should be treated as surplusage.
Noting that other courts viewed a reduction in the period of the statute of limitations as “reasonable,” the
court was not convinced that a finding of reasonableness alone was sufficient since a statute of limitations
modification could be “reasonable” but still materially alter the contract if the term is materially shorter than
customary or otherwise resulted in unreasonable surprise or hardship to the other party. In the case before
it, the court treated it as a material question of fact, thereby denying a motion for summary judgment.
Packgen v. Berry Plastics Corp., 973 F. Supp. 2d 48 (D. Me. 2013).
[h] The “Rolling” (“Layered”) Contract Theory

There are numerous cases applying § 2-20 to written confirmations containing variant terms, but recent
developments question that analysis, suggesting that standard forms include boilerplate that should be
enforced unless the clause is unconscionable.
The Hills used their credit card to order a Gateway computer by telephone. When the computer was
delivered, inserted inside the box were terms not previously announced or discussed. The terms included
an arbitration clause that Gateway relied upon in seeking to compel arbitration when the Hills sued in a
court of law. The district court applied § 2-20 in holding that the Hills were not subject to arbitration.
The court of appeals reversed. The court’s view that § 2-20 applies only when there are two forms that
conflict ignored both statutory language and precedent that applied § 2-20 when only a seller sent a
confirmation containing variant terms. Having eliminated § 2-20 whenever there is only a seller’s form,
whether the buyer is a merchant or non-merchant, the court proceeded to suggest that previously
undisclosed terms that arrive with the product are enforceable against the buyer if the buyer is afforded the
opportunity to reject the terms and return the product for a refund within the time set forth in the seller’s
terms. The contract, therefore, is not formed when the buyer orders the goods or when the goods are
shipped by the seller. The last “layer” of the contract formation process occurs when the buyer receives the
terms inside the container and either chooses to reject them and return them or accept such terms, which
would typically occur by silence. Hill v. Gateway 2000, 105 F.3d 1147 (7th Cir. 1996).
The Hill opinion was handed down six months after the first opinion announcing this new theory, ProCD,
Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). An earlier opinion in the Third Circuit applied § 2-20 in a
similar case, Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991). While the
ProCD opinion attempts to distinguish the Step-Saver analysis, the amended version of Article 2 (which has
not been enacted by any jurisdiction as of this writing) sees them as opposed but expressly refuses to
choose between them. Subsequent case law supporting the “layered” theory includes Brower v. Gateway
2000, 246 A.D.2d 246, 676 N.Y.S.2d 569 (1998); M.A. Mortenson Co. v. Timberline Software Corp., 140
Wash. 2d 568, 998 P.2d 305 (2000). Cases rejecting this view include Wachter Mgmt. Co. v. Dexter &
Chaney, Inc., 282 Kan. 365, 144 P.3d 747, 755 (2006); Klocek v. Gateway, Inc., 104 F. Supp. 2d 1332 (D.
Page 6 of 6
Kan. 2000). See also Rogers v. Dell Computer Corp., 2005 OK 51, 138 P.3d 826. In Howard v. Ferrellgas
Partners, L.P., 748 F.3d 975, 982 (10th Cir. 2014), the court noted. “It’s pretty clear that Kansas is among
those states that reject the rolling contract formation theory” citing Wachter Mgmt. and John E. Murray, Jr.,
The Dubious Status of the Rolling Contract Theory, 50 Duq. L. Rev. 35, 63–65 (2012)
[i] Different or Additional Terms under CISG

CISG applies to contracts for the sale of goods between parties who have their principal places of business
in CISG countries, which now include more than 80 nations comprising most of the international trade in the
world. CISG Article 19(1) states that a reply purporting to be an acceptance of an offer that contains
additions, limitations, or modifications of the offer is a rejection of the offer and constitutes a counter-offer.
Thus, CISG does not adopt a § 2-20 analysis. The Seventh Circuit reiterated in VLM Food Trading Int’l,
Inc. v. Ill. Trading Co., 811 F.3d 247, 2016 U.S. App. LEXIS 1013 (7th Cir. Ill. Jan. 21, 2016) that CISG
departs dramatically from the UCC by using the common-law “mirror image” rule (sometimes called the
“last shot” rule) to resolve “battles of the forms.” Article 19(2) may appear to move in the direction of § 2-20
by allowing additional or different terms that do not materially alter the terms of the offer to become part of
the contract unless the offeror objects to them. Any notion of a § 2-20 influence, however, is virtually
eliminated by Article 19(3), which contains a comprehensive list of terms that would be deemed material:
price, payment, quality, quantity, place and time of delivery, extent of one party’s liability to the other, or the
settlement of disputes. Moreover, the list is not exhaustive since it is prefaced by the phrase, “among other
things.” It is clear that the drafters of CISG chose to avoid the considerable consternation surrounding the
application and construction of § 2-20 .
Practice Resource:
• Corbin § . (conditional acceptances and counter-offers under the
UCC and the United Nations Convention).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 4 INDEFINITENESS AND MISTAKE IN

EXPRESSION
CHAPTER 4 INDEFINITENESS AND MISTAKE IN EXPRESSION

the subject matter.

End of Document

EXPRESSION
§ 4.01 Agreements Must Be Sufficiently Definite and Certain to Be Enforced
[1] Even if Parties Intend to Be Bound, the Agreement Must Be Sufficiently Definite to Enable a Court
to Ascertain the Terms
There are innumerable cases involving myriad fact situations recognizing the essential requirement that any
agreement must be sufficiently definite and certain to be enforced. A court cannot enforce a contract unless it
can determine what it is. If the contract is not legible, a court cannot enforce it. Stewart v. Moon, 2015 U.S. Dist.
LEXIS 163687 (N.D. Ohio Dec. 7, 2015). The parties must have expressed themselves in a manner that is
capable of understanding. The frustration of a court in attempting to discern the parties’ intention is found in a
case involving an alleged agreement arising out of a divorce. The court stated:
We conclude that the terms of the alleged agreement were so vague and indefinite as to prevent the
creation of an enforceable contract. We have carefully examined the almost 1,000 pages of record and
transcript. Therein appear repetitious contentions and counter contentions ad nauseam. The record is
loaded with trivia which was injected by both counsel despite the valiant efforts of the trial judge to keep the
parties to the point at issue. Despite this voluminous mass of testimony, we nowhere found in the record
any evidence of a clear understanding or even a clear assertion of any contractual terms.
Shetney v. Shetney, 49 Wis. 2d 26, 38, 181 N.W.2d 516, 521–522 (1970).
In Silicon Int’l Ore, LLC v. Monsato Co., 155 Idaho 538, 314 P.3d 593 (2013), SIO claimed a verbal agreement
under which Monsanta would continue to supply SIO with silica sand to be processed. Neither quantity nor
price were agreed upon. Moreover, the duration of the agreement was alleged to continue so long as it was
“mutually beneficial.” The court cited the Corbin treatise in holding that a court cannot enforce a contract unless
it can determine what it is.
It is important to emphasize that the question is not whether the parties intended to agree. If their expressions
and the surrounding circumstances do not allow a court to ascertain the terms of the agreement, it cannot be
enforced regardless of their general intention. A contract to provide financial advisory services in preparation of
the sale of a business included a commitment to pay an investment banking fee based on a formula for
calculating “transaction value.” While there was no question that the parties intended to include an investment
banking fee in their contract, the agreement pursuant to that intention was so uncertain and indefinite that the
court could not enforce a promise to pay such a fee. Tranzact Techs., Ltd. v. Evergreen Ptnrs., Ltd., 366 F.3d
542 (7th Cir. 2004). Where an agreement provided that a party was to receive “a home in Ferrington Village or
elsewhere,” the court explained that the agreement provided no guidance that would allow it to determine the
type of home to be purchased or any particulars such as price, lot size, or location. The court stated:
It is not enough that the parties think they have made a contract. They must have expressed their
intentions in a manner that is capable of being understood. It is not enough that they have actually agreed,
if their expressions, when interpreted in light of accompanying factors and circumstances, are not such that
the court can determine what the terms of the agreement are.
Johnson v. Johnson, 418 B.R. 682 (E.D.N.C. 2009).
Whether the parties’ expressions of agreement are sufficiently definite, however, is a matter of degree. All
agreements have some degree of uncertainty. Bankers Trust Co. v. Wright, 2010-Ohio-1697, 2010 Ohio App.
LEXIS 1400 (6th Dist.). Even what may appear as pristine clarity of expression may reveal some indefiniteness,
vagueness, or ambiguity. Courts must not hold parties to some ideal or impossible standard of clarity. The
critical principle is stated in Restatement (Second) of Contracts § 2 and comment b and the Uniform
Commercial Code (UCC) § 2-20 . Both include a standard of reasonable certainty that is met if the parties’
expressions provide a basis for ascertaining that the parties intended to make a contract and the terms are
Page 2 of 2
sufficiently certain to allow a court to provide a remedy in the event of a breach. Where a supplier agreed to
provide “a workable line of credit” to the purchaser of a company previously indebted to the supplier in
exchange for the purchaser’s promise to pay the debt, the purchaser later claimed no contract was formed
since the contract was too indefinite. The court found “workable line of credit” to have been understood by the
parties as the same as the line of credit formerly extended to the debtor company that had failed to pay. The
court cited the Corbin treatise for the proposition that where the finder of fact can determine the parties’
intention, indefiniteness disappears as a reason for refusing enforcement. Cent. Supply, Inc. v. Roosevelt
Capital, LLC, 329 Wis. 2d 711, 790 N.W.2d 543, 2010 WI App 135.
[2] UCC Provides “Gap-Fillers” When Intent to Be Bound Is Manifest

If one or more terms are left open, the contract will not fail for indefiniteness if there is a manifest intention to be
bound and a reasonable basis for affording a remedy in the event of a breach. Again, it is a matter of degree.
Both the Restatement (Second) and the UCC agree that the more terms left open, the less likely it is that the
parties intended to conclude a binding agreement. UCC § 2-20 Restatement (Second) of Contracts § cmt.
c. If, however, there is a sufficient manifestation of intention to be bound, the UCC provides certain “gap-fillers”
to account for the missing terms. UCC § 2- 0 provides for a reasonable price in the absence of a price term
and UCC § 2- 0 provides for a reasonable time in the absence of a specific time for performance.
[3] Performance May Cure Indefiniteness

The parties may cure the indefiniteness of the agreement by performance. Their course of performance may be
sufficient to fill in vital gaps and it may be equally important in curing the indefiniteness of “ambiguous”
language of the agreement. Course of performance is the strongest evidence of what the parties meant by their
language. Beyond explaining the parties’ intended meaning, how the parties began performing the agreement
may also supplement the terms of the contract. Similarly, the parties’ course of dealing in prior contracts can be
used to explain the meaning they attached to their words as well as supplementing the terms of their present
agreement. The trade usage surrounding the agreement may also assist courts to understand the parties’
intentions with respect to the meaning of their words and the normal operations of reasonable parties within
such a trade. UCC § 2-202 and § 2-20 .
While courts sometimes state that the remedy of specific performance of a contract will demand expressions of
greater definiteness than actions seeking the payment of damages, it is difficult to determine why this should be
so. If a court finds sufficient definiteness to enforce a contract, in general it should be willing to grant a remedy
of specific performance if such a remedy is appropriate. Indeed, where a damage remedy may be deemed too
uncertain, a court could be persuaded to decree specific performance to assure an adequate remedy. Further
discussion of specific performance and contract remedies may be found in Chapter 63 below.
Practice Resource:
• Corbin § .1 (vagueness and indefiniteness of terms).

End of Document

EXPRESSION
§ 4.02 Indefinite Time of Performance
[1] A “Reasonable Time” Will Be Applied by Courts if the Offer Fails to Set a Time of Performance
Contracts often fail to specify a time for performance. In many instances, no dispute arises as to whether a
contract has been performed in a timely fashion. When a dispute does arise, courts apply the generic rule that a
reasonable time under all of the surrounding circumstances will be implied. The determination of such a
“reasonable time” is a question of fact that must be considered in context, but it is a workable standard.
Contracts contemplating continuous performances, such as output, requirements, or franchise contracts, may
omit any statement of duration or provide for continuation until termination by notice. Contracts without a stated
term are terminable at the will of either party upon reasonable notice. Yashi II, LLC v. Yashi Fine Foods LLC,
2015 U.S. Dist. LEXIS 159672 (D. Ariz. 2015). The UCC has addressed indefiniteness in such contracts by
limiting duration to a reasonable time, but allowing termination by either party unless otherwise agreed. UCC
§ 2- 0 2 . Unless the contract is expressly agreed to end upon the occurrence of a specified event, such
termination requires reasonable notification. UCC § 2- 0 . A reasonable notification period should allow the
terminated party sufficient time to make substitute arrangements and to recoup the investment it made when
the contract was formed. A provision that states the agreement may be terminated at any time still requires
reasonable notice. An agreement dispensing with notice is subject to invalidation under the unconscionability
standard. UCC § 2- 0 . Statutes may protect certain parties against bad faith practices. See, e.g.,
Automobile Dealers Day in Court Act, 15 U.S.C.A. § 1 22.
Leasehold contracts may state that the lease shall be renewable at the lessee’s option, but fail to state any
duration of the renewed term. Absent contrary evidence, the implication is that the renewal is for the same
duration as the original lease and on similar terms.
In 1987, MPSC, which provided cattle slaughtering facilities a patented meat “processing” technique called the
“Rinse & Chill service,” entered into a written royalty agreement with Lamoureux whereby Lamoureux would
pay MPSC $150,000 to “purchase” the right to a $1.50 payment for every animal processed anywhere in the
world with the Rinse & Chill service “as long as this agreement remains in effect.” The agreement spelled out
three termination scenarios: (1) The dissolution, bankruptcy, insolvency or receivership of the company; (2)
Lamoureux’s demise without survivors; (3) A written agreement. None of the three occurred, but MPSC
declared it intended to terminate the contract at will after providing reasonable notice. In the ensuing litigation,
the court held MPSC was required to continue making royalty payments. The contract was not indefinite
because it contained termination events, and MPSC’s performance was conditioned on the continued use of
Rinse & Chill. Lamoureux v. MPSC, Inc., 2015 U.S. Dist. LEXIS 163648 (D. Minn. Dec. 7, 2015).
If no time for performance is specified in a contract for the sale of goods or for the provision of services, delivery
of goods is due within a reasonable time §§ 1-20 2-309(1)) and payment is due when the service is
completed and when the goods are received (UCC § 2- 10 Restatement (Second) Contracts § comment d).
Course of dealing or trade usage may allow for a delay in payment as when a buyer has been regularly paying
invoices within 30 days after delivery of the goods or buyers in a given industry normally make payments within
that time. Course of dealing or usage of trade become part of the contract unless carefully negated by the
parties. See UCC § 2-202, cmt. 2.
[2] Employment Agreements Without a Specified Duration Generally Are “Terminable-at-Will”—

Promissory Estoppel
Page 2 of 4
For almost a hundred years, our contract law viewed employment agreements without a specified duration as
an agreement “terminable-at-will” for good cause, no cause, and even for causes that were morally wrong.
Similarly, the employee could walk off the job at any time with impunity. An agreement terminable-at-will,
therefore, could not constitute an executory contract. If the employee failed to appear after promising to start
work on a given day or if the employer refused to allow the employee to work, neither party was liable.
The view that it is impossible to recognize a terminable-at will agreement as a contract unless performance
continues is the prevailing view, but recent cases have questioned this traditional view. For example, a
defendant offered to employ the plaintiff as a project manager and the plaintiff manifested acceptance of that
offer, but the defendant attempted to withdraw the offer after learning that the plaintiff had testified adversely to
the defendant several years earlier. Though the plaintiff had not commenced any performance, the court held
that a bilateral contract had been formed. The defendant’s basis for termination of the agreement was a
violation of public policy. The court noted that the defendant’s argument that an executory terminable-at-will
contract could not be made would recognize a claim in an employee fired illegally after one minute of
performance, but not recognize the same claim in an employee fired illegally one minute before performance
was to begin. The court saw no value in that distinction. Reust v. Alaska Petroleum Contrs., Inc., 127 P.3d 807
(Alaska 2005).
In another case, a plaintiff orally accepted the defendant’s offer of employment, but when she reported for work
on the first day, she was told the offer was rescinded. The plaintiff had terminated her previous employment in
reliance on the new agreement. The court recognized that the majority of jurisdictions would conclude that a
cause of action does not exist under a terminable-at-will contract when the employee has yet to commence
work. Moreover, most jurisdictions would also conclude that reliance on a promise of at-will employment is
unreasonable as a matter of law since such a promise creates no enforceable right. An employer who allows a
terminable-at-will employee to commence working has broken no promise. Here, however, the employer broke
a promise to allow the plaintiff to commence work after she had relied to her detriment on the promise. In
enforcing the promise, the court found support in cases allowing recovery of reliance losses when a promisee
reasonably relied on a promise to become a franchised dealer and the franchise was not granted. Goldstein v.
Unilever, 2004 Conn. Super. LEXIS 1126 (May 3, 2004). Even courts that recognize promissory estoppel as a
cause of action where the employment is at-will, however, also insist that the employee’s reliance must be
reasonable. Where the plaintiff was “welcomed to the family” of a new employer and relied by surrendering her
former employment, she knew that a background check would occur before her employment began. That check
revealed the discovery of DUI convictions precluding a valid driver’s license that could affect her employment.
The court held that her reliance was not reasonable under these circumstances. Ladd v. Mohawk Carpet
Distrib., L.P., 2010 U.S. Dist. LEXIS 60021 (D. Minn. Apr. 1, 2010).
[3] Statutes May Provide Protections to Terminable-at-Will Employees

Courts have also held a terminable-at-will employment agreement to constitute a “contract” as that term is used
in a civil rights statute providing all persons with the same right to enforce a “contract” as a white person. See
Walker v. Abbott Labs., 340 F.3d 471 (7th Cir. 2003) (adopting the traditional “unilateral contract” construction
recognizing a contract as long as it was performed). Other statutes protect terminable-at-will employees against
religious, age, gender, and other forms of discrimination. See, e.g., 42 U.S.C. § 2000 e (prohibiting termination
for reasons of race, color, sex, or national origin); 29 U.S.C. § 2 1 (prohibiting termination for reasons of
age). Public policy will also preclude termination when, for example, an employer attempts to terminate an at-
will employee because the employee performs the mandated duty of jury service. Reuther v. Fowler & Williams,
Inc., 255 Pa. Super. 28, 386 A.2d 119 (1978). Where, however, a terminable-at-will employee claimed he was
not bound by an arbitration agreement which he signed under “duress” because he would have been
terminated if he did not sign, the court found no duress since the employer had the right to terminate the
employment for any reason except those prohibited by law. Jackson v. Home Team Pest Def., Inc., 2013 U.S.
Dist. LEXIS 163269 (M.D. Fla. Sept. 18, 2013).
Since an employment contract without a stated duration may be terminated at will unless it falls within an
exception, one of the common questions is whether the language or other manifestations of assent in a given
agreement should be interpreted as creating an agreement that is terminable-at-will. The issue is not unlike
other questions of contract interpretation under all surrounding circumstances. If the agreement provides for
payment of a stated weekly, monthly, or yearly salary, the facts may justify the implication of a contract for that
Page 3 of 4
salary period. If employment is characterized as “permanent,” however, courts have distinguished the
permanency of the position from the duration of the employment of a party occupying that position. See, e.g.,
Fisher v. Jackson, 142 Conn. 734, 118 A.2d 316 (1955). Without more, an agreement for a “permanent”
position is terminable-at-will. If an employee has provided separate consideration in exchange for a promise of
permanent employment, courts are more likely to find that the employment continues as long as proper service
is performed With respect to “lifetime” employment agreements, courts have also been more willing to regard
them as having a sufficiently definite duration.
When boxer Mike Tyson orally agreed that Kevin Rooney would train Tyson “for as long as the boxer fights
professionally,” the terminated trainer sued; Tyson claimed the agreement was terminable at will. While the
court had previously found employment terms such as “permanent” and “continue indefinitely” to be of indefinite
duration and, therefore, terminable at will, over a vigorous dissent the court held here that the statement, “for as
long as the boxer fights professionally” was a sufficiently ascertainable duration even though the end-date of
Tyson’s professional career was not precisely calculable. The trainer’s contract, therefore, was not subject to
the rebuttable at-will presumption. Rooney v. Tyson, 91 N.Y.2d 685, 674 N.Y.S.2d 616, 697 N.E.2d 571 (1998).
[4] Employment Manuals May Be Found to Preclude Termination at Will

Numerous cases have focused on the effect of employment manuals or handbooks on the terminable-at-will
status of employees. The paradigm situation is the employer’s distribution of manuals to employees that contain
procedural protections against termination or otherwise provide that an employee will not be discharged except
for cause. To the extent that statements in the manuals are deemed to be promises, the employee’s continued
performance after receiving the manual is construed as an acceptance of the manual’s promises, forming a
modified unilateral contract that precludes termination at will. Numerous courts have adopted this analysis. See,
e.g., Duldulao v. St. Mary of Nazareth Hospital Center, 115 Ill. 2d 482, 505 N.E.2d 314, 106 Ill. Dec. 8 (1987).
General statements of the employer’s policy or general assurances that the employee has a great future with
the company will not suffice. See Pine River State Bank v. Mettille, 333 N.W.2d 622 (Minn. 1983).
The enforcement of these promises has induced employment manuals and handbooks to include provisions
disclaiming any intention that statements therein should be viewed as legally binding. See, e.g., Anderson v.
Douglas & Lomason Co., 540 N.W.2d 277 (Iowa 1995). The enforcement of such disclaimers will often depend
upon their clarity and conspicuousness. The Anderson court found a disclaimer effective without regard to its
conspicuousness, although it recognized that other courts would consider conspicuousness to be an important
safeguard in enforcing such clauses. Where an employment manual disclaimed contractual liability only with
respect to salaries and salary ranges, the court not only found that the disclaimer did not apply to other
employer duties set forth in the manual, it emphasized that the other duties were a matter of contract with
otherwise at-will employees. Cabaness v. Thomas, 2010 UT 23, 232 P.3d 486. Where a manual disclaimed any
binding effect but contained a statement that the CEO was authorized to enter into a binding agreement, a
whistleblower policy promising protection against adverse employment action such as termination, signed by
the CEO, was held to be an exception to the usual policy that an at-will employee could be terminated without
cause. Mills v. United Producers, Inc., 2012 U.S. Dist. LEXIS 38002 (E.D. Mich. Mar. 21, 2012).
Statements in an employment manual reserving an employer’s right to change the terms of the manual at any
time may affect a court’s determination as to the enforceability of statements in the manual since the statement
itself suggests that the employer is not making a commitment but merely expressing a policy that it may decide
to change. If a manual contains a promise that the employees accept by continuing to work, and the employer
later issues a subsequent manual unilaterally revoking that promise, should the employees’ continuation of
work constitute an implied acceptance of this proposed modification of their pre-existing right? A court held that
the employees did not accept the modification of their pre-existing right simply by continuing to work since there
was no consideration for surrendering that right and no evidence of mutual assent to the modification proposed
in the subsequent handbook. DeMasse v. ITT Corp., 194 Ariz. 500, 984 P.2d 1138 (1999). A dissenting opinion
claimed that, even though a right can be created by a handbook promise followed by the employee’s continued
work, the employer could subsequently revoke that right. The dissent’s efforts to reconcile this singular analysis
with traditional contract doctrine limps. The judges’ essential rationale appears to be a nostalgic view of the
older terminable-at-will tradition that vests absolute power in the employer
Page 4 of 4
Practice Resource:
• Corbin § .2 (time of performance indefinite; at will employment).

End of Document

EXPRESSION
§ 4.03 Indefinite Price or Terms of Payment
[1] An Agreement That Provides a Practicable Method of Calculating the Price Will Not Be Deemed
Indefinite
The price term in a contract is certainly a vital term, but myriad contracts for goods or services have omitted it.
The reasons for the omission of a price term are equally diverse. The parties may have dealt with each other in
the past and have no concern that the price would be anything other than a fair market price. The buyer may
have required the products or services immediately with no time to dicker over price. Whatever the reason, if
the agreement provides a practicable method of calculating the price, there is no indefiniteness or uncertainty in
the price term that would preclude enforcement of the contract.
A defendant agreed to pay a farming partnership overhead and equipment fees for farming activities for his own
benefit while he continued to work for the partnership. Under the agreement, the partnership equipment would
be appraised and the market value divided, the per-acre cost of the equipment would be calculated by dividing
the annual cost of the equipment over the farmed acres, and overhead costs would be determined for all acres
and charged to the defendant only for his acres. The court rejected the defendant’s claim that the price was too
indefinite since the method of calculation made the price reasonably certain. Moody v. Lea, 83 S.W.3d 745
(Tenn. Ct. App. 2001).
If the parties expressly agree that the price will be a “market price,” it would be an extremely rare case in which
the court could not discover such a price since there is a market price for virtually anything, or, at least, there is
the availability of expert valuators. If a price is stated as the “price in effect at time of shipping,” there is an
identifiable market price. If the parties expressly agree that the price will be a “reasonable price,” it should not
be assumed that this price is necessarily the same as a fair market price for such goods or services. If the
parties have previously dealt with each other and their course of dealing indicates a price lower than the
prevailing market price, a “reasonable price” in such a contract should reflect that discount from the established
market price. The parties may agree that arbitrators will fix the price or that a third party will determine a fair
price. When an option permitted a receiver to purchase a home at a price determined by the Department of
Health in accordance with the Public Health Law and other rules and regulations of the Department, the court
held that it was not so indefinite as to price to preclude enforcement. Cobble Hill Nursing Home, Inc. v. Henry &
Warren Corp., 74 N.Y.2d 475, 548 N.Y.S.2d 920, 548 N.E.2d 203 (1989).
When the parties do not expressly agree that the price will be a “reasonable” or “market” price, the omission will
typically be cured by the implication of a reasonable price, as long as the agreement otherwise manifests
sufficient certainty and an intention of the parties to be bound. When, for example, Herder sold his actuarial
business to Regnier, who assumed complete ownership under his own name and retained the original
employees, the parties failed to reach an agreement on the price of the business. Regnier claimed that this
made the agreement fatally indefinite. The court determined that the parties’ conduct evidenced a clear
intention to be bound to an agreement and held that Regnier had failed to rebut the presumption that such
parties intend a market price or some other reasonable price. Herder Hallmark Consultants, Inc. v. Regnier
Consulting Group, Inc., 275 Wis. 2d 349, 685 N.W.2d 564, 2004 WI App 134.
[2] When a Judicial Determination of the Price Would Be Speculative, the Agreement Will Be Deemed
Too Indefinite to Enforce
Courts recognize that determining a “reasonable” price is “a relatively straightforward factual inquiry.” Fischer
Imaging Corp. v. GE, 187 F.3d 1165, 1171 (10th Cir. 1999). There are situations, however, when no price is
Page 2 of 4
mentioned in the agreement, the parties did not prescribe a method for determining the price, and the evidence
does not allow for the implication of a reasonable price. In such situations, a judicial determination of the price
would be speculative and thus the agreement too uncertain for enforcement. In Schweiger v. Kia Motors Am.,
Inc., 347 Wis. 2d 550, 830 N.W.2d 723, 2013 WI App 55, the parties agreed on a refund in relation to the
purchase or a car. The parties, however, failed to agree on a refund calculation which the court viewed as an
essential term of the contract. Citing the Corbin treatise, the court concluded that a price is sufficiently definite
only if the parties specify a practicable method for determining price. Where, however, a court is convinced that
the parties intended to be bound, unless the court determines that its effort to discover a price is futile, it may
stretch to unearth a reasonable price.
When a lease contains a tenant’s option to renew for an additional term at a price to be agreed upon, courts
may find an insuperable obstacle to enforcing such an “agreement to agree” since enforcement may require a
court to impose its own conception of a price on the parties. Joseph Martin, Jr., Delicatessen, Inc. v.
Schumacher, 52 N.Y.2d 105, 417 N E.2d 541 (1981). An option under a lease to purchase the leased premises
at a purchase price of $1.2 million provided that it would be adjusted to take into consideration environmental
conditions “which adjustment shall be mutually determined by Lessor and Lessee.” The court found this
language to constitute an “agreement to agree.” It concluded that a statement that parties will negotiate a future
price does not mean that they will establish a mutually satisfactory price. SS-II, LLC v. Bridge St. Assocs., 293
Conn. 287, 977 A.2d 189 (2009).
Where the buyers of property had an option to purchase an additional tract, “purchase price to be mutually
agreed upon based on independent appraisal at time of notice to sell,” the parties could not agree upon the
price and the trial court appointed an appraiser, who valued the property at $97,000. The appellate court
recognized that it is possible for parties to agree in advance that the price would be determined by an
independent appraisal. Here, however, the court found the phrase, “based on independent appraisal” to be
vague, while finding the “price to be mutually agreed upon” to clearly require each party to agree. Huber v.
Calloway, 2007 Tenn. App. LEXIS 435 (July 12, 2007). The opinion suggests a traditional antipathy for
enforcing any “agreement to agree” notwithstanding some major changes in this area.
[3] UCC § 2 305 Provides That a “Reasonable Price” Will Be Applied When There Is a Missing Price
Term
The UCC presented a radical departure from cases finding fatal indefiniteness from a missing price term or an
agreement to agree upon a price term. The general formation section of the UCC requires a court to discover
an intention to make a contract before it can enforce a contract with a missing term. UCC § 2-20 . UCC § 2-
305(1) requires the same foundational element to find an enforceable contract with a missing price term. See,
e.g., In re R.F. Cunningham & Co., 2007 Bankr. LEXIS 2066 (E.D.N.Y. June 8, 2007).
Assuming an intention to be bound, if the contract states nothing about price, or the parties agree to agree upon
the price and they subsequently fail to agree, or if the price is to be fixed by some market standard or agency
and it is not recorded, the price will be a “reasonable price.” UCC § 2- 0 1 . If the parties state that one of
them (buyer or seller) will later determine the price, the price will be one determined in good faith. UCC § 2-
305(2). See, e.g., Marcoux v. Shell Oil Prods. Co. LLC, 524 F.3d 33, 49–50 (1st Cir. 2008). revd in part on other
grounds, Mac’s Shell Serv. v. Shell Oil Prods. Co. LLC, 559 U.S. 175, 130 S. Ct. 1251, 176 L. Ed. 2d 36, 2010
U.S. LEXIS 2203, 78 U.S.L.W. 4181, 22 Fla. L. Weekly Fed. S 147 (U.S. 2010). If a price is left to be fixed and
it is not fixed through the fault of one of the parties, the other party may cancel the contract or fix a reasonable
price. UCC § 2- 0 . UCC § 2- 0 recognizes the situation in which the parties intend not to be bound
unless they have agreed upon the price. In such a case, the subsection requires any goods already received by
the buyer to be returned to the seller; if the buyer is unable to return them, it must pay their reasonable value.
UCC § 2- 0 therefore, begins and ends with the critical issue of intention to be bound, notwithstanding a
missing price term. Finding an intention to be bound will allow enforcement of a reasonable and good faith
agreement to agree on price. Restatement (Second) of Contracts § cmt. e, states that principles similar to
those found in § 2- 0 “apply to contracts for the rendition of services.” In contracts to which the UCC does not
apply, the case law does not consistently reflect these changes. It seems likely, however, that there will be a
continuous movement toward recognizing them in contracts for services, and other contracts not governed by
§ 2- 0 .
Page 3 of 4
[4] Where Goods or Services Have Been Provided, Courts May Discover an “Implied-In-Fact” Contract
When goods or services have been provided, unless the recipient reasonably understood them to be gratuitous,
courts will discover either an implied-in-fact contract or a quasi contract (contract implied-in-law) and fashion an
appropriate remedy. Characterizing a contract as “implied-in-fact” because it is not manifested in language is
unnecessarily confusing. If there is objective evidence of mutual assent and an intention to be bound, the
omission of a price term presents no unique problems just because the agreement is not expressed in words. It
will be the same “reasonable price” as found in a contract manifested in words that omits the price term.
The “implied-in-law” characterization is even more confusing and unnecessary. There is no offer, acceptance,
or bargained for exchange. There is the conferring of a benefit-an enrichment-by the plaintiff on the defendant
for which the plaintiff expects to be compensated. To avoid unjust enrichment of the defendant, a court will
construct (imply as a matter of law) a quasi contract. Quasi means, “as if,” and joined with “contract” it means
we are going to treat the defendant as if the defendant made a contract and breached it.
Both “implied” contracts used to be brought under the writ of assumpsit (meaning “he undertook”) and may be
pleaded by using an historic pleading device, quantum meruit, which literally means, “as much as he deserves.”
The goal is to achieve restitution by having the unjustly enriched party surrender the benefit conferred (the plus
quantity) to the unjustly deprived party who has suffered deprivation (the minus quantity) by not receiving the
compensation for the product or services. There is a difference in remedy, however. If the implied contract is
real, albeit implied-in-fact, the normal expectation interest can be protected to place the aggrieved party in the
position the party would have occupied had the contract been performed. If, however, the action is brought in
quasi contract, the plaintiff recovers the reasonable value of the benefit conferred which, in a given situation
may be materially different from that which would have been received under a genuine, albeit implied-in-fact,
contract. If there is an implied-in-fact contract, the plaintiff’s remedy is limited to the expectation interest, since it
is not possible to recover the restitution interest in such a situation.
[5] Missing or Indefinite Terms of Payment

While the absence of definite payment terms can signal a lack of mutual assent concerning material terms,
modern courts are willing to supply omitted terms where it is necessary to determine their rights and duties. If
the parties provide a practicable, objective method for determining price or compensation, there is no
indefiniteness or uncertainty as will prevent the agreement from being an enforceable contract. United States
Golf Learning Inst., LLC v. Club Managers Ass’n of Am., 2011 U.S. Dist. LEXIS 132592 (E.D. Va. Nov. 15,
2011); Gerard v. Gerard, 2015 Wisc. App. LEXIS 480 (2015). Even if the contract does not furnish guidance for
determining price, to prevent the contract from being held too indefinite to enforce, courts may look to trade
usage, the parties’ post-formation course of performance, and a standard of reasonableness. A boxer was
entitled to recover against a prizefight promoter for the latter’s failure to schedule a rematch in accordance with
the terms of the parties’ contract even though the contract contemplated the execution of a subsequent
agreement and did not provide for a purse amount. The court cited this treatise for the proposition that even
where a contract contains a missing price term, “the agreement will be enforced if the missing term can be
‘supplied by a finding of the trial court based on proof of established custom and practice in the i st y.
Oquendo v. CCC Terek, 2015 U.S. Dist. LEXIS 67169 (S.D. N.Y. 2015). Coca-Cola Refreshments, USA, Inc. v.
Binghamton Giant Mkts., Inc., 127 A.D.3d 1319 (2015) (price established by parties’ long-standing procedures
for resolving price disagreements on an ongoing basis per the plaintiff’s monthly statements); Himmelfarb v.
First Int’l Diamond, Inc. (In re Himmelfarb), 2015 Bankr. LEXIS 2046 (Bankr. D. Haw. 2015) (missing interest
rate on loan could be judicially supplied).
Indefiniteness is typically not fatal to a contract where the parties intend to be bound and there is a sufficient
basis for affording a remedy (Restatement (Second) of Contracts § 2 . Where, however, a contract fails to
include a crucial term such as price, which term a court cannot reasonably supply by interpretation, the contract
fails for indefiniteness since the crucial term cannot be reconstructed. ATA Airlines, Inc. v. Fed. Express Corp.,
665 F.3d 882 (7th Cir. 2011).
In Barnes v. Michalski, 399 Ill. App. 3d 254, 925 N.E.2d 323, 338 Ill. Dec. 826, the plaintiff loaned the defendant
$27,000 in the form of two certified checks. Two years later when the plaintiff sought repayment, the defendant
claimed that the payment was a gift. The trial court held that the plaintiff failed to establish a prima facie case by
proving terms of repayment of the alleged loan. The court of appeals disagreed since the common law is clear
that a party does not have to prove any terms of repayment to obtain a judgment for repayment of a loan (citing
Page 4 of 4
Restatement (Second) of Contracts § 20 . The case law suggests two views: if no time for repayment is stated,
the loan is repayable (1) upon demand by the creditor, or (2) within a reasonable time (Restatement (Second)
§ 20 cmt. d). Under either view, however, the loan is repayable. If the check was not made payable to a
spouse or a relative, it is presumed not to have been a gift.
Practice Resources:
• Corbin § . (indefiniteness of price or terms of payment); § . (methods of
determining price or amount); § . (reasonable price—quasi-contractual
remedy); § . (subsequent action may create a quasi contract).

End of Document

EXPRESSION
§ 4.04 Uncertainty of Subject Matter
[1] There Must Be a Method of Determining the Identification and Quantity of Goods or Services
In addition to price, another of an agreement’s critical terms is the quantity term. An agreement may not
sufficiently identify the subject matter of the contract or the quantity. If Ames offers to sell any pre-owned
automobile on Ames’s lot to Barnes for $15,000 and Barnes agrees, there is a very definite contract for one of
those cars to be selected by Ames. An agreement for “some” circuit boards or “some” potatoes is patently too
indefinite to enforce when there is no plausible way to determine how many “some” constitutes. If the parties
had a private understanding that “some” means 1,000 circuit boards or 500 bushels of potatoes, evidence of
that private understanding could remedy the missing term. Such a “gap,” however, cannot be filled with a
reasonable quantity. There must be a method of determining the identification and quantity of goods or services
to cure the indefiniteness.
[2] Output or Requirements Contracts Are Enforceable Even Though the Quantities Will Not Be
Determined Until the End of the Contract Period
If the Ames Coal Company agrees to supply the Barnes Power Company with all of the coal that Barnes
requires for the next calendar year to operate a generating plant, such a “requirements” contract is enforceable
even though the quantity will not be determined until the end of the contract period when Barnes’s requirements
for that period are totaled. If the Barnes Power Company contracts to purchase all of the coal mined by Ames
Coal Company during a specified period, this “output” contract is enforceable even though the quantity will not
be determined until the end of the contract period. Requirements and output contracts are common. They
provide an assured source of supply to the buyer and an assured demand to the seller for its product.
Any historical shackles limiting enforcement of output and requirements contracts for the sale of goods were
removed by the UCC. UCC § 2- 0 recognizes that a contract for output or requirements means the actual
good faith output of the seller or requirements of the buyer. There is consideration since the buyer must buy its
requirements from the seller and the seller must sell its output to the buyer. Though a buyer’s requirements
may be reduced to zero, there is no breach of the requirements contract if the reduction is in good faith. See
Brewster of Lynchburg v. Dial Corp., 33 F.3d 355 (4th Cir. 1994). See also UCC § 2- 0 cmt. 2.
Practice Resource:
• Corbin § . (uncertainty of subject matter to be exchanged for price;
requirements and output contracts).

End of Document

EXPRESSION
§ 4.05 Parties May Cure Indefiniteness Through Words or Conduct
[1] A Subsequent Writing May Explain or Elaborate on an Agreement’s Indefinite Terms

If indefiniteness makes an agreement unenforceable, the parties may cure the indefiniteness through words or
conduct. If a written agreement contains an indefinite term, a subsequent writing or writings may explain or
elaborate on that term to cure its indefiniteness. Thus, where an agreement did not state the amount of funds
that one party would advance for the construction of a manufacturing plant, the court cited Corbin on Contracts
in holding that the critical term was supplied 35 days later when the same party agreed to fund the remainder of
the construction; this also explained his complete commitment. Neb. Nutrients, Inc. v. Shepherd, 261 Neb. 723,
626 N.W.2d 472 (2001).
[2] Course of Performance Is the Strongest Evidence of an Agreement’s Meaning

If one or both parties begin to perform an agreement without objection by the other, such course of
performance is the strongest evidence of the meaning of their agreement and the same course of performance
can cure an otherwise fatally indefinite term. Restatement (Second) of Contracts § cmt. c. In an agreement
to build a dredge, the owner claimed that the agreement contained a contract price not to exceed $4 million, but
the shipbuilder claimed it was entitled to payment on a time and materials basis according to a price schedule
that could exceed a total payment of $4 million. Finding no agreement for a maximum price of $4 million, the
court relied on the Corbin analysis that the subsequent conduct of the parties may cure the indefiniteness of a
price term. Though the shipbuilder’s price schedule did not govern the original contract, the schedule was sent
to the owner, who made payments according to that schedule for nine months. The court held that the parties’
course of performance manifested a definite intention concerning the price term. Lake Mich. Contrs. v.
Manitowoc Co., 2002 U.S. Dist. LEXIS 9547 (W.D. Mich. May 21, 2002).
It may be difficult to determine whether the parties’ subsequent conduct simply clarifies an existing term of their
agreement sufficient to make the agreement enforceable, or whether their subsequent conduct goes beyond
clarification to constitute a modification of their original agreement. Thus, in the dredge case, the parties had
discussed a price that would not exceed $4 million, which the court viewed as merely an estimate to which the
shipbuilder never assented. If the court had determined that the parties had agreed to the $4 million maximum,
it still could have held that their course of performance modified their original intention and operated on the
basis paying for time and materials that could exceed that amount. UCC § 2-20 recognizes course of
performance operating as a waiver or modification of the original agreement.
Practice Resource:
• Corbin § . (effect of subsequent verbal clarification or action by the parties).

End of Document

EXPRESSION
§ 4.06 Mistakes Pertaining to Offer and Acceptance
[1] Mistakes in Expression May Involve Oral or Written Agreements

The subject of mistake in contract law is complex. There are unilateral and mutual mistakes, intentional and
unintentional mistakes, negligent mistakes, and clerical mistakes that are barely negligent. There are mistakes
of identity, mistakes of subject matter, mistakes of value, and there are mistakes by third parties including
scrivener’s errors in the writing of the parties’ contract. The subject of mistake will be covered in more detail in
later chapters. At this point, it is important to introduce fundamental concepts of mistake as they pertain to the
agreement process of offer, acceptance, and mutual assent.
If every party to every contract made precise and accurate oral or written statements that were clearly
understood by both parties exactly as they were intended by the speaker or writer, a huge percentage of all of
the contracts cases ever recorded would not exist. The real world, however, consists of oral offers that lack
precision in enunciation and purported acceptances that reveal hearing problems in the offeree. When the
owner of a horse stated the price at $165 and the buyer understood him to say $65, the court found no mutual
assent and no contract. Rupley v. Daggett, 74 Ill. 351 (1874).
While written expressions of agreement reduce the probability of mistakes, they are not immune from error.
Either party may, through inadvertence or ignorance, use words that fail to express accurately the user’s own
meaning and intention. Either party may also give a word or phrase an interpretation not justified in common
usage. When a third party is responsible for drafting the document representing the contract the parties
intended, mistakes in expression may also occur and there are situations where both parties innocently agree
on the basis of a misleading document created by an intermediary. In a well-known case, an architect designed
a building and presented the written contract at different times to the owner and the contractor for their
signatures. Through the architect’s artifice, the builder signed at a price of $35,500 while the owner signed at a
price of $23,000. The architect was nowhere to be found. The court could find no mutual assent between the
owner and builder, since each was innocent. Since the construction of the building on the owner’s land had
been substantially completed, the builder was entitled to receive the reasonable value of the labor and
materials used in the construction to avoid the unjust enrichment of the owner. Vickery v. Ritchie, 202 Mass.
247, 88 N.E. 835 (1909).
[2] Objective Manifestation of Mutual Assent Is Required to Create a Binding Agreement

Just because parties give different meanings to the same language, however, it does not preclude the finding of
a contract. Otherwise, any party could avoid being contractually bound simply by declaring a subjective
understanding of a term that differed from the other party’s intention. There have been historic arguments over
two “theories” of contract law—the objective theory and the subjective theory. Essentially, the objective theory
recognizes contracts created by the agreement of the parties’ expressions—their words or conduct. The
subjective theory insists upon an agreement in intention, properly expressed. The subjective theory descends
from a “will theory” of contract, which emphasizes that a contract is made by the voluntary agreement of the
parties and a party cannot be bound unless he or she “wills” to be bound. Phrases such as “meeting of the
minds” and “consensus ad idem” flow from such a theory. While these phrases sometimes appear in modern
cases, courts recognize that a “will” theory cannot provide a rational framework for the operation of the social
institution of contract.
If a party may avoid a commitment under an agreement simply by stating that he or she did not intend to be
bound, the institution of contract is emasculated. If a party may avoid obligations under an agreement by
Page 2 of 4
claiming that the use of a particular term in the written agreement was not in accordance with the reasonable
understanding of that term under all of the circumstances, it would not be prudent to rely on any agreement.
Innumerable cases repeat the statement that a court’s purpose is to effect the “intention of the parties.” But
courts certainly do not mean to suggest that they are effecting the actual, subjective intention of the parties. Any
determination of a party’s intention must be predicated on outward manifestations of intention although such
evidence may clearly indicate that the parties have not arrived at a “meeting of the minds.” A “reasonableness”
standard is incorporated even though it is not entirely devoid of a subjective dimension. The actual decisions
suggest that each party is bound by what reasonable persons similarly situated would understand the terms to
mean. One case refers to the Corbin treatise in stating the prevailing view:
Under basic contract law principles, for an offer and acceptance to create a binding agreement there must
be an objective manifestation of mutual assent, i.e., what is often referred to (somewhat misleadingly) as a
“meeting of the minds.”
Nortek, Inc. v. Liberty Mut. Ins. Co., 65 Mass. App. Ct. 764, 772, 843 N.E.2d 706, 713–714 (2006).
[3] An Offeree May Not “Snap up the Offer” When the Offeree Knows That the Offeror Misspoke
Consider the following hypothetical situation. Ames owns two vintage autos, a Duesenberg and a Mercedes. In
a social gathering, Barnes indicated his desire to purchase one of these autos from Ames. Ames immediately
stated that she would never sell the Duesenberg but might be interested in selling the Mercedes. Their
subsequent discussion emphasized Ames’s intention to never part with the Duesenberg. Barnes made a
$90,000 offer for the Mercedes to which Ames replied, “I’ll let you have the Duesenberg for $100,000.” Barnes
instantly replied, “I accept.” The group listening to this discussion from its inception began to roar with laughter
as one member said to Ames, “You just sold the Duesenberg.” Ames replied, “But I meant the Mercedes. You
know I did not mean to say Duesenberg.”
If the evidence is clear that Ames simply misspoke-a slip of the tongue-and Barnes knew or should have known
that Ames intended to say “Mercedes” instead of “Duesenberg,” Barnes knew or should have known that Ames
was making a mistake. In such a situation, the offeree may not “snap up the offer.” First Restatement of
Contracts § 1 would find no contract for either automobile. Restatement (Second) of Contracts § 20 agrees
that there is no contract for the Duesenberg, but would find a contract for the Mercedes since, under all of the
surrounding circumstances, Barnes had to understand that when Ames offered to sell the “Duesenberg” for
$100,000, she was offering to sell the Mercedes for that amount.
When a telegram was sent to purchase oranges but the price in the message was inadvertently altered by the
telegraph company to state a price substantially below the market price, the court held the buyer knew or
should have known that there was mistake in the message that precluded the buyer’s acceptance at the lower
price. Germain Fruit Co. v. Western Union Tel. Co., 137 Cal. 598, 70 P. 658 (1902). To hold otherwise would
allow a party to take opportunistic advantage of the other party, promoting bad faith.
Again, however, the fact that the parties attach materially different meanings to the terms of their agreement will
not necessarily preclude the formation of a contract. Thus, if one party understands a term in accordance with
its reasonable meaning under the circumstances and is unaware that the other party is attaching a narrower or
unusual meaning, the reasonable meaning will prevail. See Frigaliment Importing Co. v. B. N. S. International
Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960). The situation becomes even more complex when the term is
susceptible to two or more reasonable meanings.
[4] There Is No Mutual Assent When Parties Attach Materially Different Meanings to Their
Manifestations of Assent and Neither Party Knows the Meaning Attached by the Other
A buyer of marine fuel paid its seller for the fuel, which the seller had obtained from a supplier of such fuel. The
seller became insolvent and never paid the supplier. The supplier provided various documents naming the
buyer as the party to receive the fuel, which indicated that the supplier thought it was dealing directly with the
buyer. The documents, however, proved that the supplier only had a contract with the insolvent seller and had
no claim against the buyer with whom it had no contract. Equatorial Marine Fuel Mgmt. Servs. PTE v. MISC
Berhad, 591 F.3d 1208 (9th Cir. 2010).
A celebrated case is Raffles v. Wichelhaus, 2 H & C. 906 (1864). In Raffles, the plaintiff agreed to sell and the
buyer agreed to purchase 125 bales of Surat cotton to arrive at Liverpool on a ship named “Peerless” sailing
Page 3 of 4
from Bombay. Neither party was aware that there were two ships named “Peerless” that sailed from Bombay.
The buyer intended the “Peerless” sailing in October; the seller intended the one sailing in December. There
was no cotton for the buyer on the October “Peerless,” and there was no buyer for the seller’s cotton on the
December “Peerless.” In the seller’s action, the court could find no fault on the part of either party. There was
no evidence of trade usage, course of dealing, or other objective evidence that would have allowed a
determination that it would be more reasonable to interpret “Peerless” as used by the parties to refer to the
October or December ship. The court held that, “the moment it appears that two ships called the ‘Peerless’
were about to sail from Bombay, there is a latent ambiguity” that allowed the parties to introduce evidence of
each subjective understanding. The court found no consensus ad idem and no binding agreement.
The modern statement of the holding in Raffles discloses no mutual assent when the parties attach materially
different meanings to their manifestations of assent and neither party knows or has reason to know the
meaning attached by the other. Restatement (Second) of Contracts § 20 1 . In this situation, each party is
without fault. When each party knew or had reason to know that there were two ships called “Peerless” and the
other party may have intended a different ship, both parties are equally at fault and the same result follows.
Restatement (Second) of Contracts § 20 1 .
There is a different result, however, if one party knows or should know of the ambiguity and the other party is
totally innocent. Thus if the buyer is unaware of the latent ambiguity and neither knows nor has reason to know
of any different meaning attached by the seller, but the seller knows or has reason to know the meaning
attached by the buyer, the seller is at fault and the court will recognize a contract according to the meaning
attached by the buyer, who is the innocent party. Restatement (Second) of Contracts § 20 2 .
[5] Risks of Mistakes in Transmission Were Allocated to the Party Who Chose the Medium of
Communication
When the telegram constituted a common medium of communication, a number of cases arose involving
mistakes by the telegraph company in the sending of messages, raising the question of allocating the risk of
such a mistake by the intermediary between the innocent offeror and innocent offeree. If the recipient of a
message knew or should have known that the message was mistaken, no contract could result. If, however,
neither party knew or should have known of the mistake, courts had to decide upon the allocation of that risk
between two innocent parties. An agency theory suggested that the telegraph company was the agent of the
sender who should be held for the agent’s mistakes. Just as the post office is not the agent of a sender of a
letter, however, neither was the telegraph company an agent of the sender.
What came to be the prevailing view in such cases allocated the risk of transmission to the party who chose the
telegraph or first suggested it as the medium of communication. This “rationale” was not even a thin reed to
support such holdings. There is no more objective or subjective manifestation of assent in such cases as there
would be in the case of the latent ambiguity.
The demise of the telegraph has made cases involving mistakes in communication by the intermediary rare. In
a case involving a newspaper advertisement of an automobile with a mistaken price, the court first had to
consider whether the advertisement was an offer since, typically, they are not offers. Having found that this ad
was an offer, the court recognized the analysis set forth in the Corbin treatise in granting relief on the footing
that enforcing the agreement pursuant to this material mistake would be unconscionable. Donovan v. RRL
Corp., 26 Cal. 4th 261, 27 P.3d 702 (2001).
Practice Resources:
• Corbin § . (mistake—difficulty and complexity of the subject); § .10 (mistake
as to the words used, or as to the meaning given to words and expressions);
§ .11 (mistake in transmission of messages); § .12 (objective and subjective
theories); § .1 (mutual assent—“meeting of the minds”).

Page 4 of 4
End of Document
Corbin on Contracts Desk Edition > CHAPTER 5 CONSIDERATION
CHAPTER 5 CONSIDERATION
the subject matter.

End of Document
§ 5.01 Consideration Is the Dominant Validation Device for the Enforcement

of Promises
[1] The Concept of Consideration Derives from Common Law Writs

One of the fundamental questions of any society is whether and to what extent society will enforce promises.
Not all promises should be enforceable. In the common law, the doctrine of consideration has emerged as the
dominant validation device for the enforcement of promises. The difficulty in comprehending consideration is
largely traceable to its origins, which are controversial.
Although consideration has emerged as the dominant validation device, other validation devices exist. One is
the sealed promise, although the seal is either inoperative or of only presumptive force in numerous (but not all)
jurisdictions. There are statutes that recognize the enforceability of certain kinds of promises evidenced by a
writing. An informal promise without consideration will have legal operation if it is accompanied by other facts
such as reasonable and expected detrimental reliance. Even a gift promise, which, standing alone, is
unenforceable, will be recognized as valid if the gift is executed by delivery and donative intent.
[2] Origins of Consideration

The early common law lawyer would not understand the modern concept of consideration. (John E. Murray Jr.,
Murray on Contracts § provides a good short statement of the origins of consideration.) The lawyer’s focus
was on the many common law writs that were quintessential to the enforcement of a promise. The written
promise under seal could be enforced through the writ of covenant. The writ of detinue was used essentially in
bailment contracts where the defendant was charged with unjust detention of a plaintiff’s property. If the parties
had effected a bargained-for-exchange and one party had performed its side of the bargain, such a half-
completed exchange would allow an action under the writ of debt. In addition to their intrinsic limitations,
however, the writs of detinue and debt were subject to wager at law, which allowed recovery to be defeated by
securing 11 persons who, with the defendant, would swear the defendant told the truth. “Wager of Law” has
been described as a plea by a defendant that he would “wage his law”-that he would plead to the action brought
against him and would successfully exculpate himself by an oath that he owed nothing. A. W. B. Simpson, A
History of the Common Law of Contract 137-140 (1987).
To meet the need for a more flexible writ, the writ of trespass on the case with its tort overtones was being
developed in Court of King’s Bench. It was expanded to permit the creation of special assumpsit, which
involved an undertaking (assumpsit: “he undertook”) by a party who performed the undertaking badly (a
misfeasance). Thus, if a blacksmith undertook to shoe a horse and misfeased by performing badly, the horse
was injured, causing a detriment to the owner of the horse. Suppose, however, the blacksmith undertook to
shoe the horse and did not perform badly; rather, he did not perform at all. Instead of misfeasance; he was
guilty of nonfeasance. To remain within the contours of the writ of trespass, a connection was constructed to
find the nonfeasing party guilty of deceit in not performing his promise. Thus, if a party breached a promise to
sell a house by selling it to a third party, that party would be guilty of deceit. Gradually, the emphasis was
placed not on the deceitful performance, but on the party’s failure to perform the promise; this transformed the
writ from its ex delicto (tort) nature to an ex contractu character.
The quantum leap in the recognition of an action for breach of the typical modern informal contract arrived in
1602 in Slade’s Case, 4 Coke 92b [1602]. If a chattel had been purchased for which the buyer failed to pay, the
writ of covenant would not lie since the promise was not under seal. Neither would detinue, since there was no
unjust detention of property. Only the writ of debt applied, which was subject to wager of law. If, however, the
defendant could be shown to have made a promise to pay for the chattel a second time, the writ of indebitatus
Page 2 of 3
assumpsit (being indebted, he undertook) would lie. The Court of King’s Bench was eager for the development
of assumpsit in such cases from which it would derive litigation fees. In Slade’s Case, the court held that the
second promise need only be alleged and not proved, thus permitting the writ of assumpsit in actions where
debt alone had previously been available. Unlike the writ of debt, assumpsit was not subject to “wager of law.”
Early applications of the writ of assumpsit raised the question of whether it would lie for the breach of any
promise. Pleadings began to use the term consideration: “In consideration that the buyer paid £50, the seller
promised to deliver his horse to the buyer.” It was used to express, in a vague fashion, that there had to be
some reason for enforcing the promise, a reason why the promisor was induced or motivated to make the
promise.
A popular view is that common lawyers resorted to their origins in the common law writs-the forms of action-to
construct the essential basis for distinguishing enforceable from unenforceable promises. Thus, the writ of debt
involved a half-completed exchange-a quid pro quo-where the defendant had already received a benefit
through the performance of the other party, who suffered a detriment in providing that performance. The only
remaining promise to be performed was that of the defendant, the only remaining promisor. Thus, in an
exchange involving either a benefit to the promisor or a detriment to the promisee, courts would find the
classical concept of consideration that provided a rationale for enforcing a promise that was derived, in part,
from the old writ system.
Other views of the origins of consideration include the reflections of O. W. Holmes, Jr., who suggested that the
quid pro quo requirement fulfilled an evidentiary function. O. Holmes, The Common Law 254-59 (1923). In civil
law countries the concept of causa, although quite different from consideration, provided a basis for determining
whether the promise should be enforced.
Among United States jurisdictions, Louisiana is unique since it emanated from a Napoleonic Code Civil Law
tradition. One court stated:
Under Louisiana law, the mere will of the parties will bind them without what common-law courts would
deem to be consideration to support a contract, so long as the parties have ‘lawful cause,’ which need not
have any economic value. Under Louisiana law, no obligation can exist without lawful cause which is
defined as the reason why a party obligates himself.
Rogers v. Brown, 986 F. Supp. 354, 359 (M.D. La. 1996) (citing Sound/City Recording Corp. v. Solberg, 443 F.
Supp. 1374 (W.D. La. 1978), which further explains the concept of “cause” identified as “motive”).
Scholars have differed on whether the common counts were significantly influenced by causa in the evolution of
consideration. See J. Salmond, Jurisprudence and Legal History, ch. iv, 27 London: Steven & Haynes 1891).
Indeed, there are important suggestions that consideration is not attributable either to the action of debt or to
the concept of causa. Introduction to the Reports of Sir John Spelman, 292–97 (Selden Society, J. H. Baker,
ed. 1978).
In the eighteenth century, Lord Mansfield, Chief Justice of King’s Bench from 1756 to 1788, was almost solely
responsible for the erosion of the consideration doctrine for some 13 years. In 1765, his opinion in Pillans &
Rose v. Van Mierop & Hopkins, 3 Burr. 2664, 97 Eng. Rep. 1035 [K.B. 1765], suggested that a promise should
be enforced simply because it was in writing. Consideration was unnecessary. As will be seen later in this
chapter, there are some modern iterations of this theme with respect to certain types of promises. Mansfield’s
willingness to ignore consideration may be explained in part by his education in the Civil Law from which he
imported some concepts when he was the dominant judicial figure in the English common law. In 1778,
however, the House of Lords emphatically reinstated the consideration doctrine. Rann v. Hughes, 7 T. R. 350,
101 Eng. Rep. 1014 (1778).
The vigorous debates concerning the origins of consideration and criticisms of its present value have not
succeeded in its elimination, although it has certainly been modified under modern neoclassical contract theory.
It is clear that consideration was not a well-planned, rationally conceived concept. Like other common law
doctrines, it evolved over centuries and remains the principal device to distinguish enforceable from
unenforceable promises in the common law system.
[3] Consideration Provides Substantial Evidence That a Promisee’s Expectation of Performance Is

Reasonable
If a promisor is receiving consideration for its promise, it may be suggested that such consideration is evidence
of the promisor’s intention to be bound, but that can be misleading. The purpose of contract law is to ascertain
Page 3 of 3
the realization of the promisee’s reasonable expectations. A promisor who has no intention to be bound,
therefore, will nonetheless be held to its promise if the promisee’s expectation was reasonable. A promisor who
intends a promise only in jest or a promisor who is entirely ignorant of legal consequences that may attach to its
promise will be held to have made an enforceable promise. The existence of consideration, therefore, provides
substantial evidence that the promisee’s expectation of performance is reasonable.
[4] “Quid Pro Quo” Signifies a Bargained-for-Exchange

The phrase “quid pro quo” is defined as “what for what” or “something for something” and signifies a bargained-
for-exchange. If Ames agrees to sell her property to Barnes for $100,000, each party is receiving something
(benefit) in exchange for what it is surrendering (detriment). The old common law action of debt was predicated
on the fact that one party had received something of value for which it promised to pay but failed to pay. The
“something” (quid) received by the promisor, however, did not have to be something physical such as land or
goods. An action of debt would lie if the promisee had surrendered the right to sue the promisor. Such a right
manifested “value” and could be exchanged for the promise to pay a certain amount. Though the common law
action of debt has long passed into history, there are traces of that writ as well as other common law writs in the
modern law of consideration.
Practice Resources:
• Corbin § .1 (meanings of the terms “consideration” and “nudum pactum”); § .2
(not all promises are legally enforceable nor should they be); § . (is
consideration evidence of intention to be bound?); § . (is an informal promise
without consideration or any other reason for enforcement wholly void?); § .
(reasons for making a promise and reasons for giving consideration); § . (is
consideration a “quid pro quo”?).

End of Document
§ 5.02 Ascertaining Motivation and Inducement
[1] Bargained-for-Exchange Is a Critical Element of Consideration
[a] The Promise and the Detriment Are the Conventional Inducements for Each Other
What may be the most famous description of consideration in the common law belongs to Justice O. W.
Holmes, Jr.:
[T]he promise and the detriment are the conventional inducements each for the other. No matter what
the actual motive may have been, by the express or implied terms of the supposed contract, the
promise and the consideration must purport to be the motive each for the other, in whole or at least in
part. It is not enough that the promise induces the detriment or that the detriment induces the promise
if the other half is wanting.
Wisconsin & M. R. Co. v. Powers, 191 U.S. 379, 386, 24 S. Ct. 107, 108, 48 L. Ed. 229, 231 (1903).
The motive of the promisor, however, may induce a promise that is not supported by consideration. If Ames
promises to give $10,000 to his daughter on her wedding day for which Ames seeks nothing in return, he is
not inducing her to marry since she has already agreed to marry. His motivation appears to be gratuitous
and the promise is not supported by consideration. This is not the meaning of “motive” as used by Justice
Holmes. He suggested a second meaning of motive: the sought after result the promisor seeks to achieve
that requires some action or forbearance by the promisee.
If Ames tells his daughter to meet him for lunch and promises to purchase a diamond bracelet for her, the
promise appears to be gratuitous. While the daughter must surrender her freedom and suffer the detriment
of coming to lunch, Ames was not bargaining for her to come to lunch. The luncheon meeting was simply a
convenient way of meeting to allow for a pleasant luncheon and Ames’s performance of his gratuitous
promise to purchase the bracelet for his daughter-a conditional gift. As quoted in Fritz v. Fritz, 2009 Iowa
App. LEXIS 204 (Mar. 26, 2009), the famous Professor Williston illustration is the promise by a benevolent
man to a homeless person, “If you go around the corner to the clothing shop there, you may purchase an
overcoat on my credit.” While the walk around the corner is technically a legal detriment, it is not
reasonable to assume that it was requested as the price for the promise. Rather, it was simply a necessary
condition to obtain a gift. See also Mortensen v. Dazet, 2009 U.S. Dist. LEXIS 32222 (D. Utah Apr. 15,
2009).
Ames’s promise to give the daughter a diamond bracelet takes on a totally different character, however, if
he and his daughter were estranged to the point that the daughter would not communicate with him. His
underlying motivation is to have an opportunity to remedy the troubled relationship with the daughter. To
achieve that result, his promise is designed to induce her willingness to meet him to allow him to pursue his
ultimate motivation. In Holmes’s terminology, the promise and detriment are the “conventional inducements
each for the other.” The promise must induce the detriment and the detriment must induce the promise.
Ames’s promise induces the detriment of his daughter in meeting with him; the detriment of the daughter in
coming to such a meeting is the inducement for the promise. It is the result that Ames desired in making the
promise. “A performance or return promise is bargained for if it is sought by the promisor in exchange for
his promise and is given by the promisee in exchange for that promise.” Restatement (Second) of Contracts
§ 12.
[b] That Which Is Sought by the Promisor in Exchange for the Promise Need Not Be the Sole
Motivation Inducing the Promise
Page 2 of 5
After achieving great wealth, the primary motivation of a famous athlete such as Tiger Woods will be to win
certain golf tournaments such as the Masters or United States Open, but the prize money may be quite
secondary or even tertiary. Highly successful and wealthy business leaders often leave their multimillion
dollar employments to become government officials where the salary is hardly any inducement. Presumably
there is some motivation to accept the prize money in an athletic contest or to accept the government
salary though it is a secondary motivation. As the Holmes admonition in Wisconsin & M. R. Co. suggests,
“the promise and consideration must purport to be the motive for the other, in whole or at least in part”
(emphasis supplied).
Restatement (Second) of Contracts § 1 1 insists that nothing is consideration unless it is bargained for by
the promisor in exchange for the promise. Yet, it recognizes that what is sought by the promisor in
exchange for the promise need not be the sole or even primary motivation inducing the promise:
(1) The fact that what is bargained for does not of itself induce the making of a promise does not
prevent it from being consideration for the promise.
(2) The fact that a promise does not of itself induce a performance or return promise does not prevent
the performance or return promise from being consideration for the promise.
Restatement (Second) of Contracts §§ 1 1 and (2) (emphasis supplied).
The parents of John Fritz conveyed an 80-acre tract of land known as Roseland to him under a contract
drafted by an attorney which required John to assume the duty of the parents to pay a $16,000 note, pay all
real estate taxes on Roseland, maintain the property in good repair, and comply with certain “oral
understandings” of the parties not set forth in the contract document. The value of the land was set at
$70,000 and the contract provided that the $54,000 difference between the value of Roseland ($70,000)
and the $16,000 note obligation would be “gifted by Seller to Buyer” over the five year term of the contract.
Another provision stated that the buyer would forfeit the contract by failing to comply with its terms. A
consent to forfeiture was signed by John and his wife, Gena. A warranty deed and four promissory notes
obligating John to pay $10,000 to each of his siblings were also prepared by the attorney, but they were
unsigned. His mother later testified that the “oral understandings” required John to sign the promissory
notes and to help his father with farming activities. John made one payment on the $16,000 note, paid
property taxes for two years, and made improvements to Roseland. The father died and the mother paid off
the balance of the $16,000 note. John and Gena separated and the following year John died before the
divorce with Gena was finalized. Previously, the mother had sent a one sentence notice of forfeiture to
John, but not Gena. After the mother sold Roseland to her son, Mark and his wife. for $60,000, Gena
sought a declaratory judgment that she and/or John’s estate were the equitable owners of Roseland. The
trial court found that the transaction with John was a conditional gift rather than a contract to which an Iowa
statute requiring a certain notification of forfeiture did not apply. The court further held that, even if the
statute did apply, the mother’s notice of forfeiture was sufficient since John and Gena had waived such a
right to notice by signing the consent to forfeiture. On appeal, the instant court recognized that the
transaction was, in some ways, a hybrid of contract and gift and that donative intent may have originally
motivated the transaction. Citing Restatement (Second) of Contracts § 1 the court repeated the principle
that, even though what is bargained for does not itself induce the making of a promise, that does not
prevent it from being consideration for the promise. (See also § 1 and comment c indicating that a
transaction that is part bargain and part gift “may nevertheless furnish consideration for the entire
transaction.”) The court distinguished “motive” from “consideration” by quoting the famous Williston
illustration where a benevolent person makes a promise to a tramp to provide the tramp with an overcoat if
the tramp simply walked around the corner to a clothing shop. Though it would be a legal detriment, the
short walk to the clothing shop would not be bargained for consideration. Here, the detriments to John were
clearly bargained-for. Having found a contract for sale rather than a conditional gift, the court proceeded to
find that the mother’s notice of forfeiture under the statute was insufficient and John had an interest in
Roseland.
[2] Consideration Requires a Benefit to the Promisor or Detriment to the Promisee and a Bargained-
for-Exchange
Page 3 of 5
In 1875, consideration was defined in an English court as consisting of “either some right, interest, profit, or
benefit, accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered, or
undertaken by the other.” Currie v. Misa, 1 L.R., 10 Exch. (1875). This definition is often shortened by stating
that consideration requires either a benefit to the promisor or a detriment to the promisee.
In either its long or short form, the definition is incomplete, however, since it fails to include the critical
bargained-for-exchange element of consideration. While historians differ concerning the origins of this formula,
it is often suggested that the benefit to the promisor may have been derived from the old action of debt-the half-
completed exchange in which one party has conferred the promised benefit and the other party refuses to
perform the promise. The detriment to the promisee may be derived from the action of indebitatus assumpsit,
where the original emphasis of this derivative of trespass on the case was on performing the promise
(undertaking) badly (misfeasance), before it evolved to a concentration on the nonfeasance of simply not
performing the promise.
The typical contract involving an exchange of promises clearly manifests benefits to the two promisors and
detriments to the two promisees. If Ames promises to sell her land in exchange for Barnes’s promise to buy it
for $100,000, promisor Ames has the benefit of receiving $100,000. As a promisee, Ames suffers the detriment
of surrendering ownership of the land. Promisor Barnes has the benefit of becoming owner of the land, and
promisee Barnes suffers the detriment of paying $100,000 to Ames. If either party fails to perform, the other
party will have no difficulty in demonstrating consideration, not only in terms of benefits and detriments, but in
terms of the critical bargained-for-exchange element, since each promise induced a detriment and each
detriment induced the respective promise. Where a bank had a security interest in certain growing crops owned
by a party with an obligation to pay for the crops, the owner asked the bank to subordinate $72,000 of its
interest in the crops to allow payment to a harvester of the crops in exchange for the owner’s promise to remit
the balance of the value of the crops of some $196,000 to the bank. The bank agreed, but the owner remitted
only $46,000. The bank sued for breach of contract which the owner defended on the ground that there was no
consideration in the agreement. The court, however, found a benefit to the promisor (owner) in having the crops
harvested that was exchanged for a detriment to the bank in surrendering $72,000 that was otherwise due the
bank. Bank of the West, Inc. v. Organic Grain & Milling, Inc., 2010 U.S. Dist. LEXIS 24915 (D. Ariz. Mar. 17,
2010).
[3] Consideration May Be Found Even Without an Economic Benefit to the Promisor or Detriment to
the Promisee
The problem with the benefit/detriment formula is that one can find consideration even when there is no
discernible benefit to the promisor. It is also possible to discover consideration when there is a question as to
whether the promisee suffered any genuine economic detriment or other disadvantage.
The classic case is Hamer v. Sidway, 124 N.Y. 538, 27 N.E. 256 (1891). In Hamer, an uncle promised to pay
his nephew $5,000 if he would refrain from drinking liquor, using tobacco, swearing, and playing cards or
billiards for money until he reached the age of 21. The nephew did forbear from any of this conduct until his
twenty-first birthday, but the uncle refused to pay. The court defined consideration by quoting the definition in
Currie-consideration may consist of a benefit to the promisor or detriment to the promise-and dismissed any
necessity of finding a benefit to the promisor-uncle. Such an inquiry would have been highly speculative. The
court was quite satisfied to find only a “detriment” to the promisee-nephew, although it recognized that
forbearing from the conduct as required by the uncle’s promise was hardly detrimental in the sense of the
nephew’s economic or physical well-being. Indeed, the uncle had induced conduct that presumably effected a
healthier and wealthier nephew. Nonetheless, the court found a detriment to the promisee in forbearing his
legal right to engage in such conduct. Since the desired conduct of the nephew was induced by the uncle’s
promise and the uncle was induced to make the promise by the nephew’s forbearance, there was a bargained-
for-exchange with a provable “detriment” to the promisee.
If Barnes wants to borrow $10,000 from a bank but his credit rating is not sufficient, a promise by Ames to
repay the $10,000 if Barnes fails to repay the loan may induce the bank to lend the $10,000 to Barnes. Barnes
is the principal debtor and Ames is the “surety” for the loan. There is no discernible benefit to Ames, who may
have undertaken this duty to the bank as a gesture of friendship to Barnes. Whatever his motivation with
respect to Barnes, Ames desired a specific result. He wanted the bank to lend money to Barnes. His promise
induced the bank to make the loan to Barnes since, without his promise, the loan would not have been made.
Page 4 of 5
The promise induced the bank to suffer the detriment of lending the money, which is the result Ames desired.
The promise induced the detriment and the detriment induced the promise. Both elements are necessary to
establish the bargained-for-exchange element of consideration, though either a benefit to the promisor or a
detriment to the promisee is sufficient to meet the other requirement of consideration. If the “formula” statement
of a benefit to the promisor or detriment to the promisee is reversed to state a benefit to the promisee or
detriment to the promisor, it would describe a gift promise that would not be supported by consideration. See
Lyon Fin. Servs. v. AKB Enters., 2010 U.S. Dist. LEXIS 48243 (N.D. Ill. May 17, 2010).
[4] The “Objective” Value of the Detriment Sought in Exchange for a Promise Is Irrelevant
Notwithstanding the popularity of the benefit/detriment formula, the famous Holmes statement refers exclusively
to a bargained-for detriment. While there are numerous cases in which there is no discernible benefit to the
promisor and the court finds consideration in a bargained-for detriment, there is no recorded case in which
consideration was found exclusively on the basis of a benefit to the promisor with absolutely no detriment to the
promisee. While the “detriment” is indispensable, it has been criticized since it is used in a very narrow sense
that would exclude any necessity of an economic or physical detriment, as seen in Hamer.
The objective, reasonable, or market value of the detriment that is sought in exchange for a promise is
irrelevant. In an old case, the Supreme Court of Maine uttered what became the famous dictum that even a
peppercorn “in legal estimation” will do as consideration. Whitney v. Stearns, 16 Me. 394 (1839).
Almost a century and a half later, a California court of appeal considered a promise written on the outside of an
envelope stating that the addressee would receive a watch “just for opening the envelope.” The envelope was
opened to reveal the necessity of purchasing a subscription to a magazine to receive the watch. While
recognizing that opening the envelope was an insignificant act of highly limited value, it was bargained-for,
nonetheless. The court held that the promise to provide the watch induced the opening of the envelope, which
would otherwise have been treated as a mere advertisement that very well may have gone unopened. Harris v.
Time, Inc., 191 Cal. App. 3d 449, 237 Cal. Rptr. 584 (1987).
There is no question that a detriment with no economic value will be recognized as sufficient if that is what the
promisor desired. A document that is worthless may constitute consideration for a promise to pay some amount
for the document since it is a document desired by the promisor, even though no other person in the world
would entertain such a desire. Restatement (Second) of Contracts § illus. 2 recognizes consideration in
such a case on condition that the worthless document was “bargained for.” The bargained-for requirement
establishes that the document was the desire of the promisor, although no other party would desire it.
[5] Consideration to Support a Promise May Come from One Other than the Promisee
The consideration to support a promise typically moves from the promisee, but it need not do so. An employer
established an employment trust for employees with funds that accrued solely to the benefit of the employees.
An employee’s vested share, however, could be distributed only five years after the employee left the company.
The employer’s president, as sole trustee of the fund, agreed to accelerate the payment of the vested amount
in exchange for an employee’s agreement not to compete with the employer.
Shortly after the accelerated payment was made, the employee violated the non-compete clause. The
employee claimed that no consideration supported his promise not to compete. He argued that, while there was
a benefit to him, there was no detriment to the employer (promisee) since no consideration moved from the
employer, which had no stake in the trust. While holding that the promise was supported by consideration, the
court cited Corbin on Contracts in recognizing that it is not in all cases necessary for the consideration to move
from the promisee to the promisor. For example, the practice of naming mortgagees in contracts insuring the
property as the collateral for the mortgage loan is a promise to pay the mortgagee even though the premiums
on the insurance are paid by the mortgagor. Thus, the promise by the insurer is a promise to pay a promisee
where the consideration came from a third party (the mortgagor). Marine Contractors Co. v. Hurley, 365 Mass.
280, 286, 310 N.E.2d 915, 919 (1974). See also, Restatement (Second) of Contracts § 1 and cmt. e.
Practice Resources:
• Corbin § . (motive and inducement—must consideration be the “inducing
Page 5 of 5
cause” of the promise?); § . (is consideration defined as benefit to the

promisor or detriment to the promisee?); § . (benefit to promisor as
consideration); § .10 (detriment to promisee as consideration); § .11
(consideration given by third party instead of the promisee).

End of Document
§ 5.03 Multiple Promises May Be Given for a Single Consideration
[1] Promises Exchanged for a Single Consideration May Be Made by Different Parties
It is common for one party to a contract to promise several performances for a single consideration. In
exchange for a buyer’s promise to make one total payment, the seller of a business corporation may promise to
transfer the stock certificates, the existing inventory and equipment, and simultaneously agree not to compete
in the same business for a period of time within a certain geographical radius. A lease contract may include not
only a promise to lease the property, but a promise to provide the lessee with a right of first refusal to match a
third party’s offer to purchase the property during the lease term. The promises exchanged for a single
consideration may be made by different parties. When a bank agrees to lend $100,000 to a principal debtor, it
may also require a promise from a surety, who promises to pay if the principal debtor does not pay. Thus, the
bank receives two promises, one from each promisor, in exchange for the single loan to the principal debtor. Ag
Venture Fin. Servs. v. Montagne (In re Montagne), 2010 Bankr. LEXIS 1437 (Bankr. D. Vt. May 4, 2010).
In GRT, Inc. v. Marathon GTF Tech., Ltd., 2012 Del. Ch. LEXIS 134 (June 21, 2012), the court cited § 0 cmt.
a, in noting that, since consideration need not be adequate in value, two or more promises may be binding
though made for the price of one. In Martin v. World Savings & Loan Assn., 92 Cal. App. 4th 803, 112 Cal. Rptr.
2d 225 (2001), when a buyer obtained a loan to purchase his residence he promised to buy hazard insurance
but did not promise to purchase earthquake insurance. He did, however, promise to name the lender as a loss
payee of any earthquake insurance he purchased. The buyer purchased earthquake insurance and suffered a
casualty for which the insurer paid $60,000. The lender was not named as a loss payee. The buyer argued that,
since he had no obligation to buy earthquake insurance, he could not have had an obligation to name the
lender as a loss payee of such insurance. The court, however, relied on the Corbin treatise in holding that
consideration is not invalid because it is exchanged for more than one promise. The lender’s single promise
was given in exchange for the borrower’s multiple promises. The promise to name the lender as a loss payee of
the earthquake insurance was supported by consideration.
[2] One Valid Consideration Is Sufficient

When the consideration requires more than one promise of different performances, if one of the promises
cannot be enforced because it is invalid, the remaining valid consideration may still support the other party’s
promise. For example, in the famous Hamer case, discussed above, an uncle promised to pay his nephew
$5,000 on the nephew’s twenty-first birthday if he would forbear from gambling, swearing, alcoholic beverages,
and smoking. If Ames was the 18-year-old nephew who was prohibited by law from gambling or drinking
alcoholic beverages at his age, he would not be able to demonstrate a detriment by avoiding such conduct
since he was previously bound to avoid it. Promising to forbear from conduct that he had a pre-existing duty to
avoid is an illusory promise since it promises nothing. If swearing and smoking were not prohibited by law,
however, Ames cold still establish consideration by proving that he abstained from such conduct for the
required period.
Practice Resources:
• Corbin § .12 (one consideration exchanged for several promises); § .1 (two
considerations, one being invalid or not proved).

Page 2 of 2
End of Document
§ 5.04 Adequacy of Consideration
[1] Courts Generally Will Not Inquire Into the Adequacy of Consideration
Innumerable cases proclaim that courts will not inquire into the adequacy of consideration, i.e., the relative
values exchanged. This common law principle is captured in a quotation used by the great Judge Benjamin
Cardozo in one of his many well-known opinions: “If a person chooses to make an extravagant promise for an
inadequate consideration it is his own affair.” Allegheny College v. National Chautauqua County Bank, 246 N.Y.
369, 377, 159 N.E. 173, 176 (1927), quoting 8 Holdsworth, History of English Law at 17. “[T]he requirement of
consideration is not a safeguard against imprudent and improvident contracts.” Sanford v. Nat’l Ass’n for the
Self-Employed, Inc., 2009 U.S. Dist. LEXIS 47977 (D. Me. May 26, 2009).
While it is common to speak of “market value” as the monetary amount that a willing buyer and seller would
place on certain property, if it is valuable only in the eyes of one person who promises to pay a specified
amount that no one else would pay, such an exchange is part of the “market.” A promise to pay a substantial
sum for what would be objectively viewed as a worthless document is consideration if its surrender was desired
by the promisor to whom it would not be worthless. Thus, while it may objectively appear that a given promise is
extravagant in terms of what the promisor is receiving in exchange, it is not extravagant to a promisor who
desires that consideration in exchange for the promise. When conduct by another party, such as forbearing
from smoking, is desired by a promisor, there is an isolated and unique market for the exchange of a specified
payment for that forbearance. Thus, while objective market values may be assigned by experts, value remains
a matter of opinion and courts will not interfere with the parties’ own determination of value.
The judicial refusal to consider equivalence in exchanged values may lead to apparent absurdities in some
cases. Earlier, this chapter quoted the old adage that even a “peppercorn” would suffice as consideration, and
reported a modern case that regarded the mere opening of an envelope as consideration for a promise to a
deliver a watch. A court may avoid finding consideration in such cases on the ground that there was no
bargained-for-exchange. Absent such a finding, however, the insignificant value of the property or service
exchanged for the promise should not preclude a finding that it constitutes consideration.
[2] Adequacy of Consideration May Be Looked at When an Equitable Remedy Is Sought

If a party to a contract seeks an equitable remedy such as specific performance of a contract or an injunction to
prevent the other party from allegedly breaching a contract, a court sitting as a court of equity may inquire into
the adequacy of consideration since equitable relief is discretionary and should not be granted if the
consideration is grossly inadequate. Restatement (Second) of Contracts § 1 c.
An interest-free loan of $5,000 was made to a defendant to assist him in purchasing commercial property. The
lender, an adjoining property owner, insisted on a contract that placed major restrictions on the use of the
property for 25 years. The loan was repaid within seven months. When the defendant’s enterprise was failing,
he violated certain restrictions in the contract, which induced the plaintiff seek an injunction. The court
measured the value of the restrictions and hardships to the defendant against the value of the interest on the
loan of $145 that the defendant had received in exchange for his promises not to use the property in certain
material ways. The court found that the plaintiff, a lawyer experienced in business matters, had exacted
oppressive restrictions from the relatively inexperienced defendant for an inadequate consideration. McKinnon
v. Benedict, 38 Wis. 2d 607, 157 N.W.2d 665 (1968).
A court of equity will not refuse to grant an equitable remedy simply because the consideration may appear to
be “unfair.” If, however, the unfair exchange is accompanied by one party taking opportunistic advantage of the
other party, or if there is also evidence of misrepresentation or fraud though the evidence fall short of what is
Page 2 of 4
required for relief under such doctrines, courts will be inclined to deny an equitable remedy. Restatement
(Second) of Contracts § cmt. a.
[3] UCC § 2 302 Extends Unconscionability to Actions at Law

The classic statement of unconscionability is found in an eighteenth century Chancery Court opinion that
characterized a bargain as unconscionable if it was “such as no man in his right senses and not under delusion
would make on the one hand, and as no honest and fair man would accept on the other.” Earl of Chesterfield v.
Janssens, 2 Ys. Sen. 125, 155, 28 Eng. Rep. 82, 100 (Ch. 1750). There is a long history of unconscionability in
equity proceedings, but it was not until Professor Karl Llewellyn managed to include his “favorite section” in the
Uniform Commercial Code (UCC) that unconscionability became a basis for refusing to enforce a contract in an
action at law for damages. UCC § 2- 02.
The seminal case inspiring the new unconscionability concept involved a plaintiff seeking equitable relief. A
soup company sought an injunction against farmers who had agreed to sell all of their carrots of a particular
type to be grown on certain acreage. The farmers breached their contract by selling carrots to other buyers.
The trial court found that the carrots were not sufficiently “unique” to allow for equitable relief. While the
appellate court disagreed with that finding, the court nonetheless affirmed the judgment below because the
contract was “too hard a bargain and too one-sided an agreement to entitle the plaintiff to relief in a court of
conscience.” Individual contract terms required by the company, though favorable to the buyer, were not
unconscionable in themselves; it was their cumulative effect that made the contract unconscionable.
In particular, the court noted a provision that allowed the company to reject carrots and that also precluded the
farmers from selling the rejected carrots to others. Although it expressly recognized the farmers’ breach and
had no desire to excuse them, the court concluded that it would not grant the equitable relief sought by the
company because:
"[A] party who has offered and succeeded in getting an agreement as tough as this one is, should not
come to a chancellor and ask help in the enforcement of its terms. That equity does not enforce
unconscionable bargains is too well established to require elaborate citation.”
Campbell Soup Co. v. Wentz, 172 F.2d 80, 83 (3d Cir. 1948).
The UCC’s extension of a modern unconscionability concept to an action at law is replicated in Restatement
(Second) of Contracts § 20
If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to
enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may
so limit the application of any unconscionable term as to avoid any unconscionable result.
Comment c is careful to note that mere inadequacy of consideration does not invalidate a bargain, “but gross
disparity in the values exchanged may be an important factor in a determination that a contract is
unconscionable and may be sufficient ground, without more, for denying specific performance.” Gross disparity
in the values exchanged alone is rarely a basis for finding unconscionability. Court often insist that parties are
free to establish the terms of their agreement which will be enforceable even if the consideration exchanged is
grossly unequal or of dubious value. Vargas Realty Enters. v. CFA W. 111 St., L.L.C. (In re Vargas Realty
Enters.), 440 B.R. 224 (S.D.N.Y. 2010). If, however, the disparity is gross and is accompanied by the absence
of any bargaining power (e.g., when the buyer is a consumer) as well as inconspicuous boilerplate contract
clauses that are oppressive, courts may be moved to declare the clause or the entire contract to be
unconscionable.
The conclusory language of the unconscionability sections of both the Restatement (Second) of Contract and
its predecessor in the UCC have induced numerous efforts to provide more elaborate explanations of the
concept. One of the more frequently quoted statements suggests that:
“Unconscionability has generally been recognized to include an absence of meaningful choice on the part
of one of the parties together with contract terms which are unreasonably favorable to the other party.”
Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (1965).
Williams involved a contract for the sale of goods from a furniture store by a consumer who had been a
previous buyer of furniture. The contract for the latest purchase included a clause in the language that a
consumer would not understand stating that failure to make a payment on the latest purchase would activate
the right of the seller to repossess not only the latest item purchased but also previously sold items on which
payments had been made. The court held the clause to be unconscionable and, therefore, unenforceable.
Page 3 of 4
[4] A Promise Made to Pay a Large Sum of Money In Exchange for a Smaller Sum Is Not Supported by
Consideration
A promise made to pay a larger sum of money in exchange for a smaller sum is not supported by consideration.
There are very few cases illustrating this point. In the most famous case, a husband promised to pay three
parties $200 each in exchange for one cent for the purpose of fulfilling the intention of his deceased wife; she
wanted to pay these parties in her will but her estate had no assets from which such payments could be made.
The court held that the husband’s promise was not supported by consideration because of what it characterized
as an “exception” to the usual rule that inadequacy of consideration will not vitiate an agreement. The better
rationale, however, is that the husband was not bargaining to pay $200 to each of these parties in exchange for
a payment of one cent. The document containing these promises stated that he was making the promises in
consideration of “the love and respect he bears to his wife; and furthermore, in consideration of one cent
received by him of the second parties.” Schnell v. Nell, 17 Ind. 29 (1861).
The “love and affection” the promisor had for his departed wife was clearly the motivation for making the
promises, but the promisor had already received such love and affection from his wife. Countless cases,
including Schnell, state that love and affection cannot be bargained for, although it is theoretically possible that
future love and affection could be the subject of a bargain. It is, however, impossible to bargain for past love
and affection, which, like any other “past consideration,” cannot support a promise. The recital of “one cent” as
consideration was, therefore, nothing more than an effort to infuse the promises to pay $200 to each named
promisee with enforceability. No particular “cent” of numismatic value was required. It was patently clear that
the one cent was not bargained for and could not, therefore, constitute consideration.
While driving Keys’ automobile, Turner was involved in an accident that totaled the car. Though Keys’ insurer
compensated her for her loss, Turner executed a writing to pay Keys $5,000 in installments. The motivation
was “to preserve friendship.” Citing the Restatement (Second) of Contracts § 1 comment a, as well as the
Corbin treatise, the court found such “friendship” to be akin to “love and affection” which Ohio does not
recognize as consideration. Keys v. Turner, 2012-Ohio-4489, 2012 Ohio App. LEXIS 3923 (6th Dist. 2012).
[5] “Nominal” or “Sham” Consideration Is Not Consideration

“Nominal” consideration is an amount actually paid but not bargained for. “Sham” consideration is an amount
that was never intended to be paid though it was stated as paid. Even though courts may not inquire into the
equivalence of values (except where equitable relief is sought), if a promisor can prove that there was no
bargained for exchange, that promise is not supported by consideration. Even if the amount recited as paid is
substantial but it was never intended to be paid and was not, in fact, paid, it is so-called “sham” consideration,
which is a lie and the promise will not be enforceable.
[6] Nominal Consideration Is Deemed to Have Been Bargained for in the Case of Option Contracts
Documents containing clauses reciting the payment of consideration such as, “In consideration of ten dollars in
hand paid,” may be contradicted by evidence that the recited amount was not paid or evidence that it was not
bargained for. Courts have, however, relaxed the consideration requirement in certain types of contracts. Thus,
in option contracts, even the payment of a nominal consideration will be deemed to have been bargained for to
make such a “socially useful” agreement enforceable. Laporte v. Blum, 2015 Vt. Super. LEXIS 12 (Vt. Super.
Ct. Mar. 17, 2015) explained: “… it is typical to recite a few dollars as consideration but not expect it to be paid.
To hold that every such agreement is void would not be in keeping with the intent of the parties to such
options.” If the recital is a lie because the nominal amount has not been paid, however, a number of cases have
held that there is no enforceable option contract. See, e.g., Lewis v. Fletcher, 101 Idaho 530, 617 P.2d 834
(1980). This is often stated as the “majority” view.
Other cases invoke an “estoppel” or “implied promise” theory to permit the enforcement of the option contract.
See Real Estate Co. v. Rudolph, 301 Pa. 502, 153 A. 438 (1930) (estopping a promisor from contradicting the
statement in the recital clause that the stated consideration was received); Smith v. Wheeler, 233 Ga. 166, 210
S.E.2d 702 (1974) (finding an implied promise to pay the recited consideration that was proven not to have
been paid).
Page 4 of 4
Moreover, Restatement (Second) of Contracts § cmt. b, adopts the view that a clause reciting nominal
consideration in either a guaranty or option contract should be enforceable even though the recited
consideration was never paid. The Restatement candidly recognizes that there is no consideration supporting
such promises, but asserts that the recital of paid consideration, albeit a lie, should operate as a formal basis
for enforcing the contract because the recital has an effect comparable to the classic seal as a validation device
that “satisfies the desiderata of form.” A recent judicial adoption of this view recognizes it as a “minority
position.” 1464-Eight, Ltd. v. Joppich, 154 S.W.3d 101 (Tex. 2004).
Practice Resources:
• Corbin § .1 (adequacy of consideration); § .1 (unconscionability and
consideration); § .1 (sum of money as consideration for a promise to pay a
larger sum); § .1 (nominal and sham consideration); § .1 (is consideration
required to be valuable? love and affection; marriage).

End of Document
§ 5.05 Change in Legal Relations as Consideration
[1] Consideration Exists When a Promisor Bargains for a Performance That Extinguishes a Legal Right
It is often stated that consideration is the surrender of a legal right. Like other general statements, however, this
statement requires clarification and elaboration. When a promisor bargains for a performance rather than a
promise, and the performance extinguishes an existing legal right, such a “surrender” of a right constitutes
consideration supporting the promise. Restatement (Second) of Contracts § 1 c notes that a bargained-for
performance to support a promise may consist of the creation, modification, or destruction of a legal relation.
[2] Release of a Mortgage, Surrender of an Option, or Cancellation of a Promissory Note Are

Performances That Constitute Consideration
A release of a mortgage, surrender of an option, or the cancellation of a promissory note are illustrations of
performances that extinguish legal relations and that will constitute consideration for a bargained-for promise. In
order to constitute consideration, however, it is not necessary that the performance given in exchange for a
promise must change a legal relation. A forbearance to smoke or to pursue other legal acts in exchange for a
promise of payment may suggest that the promisor is seeking the “surrender” of a legal right from the promisee.
More precisely, however, the promisor is seeking the promisee’s forbearance of a legal act that the promisee
may choose to forbear. During the forbearance period, the promisee does not “surrender” the legal right to
smoke since he or she may resume smoking at any time, though such resumption will preclude the
enforcement of the promise of payment.
It may be that even a promise of payment in exchange for an affirmative act will not involve the surrender of a
legal right. Thus, a promise by Ames to pay Barnes $5,000 in exchange for Barnes’s act of taking a vitamin pill
of a certain brand for 30 consecutive days would not require the “surrender” of a legal right since Barnes would
not be precluded from choosing not to take the pill at any time during the forbearance period. Barnes would not
collect the $5,000 unless Barnes performed the required act for 30 days, but, again, Barnes would not have
“surrendered” a legal right during that period.
[3] The Exchange of Bargained-for-Promises Creates a Legal Relation Between the Parties
If the consideration is not the actual performance but is a promise given in exchange for the offer, there is
necessarily a change in legal relations since the exchange of bargained-for-promises creates a legal relation
between the parties. The parties, however, are not bargaining for mere promises; the promise is only the
assurance of the performance that has been promised and, again, that performance need not change a prior
legal relation to constitute consideration.
A party may bargain for the creation of a legal power or privilege or immunity. A promise to offer franchises to
certain parties was a promise to offer powers of acceptances to such parties, which was held to constitute
consideration for an assignment of a right of first refusal. Bero Motors v. GMC, 2006 Mich. App. LEXIS 2488
(Aug. 10, 2006). A bargain promising payment for the privilege of using another’s property for hunting or fishing
of taking water from the owner’s well provides clear consideration supporting the promise because the promisor
would otherwise be committing a trespass; through the bargain the promisor has become immune.
[4] “Lack of Consideration” Distinguished from “Failure of Consideration”

The lack of precision in the expression of legal concepts is still found in the use of phrases such as “lack of
consideration” and “failure of consideration.” Ames promises to sell her automobile to Barnes for $10,000 in
exchange for Barnes’s promise to buy the car for $10,000. A contract is formed with obvious consideration
Page 2 of 2
moving to and from both parties. If either Ames or Barnes refuses to perform, there is a breach of the contract.
There has been a “failure of performance.” To call it a “failure of consideration” is both inaccurate and
misleading. See Commercial Recycling Ctr., Ltd. v. Hobbs Indus., 228 P.3d 93, 99 (Alaska 2010); Restatement
(Second) of Contracts § 2 cmt. a.
Raymond Wirth executed a promise stating, “In consideration of my interest in education, and intending to be
legally bound, I … irrevocably pledge and promise to pay Drexel University the sum of … $150,000.” As stated,
the promise manifested no consideration since Wirth was not bargaining for anything in exchange. It was a gift
promise. The promise, however, was governed by Pennsylvania law, which uniquely includes the Model Written
Obligations Act (33 Pa. Stat. Ann. § . The Act makes a written and signed promise expressing the signer’s
intention to be legally bound enforceable without consideration. Wirth’s estate argued that there was a “failure”
rather than a “lack” of consideration. Citing Corbin on Contracts, the court found this argument to rest “only on
confusion” since “failure of consideration” can only mean failure to render a promised performance and no
performance by Drexel was required in this case. In re Estate of Wirth, 5 N.Y.3d 875, 842 N.E.2d 480 (2005).
Pennsylvania’s Model Written Obligations Ace has its limitations. In Socko v. Mid-Atlantic Sys. of CPA, Inc.,
2015 Pa. LEXIS 2672, 126 A.3d 1266, 40 I.E.R. Cas. (BNA) 1568, 166 Lab. Cas. (CCH) P61,652 (Pa. 2015),
Mid-Atlantic had its employee Socko sign an agreement entitled “the Non-Competition Agreement” during the
course of his employment. The agreement provided that Socko was not permitted to compete with Mid-Atlantic
for two years after the termination of his employment in various states, and it contained the language required
under the Written Obligations Act. Importantly, Socko did not receive any benefit or any change in his existing
employment status in exchange for signing the Agreement. Socko later challenged the validity of the agreement
on the basis of lack of consideration. The Pennsylvania Supreme Court held that the contractual language
satisfying the UWOA did not prevent Socko from challenging the agreement on the basis of a lack of
consideration. An agreement in restraint of trade requires something more than the words of the Written
Obligations Act or a seal.
Practice Resources:
• Corbin § .1 (change in legal relations as consideration); § .20 (lack of
consideration distinguished from failure of consideration).

End of Document
§ 5.06 Forbearance as Consideration
[1] Bargained-for-Forbearance Is Consideration

The typical promisor bargains for some affirmative act by the promisee, such as selling goods or land or
performing a service. It is not uncommon, however, for the promisor to bargain for the promisee to forbear from
performing an act that the promisee may choose to perform. When forbearance is bargained-for, it certainly
qualifies as consideration whether the promisor seeks a promise to forbear or simply the act of forbearance.
Forbearance or a promise to forbear, however, must meet the usual requirements of a bargained-for-exchange
to constitute consideration. Where a judgment was entered for an insured based on its insurer’s failure to
defend a claim, the insured notified the insurer that it would execute the judgment to which the insurer promptly
promised to pay the judgment. Instead of keeping this promise, the insurer appealed and the court vacated the
judgment. Notwithstanding this decision, the insured claimed that its forbearance in executing the judgment was
consideration for the insurer’s promise to pay. The court held that the insurer’s promise to pay the judgment did
not constitute consideration because it was nothing more than a promise to perform what appeared to be its
pre-existing duty to pay the judgment. There was no bargained-for-exchange since there was nothing to be
exchanged. Stephen Haskell Law Offices, PLLC v. Westport Ins. Corp., 2011 U.S. Dist. LEXIS 37360 (E.D.
Wash. Apr. 5, 2011).
Traverlers Indemnity Company agreed to become a guarantor of a debt owed by Smith to Lane. When Smith
failed to pay, Lane sought recovery from Travelers, which resisted on the ground that a guarantor is discharged
from its obligation when the creditor makes a binding agreement to extend the time for the debtor to pay. The
court concluded that while the mere extension of time for payment by a creditor to a debtor would not discharge
a guarantor, when the creditor agrees to forbear declaring the debtor in default, such an agreement of
forbearance discharges the guarantor. Lane v. Travelers Indem. Co., 1997 SD 58, 563 N.W.2d 423. The court’s
determination of an implied promise of forbearance by the creditor illustrates a curiosity in the recognition of
forbearance as consideration.
[2] If a Promisor Seeks Forbearance in Exchange for the Promise, the Act of Forbearance Forms a
Unilateral Contract
While the early common law enforced half-completed exchanges, which were later called unilateral contracts,
once the idea of enforcing informal bilateral contracts involving an exchange of promises was accepted, it
occupied a very large place in the legal mind. One of the common statements in the nineteenth century
suggested that unless both parties are bound, neither is bound. This unfortunate axiom led to erroneous
statements that forbearance alone, without a prior promise, would not be consideration; in other words, unless
there was a promise to forbear, the fact of forbearance would not be effective. This notion totally ignored the
possible existence of a unilateral contract. Although forbearance that is not bargained for is no more
consideration than any other performance that is not bargained for, if a promisor seeks forbearance in
exchange for the promise, the act of forbearance forms a unilateral contract. This reality is certainly recognized
in modern cases, but there is an inclination to pursue the totally unnecessary effort to discover an implied
promise to further support the concept of forbearance as consideration, even when the evidence to support
such an implication may be minimal.
If the promisor seeking forbearance fails to specify how long such forbearance should last, a reasonable time
will be implied. An offer that can be accepted by the act of forbearance, however, should become irrevocable
upon the beginning of forbearance.
Page 2 of 2
[3] Forbearance from Litigation Is Clearly Consideration if the Promisee Has a Valid Claim
Promisors commonly seek forbearance from litigation. If the promisee has a valid claim and promises to forbear
from suing on such a claim, there is clear consideration to support the promise.
In Simrall v. Bunge-Ergon Vicksburg LLC, 2015 Miss. App. LEXIS 610 (Miss. Ct. App. 2015), Simrall agreed to
sell Ergon 100,000 bushels of corn, but a flood destroyed most of Simrall’s corn crop, and Simrall unilaterally
cancelled the contract. Simrall executed a promissory note that obligated Simrall to pay Ergon $283,812.50 as
a result of the cancellation, and a Simrall partner signed a personal guaranty on the debt. Neither Simrall nor
the partner paid, so Ergon filed suit. Simrall defended by asserting that its duty to perform under the original
contract for the supply of corn was unconscionable and discharged by the flood, so the subsequent note and
guaranty were not supported by consideration. The held that Ergon’s forbearance in filing suit was adequate
consideration.
A promise to forbear suit by a third person can constitute consideration. Assume that Barnes is indebted to
Ames in the amount of $100,000 and Ames is about to sue Barnes for failure to pay. Barnes’s friend, Carr,
promises to convey a parcel of Carr’s land to Ames in exchange for Ames’s promise to forbear from suing
Barnes. Ames’s promise to Carr is supported by the consideration of the land, Carr’s promise is supported by
Ames’s forbearance, and Barnes is a third-party beneficiary of the contract between Ames and Carr with a
defense against any action Ames may bring on the $100,000 debt.
Forbearance to sue on a claim that is asserted in good faith but turns out to be an invalid claim will typically be
recognized as consideration, making the promise to forbear enforceable. See § .0 below.
Practice Resources:
• Corbin § .21 (forbearances and promises to forbear as a consideration—
forbearance to exercise a privilege or power); § .22 (is forbearance, without a
promise to forbear, consideration?); § .2 (forbearance for an unspecified time);
§ .2 (forbearance from suit or other legal remedy or defense).

End of Document
§ 5.0 In a Bilateral Contract, When a Promise Is Exchanged for a Promise,

Each Promise Is the Consideration for the Other Promise
[1] The Typical Promisor Seeks Not Only a Promise, but the Performance of That Promise as
Consideration
The typical contract is bilateral when the parties exchange promises that are viewed as consideration for each
other. A question that produced considerable debate over a long period was whether a party to a bilateral
contract bargains for the promise or the performance of the other party. It is possible to conceive of a promisor
seeking only the promisee’s articulation of words such as “God save the king” that would constitute the
consideration for the promise, but the speaking of the words would be a performance forming a unilateral
contract. The controversy has been resolved by recognizing that the typical promisor seeks not only a promise,
but also the performance of that promise as consideration.
[2] In General, a Promise Will Constitute Consideration for a Return Promise if the Promised
Performance Would Be Consideration Had the Performance Alone Been Bargained for
If a promisor bargains for both the promise and the performance, the general rule is that the promise will
constitute consideration for a return promise if the promised performance would be consideration had the
performance alone been bargained for. Suppose that Barnes owes Ames $10,000, which Ames promises to
forbear collecting for six months in exchange for Barnes’s promise to allow Ames the privilege of crossing
Barnes’s land for the same six months. Barnes’s promise is valid consideration because the performance of
that promise of allowing Ames to cross his land is consideration. Suppose, however, that Ames promises to
forbear collecting an accrued debt owed by Barnes for six months and Barnes merely promises to pay the
same debt without any additional interest six months later. Ames is receiving no benefit since she is entitled to
payment of the $10,000 immediately. Barnes suffers no detriment because he has a pre-existing obligation to
pay the debt immediately.
Courts hold that there is no enforceable bilateral contract in this situation. Since Barnes’s performance of
paying what he already owed six months later would not be consideration if that performance alone had been
bargained for, the promise representing that performance would not be consideration. Yet, if Barnes had
bargained only for Ames’s performance of forbearance and Ames performed by forbearing for six months,
Ames’s performance would be consideration that would validate the promise. Again, however, Barnes’s
promise to pay the same debt without interest six months later would not be consideration. If, however,
Barnes’s offer was the typical indifferent offer that could be accepted either by Ames’s promise or her
performance of forbearance and Ames chose to accept by performance, there would be consideration for
Barnes’s promise when Ames completed the forbearance for the required period. While the agreement would
not be enforceable as an executory bilateral contract, it would be enforceable as a unilateral contract.
This is illustrated by the well-known case of Hay v. Fortier, 102 A. 294 (Me. 1917). Mrs. Fortier was a surety on
a debt and her obligation was due. Her lawyer sought an extension of time to pay, which was granted by the
creditor. The creditor waited even beyond the promised period of forbearance before bringing an action on the
original claim against the principal debtor and sureties. The court stated that this action was discontinued
without explanation. The following day, the plaintiff brought an action against the surety, Mrs. Fortier, on her
subsequent promise to pay later and the court found consideration to support her promise in the forbearance of
the creditor. His promise to forbear was not enforceable, but the actual forbearance, which he did not owe by
his promise, was, nonetheless, consideration for Mrs. Fortier’s promise; her promise became enforceable when
the creditor’s forbearance concluded a unilateral contract.
Page 2 of 2
The Restatement (Second) of Contracts agrees with this result but provides a different rationale. It would view
Ames’s promise as not binding because Barnes’s promise is not consideration for Ames’s promise. Ames’s
promise is “nevertheless consideration” for Barnes’s promise since the performance of Ames’s promise would
constitute consideration. Thus, Barnes’s promise is conditional on Ames’s completion of the forbearance for six
months and “can be enforced only if the condition is met.” Restatement (Second) of Contracts § illus. 4. The
rationale avoids a unilateral contract analysis and is consistent with the Restatement (Second) elimination of
the distinction between unilateral and bilateral contracts. Restatement (Second) of Contracts § 1 cmt. f.
Practice Resources:
• Corbin § .2 (bilateral contracts—promise as consideration for a return
promise); § .2 (is the validity of a promise as consideration dependent on the
validity of the promised performance as one?).

End of Document
§ 5.0 A Party May Manifest a Promissory Intention by Conduct or by Words

That Are Not Themselves Promissory
[1] An Implied-in-Fact Promise Is Not Expressed in Promissory Words

A party to a contract may manifest a promissory intention by conduct or by words that are not in themselves
promissory. The only difference between an express promise and a promise that is implied-in-fact is that the
implied-in-fact promise is not expressed in promissory words. Such an implied promise and the performance of
that promise may constitute consideration just as an express promise and its performance constitutes
consideration.
Implied promises are discovered in many different contexts. If an owner of property grants an exclusive agency
or an exclusive right to sell to a real estate broker, courts will imply a duty on the part of the broker to use
reasonable efforts to sell the property. Perhaps the most celebrated opinion implying a promise is the work of
Judge Cardozo in Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917). In Wood, the defendant,
a celebrated “creator of fashions” whose “favor helps a sale,” signed a contract that granted an exclusive
agency to one Otis Wood, an advertising agent, under which Wood would receive one-half of the profits
resulting from the agency. Lucy claimed that there was no consideration for her promise since the document
she signed failed to state any promise of performance by Wood. The court, however, found many
circumstances supporting the implication of a promise by Wood to use reasonable efforts to produce the profits.
In one of the more quoted passages, the opinion states:
It is true that [Wood] does not promise in so many words that he will use reasonable efforts to place the
defendant’s indorsements and market her designs. We think, however, that such a promise is fairly to be
implied. The law has outgrown its primitive stage of formalism when the precise word was the sovereign
talisman, and every slip was fatal. It takes a broader view today. A promise may be lacking, and yet the
whole writing may be “instinct with an obligation” imperfectly expressed. … If that is so, there is a contract.
Id. at 90–91.
The UCC includes an even higher standard in an agreement by a seller or buyer for exclusive dealing where an
obligation is imposed on a seller to use best efforts to supply goods and a similar obligation on a buyer to use
best efforts to promote the sale of the seller’s product. UCC § 2- 0 2 .
[2] A Pervasive Standard of Good Faith or Fair Dealing Is Implied in Any Contract
There is a pervasive standard of good faith or fair dealing implied in any contract. UCC § 1-20 imposes an
obligation of good faith in contracts for the sale of goods. Restatement (Second) of Contracts § 20 imposes the
same duty of good faith and fair dealing in the performance and enforcement of all contracts. The implied
promise of good faith, however, does not create new duties under the contract. Rather, it deals with the
performance and enforcement of existing duties under the contract. Williams v. Fed. Home Loan Mortg. Corp.,
2013 U.S. Dist. LEXIS 177244 (D. Md. Dec. 18, 2013). The implication of good faith may supply sufficient
certainty to make a contract enforceable as it does in the case of contracts of a buyer who agrees to purchase
its requirements for a given period from a single seller, or where a seller agrees to sell its entire output of a
product to a single buyer. In either case, the quantity term is necessarily undefined, although it will be defined at
the end of the contract period. The UCC allows the quantity to be measured by the actual requirements of the
buyer or output of the seller that may occur in good faith. UCC § 2- 0 1 . The same subsection states that, if
there is a stated estimate of requirements or output in the contract of there evidence of past requirements or
output, no unreasonably disproportionate quantity may be tendered or demanded. The good faith standard will
be discussed later in this volume.
Page 2 of 2
Practice Resource:
• Corbin § .2 (implied promise as consideration).

End of Document
§ 5.0 Voidable, Unenforceable, and Illusory Promises as Consideration
[1] If One Party Is Induced to Make a Promise Through the Fraud of the Other Party, the Contract Is
Voidable by the Defrauded Party
It is often said that both parties must be bound to a contract or neither is bound. This is a generalization,
inaccurate for a number of reasons. In a unilateral contract there is only one promisor, who becomes bound to
perform a duty when the promisee has completely performed the act requested by the promisor. Thus, a
promisee in a unilateral contract has already performed and has no duty left to perform; otherwise, there would
be no unilateral contract.
When a contract is bilateral, the generalization moves much closer to accuracy, but total accuracy is still not
achieved. For example, when promises are exchanged between an adult and an “infant” (someone below the
age of majority, which is generally 18 years), the infant has a power of avoidance (disaffirmance). The adult is
bound by his or her promise, but the infant may avoid the contract. A similar analysis applies to contracts
induced by fraud. If one party to the contract is induced to make a promise through the fraud of the other party,
the contract is voidable by the defrauded party. In either the infant or fraud example, there is a contract, but it is
subject to avoidance by the innocent party.
[2] The Statute of Frauds May Make an Oral Contract Unenforceable

Under the statute of frauds, certain types of contracts must be evidenced by a writing, such as contracts for the
sale of land or goods, contracts to answer for the debt of another, contracts that cannot be performed within
one year of their making, and contracts in consideration of marriage. UCC § 2-201 requires contracts for the
sale of goods at a price of $500 or more to be in writing.
An oral contract that falls within one of these classifications is still a contract. When sued upon, however, a
defendant may raise the statute of frauds as an affirmative defense, which makes the contract unenforceable. If
the parties executed a sufficient writing after making the oral contract, such a writing will satisfy the
requirements of the statute.
[3] Words in Promissory Form That Promise Nothing Are Illusory Promises
When a statement appears to be promissory but, upon examination, it promises nothing, the promise is illusory.
It is a mirage. An employer was not permitted to retroactively reduce of commissions an employee had already
earned. Such a reduction would essentially render the contract illusory. Where a promisor retains an unlimited
right to choose the nature and extent of his performance, the promise is illusory. Powanda v. Inteplast Group,
LTD, L.P., 2015 U.S. Dist. LEXIS 44261 (D. Conn. 2015). Suppose Ames writes to Barnes, “I am thinking about
selling my sports car, which you have admired for several years. I will sell it to you for $20,000 unless I change
my mind.” Barnes replies, “We have a deal for the car at $20,000.” There is no contract because Ames has
promised nothing. In form, his promise to sell the car to Barnes unless he changes his mind may appear to be a
conditional promise, but the condition places no restriction on Ames’s future choice. His liberty of action is not
circumscribed in any way.
Suppose Ames had said, “I’m thinking about selling my sports car within the next thirty days. If I decide do sell it
within that time frame, I will sell it only to you for $20,000 if you are interested.” Barnes replied, “I will purchase
your sports car for $20,000.” While Ames continues to have total control over whether he will sell the sports car,
his liberty of future action is now circumscribed. Prior to making that promise, Ames was totally free to sell the
car to anyone or not sell the car to anyone for 30 days. He had the same freedom as in the first example in
which he could simply “change his mind” and not sell the car to Barnes and either not sell it at all or sell it to any
Page 2 of 3
other buyer. In the second illustration, however, his choices are limited to either not selling the car to anyone
within 30 days, or selling it to Barnes within that time frame. See Scott v. Moragues Lumber Co., 80 So. 394
(Ala. 1918). An attorney-client agreement that obligated certain types of claims (those that might be brought by
the law firm) are not arbitrable, but other kinds of claims (the kind a client might assert against the law firm) are
arbitrable was held not illusory. The court explained that “[a]n arbitration agreement is illusory if it binds one
party to arbitrate, while allowing the other to choose whether to arbitrate.” But if the arbitration provision binds
parties to arbitrate only certain disagreements, that does not make it illusory. Royston, Rayzor, Vickery &
Williams, LLP v. Lopez, 58 Tex. Sup. J. 1422 (2015).
A clause in a pharmacy provider agreement that allowed the defendant to amend the provider manual and all
policies in its sole discretion was not illusory since the discretion was tempered by the requirement that the
defendant must act in good faith and fairness Pearson’s Pharm. Inc v. Express Scripts, Inc., 2009 U.S. Dist.
LEXIS 100915 (M.D. Ala. Oct. 29, 2009). A contract to sell real estate required a “safe well water test prior to
closing.” The seller claimed that this made the contract illusory since the definition of “safe” would be entirely at
the discretion of the buyers. The court disagreed, finding that “safe water” meant objectively “safe to drink” as
determined by laws in effect at the time the contract formed. The promise was not illusory. Maciolek v. Ross,
322 Wis. 2d 734, 778 N.W.2d 171, 2010 WI App 1. To meet his obligations as a member of a limited liability
company, Watkins executed four promissory notes and also executed four guaranties on the notes. When he
failed to pay the notes, he was sued and claimed the guaranties were illusory and redundant since he was
already obligated to pay the notes. The court, however, found that the guaranties contained restrictions on
Watkins’ ability to repay and, therefore, did not constitute illusory contracts. Midland Prop. Partners, LLC v.
Watkins, 416 S.W.3d 805 (Mo. Ct. App. 2013).
In contrast to cases where one party has the unilateral right to modify or rescind the agreement and the
agreement is, therefore, not legally operative because it is supported by an illusory promise, a dispute
resolution agreement that provided for a 60-day notice period of any changes and explicitly required the
employee’s “acceptance” of proposed changes before they could be made did not make an illusory promise.
Brock Servs., LLC v. Solis, 2015 Tex. App. LEXIS 10379, 40 I.E.R. Cas. (BNA) 1300 (Tex. App. Corpus Christi
Oct. 8, 2015).
In Fagerstrom and Wiseley v. Amazon.com, Inc., 2015 U.S. Dist. LEXIS 143295 (S.D. Calif. 2015), plaintiffs
filed a putative class action against Amazon, and Amazon argued plaintiffs were subject to an arbitration
agreement contained in Amazon’s Conditions of Use (COU). The COU stated: “We reserve the right to make
changes to our site, policies, Service Terms, and these Conditions of Use at any time.” The court granted
Amazon’s motion to compel arbitration, citing the Corbin treatise for the principle that the provision allowing
Amazon to make changes to the COU was not an illusory promise because “both Plaintiffs and Amazon have
incurred performance obligations under the Agreement, and those performance obligations remain in place
based on the assent manifested by the parties and the consideration exchanged.” In addition, “Amazon is
bound to exercise [its] discretion consistent with the duty of good faith and fair dealing.” The court cited the
Corbin treatise in support of its conclusion that the restriction on Amazon’s discretion imposed by the duty of
good faith and fair dealing “saves the Agreement from being illusory.” The court quoted Corbin: “If there is a
restriction, express or implied, on the promisor’s ability to terminate or to refuse to perform, the promise is not
illusory. … An implied obligation to use good faith is enough to avoid the finding of an illusory promise.” The
duty of good faith would forbid Amazon from refusing to arbitrate a particular dispute at its discretion. In
Powanda v. Inteplast Group, LTD, L.P., 2015 U.S. Dist. LEXIS 44261 (D. Conn. 2015), an employer was not
permitted to retroactively reduce of commissions an employee had already earned since such a reduction
would render the contract illusory. While “courts will imply a limited obligation of good faith or reasonableness in
the exercise of such discretion to avoid an illusory promise,” there was no allegation of good faith in that case.
Where one party to a contract promises to pay money to finance a new business and the other party promises
to manage the business but does not put a fixed time or duration on the services, the latter promise is optional
and, therefore, illusory. DiCosola v. Ryan, 2015 IL App (1st) 150007, 2015 Ill. App. LEXIS 843 (Ill. App. Ct. 1st
Dist. 2015). But in Runzheimer International Ltd. v. Friedlen, et al., 2015 WI 45, 862 N.W.2d 879 (WI 2015), an
employer’s forbearance in exercising its right to terminate an at-will employee was held to constitute lawful
consideration for signing a restrictive covenant. In reaching its conclusion, the court relied upon the Corbin
treatise for the proposition that “the fundamental element of an illusory promise is a promisor’s expression of
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intention that the promisor’s future conduct shall be in accord with the present expression, irrespective of what
the promisor’s will may be when the time for performance arrives.”
[4] Voidable or Unenforceable Promises Can Be Consideration

Restatement (Second) of Contracts § emphasizes that a promise that becomes voidable or unenforceable
when the defendant raises a defense such as infancy or the statute of frauds does not prevent that promise
from constituting consideration for a counter-promise. Comment a to this section explains, “The value of a
promise depends on its terms and the probability that it will be performed” and states that “the probability of
performance may be greater for a voidable or unenforceable promise … than for the judgment or decree of a
court.
The same point is addressed in Restatement (Second) of Contracts § which provides:
The value of a promise does not necessarily depend upon the availability of a legal remedy for breach, and
bargains are often made in consideration of promises which are voidable or unenforceable. Such a
promise may be consideration for a return promise.
Restatement (Second) of Contracts § cmt. d.
Practice Resources:
• Corbin § .2 (illusory promise is not consideration); § .2 (voidable or
unenforceable promises as consideration); § . 0 (non-binding promises as
consideration).

End of Document
§ 5.10 Conditional Promises as Consideration
[1] A “Promise” Is Not a “Condition”

Promises are often attended by conditions. While conditions in the law of contracts will be explored in detail
later in this volume, it is important to recognize the essential concept of a condition at this earlier stage.
Professor Corbin’s comparison of promises and conditions is particularly helpful. A promise creates a duty,
such as Ames’s promise to purchase Barnes’s property known as Blueacre for $100,000. Ames’s duty,
however, may be subject to a condition, such as the ability to procure a mortgage loan of $80,000 from a bank
or another lender. This condition does not create the duty—the promise created the duty. The condition is an
event that postpones Ames’s duty. The duty was created at the time the promise was made, but that existing
duty was not immediately enforceable. It is activated when the loan is granted. If the loan is not granted, the
duty is never activated; it expires. Ames has an implied obligation to make a good faith effort to secure the loan
and a failure to do so will breach the contract. Barnes may not sell Blueacre to any other buyer while awaiting
the condition of Ames’s securing the loan within a reasonable time to occur.
When Barnes agreed to sell Blueacre to Ames subject to the loan condition, Barnes was not bargaining for the
condition. The condition was not consideration for the promise. Barnes was bargaining for Ames’s promise to
pay $100,000 for Blueacre, albeit the duty created by that promise was subject to a condition. Parties entered
into a settlement agreement where the employer promised to promote the plaintiff if she met certain specific
and easily obtainable requirements in exchange for her surrender of her claim against the employer. The
employee claimed the settlement agreement lacked consideration. Citing the Corbin treatise, the court held that
a promise can be consideration for a return promise even though it is conditional. Cole v. Powell, 605 F. Supp.
2d 20 (D.D.C. 2009). Where the plaintiff and defendant agreed to a settlement of $1.2 million, contingent on the
approval of the Department of Justice Assistant Attorney General, the plaintiff claimed that the agreement was
not binding because it was conditional. The court held that a contract is enforceable albeit the promise of one
party is conditional, unless the condition made the promise illusory. Here, the parties were bound, conditioned
only on the approval of a third party in his discretion. Phinisee v. United States, 2012 U.S. Dist. LEXIS 109687
(E.D. Pa. Aug. 6, 2012).
[2] A Conditional Promise Can Be Consideration Even if It Is Aleatory

Moreover, the condition may be one that may never occur. For example, a casualty insurance policy contract
may be created under which the insurer promises to pay for casualty to property only if a loss occurs, and the
loss may never occur. A promise that is subject to such a fortuitous condition that may never happen is an
aleatory promise, and such a contract is an aleatory contract.
Even if the promisor has control over the condition, if the promisor’s liberty of action has been circumscribed,
consideration will be found. For example, Ames promises to sell her car only to Barnes for $10,000 on the
condition that Ames decides to sell the car within the next 30 days. If Ames offers the car for sale to any other
buyer during that period, she has breached her contract with Barnes since she had undertaken a duty to
Barnes conditioned only on her decision to sell the car within 30 days.
[3] A Promise Subject to Conditions of Personal Satisfaction May Be Consideration

Suppose that Barnes promises to purchase a painting from Ames for $20,000 conditioned only on Barnes being
personally satisfied with the painting. Such a condition may appear to create an illusory promise since Barnes
may simply state that he does not like the painting. Courts recognize promises subject to conditions of personal
satisfaction as consideration, however, since the promisor must operate in good faith. Although it may be
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difficult to prove bad faith, it remains an objective standard. It could be demonstrated by showing Barnes’s
failure to inspect the painting at all or sufficiently, by evidence indicating his dissatisfaction with the bargain he
made rather than with the painting, or evidence of rejecting the painting on a basis other than his satisfaction or
dissatisfaction with the painting.
Building contracts often involve progress payments to be made at various stages of construction, conditioned
on an architect’s certificate of the completion of each stage that requires the satisfaction of the named architect
rather than a “reasonable” architect. Again, the good faith standard applies. If the subject matter of the contract
is not aesthetic or otherwise subject to personal taste, absent clear language to the contrary, courts will apply
an objective standard of mechanical utility to determine whether a condition of satisfaction has been met.
UCC § 2- 2 recognizes a “sale on approval” contract that allows a buyer to return delivered goods even
where the goods conform to the contract. Comment 1 explains that a seller may undertake a risk of the buyer’s
satisfaction. There is a contract that the parties have agreed to perform, but until the buyer announces his or
her satisfaction, the goods remain the property of the seller.
Practice Resources:
• Corbin § . 1 (conditional and aleatory promises as consideration for a return
promise); § . 2 (promises conditional upon events within the promisor’s power);
§ . (promises conditional on personal satisfaction); § . (condition
distinguished from consideration).

End of Document

EXPRESSION
§ 4.0 An Auction Sale Is One in Which the Price Is Determined by

Competitive Bids
[1] Auctioneer Generally Solicits Offers from Prospective Bidders—“With Reserve and “Without
Reserve”
An auction sale is one in which the price is determined by competitive bids. Unless prohibited by statute or
otherwise mandated by court order, customary rules published or announced prior to the auction will be part of
the resulting contracts. Beyond these additions or variations, UCC § 2- 2 governs auction sales of goods;
Restatement (Second) of Contracts § 2 replicates the UCC rules for auction contracts to which the UCC does
not technically apply.
The typical auction is an auction “with reserve” in which the auctioneer solicits offers from prospective bidders.
The auction begins by the auctioneer placing a property up for sale. Until the hammer falls or the auctioneer
otherwise announces the close of the sale, the property may be withdrawn by the auctioneer as may the offer
from the bidder. Like any other offer, the offer of the highest bidder need not be accepted by the auctioneer and
the bidder may revoke an offer. Absent contrary manifestations of intention, auctions sales are presumed to be
“with reserve.” Garden v. Cent. Neb. Hous. Corp., 2011 U.S. Dist. LEXIS 116087 (D. Neb. Oct. 5, 2011). When
an auction sale is explicitly announced to be “without reserve,” the roles are reversed. The seller is the offeror
and the bidder is the offeree.
[2] A Bid in a “Without Reserve” Auction Makes the Auctioneer’s Offer Irrevocable
In an auction “without reserve,” it is generally understood that the goods will not be withdrawn unless there is no
bid within a reasonable time. In effect, such a sale is viewed as an offer to sell the property to the highest
bidder. Once a bid is made, therefore, the situation may appear to form a contract between the owner of the
property and the bidder, subject to no higher bid being made. That construction, however, is precluded
because, like the bidder in a “with reserve” sale, the bidder in a “without reserve” sale is permitted to withdraw
the bid prior to the close of the sale. Thus, a bid in a “without reserve” sale simply makes the auctioneer’s offer
irrevocable; it creates, in effect, an option contract with the current bidder. A higher bid will discharge that
“option” contract and substitute a new offeree with an irrevocable power of acceptance. If the bidder does not
withdraw the highest bid prior to the closing of the sale, the bid can no longer be withdrawn and a contract at
the price of the highest bid is formed upon the closing of the sale. Custom AG Serv., Inc. v. Watts, 2014 Wash.
App. LEXIS 2455 (Wash. Ct. App. Oct. 14, 2014). If the highest bidder withdraws the bid prior to the closing of
the sale, however, no previous bid is revived.
Where an auction sale of land is advertised to be “absolute” it is “without reserve,” an offer to sell to the highest
bidder. If the owner later defends his refusal to convey the land to such a bidder because there is no writing to
satisfy the statute of frauds, some courts find an exception to the statute and enforce such contracts while
others insist upon the usual written confirmation of the sale. In Wakelam v. Hagood, 151 Idaho 688, 263 P.3d
742 (2011), the court recognized this split of authority and concluded that, in the case before it, the seller’s
signature on an agreement with the auctioneer promising to sell the land to the highest bidder and the buyer’s
signed purchase and sale agreement satisfied the statute.
If an auctioneer receives a bid from a party representing the seller of the property or the seller procures such a
bid absent a pre-sale announcement that the seller had liberty to bid at the auction, the bid is a sham. Such a
bad faith practice called “by-bidding” is designed to enhance the bid price for the auctioned property. A buyer
whose higher bid was necessitated by one or more sham bids may avoid the contract that was formed at the
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close of the sale, or the buyer may take the property at the price of the last good faith bid before the first sham
bid. UCC § 2- 2 . See Nevada National Leasing Co. v. Hereford, 36 Cal. 3d 146, 203 Cal. Rptr. 118, 680
P.2d 1077 (1984).
Practice Resource:
• Corbin § .1 (auction sales—offers to buy and sell).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 6 CONSIDERATION—MUTUALITY OF

OBLIGATION—REQUIREMENT AND OUTPUT CONTRACTS—EFFECT OF OPTION
CHAPTER 6 CONSIDERATION—MUTUALITY OF OBLIGATION—

REQUIREMENT AND OUTPUT CONTRACTS—EFFECT OF OPTION
the subject matter.

End of Document

§ 6.01 Mutuality of Obligation
[1] “Mutuality of Obligation” is Unnecessary if There Is Consideration or Some Other Basis for
Enforcement
The term “mutuality” is inviting. It suggests equality and fairness and it appears in a variety of expressions
including mutuality of assent, mutuality of consideration, mutuality of remedy, and mutuality of obligation. Each
of these uses will be discussed in this volume. Here we focus on “mutuality of obligation” and “mutuality of
consideration.”
In 1698, a court was confronted with an argument that a man’s promise to marry was not consideration for the
woman’s promise to marry, but the woman’s promise was consideration for the man’s promise. The court stated
that either both promises are binding or neither is: “[E]ither all is a nudum pactum, or else one promise is as
good as the other.” Harrison v. Cage, 5 Mod. 411, 87 Eng. Rep. 736 [1698]. Thus originated the doctrine that
came to be called “mutuality of obligation.” The dictum has been repeated in scores of cases, but the dictum,
like the “doctrine,” is both meaningless and confusing. To the extent that the statement is intended to mean only
that a promise that is not legally binding cannot constitute consideration, it is a tautology. Under an agency
agreement, MAW had the authority to issue insurance policies issued by CNA. The contract contained a
mandatory arbitration provision but allowed CNA, in its sole discretion, to pursue judicial remedies in certain
types of cases. MAW claimed no consideration for its promise to arbitrate since CNA was not bound to
arbitrate. The court rejected that argument since the entire agreement was supported by consideration. The
benefit to MAW was the authority to market and bind insurance for CNA and to receive commissions.
There is no requirement of equivalency or symmetry with respect to every promise on either side of the
contract. Thus, so-called “mutuality of obligation” is not necessary if the requirement of consideration has been
met (Restatement (Second) § c and cmt. f). As the court stated in Mittleider v. Dakota, Minn., & E. R.R.,
2014 U.S. Dist. LEXIS 37763 (D.S.D. Mar. 19, 201 “So long as consideration exists, there is no additional
requirement of mutuality of obligation.” If consideration is present, the fact that only one party has agreed to
arbitrate disputes does not make that promise illusory. Carter v. SSC Odin Operating Co., LLC, 2012 IL
113204, 976 N.E.2d 344, 364 Ill. Dec. 66.
If mutuality of obligation were necessary, unilateral contracts would not exist. Unilateral contracts manifest only
one promise. A promise exclusively seeking a performance rather than a promise to perform will be binding
upon the completion of the performance, creating a right in the promisee and a duty in the promisor-a unilateral
contract. (For a discussion of irrevocability, see § 2.12 above). Thus, at the time of formation, only one party is
bound to perform since the other party has already rendered the performance requested by the promisor.
A requirement in a deed of trust that the borrower protect the value of the security for the lender's benefit did
not implicitly mandate a reciprocal requirement that the lender not diminish the value of appellants' property.
Berke v. Bank of Am., 2016 Cal. App. Unpub. LEXIS 386 (2016). The Berke court cited the Corbin treatise for
the proposition that “California law does not require mutuality of every term and provision, so long as each party
has made binding obligations in consideration for their respective promises.” Further: “[S]ymmetry is not justice
and the so-called requirement of mutuality of obligation is now widely discredited.”
[2] The Promise of an Option Giver is Enforceable Despite a Lack of Mutuality of Obligation
In an option contract, only the party granting the option is bound; the party holding the option is free to exercise
or not exercise the option. Option contracts are typically unilateral contracts if the option holder makes no
Page 2 of 2
promise but pays consideration for the promisor to hold an offer open. Option contracts may, however, be
bilateral if the option holder has not yet paid, but promises to pay.
Ames leases property to Barnes for consideration and the lease also provides Ames with a “right of first
refusal.” If a third party offers to purchase the property and Ames wants to sell to that party, Barnes is not
bound, but Ames is bound to allow Barnes to exercise a right of first refusal.
When members of a fraternal benefit society alleged various breaches of life insurance contracts, the society
claimed that such disputes were subject to arbitration under amended bylaws to which the insurance contracts
were subject. The plaintiffs claimed that the contracts lacked mutuality of obligation since the plaintiffs were
required to subject all disputes to arbitration while the society was not required to do the same. The court held
that “mutuality of obligation” is unnecessary under modern contract law if there is consideration to support a
promise. Just because every obligation on either side of a contract is not met with a counter-obligation of the
other party does not evidence a lack of consideration. One party to a contract may have several duties while
the other party may have only one duty. Hawkins v. Aid Ass’n for Lutherans, 338 F.3d 801 (7th Cir. 2003).
The First Restatement of Contracts required “mutuality of consideration” in bilateral contracts. The Restatement
(Second) of Contracts § recognizes consideration in promises that are subject to a power of avoidance as in
minors’ contracts or contracts that may be unenforceable if the affirmative defense of the statute of frauds is
raised.
Practice Resource:
• Corbin § .1 (mutuality of obligation, mutuality of consideration).

End of Document

§ 6.02 Employment and Agency Contracts
[1] A Unilateral Contract is Formed When an Employer Promises to Pay for a Service and an Employee
Has Performed
If an employer promises to pay for service and the employee has performed the requested service, there is a
unilateral contract notwithstanding the lack of stated duration of the contract. The employment is “terminable at
will,” but the employer has a duty to pay for the service in accordance with the promise to pay. There is no
“mutuality of obligation” in such contracts since it is the performance rather than the promise of the employee
that manifests acceptance of the offer to perform. The duration of such contracts is defined by the period of
performance and the willingness of both the employer and employee to continue that performance. An at will
employee has no right of recovery in the absence of a specific promise of job security. Murton v. Android
Indus.-Bowling Green, LLC, 2015 U.S. Dist. LEXIS 72968 (W.D. Ky. 2015).
An offer in a unilateral contract can be made irrevocable upon part performance as suggested in § of either
the First or Second Restatements of Contracts. Though the § theories differ, they each conclude with an
irrevocable offer. Part performance creates a contract conditioned on full performance under the First
Restatement, while the Second Restatement views the part performance as creating an option contract to keep
the offer open. See also, Kiss Elec. v. Waterworld Fiberglass Pools, 2015 U.S. Dist. LEXIS 37547 (D. N.J.
2015) (citing the Corbin treatise for the proposition that where “part performance is so rendered as to justify the
implication of a promise to render the entire performance proposed in the offer,” the entire unilateral contract
may become binding). Bahr v. Tech. Consumer Prods., 601 Fed. Appx. 359, 2015 U.S. App. LEXIS 2220 (6th
Cir. Ohio 2015) (consideration exists when employee who is free to quit performs the designated act or
forbearance stated by the offer).
A city agreed, conditioned on the approval of city council, to pay the plaintiff severance pay for remaining in her
position; the employee continued to perform. When the city rescinded that promise, the court recognized the
Corbin on Contracts view that an employee’s performance can operate as consideration for such a promise in
addition to the employee’s salary, even though this promise was expressly conditioned on the approval of city
council, which had not been granted. Ryner v. City of Hamtramck, 2003 Mich. App. LEXIS 2864 (Nov. 13,
2003).
If an employer promises to pay for the employee’s service, and also promises to continue the employment for a
definite or determinable period of time, the employment should no longer be viewed as “at will” once the
employee has begun to render that service or has acted in reliance on such a promise; this is the case even
though the employee has made no promise to remain in that employment for the prescribed period. Though
there is no mutuality of obligation, there is consideration for a promise to employ a party for as long as that
party wishes to stay when the employee begins to perform. Cases to the contrary are based on a belief that
both parties must be bound or neither is bound.
If an employer promises to continue the employment for a specified period or for a “lifetime,” a number of cases
suggest a requirement of “additional” or “independent” consideration, i.e., consideration in addition to the
promised salary. Absent such consideration, these cases hold the employment continues to be “at will.” The
employee can be discharged for any reason or no reason (other than reasons violating statutory or public policy
requirements).
The “additional” consideration concept is predicated on mutuality of obligation, which one court calls a
“thoroughly discredited notion.” Greene v. Oliver Realty, Inc., 363 Pa. Super. 534, 552, 526 A.2d 1192, 1200
(1987). Moreover, the “doctrine” violates two basic principles of consideration: the principle that one
Page 2 of 2
consideration can support several promises, and the principle that the law does not ordinarily inquire into the
adequacy of consideration.
Courts recognize that a “lifetime” contract places a “tremendous obligation” on an employer while it is “very
difficult to enforce any employment agreement against an employee.” Greene v. Oliver Realty, Inc., 363 Pa.
Super. 534, 550, 526 A.2d 1192, 1200 (1987). The solution, however, is not found in a mechanical “additional”
consideration requirement. The issue is more realistically viewed as a question of interpretation: did the
employer make a promise and what was the extent of that promise? The intention of the parties is the critical
determinant as best that intention can be discerned from the parties’ expressions, conduct, and all of the
surrounding circumstances. If the employee provides additional consideration, it is certainly a factor suggesting
an intention of job security. Again, however, its absence alone should not be dispositive.
[2] A Contract Between a Principal and an Agent May Be Bilateral or Unilateral

A contract between a principal and an agent may be bilateral, involving an exchange of promises, or, as is often
the case, unilateral when the agent accepts the offer to perform a particular service for the principal. A real
estate agent seldom promises to find a buyer for the seller’s property at a particular price. Rather, the agent
typically makes a promise to use diligent effort to secure such a purchaser. The principal does not agree to pay
the commission for diligent effort; the commission is payable only upon the securing of a buyer ready and
willing to pay a price that the principal deems acceptable.
A principal may promise not to revoke the agency for a particular period, or to grant an exclusive agency or
even to pay a commission if the principal sells the property within the time of an exclusive agency. Such
promises require consideration moving from the agent, which is normally found in implied promises of the agent
to use diligent efforts. Indeed, in the case of an exclusive agency, the implication is well-nigh irresistible. Wood
v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917).
[3] Absence of Quantity Terms Is Not Fatal to a Sales Agency Contract

When an agent agrees to sell or distribute the principal’s goods, the contract often does not state the number of
articles the agent is required to sell. “Sales agency” is a term that may involve a traditional principal and agent
relationship, or it may involve a franchise or distributorship where the franchisee or distributor is buying the
products of a manufacturer for resale to customers. These contracts often leave the quantity terms flexible in
recognition of changing market conditions, but the absence of such a term is not fatal. There is consideration in
the implied promise of the agent to use diligent efforts to market the principal’s product.
The Uniform Commercial Code (UCC) recognizes such an implied obligation in exclusive dealing contracts.
Unless otherwise agreed, a seller must use best efforts to supply the goods and the buyer use best efforts to
effect their sale. UCC § 2- 0 2 . Even if the parties have “otherwise agreed” that the “best efforts” standard
would not apply, they each impliedly promise to perform according to the pervasive standard of good faith and
fair dealing with each other, and that implied standard imports consideration. UCC Revised § 1- 0 . In keeping
with the good faith requirement, UCC § 2- 0 2 requires reasonable notification of termination of even a non-
exclusive dealing contract, and this requirement may be seen as supplying consideration for a return promise.
Practice Resources:
• Corbin § .2 (promise of employment duration, job security or fringe benefits with
no promise by the employee); § . (unilateral and bilateral agency contracts);
§ . (sales agency agreements for indefinite amounts or periods).

End of Document

§ 6.03 Requirement and Output Contracts Under the UCC
[1] Output and Requirements Contracts Do Not Lack Mutuality

When a buyer agrees to buy all of its requirements from a seller or a seller agrees to sell all of its output to the
buyer, consideration for either promise is clear since each party has circumscribed its liberty of action in dealing
with any other party. In a classic case, an agreement by a buyer to purchase all of the sand it could resell
outside the City of Tulsa was consideration for the seller’s promise to supply the sand at a significant discount.
The buyer may have sold no sand outside of Tulsa, but if it sold a grain of sand, it would have to be supplied by
the seller. McMichael v. Price, 58 P.2d 549 (Okla. 1936).
UCC § 2- 0 1 recognizes the utility of output and requirements contracts and notes that such contracts do not
lack “mutuality” since the party controlling the output or requirements must do so in accordance with the
standard of good faith and fair dealing. UCC § 2- 0 cmt. 2. Output and requirements contracts necessarily
contain no defined quantity term. The vagaries of the market will determine the output or requirements, which
are not defined at the time of formation, but will be defined at the end of the agreed contract period. Such
contracts are very useful in providing sellers with an assured market for their goods and buyers with an assured
source of supply. It is possible for a seller to have no output just as it is possible for a buyer to have no
requirements at a given time, but if either situation is constructed by either the buyer or seller to escape the
bargain they have made, courts will find that a breach has occurred.
[2] Parties May Not Tender or Demand Amounts Unreasonably Disproportionate to Estimates or Prior
Amounts
If the parties include estimates, or if there is evidence of prior outputs and requirements, the seller may not
tender nor may the buyer demand amounts unreasonably disproportionate to such estimates or prior amounts.
UCC § 2- 0 1 . An increased demand was obviously in bad faith when one buyer increased its demand by 63
percent above a contract estimate for a given year to pursue lines of business different from the original
estimate in order to profit from a fixed price when the market price was rapidly increasing. Orange & Rockland
Utilities, Inc. v. Amerada Hess Corp., 59 A.D.2d 110, 397 N.Y.S.2d 814 (1977).
[3] A Buyer May Decrease Its Requirements in Good Faith

Buyers may decrease their requirements in good faith and may even shut down an operation of a plant
because of a lack of orders, but not simply to curtail losses. A termination of demand without an independent
business rationale typically manifests an absence of good faith. See Empire Gas Corp. v. American Bakeries
Co., 840 F.2d 1333 (7th Cir. 1988).
A seller agreed to supply all of the chloroform the buyer required in the production of a refrigerant known as R-
22 at the buyer’s Wichita plant. When the market price of chloroform no longer made this contract desirable, the
buyer notified the seller that it no longer required chloroform for that plant, which it closed. The buyer, however,
continued to produce R-22 at another plant using another supplier’s chloroform at a lower price. There was no
decrease in demand for R-22 or the chloroform used in making that product. The court found that the buyer
breached the requirements contract by failing to operate in good faith. Vulcan Materials Co. v. Atofina Chems.
Inc., 355 F. Supp. 2d 1214 (D. Kan. 2005).
UCC § 2- 0 2 deals with requirements contracts in which the buyer is the exclusive distributor of the seller’s
products in a given territory. In such a contract, the UCC demands a standard of performance beyond good
faith from the buyer, who must use “best efforts” to promote the sale of the seller’s products. The origins of this
Page 2 of 2
requirement may be seen in the famous case of Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214
(1917), in which Judge Cardozo found an implied duty to on the part of an exclusive agent to use reasonable
efforts to market the defendant’s designs. A comment to § 2- 0 2 suggests that such contracts require
reasonable diligence as well as good faith. Where a contract required a seller to sell its entire output to a buyer
who had no corresponding duty to purchase any quantity from the seller, the court cited the Corbin treatise in
finding the “best efforts” concept was designed to protect the party who is at the mercy of the other party. Here,
the seller was at the mercy of the buyer who had the benefit of the seller’s exclusive commitment. Thus, the
obligation of “best efforts” was not on the seller. Keyes Helium Co. v. Regency Gas Servs., L.P., 393 S.W.3d
858 (Tex. App. 2012).
[4] Requirements Contracts Versus Satisfaction Contracts

Johnson Controls v. Atl. Auto. Components, 2015 Mich. App. LEXIS 1856 (Mich. Ct. App. Oct. 13, 2015)
contrasted two types of contracts that sometimes bear a resemblance, requirements and satisfaction contracts.
In the Johnson case, “JCI agreed to purchase its production and service requirements … from defendant, but
the parties also agreed that JCI could resource the production of the parts if JCI did not have continuing
satisfaction with [defendant's’] quality, delivery, meeting of program milestones, service and price-
competitiveness. Under these circumstances, the trial court properly determined that the contract was a
satisfaction contract and not a requirements contract.” The court described requirements contracts: “A
requirements contract is one in which ‘the quantity term is not fixed at the time of contracting [and the] parties
agree that the quantity will be the buyer's needs or requirements of a specific commodity or service’ over the life
of the contract. Corbin, Contracts. Under a requirements contract, the parties are expected to act in good
faith and according to commercial standards of fair dealing in the t e. . A party may be subject to liability
for breach of contract if it acts in bad faith or seeks to unilaterally terminate purchase orders.” The court also
described “satisfaction” contracts: Contracts in which one party agrees to perform his part to the satisfaction of
the opposite party are known as ‘satisfaction co t cts. . The trial court properly construed the supply
agreement to be a satisfaction contract.” The court noted a distinction between two types of contracts premised
on the satisfaction of one of the parties: “The first type is where satisfaction is dependent on the personal taste,
feeling or individual judgment of the party to be s tis ie . . The second type is where ‘mechanical utility or
operative fitness in relation to which some standard is available are bargained o . . Where the contract is of
the former type, the reasonableness or justice of the party's dissatisfaction cannot be estio e . . However,
the party's dissatisfaction cannot be given in bad faith, dishonestly, insincerely, or e t y. . Where the
contract is of the latter type, the party's dissatisfaction must be both genuine and reasonable.”
Practice Resources:
• Corbin § . (promise to buy one’s needs or requirements); § . (promise to
supply goods as promisee may order); § . (promise to sell producer’s output).

End of Document

§ 6.04 Promises to Buy or Sell Conditioned on Future Prices

Consideration in a contract for the sale of a product at a given price is not defeated by a provision stating that the
buyer is free to purchase the same or similar product from another seller at a lower price. While the buyer is “free”
to pursue that possibility, it is not “free” to purchase the product from any other supplier at the same or higher price.
It must purchase the product from the original seller. If the contract also states that the seller is entitled to meet
such a lower price and the seller chooses to do so, the buyer is not at liberty to deal with another supplier. It is
committed to the original seller, which is consideration for the seller’s promise.
When a contract allowed parties to agree on a price no lower than a stated minimum price and no higher than a
stated maximum, even though the seller promised to sell at the maximum price and the buyer agreed to buy at the
minimum price if the other party agreed, the court quite properly found consideration since each party was
committed to buy and sell at a given price if the other party exercised its option to purchase or sell at that price.
Wood County Grocer Co. v. Frazer, 284 Fed. 691 (8th Cir. 1922). While there are no UCC provisions that deal with
these issues, UCC § 2- 0 recognizes contracts with open price terms and agreements to determine the price after
the contract is formed.
Practice Resource:
• Corbin § . (promise to buy or sell, conditional on future prices).

End of Document

§ 6.05 A Promise May Be Consideration Even if the Promisor Has a Choice

Between Performances
If an agreement allows a promisor to choose to perform either of two alternative performances and either alone
would be consideration, the promisor’s liberty of action is circumscribed regardless of which performance is chosen.
Thus, it constitutes consideration for a counter-promise. If Ames agrees to sell either a boat or used auto to Barnes
for $10,000, either alternative alone would constitute consideration; allowing Ames to choose one does not change
that analysis. Restatement (Second) of Contracts § . In Comrie v. Enterasys Networks, Inc., 837 A.2d 1 (Del.
Ch. 2003), the consideration provided for the sale of the plaintiffs’ business included options on stock in a
corporation the defendant planned to take public through an initial public offering (IPO). In the event the IPO did not
occur, the parties agreed the defendant would (1) issue “equivalent substitute or replacement” options or (2) pay
$4.62 million in cash. A year later the defendant decided not to proceed with the IPO and provided replacement
options of decreased value to the plaintiffs. The court cited the Corbin definition of an alternative contract which it
found in this case. Though equivalency between the choices is not essential, a reasonable relationship between
them is required. Finding the language of the contract ambiguous, the court held that the first alternative required
options at a value “equivalent” to the value of such options at the time of issuance as the plaintiff’s contended rather
than options valued at the date of replacement.
If Ames promises to charter a ship to Barnes for a certain time at a certain price if Ames purchases the ship, Ames
is under no obligation to purchase the ship, but Ames must still chose between alternatives: either purchase the
ship and charter it at the agreed price to Barnes, or refrain from buying the ship. While the latter choice may appear
to provide Ames with total freedom of action, prior to making the agreement with Barnes, Ames was free to buy or
not to buy the ship with no obligation to lease it to Barnes or any other party. After making the agreement, however,
Ames can no longer decide to buy or not buy the ship without other obligations. Scott v. Moragues Lumber Co., 80
So. 394 (Ala. 1918).
Courts sometimes lose sight of this fundamental analysis. In one case, the sale of a liquor business was expressly
conditioned on the buyer’s obtaining a new lease from the owner. Before the time for performance, the seller
repudiated the agreement. He defended against the buyer’s action for damages on the footing that his promise was
not supported by consideration since the buyer was not obligated to obtain a new lease. The court emphasized that
the buyer was under no “compulsion” to obtain the lease, which appeared to be a conclusion based on the absence
of an express promise to obtain the lease. The inevitable conclusion found the contract “void for lack of mutuality.”
Paul v. Rosen, 3 Ill. App. 2d 423, 122 N.E.2d 603 (1954).
Although recognizing that the buyer’s duty was subject to the condition of obtaining a new lease, the court failed to
recognize the implied obligation of the buyer to pursue a good faith effort to obtain a new lease. Nothing in the facts
of Paul reflects any contrary intention of the parties. The facts are analogous to a promise to purchase a house
conditioned on obtaining a mortgage loan where a buyer has an implied obligation to make reasonable efforts to
obtain such a loan. Such buyers do not promise to obtain a loan, since that is a judgment of the lender just as the
buyer of the liquor business could not promise to obtain a new lease, which depended upon the willingness of the
owner of the property to agree to a new contract. A new lease at the same location of a business, however, is
typically a material factor in the value of a business and the price that a buyer is willing to pay. The court appeared
to be oblivious to this analysis and prematurely decided to rely on a meaningless doctrine to decide the case.
Page 2 of 2
Practice Resource:
• Corbin § . (effect of promisor’s option on whether the promise constitutes
consideration).

End of Document

§ 6.06 Power to Terminate a Contract
[1] Power to Terminate Is Created by the Agreement of the Parties and Ends the Contract for Reasons
Other than Breach
A “power to terminate” a contract is often confused with “cancellation” or “rescission” of a contract. While the
term “rescission” or “rescind” is often used in different contexts, it should be relegated to a contract of discharge
in which each party agrees to surrender its existing rights under a prior contract. “Cancellation” occurs when an
aggrieved party chooses to end a contract upon breach by the other party. UCC § 2-10 . “Termination,”
however, does not depend upon a breach by the other party. It is a “power” created by the agreement of the
parties that puts an end to the contract otherwise than for its breach. UCC § 2-10 .
In one case, the Supreme Court of South Carolina distinguished these terms. The defendant claimed that a
contract had been “rescinded,” resulting in no damages. The court, however, found that the plaintiff had
exercised its right to “cancel” the contract, which does not extinguish liabilities that have already occurred under
the contract. The court also quoted Corbin on Contracts in noting that a power of termination typically has a
prospective operation, discharging parties from executory duties, but not discharging breaches that have
already occurred. Boddie-Noell Props. v. 42 Magnolia P’ship, 352 S.C. 437, 574 S.E.2d 726 (2002).
[2] An Option to Terminate Typically Is Not Conditional on the Dissatisfaction of the Option Holder
An “option to terminate” is a common method of producing a result similar but not identical to the effect
produced by attaching a condition of personal satisfaction to a promise. Under a condition of personal
satisfaction, if the promisor is honestly and in good faith not satisfied with a performance, he or she may refuse
to perform the duty created by his or her promise since the condition did not occur and the duty, therefore, was
not activated. An “option to terminate” provides an even more extensive power, since it is typically not
conditional on the dissatisfaction of the option holder. If the option to terminate is unlimited, a court may
conclude that the promise is illusory or that there is a lack of “mutuality of obligation.” It is possible, however, to
discover consideration even when the option to terminate is unlimited.
Consider the typical offer that creates a power of acceptance in the offeree, but leaves a power of termination
(revocation) of the offer in the offeror. This power of termination is unlimited, but the issue of consideration does
not arise since no contract yet exists. Suppose, however, that Barnes writes to Ames, “Make me a thirty day
written offer, revocable at your pleasure, to sell me your property known as Northvue for $100,000 and I will pay
you $100.” When Ames makes the requested offer to Barnes, Barnes’s promise to pay $100 becomes binding
since Barnes has received what was desired in exchange for the $ 100: a power of acceptance, albeit a
revocable power of acceptance.
In one case, the plaintiff promised to buy and the defendant promised to sell and to ship within three months
plate glass at an agreed upon price. The defendant’s acceptance letter added, “You have the option to cancel
the above order before shipment.” Though the plaintiff never exercised the option, the defendant refused to ship
any glass and claimed that the contract was void for lack of mutuality. The court held that there was a contract
despite the option to terminate granted to the buyer. The option was not unlimited; it had to be exercised before
shipment. Notice of the option would have to be received before shipment. Once shipment occurred, the option
to terminate was extinguished. It should be emphasized that this was not simply a case of an unaccepted offer.
The court noted that there did not appear to be any reservation of a power or option to terminate in the buyer’s
“order” of the glass, but the parties treated the agreement as containing such a term and the defendant’s
Page 2 of 3
argument was exclusively predicated upon the absence of consideration. Gurfein v. Werbelovsky, 97 Conn.
703, 118 A. 32 (1922).
[3] If a Promisor Reserves the Power to Terminate at Any Time Without Notice, the Promise Is
Unenforceable
If a promisor reserves the power to terminate at any time, with no waiting period and without any notice, the
promise is unenforceable. Moreover, a provision dispensing with any notice may be deemed unenforceable.
The UCC deems such a provision invalid if its operation would be unconscionable, since the principles of good
faith and sound commercial practice normally call for notification of termination of an existing contract to allow
the other party to make substitute arrangements. UCC § 2- 0 and cmt. 8. The section requires reasonable
notice of termination to be received by the other party.
If Ames offers employment to Barnes for one year beginning on June 1 at $1,000 per week and Barnes
responds, “I accept your offer and will serve unless I choose not to serve,” Barnes is obviously promising
nothing. If, however, Barnes has an option to notify Ames before June 1 that he will not serve, there is
consideration, since Barnes is obligated to either serve or notify Ames before June 1 that he will not serve.
Barnes’s option is no longer unlimited.
[4] A Contract Is Not Invalid Because One Party Has the Power to Terminate by Providing Notice of a
Specified Period
If a power of termination can only be exercised by providing notice of a specified period such as “notice of thirty
days” or “terminable on one week’s notice,” the contract is not rendered invalid because of a lack of mutuality.
Applying Maine law, a court found that, in the absence of a duration term, the power to terminate at will is
limited by the requirement to provide reasonable notification of a period during which the contract would
continue. In addition to Maine precedent, the court cited § 2- 0 of the Uniform Commercial Code
prescribing reasonable notification of termination. Fitzpatrick v. Teleflex, Inc., 763 F. Supp. 2d 224 (D. Me.
2011). An employer’s duty to provide 30 days notice of any amendment or termination of its dispute resolution
program was consideration to make an arbitration agreement enforceable. Crowe v. BE&K, Inc., 2010 U.S.
Dist. LEXIS 48486 (S.D. Ohio Apr. 22, 2010). When a manufacturer of semiconductors entered into a non-
exclusive sales agency contract that contained a “terminate for convenience” clause upon giving 60 days’
notice, the court recognized that such a power of termination could be exercised notwithstanding the absence
of any breach or fault by the other party. Harris Corp. v. Giesting & Assocs., 297 F.3d 1270 (11th Cir. 2002).
Although an agency relationship allows a principal to terminate the agent’s power to bind the principal in
dealings with third parties, a principal’s contract with an agent for a specified period of time does not
automatically include an option or power of termination. Agency contracts, therefore, typically contain a
provision allowing an option to terminate. As discussed earlier, the term “sales agency” is used in its
commercial sense to denote a principal and agent relationship or a franchise or distributorship where a sales
agent purchases a manufacturer’s product for resale. Often these contracts denote an exclusive territory for the
distributor.
Exclusive dealing contracts between automobile manufacturers and their dealers typically contained a
manufacturer’s power of termination that placed disproportionate risks on the dealers. Cases holding
termination clauses in such contracts invalid for want of mutuality may have been influenced by the perceived
unfairness to dealers, which eventually prompted legislation to provide protection to the dealers known as the
“Automobile Dealer’s Day in Court Act.” 15 U.S.C. §§ 1221–1225.
[5] A Promisor May Reserve a Power of Termination for Good Cause or Other Condition
Earlier in this chapter we saw that a promise conditioned on the promisor’s personal satisfaction is
consideration for a counter-promise. The same is true when a promisor reserves a power of termination for
good cause or another condition. When a party materially breaches a contract and the breach cannot be cured,
the aggrieved party has a power of cancellation as a matter of law. An express reservation of that power in the
contract may appear superfluous, but it could operate to clarify the availability of a power of cancellation or
termination.
Page 3 of 3
A wholesaler of groceries reserved a power to terminate or cancel a contract with a retailer only “upon the
occurrence of a material change in the condition (financial or otherwise) of the business or prospects of the
retailer or any guarantor of the retailer’s liabilities and obligations.” The court cited Corbin in finding that the
termination option was not illusory since the power could only be exercised when the change was both material
and adverse. Karns Prime & Fancy Food, Ltd. v. Comm’r, 494 F.3d 404, 412 (3d Cir. 2007).
Powers of termination are enforceable even if they may be exercised for breaches of contract that are
immaterial. A material breach ends a contract; the aggrieved party is discharged. The exercise of a power of
termination for an immaterial breach is the exercise of a privilege reserved in the contract. The holder of that
power is privileged to stop performing his or her duty under the contract.
[6] Power to Terminate May Be Given to Both Parties

A contract may provide a power of termination to either or both parties. Since a contract reserving the right of
one party to terminate upon 30 days’ notice to the other party is not void for want of mutuality, neither is a
contract that provides the same power of termination for either party. The validity of the contract is determined
in exactly the same way as it is in the case of an option to terminate in only one party.
[7] Power to Terminate Normally Is Not Nullified After Part Performance

A power to terminate is normally not nullified after part performance of the contract, but neither does the
exercise of such a power after part performance terminate the duty of paying for the part performance. When a
buyer agrees to purchase a seller’s entire output, the buyer’s exercise of a power of termination does not
excuse the buyer from paying for the output already produced.
Even when a court determines that a power of termination makes a promise illusory, where the power is not
exercised and the contract is performed, the court should discover an enforceable contract. A 20-year lease
granting the lessee the right to take sand from 40 acres of the lessor’s land gave the lessee a power to
terminate at any time by ceasing operations, removing equipment, and notifying the lessor to that effect. Eleven
years later, the land was sold to the plaintiff who claimed that it was not bound by the lease since it was “void
for lack of mutual obligation.” The trial court so held.
On appeal, the court could have simply held that the power of termination was not unlimited since it required
notice to the lessor. Instead, it began its analysis by stating that the plaintiff’s argument had merit. Nonetheless,
it noted that the lessee did not “walk away.” It performed the contract. The court then stated the “rule” to which it
adhered: if an agreement is not originally binding on one of the parties but has, nonetheless, been performed
by that party, conferring benefits on the other party, the contract becomes binding on the benefited party. “The
lack of mutuality is cured where the contract is executed.” Commercial Asphalt, Inc. v. Smith, 196 Kan. 164,
166, 409 P.2d 796, 798 (1966).
Practice Resources:
• Corbin § .10 (promises including an “option to terminate”); § .11 (power to
revoke an offer is a power to terminate); § .12 (effect of power to terminate at
any time without a specified period of notice); § .1 (power to terminate by
giving notice for some specified period); § .1 (power to terminate for cause or
on some condition other than promisor’s own will); § .1 (power to cancel on
some specified non-performance of duty by the other party); § .1 (power to
terminate may be given to each of the parties); § .1 (power to terminate after
part performance); § .1 (agency contracts with power to terminate).

End of Document

§ 6.0 Consideration Is Needed to Support a Covenant Not to Compete That

Is Part of an At-Will Employment Contract
Employment contracts may contain promises by an employee not to compete after leaving the employment. Such
post-employment restraints on competition are carefully scrutinized by courts which are wary of restraining
competition in general and preventing the employee from earning a living. The enforceability of such clauses is
explored in detail later in this volume. In this section, the focus is on the effect of an employer’s power of termination
in relation to such a “non-compete” clause.
The Ames Corporation, which competes with similar businesses throughout America, contracts to employ Barnes
for one year. The contract prevents Barnes from being employed by any of Ames’s competitors throughout the
country for one year after completing the contract, and it also gives Ames a power of termination with one week’s
notice at any time. Suppose Ames gives Barnes such notice on the first day of his one-year employment contract. A
week later Barnes is unemployed. Must he now refrain from taking a job with any Ames competitor for an entire
year?
A promise to pay wages by an employer can support more than one promise by the employee, but the limitation on
Barnes’s liberty to work for an Ames competitor suggests grossly inadequate consideration. Although actions at law
do not admit of inquiries into the adequacy of consideration (the relative values exchanged), Ames will have to
resort to equity to secure an injunction against Barnes working for a competitor, and a court of equity would deem
such a covenant not to compete as unreasonable. The illustration suggests a one-year contract with a power of
termination upon one week’s notice. The same analysis applies to an employment at-will contract.
When a covenant not to compete is signed after the employment is underway, some courts insist on a separate
consideration to support the promise. See, e.g., Labriola v. Pollard Group, Inc., 152 Wn.2d 828, 100 P.3d 791
(2004). When, however, the employment continues for a reasonable time after the covenant was made or other
substantial benefits have been conferred on the employee, a number of courts have held the covenant to be
binding. Such results cannot be predicated on the enforceability of the covenant at the time it was made, but they
may be justified on a unilateral contract analysis, i.e., a unilateral contract can be forged out of even a “void”
bilateral agreement.
Practice Resource:
• Corbin § .1 (employer’s power to terminate a contract that restrains the employee
from competition).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 7 CONSIDERATION—EFFECT OF PRE-EXISTING

DUTY
CHAPTER 7 CONSIDERATION—EFFECT OF PRE-EXISTING DUTY

the subject matter.

End of Document

DUTY
§ .01 The Pre-Existing Duty Rule Analysis
[1] Generally, Performance of a Pre-Existing Duty Is Not a Consideration for a Return Promise
The logic of the pre-existing duty rule suggests that if one is already under a duty to do or not to do something,
it cannot constitute consideration for the other party’s promise. A promise to forbear burglarizing the premises
of another can hardly be consideration for the other’s promise to pay $1,000 since the promisor is under civil
duty not to commit a crime. Similarly, a promise to forbear negligently injuring another person or his or her
property cannot be consideration for a promise to pay $1,000 since there is a pre-existing duty not to commit
such a tort. These pre-existing duties are imposed on all members of society.
Nina’s husband was employed by a corporation owned by a family that wanted to sell a separate business that
was subject to a trust of which Nina was a co-trustee. In anticipation of her husband’s employment being
terminated, Nina agreed to approve the sale of the second business in exchange for the employer’s promise to
provide the husband with a severance payment upon his termination. The husband was fired, but the employer
refused to make the severance payment. The court held that the employer’s promise to Nina was not supported
by consideration since Nina had a preexisting fiduciary duty to the trust to be performed in the best interests of
the trust and not for her personal or selfish motives. Vitow v. Robinson, 823 A.2d 973, 2003 PA Super. 175.
In a classic exposition of the rule, an architect (Jungenfeld) refused to proceed with his work unless the owner
of the property (Wainwright) paid additional compensation. To assure timely completion of the work, the owner
acceded to the architect’s demands. In response to the argument that this was a “new contract,” the court
replied,
New in what? Jugenfeld was bound by his contract to design and supervise this building. Under the new
promise, he was not bound to do anything more or different. What benefit was to accrue to Wainwright? He
was to receive the same service from Jungenfeld under the new that Jungenfeld was bound to tender
under the original contract. What loss, trouble or inconvenience could result to Jungenfeld that he had not
already assumed? No amount of metaphysical reasoning can change the plain fact that Jungenfeld took
advantage of Wainwright’s necessities and extorted [a promise to pay additional consideration].
Lingenfelder v. Wainwright Brewery Co., 103 Mo. 578, 592, 15 S.W. 844, 848 (1890).
Another well-known example of the “holdup game” occurred when fishermen in San Francisco agreed to fish for
salmon in Alaska during the salmon season and, upon arrival, refused to perform absent a promise by the
association that had hired them to double their wages. The court held that the fishermen took unjustifiable
advantage of the necessities of the other party who could not find substitute fishermen in a timely fashion.
Alaska Packers’ Asso. v. Domenico, 117 F. 99 (9th Cir. 1902). Absent fresh consideration, such modifications
at common law are unsupported by consideration.
[2] The Common Law Refusal to Enforce Modifications of Contracts Not Supported by Additional or
Different Consideration Has Been Criticized by Modern Courts
The logic of cases involving a promise induced by unfair pressure continues to be compelling (Restatement
(Second) of Contracts § but the pre-existing duty rule was not limited to such cases at common law. It was
applied as a technical bar to good faith modifications and other situations that did not involve any taint of
unfairness. Restatement (Second) of Contracts § cmt. c. Tanner v. Bank of Am., N.A., 2014 U.S. Dist.
LEXIS 158040 (W.D. Wash. Nov. 7, 2014) (to create an enforceable modification of a home loan under the
Home Affordable Mortgage Program, the borrower must agree to do something more than pay a discounted
amount to satisfy his or her prior debt). Courts have recognized that the rule has been eroded. See United
Page 2 of 2
States v. Novosel, 481 F.3d 1288 (10th Cir. 2007). Thus, common law refusal to enforce modifications of
contracts not supported by additional or different consideration has been criticized:
[T]his solution is at once overinclusive and underinclusive—the former because most modifications are not
coercive and should be enforceable whether or not there is fresh consideration, the latter because, since
common law courts inquire only into the existence and not the adequacy of consideration, a requirement of
fresh consideration has little bite. B might give A a peppercorn … for A’s agreeing to reduce the contract
price, and then the modification would be enforceable .
Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280, 1285 (7th Cir. 1986).
Another application of the common law rule is illustrated by a situation in which a debtor owes $10,000 to a
creditor who agrees to accept a lesser amount even though the entire debt is due and owing. The absence of
consideration for the creditor’s promise has very early antecedents:
[P]ayment of a lesser sum on the day in satisfaction of a greater, cannot be any satisfaction for the whole,
because it appears to the judges that by no possibility, a lesser sum can be a satisfaction to the plaintiff for
a greater sum.
Pinnel’s Case, 5 Coke 117a, 77 Eng. Rep. 237 (1602). More than three centuries later, the Margesons decided
to sell their business to Artis for $125,000, payable at closing. Six days later, the parties executed an
“addendum” that raised the price to $155,000, with $135,000 due at closing. Reversing the trial court, the court
of appeals held that the second promise to pay the higher price was not enforceable. The court repeated the
same rationale in stating that a promise of additional compensation for the same performance is not
enforceable since the there is no consideration supporting the promise. Margeson v. Artis, 776 N.W.2d 652
(Iowa 2009).
In this chapter we will explore various exceptions and statutory changes allowing modifications to be enforced
without consideration as well as other situations where the pre-existing duty rule has been either discarded or
modified to avoid its unjustified application.
Practice Resources:
• Corbin § .1 (performance of a pre-existing duty as consideration); § .2
(performance of duty as detriment or benefit); § . (different classes of duties);
§ . (discharge of a duty distinguished from creation of duty); § .
(performance of a duty to the present promisor as a consideration).

End of Document

DUTY
§ .02 The Modern Formulation of the Pre-Existing Duty Rule
[1] Something New or Different in the Promisee’s Duties Will Satisfy the Pre-Existing Duty Rule
While clinging to the pre-existing duty rationale in situations where a party unfairly refuses to perform absent
additional consideration, courts have always discovered ways to make uncoerced modifying promises
enforceable. The simplest solution is to discover additional or different consideration.
Even in the famous Pinnel’s Case, in which the court held that payment of a lesser sum owed cannot be
satisfaction for a greater sum, Lord Coke stated,
So if I am bound … to pay £10 at Westminster and you request me to pay £5 at the day at York, and you
will accept it in full satisfaction of the whole £10, it is a good satisfaction for the whole. For the expenses to
pay it at York is sufficient consideration.
Pinnel’s Case, 5 Coke 117a, 77 Eng. Rep. 237 (1602).
Almost four centuries later, the concept was repeated in the Restatement (Second) of Contracts §
Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute
is not consideration; but a similar performance is consideration if it differs from what was required by the
duty in a way which reflects more than a pretense of bargain.
In Pinnel’s Case, Lord Coke also announced that the “value of the satisfaction is not material.” While the quoted
section of the Restatement (Second) ends with a caveat concerning sham bargains, it nevertheless contains an
illustration that replicates Lord Coke’s example. If there is additional or different consideration, the general rule
prevails that courts will not inquire into the relative values exchanged (adequacy of consideration). In satisfying
the pre-existing duty rule by something new or different in the promisee’s duties, there is precious little concern
over whether it was bargained for.
If a creditor promises to extend the time for an already mature loan to be repaid, there is no consideration for
the creditor’s promise. If, however, the debtor agrees to pay additional interest for the extension of time or to
pay in a different medium or, as Lord Coke suggests, pay in a different place, there is consideration to support
of the creditor’s promise. When a city modified a contract with a public utility that eliminated a clause allowing
the utility to pay a decreased fee to the city if its gross receipts fell below a certain point, the court quoted
Corbin on Contracts in finding that the duties of the utility created new or different consideration that supported
a new promise by the city. City of Oakland v. Pacific Gas & Elec. Co., 2005 Cal. App. Unpub. LEXIS 10236
(Nov. 8, 2005).
If a tenant agrees to pay monthly rent a day or even hours earlier than the original lease required, although it is
as least dubious whether such a change was genuinely bargained for, like any other “new” or “fresh”
consideration, it will support a new promise.
[2] Courts Have Enforced Uncoerced Modifications Even When There Is No Consideration
Courts have been adept in enforcing uncoerced modifications even when there is no consideration, although
they almost never admit that consideration is absent. There are a number of landlord and tenant cases in which
a court has enforced a promise by a landlord to accept reduced rent with absolutely no change of other duties
on the part of the tenant. Rationales contain such amorphous phrases as “waiver” or “gift” of the uncollected
rent, or that the tenant has provided consideration by remaining in the leased premises. In Wisconsin,
modifications of executory contracts require no consideration. See Fritsch v. Premier Investors, LLC, 294 Wis.
2d 699, 717 N.W.2d 854, 2006 WI App 130, (citing precedent from 1922: new consideration is necessary only
Page 2 of 2
when the contract is complete or has been executed by one party). As will be seen in § .0 below, the concept
of “rescission” is another covert tool that courts have sometimes used to circumvent the rule.
[3] Unanticipated Difficulties May Be a Basis for Enforcing an Uncoerced Promise to Pay Additional
Consideration
One of the more important “exceptions” to the pre-existing duty rule occurs when the performance of a duty is
accompanied by unanticipated difficulties. When the performance of a contract requires considerable additional
cost or expense and there is no evidence that the promisor has issued a threat of breach or is otherwise playing
the holdup game, courts have been willing to enforce such promises. See, e.g., Munroe v. Perkins, 9 Pick 298
(Mass. 1830); Williams v. Roffey Bros. & Nicholls (Contractors) Ltd., [1990] 1 All E.R. 512. The Restatement
(Second) of Contracts § recognizes “unanticipated circumstances” at the time the contract was made as a
basis for enforcing a voluntary, uncoerced promise to pay additional consideration if the modification is fair and
equitable.
Perhaps the best-known case is Angel v. Murray, 322 A.2d 630 (R.I. 1974). In Angel, Maher had provided
waste removal services for the City of Newport and entered a new five-year contract (1964–69) at $137,000 per
year. In the third year, Maher requested additional consideration because the number of dwelling units that had
previously increased at a rate of 20 to 25 annually was now increasing at a rate of 400 annually. The city
council voted to increase the consideration by $10,000 in 1968 and by another $10,000 in 1969. A taxpayer
objected to these payments. The court distinguished cases involving threats to breach the contract to coerce
additional payments from the mere request made by Maher in light of the unanticipated difficulties. The court
also noted a movement away from “a rigid application of the pre-existing duty rule” as reflected in the Corbin
treatise and the Restatement (Second) of Contracts formulation. Emphasizing the “voluntariness” of the
agreement, the court noted that the contract remained executory, the circumstances were unanticipated at the
time the contract was made, and the modification approved by the council was fair and equitable in light of the
“substantial” increases in cost to Maher. In MMR Int’l v. Waller Marine, Inc., 2013 U.S. Dist. LEXIS 103342
(S.D. Tex. July 24, 2013), the plaintiff agreed to perform work on two barges the defendant was constructing at
a price not to exceed $443,468.80. Later, the plaintiff claimed the scope of the work had drastically changed
leading to a request for an increase. Allegedly, the defendant orally agreed, stating that an increase was “no
problem.” When the plaintiff submitted its invoice for $954,837.62, however, the defendant claimed that any
modification was unenforceable for lack of consideration. Though noting that § of the Restatement (Second)
of Contracts had not yet been recognized by the Texas Supreme Court, the court assumed that it would be
applied in Texas. The court then focused upon the requirement of “an objectively demonstrable reason for
seeking modification” (cmt.b to § and found that the plaintiff had not received any detailed plans when it
agreed to the original price. The details manifested major increases in cost. Whether the defendant had made
the alleged promise was a question of fact.
Restatement (Second) of Contracts § recognizes statutory modifications such as UCC § 2-20 1 which
makes modifications without the technical requirement of consideration in contracts for the sale of goods. This
“exception” and other statutory changes will be explored later in the chapter. Restatement (Second) Section
89(c) allows modifications to be enforced when a promisee has acted in reliance or forbearance on the
promise. This exception simply recognizes the alternate validation device of promissory estoppel. Restatement
(Second) of Contracts § 0 (discussed in Chapter 8 below.
Practice Resources:
• Corbin § . (modern formulation of the pre-existing duty rule and its precursors);
§ .20 (performance of something additional or different from what the pre-
existing duty required).

End of Document

DUTY
§ .03 Performance of Duty to a Third Person

Suppose that Ames, the employer of a murdered employee, Davis, makes an offer to pay $25,000 to any person
who provides information leading to the arrest and conviction of the murderer. Barnes is a close friend of Davis who
makes an identical offer. Carr learns of both offers and provides the necessary information to both offerors. Since
Carr is under no pre-existing duty to either Ames or Barnes, his act of providing the information has accepted both
offers. Suppose, however that Carr has entered into a contract to perform services for Ames and subsequently
makes another contract with Barnes to perform the same services for Barnes. Is there consideration for Carr’s
promise to Barnes in light of his pre-existing duty to Ames?
In the well-known case, Stokes promised to pay the skilled and experienced driver McDevitt $1,000 if he won a
horse race driving a mare called “Grace” on the theory that other horses owned by Stokes would be enhanced in
value if Grace won the race. McDevitt, however, was already under contract with Shaw, the owner of Grace, to
drive in this important race. With McDevitt driving, Grace won the race. Though Stokes had received an economic
benefit in the enhancement of the value of other horses, the court applied a traditional consideration analysis in
finding that there was no “benefit” in the eyes of the law to Stokes. Nor was there any detriment to McDevitt, who
had a pre-existing duty to use his best efforts in driving Grace to victory. McDevitt v. Stokes, 192 S.W. 681 (Ky.
1917). Both Restatements, however, take a contrary position. First Restatement of Contracts § Restatement
(Second) of Contracts § cmt. d.
The argument for consideration in such a case is based on the fact that, prior to the race, McDevitt owed a duty to
Shaw to use his best efforts to drive to victory with Grace, but owed no duty to Stokes to perform that duty. While
induced by Shaw’s promise, McDevitt could also be said to have been induced by Stokes’s promise to win the race.
There is, however, no escape from the fact that McDevitt had a duty to use his best efforts to win the race induced
only by Shaw’s promise; it is on this basis that the Restatement argument appears circular, i.e., finding that a
contract exists because McDevitt had a duty to perform for Stokes because a contract existed with Stokes. The
Restatement (Second) view is more realistic in suggesting that such a promise should be enforced, not because it
is supported by consideration, but because there is less likelihood of unfair pressure or coercion in making a
promise by a stranger like Stokes enforceable than there would be if the promise to pay additional consideration
had been by Shaw. Restatement (Second) of Contracts § cmt. d. While there are cases adopting the traditional
view of McDevitt v. Stokes, there are also cases supporting both the First and Second Restatement views. See,
e.g., Bates v. JPMorgan Chase Bank, NA, 768 F.3d 1126, 2014 U.S. App. LEXIS 18655, 25 Fla. L. Weekly Fed. C
498 (11th Cir. Ga. 2014) where Bates sued JPMorgan Chase in connection with its attempts to foreclose on a
mortgage it held on her home. Bates alleged that Chase breached the mortgage deed by failing to comply strictly
with certain regulations promulgated by the Department of Housing and Urban Development (“HUD”) as part of the
Federal Housing Administration lending program. Bates alleged that Chase breached a contractual obligation to
abide by these regulations since they were incorporated into her deed as conditions precedent to the power to
accelerate and the power of sale. The Eleventh Circuit held in favor of Bates, explaining that Chase’s preexisting
duty to comply with HUD regulations was owed to the government, not Bates, and Bates had no right to enforce this
promise outside of the contract. Thus, a contractual obligation to comply with the regulations existed. In support of
this holding, the court cited Restatement (Second) of Contracts § cmt. d. (1979): “[T]he tendency of the law has
been simply to hold that performance of contractual duty can be consideration if the duty is not owed to the
promisor.”
Page 2 of 2
Practice Resources:
• Corbin § . (performance of duty to a third person as consideration); § . (two
separate and independent contracts for one performance).

End of Document

DUTY
§ .04 Performance of Official Duties

Under the pre-existing duty rule, performance of a duty by a public officer cannot be consideration for a promise.
Otherwise, public officers would expect additional payment by individual citizens for performing services that they
have a sworn duty to perform. A promise of reward for information leading to the arrest and conviction of a criminal
cannot be enforced by a police officer who is under a duty to discover and arrest such criminals. Providing such
information by a police officer who is on vacation in another jurisdiction may be viewed as outside the officer’s pre-
existing duty in that jurisdiction. See Denney v. Reppert, 432 S.W.2d 647 (Ky. 1968).
Promises by public officials to perform their duties only for additional consideration also violate public policy since
this would amount to implied or express threats not to perform absent such additional payments; this violates the
public and private interests. Similarly, a bargain to forbear committing a crime or a tort is not only unsupported by
consideration, but violative of public policy. Similar policies affect promises by individuals such as a promise by one
spouse to render ordinary services to the other spouse or a similar promise by parent to a child; such promises will
not constitute consideration.
Practice Resource:
• Corbin § .11 (performance of public or official duties: duties imposed by tort and
criminal law or economic regulation.)

End of Document

DUTY
§ .05 Theory That Promises in a Contract Are Subject to Alternative

Performances
Oliver Wendell Holmes was particularly insistent on separating questions of law from any notions of morality, which,
he believed, cause confusion in legal concepts. He insisted that there is no “mystic significance” in promises
enforced under the law of contract. To Holmes, a contractual promise simply creates a duty to pay damages if the
promise is not kept. But, according to Holmes, “such a mode of looking at the matter stinks in the nostrils of those
who think it advantageous to get as much ethics into the law as they can.” Oliver Wendell Holmes, The Path of the
Law, 10 Harv. L. Rev. 457, 462 (1897). Similarly, Holmes insisted that, if one commits a tort, one is liable to pay
only a compensatory sum. The theory suggests that every promise in a contract is subject to alternative
performances: either perform the promised duty or pay damages-and the promisor has the right to choose either
alternative. The promisor could, therefore, surrender the alternative to pay damages in exchange for additional
consideration to perform what he or she previously promised to perform. The pre-existing duty rule would, therefore,
be emasculated.
The fallacy of the Holmes analysis is in viewing the payment of compensation as an alterative performance that will
satisfy the duty under the contract. The other party bargained for the performance of the promised duty, not for the
payment of damages. Rather, the payment of damages typically constitutes a poor substitute for the breached duty
since it typically involves litigation and other transaction costs.
More recently, the concept of “efficient breach” has been proposed as allowing one party to breach the contract
where the aggrieved party will realize its expectations and the breaching party will be better off than it would have
been had the original contract been performed. See Allapattah Servs. v. Exxon Corp., 61 F. Supp. 2d 1326 (S.D.
Fla. 1999). Beyond the fact that the efficient breach theory does not include transaction costs, it also fails to
recognize the possible effect on mutual trust that reasonable expectations induced by the making or promises will
be met. There is also the interesting question of whether, if efficient breaches are to be encouraged, the
encouragement of even an efficient breach by a third party would constitute a tort.
The pre-existing duty rule effects a sound policy when it wars against classic cases in which a promisor knows that
the other party must have the promisor’s performance and takes opportunistic advantage of the other by extorting a
promise of additional consideration. In any case involving actual or potential coercion, the rule serves a desirable
purpose. When, however, the rule merely serves as a technical bar to otherwise good faith modifications, it serves
no useful purpose and exceptions have been made that will be explored in the following sections.
Practice Resources:
• Corbin § .12 (is contractual duty always alternative?); § .1 (policy of recognizing
performance of duty as a basis for validating a promise).

End of Document

DUTY
§ .06 Statutory Changes in the Pre-Existing Duty Rule

In keeping with the underlying philosophy of the Uniform Commercial Code (UCC) to remove technical barriers to
good faith agreements, UCC § 2-20 1 simply states: “An agreement modifying a contract within this Article needs
no consideration to be binding.”
This language may not be read to allow coerced modifications since the UCC imposes an obligation of good faith
and fair dealing in every agreement. UCC § 1- 0 (formerly § 1-20 . This provision does not require the
modification to be evidenced by a writing, since the UCC deals with contracts for the sale of goods, but the writing
requirement of the UCC statute of frauds must be met. (The Statute of Frauds, which requires certain types of
contracts, including contracts for the sale of goods priced at $500 or more, to be evidenced by a signed writing, will
be explored in Chapter 12 below. Any writing requirement of modifications of such contracts will be included in that
exploration.)
Although good faith modifications require no consideration, they do require mutual assent. See Van Den Broeke v.
Bellanca Aircraft Corp., 576 F.2d 582 (5th Cir. 1978). Modification can occur after the goods have been delivered
and the price is paid since warranties after the closing of the contract can be effective. Bone International, Inc. v.
Johnson, 74 N.C. App. 703, 329 S.E.2d 714 (1985) (post sale oral agreement to repair trucks at no cost). There are
state statutes that are substantially the same as UCC § 2-20 if the promise is evidenced by a writing. See, for
instance, N.Y. Gen. Oblig. § -110 (2008). A written promise evidencing an intent to be legally bound is effective in
Pennsylvania. 33 Pa. Stat. § (2008). This statute incorporated what was originally called the Uniform Written
Obligations Act, proposed by the National Conference of Commissioners on Uniform State Laws. Only
Pennsylvania and Utah enacted it and Utah later repealed it. It remains the law in Pennsylvania.
The United Nations Convention on Contracts for the International Sale of Goods (CISG) governs such contracts in
more than 70 nations unless the parties opt out of the contracts. In keeping with the Civil Law tradition, CISG
contracts do not require consideration. Thus, it is not surprising that it permits the parties to modify or terminate
their contract by “mere agreement.” CISG Article 29(2).
Practice Resource:
• Corbin § .1 (statutory changes in the pre-existing duty rule).

End of Document

DUTY
§ .0 Avoiding the Pre-Existing Duty Rule Through Rescission
[1] A Contract of Rescission Has Only One Function: To Discharge a Prior Contract
A rescission is a contract of discharge under which the parties mutually agree to surrender their executory
rights under an existing contract. A contract of rescission has only one function: to discharge a prior contract.
As soon as it is formed, it is performed. Neither party is any longer contractually bound to the other. The parties
may then enter into a new contract on any terms.
Assume that Barnes contracts to work for Ames for one year at a salary of $10,000 per month. After two
months, Barnes tells Ames that he has an offer to work for an Ames competitor at $12,000 per month. If they
want to change the compensation, a simple device would be a change in Barnes’s duties that would constitute
“fresh” consideration. Without changing any of Barnes’s duties, if the parties agree to rescind their original
contract and, even if only moments later, they sign a new contract under which Ames will pay Barnes $12,000 a
month for identical duties, there is consideration for Ames’s new promise. As soon as they agreed to rescind
the old contract, they were free of each other. Campbell v. Ag Finder Iowa Neb., Mgmt. Consultants, 2004 Iowa
App. LEXIS 531 (Mar. 24, 2004) (citing Corbin on Contracts and holding that neither party has any further rights
or duties under a rescinded contract). Barnes could have left the employment to work for the Ames competitor
or Ames could have refused to enter into a new contract with Barnes. Since both parties were free to contract
or not contract on whatever terms they agreed upon, the new contract is clearly supported by consideration.
There are three contracts in this illustration: the original $10,000 per month contract, the contract of rescission,
and the new $12,000 per month contract.
If Ames and Barnes attempt to achieve the same result with only two contracts, there is no consideration. A
new agreement that was designed as a simultaneous rescission of the old contract and creation of the new
contract stating the new payment terms with no different or additional duties to be performed by Barnes is a
clear example of circular reasoning. Ames is attempting to state, “I release you, but I don’t release you,” and
Barnes is stating, “I release you from your duty to pay me $10,000 at month in exchange for your promise to
pay me $12,000 per month.” Notwithstanding the absence of consideration to support Ames’s new promise,
there are a number of cases holding such promises to be enforceable. A leading case is Schwartzreich v.
Bauman-Basch, Inc., 231 N.Y. 196, 131 N.E. 887 (1921). An opinion recognizing the circularity of the reasoning
is Zhang v. Eighth Judicial Dist. Court, 120 Nev. 1037, 103 P.3d 20 (2004), overruled on other grounds, Buzz
Stew, LLC v. City of N. Las Vegas, 124 Nev. 224, 181 P.3d 670 (2008).
Essentially, courts are enforcing the new agreement to effect the intention of the parties, notwithstanding the
absence of consideration. This would be very harmful if Ames had been coerced into making the new promise.
If both parties in good faith desired the new agreement, to suggest that there is consideration where it is absent
violates the value of law settlement. If a court wants to hold Ames liable for such a promise, it should candidly
recognize that another basis must be found since “covert tools are not reliable tools.”
[2] Marriage Settlements

One of the best-known cases in contract law is De Cicco v. Schweizer, 221 N.Y. 431, 117 N.E. 807 (1917).
Judge Cardozo wrote an opinion for the court that circumvented the traditional application of the pre-existing
duty rule through a rescission analysis. Prior to the marriage of his daughter, Schweizer promised her an
annual payment, which was paid for 10 years after the marriage. The right to receive the annuity payment was
then assigned, but the annuity was not paid to the assignee, who brought the action. Since the couple had
Page 2 of 2
agreed to marry before the father’s promise, and breaches of such engagement contracts were actionable,
there was no discernible detriment to the groom in performing his pre-existing promise to marry the daughter.
Cardozo first concluded that the father’s promise had been made to both the daughter and her future husband.
This allowed him to generate an analysis that found a detriment to both the bride and groom through the
imaginative suggestion that the father’s promise induced the couple not to rescind their agreement to marry and
that detriment, in turn, induced the promise. The Holmes consideration formula was, therefore, met: the
promise induced the detriment and the detriment induced the promise. A third party may be interested in seeing
an existing contract performed and, if worried that even one party may offer a rescission to the other party, the
third party may contract with that party not to make such an offer.
Forbearance by both or either party to offer a rescission to the other party could be consideration if it were
bargained for. Restatement (Second) of Contracts § cmt. d. But there was little justification for
demonstrating such an intended exchange under these facts. Judge Cardozo noted the strong public policy in
favor of marriage settlement contracts and the willingness of courts, if need be, to construct consideration in
such cases where it would otherwise be missing.
Practice Resources:
• Corbin § . (marriage settlement promise); § .1 (effect of an agreement to
rescind the pre-existing contract).

End of Document

DUTY
§ .0 Payment of Liquidated Claims as Consideration

As suggested at the beginning of this chapter, the common law was clear that the payment of a lesser sum of
money that is currently due and owing cannot be consideration for a promise to accept the lesser sum—often stated
as the rule in Foakes v. Beer, L. R. 9 App. Cas. 605 (1884). The logic of the rule continues to convince modern
courts. In Wassef v. JPMorgan Chase Bank, N.A., 2013 U.S. Dist. LEXIS 37045 (D. Ariz. Mar. 15, 2013), the
plaintiffs were unable to repay their mortgage loan. They entered into a Home Affordable Modification agreement
with the defendant-bank under which they made payments that were less than payments due under their original
agreement. When the bank cancelled the agreement, the plaintiffs claimed a breach of contract, but the defendants
asserted that no enforceable agreement existed. Since the payments made were less than the original debt owed,
the court held that the repayment agreement was unenforceable for lack of consideration. In another case, a
bankrupt debtor claimed that payment of an undisputed debt within 90 days of bankruptcy was a transfer of “new
value” under the bankruptcy code. The court rejected that argument, stating that the phrase “new value” as used in
the bankruptcy code was intended to codify the usual rules of consideration. Because payment of an undisputed
debt does not constitute consideration, it does not constitute “new value” under the bankruptcy code. Claybrook v.
SOL Bldg. Materials Corp. (In re US Wood Prods.), 2004 Bankr. LEXIS 520 (Bankr. D. Del. Apr. 22, 2004).
The old rule of Foakes v. Beer is not always followed as where lessors accept reduced rents but still permit the
tenants to remain. Moreover, the rule may be otherwise avoided. At common law, a release of a liquidated debt
under seal required no consideration. The UCC allows an aggrieved party to discharge a claim or right arising out of
an alleged breach in an authenticated record without consideration. UCC § 1- 0 (revising § 1-10 . The term
“record” recognizes electronic media, which fulfill the requirements of a “writing.”
Practice Resource:
• Corbin § .1 (paying all or part of a liquidated claim as consideration).

End of Document

DUTY
§ .0 Forbearance to Sue
[1] A Good Faith Promise to Forbear from Asserting a Claim That Turns Out to Be Invalid Constitutes
Consideration
If a claim is valid, a promise to forbear from pursuing it is obvious consideration for a promise to pay a certain
amount in settlement of the claim. If a claimant agrees to forbear from prosecuting a claim the claimant knows
to be invalid in exchange for a promise of payment, enforcement of such a promise would be the enforcement
of extortion. Apart from any lack of consideration, forbearance to assert a known invalid claim, therefore, is
opposed to public policy.
The law, however, favors settlements to such an extent that a good faith promise to forbear from asserting a
claim that turns out to be invalid constitutes consideration for the other party’s promise. The party asserting the
claim must not know the claim is invalid at the time it is asserted or at any time prior to the formation of the
settlement contract. The claim must be asserted in good faith. First Restatement of Contracts § added a
requirement that the claim had to manifest at least doubtful validity so that the claimant had some reasonable
basis for asserting it. A number of courts agree with this analysis, but the articulation of a requirement beyond
good faith has been problematic. Statements that the claim should be “not frivolous” or “not absurd,” or “not
vexatious” have added little to the good faith requirement. A candid judicial effort suggested some frustration
over the meaning of “doubtful claim” and finally concluded, “[I]f the claimant, in good faith, makes a mountain
out of a mole hill, the claim is ‘doubtful.’ But if there is no discernible mole hill in the beginning, then the claim
has no substance.” Duncan v. Black, 324 S.W.2d 483 (Mo. Ct. App. 1959). It is still the rule that forbearance to
sue on a claim is not sufficient consideration where the claim is wholly invalid or worthless. Patel v. Patel, 2014
U.S. Dist. LEXIS 142607 (S.D. Ga. 2014).
In Simrall v. Bunge-Ergon Vicksburg LLC, 2015 Miss. App. LEXIS 610 (Miss. Ct. App. 2015), Simrall agreed to
sell Ergon 100,000 bushels of corn, but a flood destroyed most of Simrall’s corn crop, and Simrall unilaterally
cancelled the contract. Simrall executed a promissory note that obligated Simrall to pay Ergon $283,812.50 as
a result of the cancellation, and a Simrall partner signed a personal guaranty on the debt. Neither Simrall nor
the partner paid, so Ergon filed suit. Simrall defended by asserting that its duty to perform under the original
contract for the supply of corn was unconscionable and discharged by the flood, so the subsequent note and
guaranty were not supported by consideration. The held that Ergon’s forbearance in filing suit was adequate
consideration.
[2] If a Claim Is Doubtful in Fact or Law, Good Faith Is Assumed under the Restatement (Second) of
Contracts
The Restatement (Second) of Contracts takes a different position: forbearance to assert a claim is
consideration if: (a) the claim is doubtful, either in fact or in law, or (b) the forbearing party honestly believes
that the claim may turn out to be valid. Restatement (Second) of Contracts § 1 . The claim may be asserted
or used as a defense. Thus, if the claim is in fact or law doubtful, good faith is assumed. It must be shown only
when the claim is not otherwise doubtful in fact or law. See Matrix Fin. Servs. v. Dean, 288 Ga. App. 666, 668,
655 S.E.2d 290, 294 (2007).
The case of Fiege v. Boehm, 210 Md. 352, 123 A.2d 316 (1956), has been called the “high water mark” of the
invalid claim cases. Hilda Boehm agreed to forbear bastardy proceedings against Louis Fiege, in exchange for
his promise to pay her expenses and child support. Fiege stopped payments after tests revealed he was not the
father. Hilda brought bastardy proceedings and Feige was acquitted, but Hilda prevailed in her subsequent
Page 2 of 3
contract action. The court found that the elements of the First Restatement analysis had been met and it was
immaterial whether Fiege was the father of the child.
A recent opinion, however, is critical of Fiege. In Jordan v. Knafel, 378 Ill. App. 3d 219, 880 N.E.2d 1061, 317
Ill. Dec. 69 (2007), tests proved that Michael Jordan was not the father of Karla Knafel’s child. Jordan claimed
that Knafel had committed a fraudulent misrepresentation, but Knafel claimed good faith since she had no
knowledge that Jordan was not the father. The court, however, was unpersuaded since Knafel’s failure to
disclose that she was with another partner during the time she became pregnant could constitute a
misrepresentation. Even if Knafel was not guilty of misrepresentation, the court found that the alleged
settlement with Jordan was based on a mutual mistake of fact that was a basic assumption on which the
contract was made. The court suggested that Fiege should have been analyzed in the same fashion. In
particular, the opinion’s mistake analysis suggests an important and sometimes forgotten dimension of all
invalid claim cases.
[3] Forbearance to Sue on a Claim to Which the Statute of Limitations Can Be Asserted in Defense
Should Be Effective as Consideration
The policy in favor of autonomous settlements recognizes only rare limitations on the myriad kinds of disputes
that may be settled autonomously. For example, child support settlements are not permitted in Texas. Williams
v. Patton, 821 S.W.2d 141 (Tex. 1991). Forbearance to contest a will can be consideration just as heirs and
next of kin can agree that the estate should be divided otherwise than found in statutes of distribution.
Forbearance to sue on a claim to which the statute of limitations can be asserted in defense should be effective
as consideration notwithstanding case law to the contrary since a debt barred by the statute of limitations is a
sufficient basis for enforcement of a promise by the debtor to pay it. While such debts are “past consideration,”
the enforcement of promises to pay them is often stated as the unique kind of “moral obligation” that can
support such a promise. This kind of “moral obligation” is sufficiently certain because it is based on what was a
legal obligation that is now only technically barred.
The statute of frauds does not make a promise inoperative since a sufficient writing or one of the exceptions to
the necessity of a “record” could be discovered. Forbearance to sue on such a claim, therefore, should be
sufficient consideration for a settlement promise.
There is a situation in which a party surrenders a claim the party knows to be invalid, but the surrender
nonetheless will still constitute consideration. Ames is informed that the title to her land may be defective
because of an interest in it held by Barnes. Barnes neither made nor intended to make any such claim. Ames,
however, wants to remove any doubt concerning a defect in her title and promises to pay Barnes $1,000 for a
quitclaim deed. Barnes’s surrender of such a deed is consideration for Ames’s promise. Restatement (Second)
of Contracts § 2 cmt. e, illus. 10. See Franchise Holding II LLC v. Huntington Rests. Group Inc., 2014 U.S.
Dist. LEXIS 2018, at *6 (D. Ariz. Jan. 8, 2014).
[4] Consideration is Found in the Settlement of a Claim Through the Agreement to a Liquidated
Amount
There are obligations that are undisputed, but the amount owed is unliquidated, and may be uncertain in
amount or subject to dispute. The performance of emergency plumbing services creates an obligation to pay for
the services, but the parties may engage in an honest and good faith dispute about the dollar value of that
obligation. The compromise settlement of such a claim through the agreement of a certain, liquidated amount is
filled with consideration since one party has surrendered a claim to pay less, and the other party has
surrendered a right to receive more. Where Ames is entitled have Barnes pay her $10,000 on a certain
obligation, but Barnes, in good faith asserts that he owes only $9,000, Ames’s promise to accept the $9,000 is
supported by consideration. If Carr claims Davis owes $25,000 and Davis claims he owes Carr only $20,000,
most of the courts will regard the debt as unliquidated. Thus, if the parties in good faith agree on the payment of
the minimum amount of $20,000 in full satisfaction of the debt, there is consideration for the promise to settle
the obligation at that amount.
Practice Resource:
Page 3 of 3
• Corbin § .1 (consideration: invalid claims, claim settlements and liquidation of

unliquidated debts).

End of Document

DUTY
§ .10 Compositions with Creditors

We have referred to the famous case of Foakes v. Beer on several occasions to support the rule that the mere
payment of a lesser sum is not satisfaction for the obligation to pay a greater sum.
When, however, two or more creditors agree to accept lesser sums owed to them by a debtor, there is a contract
between the creditors supported by consideration, since each is surrendering part of what he or she is entitled to
receive in exchange for the promise of the other creditor. The debtor is both a promisee and a third-party
beneficiary of such a contract, but no consideration is moving from the debtor. The consideration for each creditor is
moving from the other creditors and not from the promisee. It was long believed that consideration must move from
the promisee. With the development of the law of third-party beneficiaries, however, there is no longer any such
requirement.
Apart from bankruptcy and other statutes, a debtor may prefer one creditor over another, but once the debtor enters
into a composition with creditors, the creditors must be treated alike. If the debtor does not expressly make a
promise to treat all creditors alike, such a promise will be implied. In this sense, it may be argued that there is
consideration moving from the debtor to the creditors since the debtor has arguably surrendered its right to prefer
one creditor over another.
Practice Resource:
• Corbin § .1 (compositions with creditors).

End of Document

DUTY
§ .11 Enforceable Promises for Past Debts

A promise by a debtor to pay an existing debt does not make a promise by a creditor to extend the time for payment
enforceable, but a new promise to pay a past debt barred by the statute of limitations will be enforceable.
Restatement (Second) of Contracts § 2 1 . The past debt cannot be consideration, which requires a present
exchange of something that was not previously owed. It is, however, the reason why such a promise is deemed to
be enforceable.
A number of cases employ the phrase “moral obligation” as a basis for enforcement in this isolated situation since
moral obligation is not a generally accepted basis for enforcing a promise on the footing that it is too broad and
vague a concept to determine which promises in society should be enforced. The past debt, however, was a legally
recognized obligation that ought to be paid and the only barrier was a technical one-the statute of limitations. The
debtor’s subsequent promise to pay such a debt “waives” the statute of limitations barrier and makes the debt
enforceable.
A promise by a creditor to extend the time for payment of a debt that is presently due cannot be supported by a
mere promise to pay the same debt at a later time with no additional or different consideration. If the creditor
breached that promise, the debtor would have a cause of action. Thus, there is no enforceable bilateral contract
when such promises are exchanged.
If, however, the creditor forbears collection of that debt for the promised period, a unilateral contract is formed by
the creditor’s performance, which provides the debtor with all that the debtor sought. If the debtor is then sued on its
promise, a defense of no consideration will fail, not because there was consideration through the creditor’s promise,
but because the creditor’s performance created a unilateral contract with a right in the creditor and a correlative
duty in the debtor. This analysis is found in the well-known case of Hay v. Fortier, 102 A. 294 (Me. 1917). For a
similar analysis involving an option contract, see Steiner v. Thexton, 48 Cal. 4th 411, 226 P.3d 359 (2010).
Practice Resource:
• Corbin § .1 (promise to perform a pre-existing duty may be binding although it does
not constitute consideration for the other’s promise).

End of Document
1-8 Corbin on Contracts Desk Edition CHAPTER 8.syn
Corbin on Contracts Desk Edition > CHAPTER 8 RELIANCE ON A PROMISE AS A GROUND FOR
ENFORCEMENT: THE DOCTRINE OF PROMISSORY ESTOPPEL
CHAPTER 8 RELIANCE ON A PROMISE AS A GROUND FOR

§ .01 o tio of the Promissory Estoppel Doctrine
§ .02The Modern Doctrine of Promissory Estoppel
§ .0 The Modern Doctrine of Promissory Estoppel in the Restatement (Second) of Contracts
§ .0 is ictio Analyses

End of Document
CHAPTER 8 RELIANCE ON A PROMISE AS A GROUND FOR

the subject matter.

End of Document
§ .01 Evolution of the Promissory Estoppel Doctrine
[1] The Reliance Principle

The common statement that any contract requires mutual assent (offer and acceptance) and consideration was
never accurate. Formal promises such as promises under seal going back to early common law with the writ of
“covenant” were binding without consideration. As demonstrated in prior chapters, the early common law
attorney did not think in terms of consideration. The attorney focused on common law writs such as “covenant,”
“debt,” and later, the writ of “assumpsit” (he undertook).
By the nineteenth century, the doctrine of consideration assumed its modern form, requiring a benefit to the
promisor or detriment to the promisee, and insisting upon a bargained-for-exchange. The formula requiring the
promise to induce the detriment and the detriment to induce the promise prevailed. The typical contract clearly
manifests consideration according to this prescription. Promises have also been enforced for centuries on the
basis of what is often called the “reliance principle.”
Generations of law students have worried about “Sister Antillico,” a nineteenth century widow living with her
children in an unhealthy neighborhood. The brother of her dead husband promised her a place to live and she
left her home and moved 60 miles to his estate. Two years later, she and her family were ejected, and she
sued. The trial court found for the plaintiff, but the state supreme court reversed that decision. Although the
judge writing the opinion voiced his inclination to find consideration to support the promise, the opinion states,
“My brothers, however, think that the promise on the part of the defendant was a mere gratuity, and that an
action will not lie for its breach.” Kirksey v. Kirksey, 8 Ala. 131, 133 (1845).
There was no consideration in its modern garb for the brother-in-law’s promise. The promise certainly induced
Antillico to suffer a detriment in abandoning her home and moving to the estate, but that detriment was not the
inducement for the promise. The “other half” of the consideration formula was missing; there was no bargained-
for-exchange. The letter containing the promise clearly manifested the promisor’s concern for the health, safety,
and happiness of his sister-in-law and her family. Abandoning her home and moving 60 miles were simply
necessary conditions to accept the promised gift of a house on the estate. Except for the opinion writer, this
1845 court felt compelled to resist enforcement of the promise since it failed to manifest what had become the
conventional wisdom of “consideration.” There were, however, centuries-old antecedents for enforcing such a
promise.
Even before 1500, the Chancellor could enforce a promise that induced a promisee to suffer a detriment by
relying on the promise without concern for whether the promise was bargained for. There is reason to believe
that the typical informal promise was originally enforced on the basis of reliance alone. Numerous cases
applied the reliance concept defensively through an equitable estoppel that prevented a promisor from raising a
technical defense such as a statute of limitations or statute of frauds where the promisee had suffered a
detriment through reasonable reliance on a promise.
The doctrine evolved to an affirmative use. In one case, a grandfather delivered a written promise in the form of
a note for $2,000 to his granddaughter to allow her to be independent. Relying on the promise, the
granddaughter quit her job. The note was not paid at the grandfather’s death. The court recognized that there
was no consideration for the promise, but it found an “equitable estoppel” that precluded the defendant estate
from showing the absence of consideration. Ricketts v. Scothorn, 57 Neb. 51, 77 N.W. 365 (1898). While the
modern doctrine of promissory estoppel is often applied in a defensive posture, there is no question as to its
availability as an affirmative action. Newton Tractor Sales, Inc. v. Kubota Tractor Corp., 233 Ill. 2d 46, 906
N.E.2d 520, 329 Ill. Dec. 322 (2009).
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Notwithstanding the importance of Ricketts, which is often regarded as a classic illustration of the modern
doctrine, “equitable estoppel” normally involves false or misleading representations. There was no false or
misleading representation in the Ricketts case. Rather, the grandfather made a promise, presumably in good
faith, to pay the granddaughter $2,000 to allow her to be independent and quit her job. The promise was
enforced because the promisee reasonably relied on that promise to her detriment. Eventually the doctrine
became known as “promissory estoppel” to avoid the inaccurate application of the traditional equitable estoppel
theory.
Even “promissory estoppel,” however, is not accurate since the enforcement of a promise based on detrimental
reliance has nothing to do with “estoppel.” To suggest that the detrimental reliance “estops” the promisor form
denying the enforceability of a promise without consideration is an unnecessary appendage to the rationale of
the reliance principle. It suggests a “new” doctrine although the reliance principle is centuries older than any
notion of consideration in its modern form. The label, promissory estoppel, however, is so embedded in the
case law, commentary, and discussions of the concept that its continued use is inevitable.
[2] A Promise May Be Supported by Consideration Even if the Promise Provides No Discernable
Benefit to the Promisor
Just because a promise will provide no discernible benefit to the promisor does not mean that the promise is
not supported by consideration. In practically all cases in which consideration is given in exchange for a
promise, the consideration is some kind of action or forbearance by the promisee in reliance on the promise. In
the Ricketts case, the granddaughter left her employment because of her reliance on the grandfather’s promise.
The grandfather did not bargain with her to leave the employment in order to receive the $2,000. Rather, the
evidence indicated that he wanted to make a gift to allow her to decide whether she wished to continue
working.
Contrast that situation with another famous case, Hamer v. Sidway, 124 N.Y. 538, 27 N.E. 256 (1891). There,
an uncle promised payment to a nephew upon his twenty-first birthday if he would forbear smoking, gambling,
and consuming alcoholic beverages. There was no discernible benefit to the promisor (uncle) and the nephew
relied on the promise by forbearing such actions. The uncle’s promise, however, was supported by
consideration since he bargained for the nephew’s forbearance. It is sometimes difficult to determine whether
the reliance induced by a promise was bargained for as the agreed exchange for the promise, or whether the
promise was made in contemplation of reliance by the promisee. Nonetheless, assuming sufficient reliance, in
either case the promise can be enforced.
[3] Antecedents to the Modern Doctrine of Promissory Estoppel

Antecedents to the modern doctrine of promissory estoppel may be found in cases involving actions taken in
reliance on gratuitous promises to convey land where the promisee takes possession and makes valuable
improvements on the land. While some courts suggest that such actions manifest consideration, it is clear that
the enforcement of such promises is based on detrimental reliance. See, e.g., Greiner v. Greiner, 131 Kan. 760,
293 P. 759 (1930).
Even older antecedents are found in gratuitous bailment cases. If Ames takes possession of Barnes’s car and
gratuitously promises to ascertain that the car has proper antifreeze protection for the winter, Ames is liable for
damage to the car through her failure to perform that promise. The evolution of the twentieth-century reliance
doctrine may also be found in charitable subscription promises, which are discussed in the next section.
[4] Distinction Between Consideration and Promissory Estoppel

It is important to keep in mind the fundamental distinction between consideration and promissory estoppel as
separate, mutually exclusive, devices for validating a promise. Both involve a promise inducing a detriment in
the promisee, but only consideration requires the detriment to be the inducement for the promise: the
bargained-for-exchange requirement. Unfortunately, promissory estoppel is sometimes called a “substitute for
consideration” as if consideration was always with us and promissory estoppel developed as a substitute or
exception. Such a statement is highly misleading since what is now called promissory estoppel is derived from
centuries of development under the reliance principle, which developed long before the doctrine of
consideration.
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In Owens v. Carman Ford, Inc., 2013 Del. Super. LEXIS 423 (Sept. 20, 2013), the court cited the Corbin
treatise in emphasizing that the doctrine of promissory estoppel cannot be applied when an enforceable
contract based on consideration otherwise exists because promissory estoppel is an independent basis for
making a promise enforceable. Thus, if a plaintiff can establish the elements of a contract which includes
consideration, a promissory estoppel claim is inappropriate.
In Besley v. FCA US LLC, 2016 U.S. Dist. LEXIS 2200 (D.S.C. Jan. 8, 2016), the Monroney sticker affixed to a
pickup truck indicated it was equipped with the “Customer Preferred Package 26Z” that included a 3.55 Rear
Axle Ratio. However, the truck was actually equipped with a standard 3.21 rear axle ratio. Plaintiff commenced
a putative class action against the truck’s manufacturer alleging, inter alia, promissory estoppel. Defendant
moved for dismissal of the promissory estoppel claim, and the court explained that a party is generally
precluded from pursuing a claim for promissory estoppel where a valid contract governs the subject matter in
dispute. If the Monroney sticker operated as a contract between the parties, plaintiff could not maintain a cause
of action for promissory estoppel. The court concluded the contractual significance of the aforementioned
express warranty was factually unresolved so it was premature to dismiss plaintiff’s cause of action for
promissory estoppel. In Marino v. Guilford Specialty Group, 2015 U.S. Dist. LEXIS 39136 (D. Conn. 2015),
plaintiff filed suit against her former employer after defendant prevented her from working at another company
by invoking the restrictive covenant she signed in his employ. Plaintiff claimed that at the time she agreed to the
restrictive covenant, she reasonably relied on defendant’s representations about not enforcing such
agreements except in limited situations. The court held that it appeared plaintiff was attempting to use the
promissory estoppel theory to add terms to the parties’ contract, something the law does not permit.
Practice Resources:
• Corbin § .1 (reasons for this classification and analysis); § .2 (doctrine for
reliance on a promise is consistent with historical development and current
definitions); § . (difficulty of determining when subsequent conduct in reliance
was in fact bargained for); § . (gratuitous promise where promisee’s reliance
was desired by but was of no benefit to promisor); § . (limits of the doctrine in
the First Restatement § 0 § .10 (Restatement (Second) of Contracts § 0 and
other sections adopting the conduct in reliance doctrine); § .11 (the four stages
in the evolution of promissory estoppel).

End of Document
§ .02 The Modern Doctrine of Promissory Estoppel
[1] The Beginning—Charitable Subscriptions

If only one opinion were available to assist in the understanding of the early recognition of the modern doctrine
of promissory estoppel, it would be the opinion by Justice Cardozo in Allegheny College v. National
Chautauqua County Bank, 246 N.Y. 369, 159 N.E. 173 (1927). Mary Johnson signed a pledge to pay $5,000 to
the Allegheny College on condition that a memorial fund be created in her name and used to educate students
preparing for the ministry. Although the payment was not due until 30 days after her death, $1,000 was paid
during her lifetime, which the college received and set aside. Johnson later repudiated her promise and the
college brought an action after her death to recover the balance due.
Justice Cardozo noted that, at the time of the case, the law of charitable subscriptions was a prolific source of
controversy in New York and elsewhere. After citing cases holding that charitable subscription promises were
enforced where consideration was dubious at best, he unveiled a history of consideration by announcing “a
classic form of statement” that “identifies consideration with detriment to the promisee sustained by virtue of the
promise.” He hastened to add that this description is only a “half truth” because it must be accompanied by the
bargained-for-exchange element, the Holmes mutual inducement formula.
The opinion then focuses on the Holmes distinction between the detriment that is merely a consequence of the
promise and “the detriment which is in truth the motive or inducement” for the promise. Cardozo then admits
“that the courts have gone far in ‘obliterating this distinction.’ “This is the landscape on which a new doctrine
appeared, a doctrine that “has grown up of recent days,” “a doctrine that a substitute for consideration or an
exception to its ordinary requirements can be found in what is styled ‘a promissory esto e .
He is careful not to suggest that promissory estoppel could be invoked to make any type of promise
enforceable as of 1927. But he does emphasize that it is the equivalent of consideration with respect to
charitable subscription promises as of that date.
Having recognized the doctrine, the opinion proceeds to reject its application in this case. This is followed by
Cardozo’s tour de force in finding consideration supporting Johnson’s promise. By accepting the $1,000 in
advance, the college was said to have made an implied promise to abide by Johnson’s wishes in naming the
fund and using it in accordance with her directions. Thus, there was consideration to support her promise.
This imaginative construction to find consideration appears necessary rather than optional. The college’s mere
acceptance of the $1,000 pre-payment of Johnson’s pledge and putting it aside with no further action or
commitment does not suggest reliance of a definite and substantial character. An insufficient change of position
in reliance on her promise to invoke the promissory estoppel may have induced the creative energies and
genius of Judge Cardozo to discover consideration.
[2] Restatement (Second) of Contracts § 0 2

Recognizing the desirability of enforcing charitable subscription promises and the dilemma that confronted
Judge Cardozo, the drafters of the Restatement (Second) of Contracts added a subsection in the revised
version. Section 90(2) allows a charitable subscription promise to be enforced without proof that it induced any
action or forbearance by a charity. The rationale suggests that courts have regularly avoided focusing on a
bargained-for-exchange in such cases and the mere “probability of reliance” by a charity should be sufficient.
To this point, the scant case law does not favor this new paradigm. For a recent iteration, see St. Joseph’s
Found. v. Bashas’ Inc. (In re Bashas’ Inc.), 468 B.R. 381 (D. Ariz. 2012); Milligan v. Mueller (In re Estate of
Schmidt), 2006 Iowa App. LEXIS 1056 (Sept. 7, 2006). The reactions of other courts range from rejection to
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concern or both. See, e.g., Congregation Kadimah Toras-Moshe v. De Leo, 405 Mass. 365, 540 N.E.2d 691
(1989); Arrowsmith v. Mercantile-Safe Deposit & Trust Co., 313 Md. 334, 545 A.2d 674 (1988); Jordan v. Mt.
Sinai Hospital, Inc., 276 So. 2d 102, 108 (Fla. Dist. Ct. App. 1973). This is in stark contrast to the welcome
received by the revised version of the general promissory estoppel doctrine in § 0 1 .
Practice Resource:
• Corbin § . (the doctrine described as promissory estoppel).

End of Document
§ .03 The Modern Doctrine of Promissory Estoppel in the Restatement

(Second) of Contracts
[1] The Restatement Places No Limitations on the Kinds of Promises That Can Be Enforced Under a
Promissory Estoppel Theory
The First Restatement of Contracts placed no limitations on the kinds of promises that could be enforced under
a promissory estoppel theory; neither does the Restatements (Second) of Contracts. The First Restatement,
however, did not include the doctrine of promissory estoppel gleefully. Its inclusion in what became § 0 was
due essentially to the advocacy of Professor Corbin. The Restatement (Second), however, embraced the
doctrine and Professor Corbin’s rationale. It appears in Restatement (Second) of Contracts § 0 1 . Charitable
subscription promises are addressed in § 0 2 as discussed in § .02.
Below is a composite rendering of the original § 0 and Restatement (Second) § 0. Language deleted from the
original version appears in brackets; the new language in the Restatement (Second) version appears in italics.
Otherwise, the language is identical.
§ 0 Promise Reasonably Inducing [Definite and Substantial] Action or Forbearance.
(1) A promise which the promisor should reasonably expect to induce action or forbearance [of a definite
and substantial character] 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. The remedy
granted for breach may be limited as justice requires.
[2] “Promises” Sufficient to Invoke Promissory Estoppel

The requirement that there be a “promise” has led to some confusion in the case law. Some cases have stated
that a promise sufficient to invoke promissory estoppel must be the equivalent of a promise constituting an
offer. A promise that is sufficient to create a power of acceptance, however, is designed to effect a bargained-
for-exchange. The promissory estoppel concept is predicated upon enforcing promises where there is no
bargain. Indeed, it is applicable in situations where detrimental reliance has occurred in a failed attempt to
create a bargain. When there are assurances in contemplation of a bargained-for-exchange, the parties
understand that no contract yet exists and there are typically a number of matters not yet agreed upon. In such
cases there is no promise constituting an offer. Nonetheless, when parties envision a bargain but fail to achieve
it, a promisee may enforce pre-contractual assurances that have been relied upon. Hoffman v. Red Owl Stores,
Inc., 26 Wis. 2d 683, 133 N.W.2d 267 (1965). Thus, to be enforceable under the reliance principle, a promise
should not be required to rise to the level of an offer that must be sufficiently definite to consummate a bargain.
See, e.g., Stewart v. Cendant Mobility Servs. Corp., 267 Conn. 96, 837 A.2d 736 (2003). “… for an enforceable
promise under California’s promissory estoppel oct i e a promise must be ‘definite enough that a court can
determine the scope of the duty, and the limits of performance must be sufficiently defined to provide a rational
basis for the assessment of m es. Wiskind v. JPMorgan Chase Bank, N.A., 2015 U.S. Dist. LEXIS 51088
(N.D. Calif. 2015).
Numerous cases state that the “promise” must be “clear and definite,” but another court may be satisfied if the
promise is “sufficiently definite and not vague.” Gallagher v. E.I. Dupont De Nemours & Co., 2010 Del. Super.
LEXIS 194 (Apr. 30, 2010). A New Jersey court read § 0 as relaxing strict adherence to the clear and definite
standard. Pop’s Cones v. Resorts Int’l Hotel, 307 N.J. Super. 461, 704 A.2d 1321, 1326 (1998). On the other
hand, a statement that one will “consider” an issue is not a promise on which the other may rely. McReynolds v.
Prudential Ins. Co. of America, 276 Ga. App. 747, 624 S.E.2d 218 (2005). Similarly, statements of mere hope
Page 2 of 3
or desire are insufficient to constitute promises under § 0. There must be some manifestation of commitment,
inducing reasonable reliance. William St. Paul v. Easter Seals Goodwill Indus. Rehab. Ctr., 2004 Conn. Super.
LEXIS 912 (Apr. 5, 2004).
In a one case emphasizing this view, the owner of a business met with a key employee who was worried about
the lack of pension or insurance benefits. The owner told the employee not to worry because, when the fast-
growing business was sold, “There will be a million dollars for you.” This promise was allegedly repeated on
several occasions. When the business was later sold, the owner refused to perform his promise. The court held
this promise to be sufficiently definite to survive the defendant’s motion for summary judgment. Another
employee did not claim that such a promise was made individually to her, but she alleged that the owner told
her and other employees that he would make them millionaires. The court held that these latter promises were
too indefinite to give rise to a valid claim. Zielinski v. Heinemann, 2008 U.S. Dist. LEXIS 40885 (D. Conn. May
21, 2008), relying on Stewart v. Cendant Mobility Servs. Corp., 267 Conn. 96, 837 A.2d 736 (2003). In
Favolise v. Highville Charter Sch., Inc., 2009 Conn. Super. LEXIS 2392 (Aug. 31, 2009), a school board
repeatedly told the plaintiff that his performance as director of the school was excellent. He submitted a budget
that reflected his continuing employment at a salary increase. The board approved the budget. A few days
before the expiration of his contract, however, he was told he would not be renewed. He claimed an implied
promise for such renewal on which he relied. The court noted that it was generally not receptive to finding
implied promises sufficient to establish a promissory estoppel claim. What set this case apart, however, was the
board’s approval of the budget containing his salary increase. See also Sykes v. Payton, 441 F. Supp. 2d 1220,
1224 (M.D. Ala. 2006): (“[A]n express promise is not necessary to establish a promissory estoppel. It is
sufficient that there be promissory elements which would lull the promisee into a false sense of security,” citing
Mazer v. Jackson Ins. Agency, 340 So. 2d 770 (Ala. 1976)).
Denver’s Department of Arts and Venues entered into a Preliminary Design Contract (PDC) with the plaintiffs,
who were artists, to do preliminary work toward the design of a public arts project. The PDC provided: “Once [a]
feasibility study and a preliminary design direction is accepted and agreed to by all the stakeholders, a new
contract will be executed to determine a new scope of work for the execution of the final design and execution
of the project.” Plaintiffs performed work under the PDC, but eventually, the City advised them it had decided
not to proceed with their design due to the limitations of the public arts budget. Plaintiffs’ suit for promissory
estoppel was dismissed on the City’s motion because any subsequent agreement beyond the work agreed to
under the PDC was only to be negotiated once the “feasibility study and a preliminary design direction [was]
accepted and agreed to by all of the stakeholders.” Since that condition did not occur, there was no additional
promise beyond the PDC on which plaintiffs could reasonably rely. Leighton v. City & Cnty. of Denver, 2015
U.S. Dist. LEXIS 125955 (D. Colo. Sept. 21, 2015).
[3] A Promisee’s Reliance Must Have Been Foreseen by the Promisor

Both versions of § 0 require that the promisee’s reliance must be or should have been expected by the
promisor. This requirement reflects the pervasive foreseeability rule in contract law. The new version extends
protection to reliance by third parties, but only if the promisor should have foreseen such reliance. Under
Restatement (Second) of Contracts § 0 cmt. d, enforcement of a promise based on promissory estoppel is the
enforcement of a “contract.” It requires proof of causation as in any other contract. See the discussion in US
Ecology, Inc. v. State of California, 129 Cal. App. 4th 887, 28 Cal. Rptr. 3d 894 (2005). It allows for a full range
of contract remedies, with particular emphasis on the flexible nature of such remedies depending on the
character of the reliance.
How definite and substantial must the reliance be to make the promise enforceable? When reviewing the
character of the reliance, it is important to remember that the essential reason for enforcing a promise under
either version of § 0 is the detrimental change in position by the offeree. When a promise is enforceable
because there is consideration in the form of a counter-promise given in exchange, no change of position
needs to occur to make such an executory promise enforceable. Under § 0 the promisor must reasonably
expect its promise to induce reliance by the promisee, but the promise is not enforceable unless the promisee
actually relies to its detriment. A promise without reliance is not actionable. Carley v. Wells Fargo Bank, 2014
U.S. Dist. LEXIS 158652 (N.D. Cal. Nov. 10, 2014). The action or forbearance, therefore, cannot be trivial.
Surrendering a mere “peppercorn” will not do. Courts almost always say that they are insisting on definite and
substantial reliance to make the promise enforceable.
Page 3 of 3
Restatement (Second) of Contracts § 0 removes the “definite and substantial” language from the section title.
It explains this change by an additional sentence at the end of the revised version that expressly allows the
punishment to fit the crime by making the promise enforceable only to the extent that “justice requires.” Justice
would not require the enforcement of a promise to make a gift where the promisee suffered only a technical
detriment of traveling a short distance to accept the gift. A comment to the new version also includes the
“definite and substantial” factor to be considered in providing any remedy for breach of the promise.
Restatement (Second) of Contracts § 0 cmt. b.
[4] The Reliance Principle Can Be Applied to Situations Beyond the Validation of a Promise Without
Consideration
The reliance principle as expressed in § 0 can be applied to several situations beyond the validation of a
promise without consideration. The Restatement (Second), however, chose to emphasize these applications in
new sections. Section 87(2) recognizes that reliance by a general contractor on the bid of subcontractor can
make the subcontractor’s offer irrevocable. Section 88(c) recognizes that reliance may support a promise of
suretyship or guaranty to an obligee. See Packaging Eng’g, LLC v. Werzalit of Am., Inc., 2010 U.S. Dist. LEXIS
73561, at *18 (W.D. Pa. July 21, 2010). A promise to modify a contract without consideration may be
enforceable on the basis of reliance as recognized in § c.
In a subsequent chapter, we will explore the statute of frauds, which requires certain types of contracts to be
evidenced by a writing to be enforceable. That exploration will include Restatement (Second) of Contracts
§1 which supports the concept of enforcing such promises without a writing if the promisee can demonstrate
definite and substantial reliance. Restatement (Second) § 1 0 mimics Uniform Commercial Code (UCC) § 2-
209(5). That section addresses the situation where a required duty or condition of an enforceable contract is
waived and the waiving party seeks to withdraw the waiver. Such a waiver becomes irrevocable upon a
showing of definite and substantial reliance by the other party.
Practice Resources:
• Corbin § . (limits of the doctrine in the First Restatement § 0 § .10
(Restatement (Second) of Contracts § 0 and other sections adopting the
conduct in reliance doctrine).

End of Document
§ .04 Form and Extent of Available Remedies

Arising from equitable concepts and historical recognition of the reliance interest where equitable relief was readily
administered, damages in a court of law for breach of a promise enforced not as a bargain but on the reliance
principle should reflect the flexibility of the doctrine’s equity ancestry. Such flexibility is emphasized in Restatement
(Second) of Contracts § 0 which directs remedies to be administered as justice requires. Indeed, the Reporter’s
Note states that this is the principal change in the new version. It was fostered by Professor Corbin, who explained
the origins of the assumpsit action, in which damages were measured by the extent of the reliance injury rather than
by the value of the promised performance.
Assume that Ames promised his niece, Jennifer, $1,000 upon her graduation from college. To Jennifer’s
knowledge, Ames has made similar gifts to other relatives and has always performed them. Jennifer relies on the
promise to purchase a new computer at a cost of $600. The question posed under the original § 0 is whether the
promise is enforceable for $1,000 or only $600. The answer provided at that time was, “Either the promise is
binding or it is not. If the promise is binding it has to be enforced as it is made.” (This statement is attributed to
Professor Williston in 4 ALI Proceedings, Appendix at 103–104 (1926)). Why, however, should Jennifer receive a
thousand dollars when her actual reliance—the reason for enforcing the promise at all—is only $600?
The all-or-nothing approach is rejected in the revised § 0 in favor of the Corbin view, which is based not simply on
history, but more important, on the reason for enforcing the promise at all. Under the Restatement (Second),
remedies may be limited as justice requires, but the Restatement (Second) does not elaborate that guideline with
any definitive standard to determine how justice should be measured. Section 90 comment d notes that the same
factors used to determine whether relief should be granted also are used to determine the character and extent of
the remedy.
In Gray v. First State Fin., Inc., 2009 Ky. App. LEXIS 175 (Sept. 18, 2009), the plaintiff argued that the Restatement
(Second) of Contracts version of § 0 no longer required a showing of reliance of a “definite and substantial
character” as required by the First Restatement. Providing a common sense interpretation of the new standard that
the “remedy may be limited as justice requires,” the court concluded, “In other words, if no measurable injustice has
occurred, no remedy is warranted.” While reliance must be foreseeable by the promisor, absent actual reliance,
there is no enforceable promise. Without any bargain to create or justify reasonable expectations, the essential
rationale for enforcing such promises is actual reliance. The remedy for such a breach, therefore, should be co-
extensive with the singular reason for enforcing the promise.
One of the leading cases involved a defendant’s promise that the plaintiff would become an authorized dealer in
Emerson radios, on which the plaintiff foreseeably relied and incurred expenses in preparing to become such a
franchisee. The court allowed recovery for the out-of-pocket outlays, thereby protecting the plaintiff’s reliance
interest to restore the plaintiff to status quo ante. The court denied the plaintiff’s claim for prospective lost profits,
which were not only speculative but would have protected the plaintiff from losses suffered from a bargain the
plaintiff never made. Goodman v. Dicker, 169 F.2d 684 (D.C. Cir. 1948). In a similar case in which a franchise was
assured if the promisee performed various acts, the court again limited recovery to the reliance interest since the
proposed agreement that could have led to expectations including profits was never made. Hoffman v. Red Owl
Stores, Inc., 26 Wis. 2d 683, 133 N.W.2d 267 (1965).
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A plaintiff operated a TCBY franchise in Margate, New Jersey and was interested in moving the franchise to a
casino location in Atlantic City. Several discussions with the defendant assured the plaintiff that it would be able to
lease space to operate the franchise on casino property. When the Margate lease had to be renewed or lost, the
defendant advised the plaintiff not to renew the lease. The plaintiff complied, but the defendant refused to grant the
casino lease. The trial court denied relief because it doubted whether a sufficiently clear promise was made; even if
the promise had been sufficient, the court denied relief on the lack of specificity in the terms of any prospective
lease since the parties had yet to agree on many terms of such a lease.
On appeal, the state supreme court found that the fundamental error at the trial level was the assumption that the
complaint sought enforcement of a lease that had not been sufficiently negotiated. The plaintiff had not sought and
would not have been able to recover damages based upon a lease that never came to fruition. Rather, the plaintiff
sought recovery for the losses sustained in the loss of the Margate property and lost earnings from that property
during the 1995 season when the plaintiff had no place to operate its franchise, out-of-pocket expenses in seeking
an alternate location, and attorney’s fees expended in the negotiations and preparation of a lease that never
existed. While the damages from the inability to operate the Margate location were certainly “lost profits,” they were
lost because of reliance and not through loss of any bargain with the defendant, since no bargain ever came to
fruition. Pop’s Cones v. Resorts Int’l Hotel, 307 N.J. Super. 461, 704 A.2d 1321 (1998).
The losses from the inability to operate the Margate location were provable because of the past records of earning
in that location. When damages caused by reasonable reliance are clearly measurable, if the reason for enforcing
the promise is the promisee’s reliance, limiting the recovery to reliance damages is reasonable. If, however, it is not
unreasonable for the promisee to fail in proving reliance damages with reasonable certainty but definite and
substantial reliance has occurred, it is “just” to enforce the promise as made. Thus, if a rich uncle promises his
niece $10,000 and the niece takes a European summer tour and does not bother keeping track of her expenses,
her inability to prove her out-of-pocket expenses with reasonable certainty should not preclude recovery of the
entire $10,000. The recovery of the expectation interest, therefore, should be permitted when there are difficulties in
measuring the reliance interest. The case law, however, pursues a more fluid approach. The conventional wisdom
insists that damages based on promissory estoppel may protect the expectation, reliance or restitution interests “as
justice requires.” Where promissory estoppel is invoked, however, the appearance of § 0 of the Restatement
(Second) of Contracts is virtually certain. Comment d to that section suggests that “full-scale enforcement is often
appropriate” which can serve to remove the last fig leaf of judicial doubt that the normal remedy is the protection of
the expectation interest which is seen in so many promissory estoppel cases. See Dynalectric Co. of Nev., Inc. v.
Clark & Sullivan Constructors, Inc., 255 P.3d 286, 288–290 (Nev. 2011).
Plaintiff Merry Gentleman, LLC produced a motion picture called The Merry Gentleman, which was a commercial
flop. Merry Gentleman sued the film’s lead actor and director, Michael Keaton, alleging that Keaton violated his
directing contract in various ways. The district court granted Keaton’s motion for summary judgment and the
Seventh Circuit affirmed, holding that Merry Gentleman failed to produce evidence from which a reasonable trier of
fact could find that Keaton’s alleged breaches caused the damages Merry Gentleman seeks: the $5.5 million it
spent producing the movie. The court explained that reliance damages are appropriate in those cases where the
injured party “cannot prove his profit with reasonable certainty.” Such damages are gauged by the loss caused by
reliance on a breached contract and “are designed to put the injured party ‘in as good a position as [the injured
party] would have been in had the contract not been m e. But this was not the typical case where reliance
damages are sought—where the defendant has simply walked away from the contract. “In those cases, it is
appropriate for the injured party to claim as damages all expenditures it made in preparation for performance
because the other side failed to perform at all.” Here, the purportedly breaching party had substantially performed,
and the damages, if any, lie in the quality of the performance. In cases like this, “the causal link between reliance
damages and the breach is not so direct” and “the breach does not cause the complete loss of investment.” The
court explained that “no reasonable trier of fact could find that Merry Gentleman lost its entire investment of $5.5
million because” of Keaton’s purported breaches. The court noted: “Reliance damages are not insurance,” and
“[r]eimbursing Merry Gentleman for all $5.5 million it spent, even though it received from Keaton a finished film
praised by critics, would put it in a better position than if the contract had not been made. Perhaps Merry Gentleman
might have been able to present a genuine issue for trial on a more modest damages theory, but it decided to shoot
Page 3 of 3
for the moon and missed.” Merry Gentleman, LLC v. George & Leona Prods., 799 F.3d 827, 2015 U.S. App. LEXIS
14937 (7th Cir. Ill. 2015).
Practice Resource:
• Corbin § . (form and extent of remedy must be adjusted to suit each case).

End of Document
§ .05 Jurisdictional Analyses
[1] All American Jurisdictions Apply a Theory of Promissory Estoppel

The great Judge Learned Hand assumed the doctrine of promissory estoppel would be limited to non-
commercial cases. He seemed particularly concerned over the possible erosion of the sacred validation device,
consideration. James Baird Co. v. Gimbel Bros., Inc., 64 F.2d 344, 346 (2d Cir. 1933). As suggested earlier,
Judge Cardozo in 1927 was not certain as to the future development of promissory estoppel beyond charitable
subscription cases.
Since that time, however, the myriad cases and situations to which the doctrine of promissory estoppel has
been applied indicate that, apart from exceptions mandated by certain statutes, there should be no limit to the
kinds of promises to which it may be applied. There are differences among jurisdictions in terms of what they
require for each element of the doctrine and the application of appropriate remedies. One extreme difference
occurs in Ohio, which treats promissory estoppel as a quasi contractual concept where a court of equity seeks
to prevent injustice by creating a contract where none existed. Commerce Benefits Group, Inc. v. McKesson
Corp., 2009 U.S. App. LEXIS 10870 (6th Cir. May 20, 2009). The notion that promissory estoppel that may
protect either a reliance or expectation interest is an “implied-in law” obligation to avoid unjust enrichment,
thereby protecting the restitution interest, is a compounded error. An extensive multi-jurisdictional survey is
provided in the main edition of Corbin on Contracts. Here, however, we will focus on one type of promise that
has not been uniformly treated and which has generated more that its share of confusion.
[2] Promises to At-Will Employees

There are cases stating that promissory estoppel is simply not applicable to employment-at-will agreements.
See Escarra v. Regions Bank, 2009 U.S. App. LEXIS 25992 (11th Cir. Nov. 27, 2009) (applying Florida law);
Johnson v. Metropolitan Atlanta Rapid Transit Auth., 207 Ga. App. 869, 429 S.E.2d 285 (1993). The application
in certain other jurisdictions, such as Texas, is uncertain. A number of jurisdictions, however, clearly recognize
the applicability of the doctrine to employment-at-will relationships. While they agree that terminable-at-will
employment agreements allow for discharge of an employee without cause or even without notice, they
recognize such agreements as contracts to which the doctrine of promissory estoppel may apply.
For example, there is no question that promissory estoppel applies to such contracts in Ohio. See Mers v.
Dispatch Printing Co., 19 Ohio St. 3d 100, 483 N.E.2d 150 (1985). In Illinois, if an employee terminated at will
had relied on an employer’s promise to continue the employee’s pay for a certain time, the employee could
have sued on the basis of promissory estoppel to enforce such a promise. Colosi v. Electri-Flex Co., 965 F.2d
500 (7th Cir. 1992) (applying Illinois law). The doctrine applies to at-will contracts in Minnesota and Delaware.
Promissory estoppel should always be available when the promisee has relied and suffered damages before
starting a new at-will contract by terminating his or her prior employment and incurring moving and relocation
expenses to take the new position. See, e.g., Hunter v. Hayes, 533 P.2d 952 (Colo. Ct. App. 1975. See also,
Newton v. Kenific Group, 2014 U.S. Dist. LEXIS 146668 (D. Md. 2014) (claim of promissory estoppel permitted
where employee resigned from his job to accept an at-will job offer that was later rescinded).The Supreme
Court of Vermont captured the essential rationale:
Nothing about the at-will doctrine suggests that it does not coexist with numerous modifications and
exceptions imposed by law, including the law of promissory estoppel, depending on the facts of a particular
case. Whether or not these modifications technically remove the employment contract from the at-will
realm, as defendant argues, is form over substance. Even with modifications, employees for an indefinite
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term are still considered at-will employees, who may be discharged for any number of reasons not
prohibited by the modifications.
Foote v. Simmonds Precision Prods. Co., 158 Vt. 566, 571, 613 A.2d 1277, 1281 (1992).
[3] Federal Common Law of Promissory Estoppel

In the 1990’s, federal courts were confronted with the application of the promissory estoppel doctrine in cases
governed by statutes such as the Employment Retirement Income Security Act (ERISA) and the Labor
Management Relations Act (LMRA), among others. Even though an action is brought before a federal court,
when a state promissory estoppel claim is made based on an employer’s alleged promise regarding employee
benefits, the plaintiff is seeking to recover benefits relating to an ERISA benefit plan, and ERISA preempts state
law. See Gruenke v. Miles, Inc., 872 F. Supp. 652 (Minn. 1995).
The preemption provisions in such federal acts are broad and often lead courts to peremptorily dismiss
promissory estoppel claims. The United States Supreme Court, however, has recognized the development of
common law rights under plans regulated by ERISA, which induced the development of a federal common law
of promissory estoppel. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110, 109 S. Ct. 948, 103 L. Ed. 2d
80 (1989). For example, in an action under LMRA, the court applied promissory estoppel to an employer’s
promise to employees who changed positions to work in management that they would retain the option to return
to their old jobs as a bargaining unit. Ulrich v. Goodyear Tire & Rubber Co., 792 F. Supp. 1074 (N.D. Ohio
1991).
In Scanlan v. United States, 825 F. Supp. 2d 941 (N.D. Ill. 2011), the court cited the Desk Edition of the Corbin
treatise to explain that the federal common law of promissory estoppel developed primarily in the context of the
ERISA and LMRA. The federal common law of promissory estoppel is generally premised on the Restatement
(Second) of Contracts § 0 1 . Federal courts will continue to develop a federal promissory estoppel, although
there is some concern that the use of the doctrine may undermine the purpose of certain statutes. Thus, Judge
Posner of the Seventh Circuit has emphasized the importance of ERISA provisions limiting the scope of judicial
elaboration of the statute. He noted that a defined benefit plan requires complex actuarial calculations, and that
a plan could become underfunded if the effect of promissory estoppel is to add terms that are not part of the
plan documents upon which such calculations are based. Shields v. Local 705, Int’l Bhd. of Teamsters Pension
Plan, 188 F.3d 895 (7th Cir. 1999).
Practice Resources:
• Corbin § .12 (jurisdictional analysis of promissory estoppel); § .1 (federal
common law of promissory estoppel).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 9 PAST CONSIDERATION AND MORAL
OBLIGATION
CHAPTER 9 PAST CONSIDERATION AND MORAL OBLIGATION

the subject matter.

End of Document
OBLIGATION
§ .01 Meaning of “Past Consideration”
[1] An Existing Obligation Generally Will Not Support a New Promise

The phrase “past consideration” is a contradiction. It refers to “consideration” that has already been received.
The phrase “has a special meaning in contract law,” one court noted. o si e tio is something of value
given in return for a performance or promise of performance that is bargained for; consideration is what
distinguishes a contract from a i t. But a thing given before the promise was made and that was neither
induced by the promise nor paid in exchange for it cannot be sufficient, valid, legal consideration. That is “past
consideration” and it cannot support a promise. State v. Schouweiler, 2016 Minn. App. Unpub. LEXIS 33 (Minn.
Ct. App. Jan. 11, 2016). If a new promise is made to perform an existing and enforceable obligation, the
detriment has already been incurred. Neither can the promise be enforced on the basis of promissory estoppel,
under which the promise must induce the detriment. Not only did the promise not induce the detriment, the
detriment did not induce the promise. Thus, it is unremarkable to find a court stating, “The general rule is that a
past consideration will not support a subsequent promise.” Thomas v. Astrue, 2010 U.S. App. LEXIS 624, at
*7–*13 (11th Cir. Jan. 11, 2010) (quoting precedent). Like other general statements, however, the accuracy of
this statement depends upon how the term “consideration” is being used.
There are situations where promises are deemed enforceable in the absence of any present exchange or
detrimental reliance because of benefits received or detriments suffered in the past. The Cramseys agreed to
sell a farm to Pavlick, and Pavlick granted to the Cramseys the option to purchase the farm back. On
September 21, at Pavlick’s request the Cramseys conveyed the farm to a corporation of which Pavlick was
president. On September 22, the corporation granted the Cramseys an option to purchase the farm back. The
option agreement stated that consideration was “the simultaneous sale of the real estate from Optionee to
Optionor, and other valuable consideration.” The option agreement stated that it was binding upon successors
and assignees. The corporation then conveyed the farm to a third party (Calloway) under a warranty deed
stating that the farm was subject to the September 22 option agreement. The successors to the Cramseys
notified Calloway of their intent to exercise the option. Calloway refused to comply claiming the September 22
option to purchase was unsupported by consideration. The court concluded the September 21 sale of the farm
to the corporation was the consideration supporting the September 22 option to purchase. The one day
separating the two events was immaterial. The court note the Corbin proposition that a promise may be
enforceable by reason of past events if those past events have such a relation to the promise as to constitute
its inducing cause. Since the consideration (the sale of the farm) was rendered at the request of the promissor
(the corporation), the court held that the one-day passage of time between the two events was legally
insignificant, and that consideration supported the option In re Estate of Cramsey, 2011 Ill. App. Unpub. LEXIS
2623 (Oct. 28, 2011).
It is essential to understand why some courts will enforce such promises even though the use of the phrase
“past consideration” to explain why such promises may be enforceable is dubious.
If a past debt is enforceable, a new promise to pay that debt appears to promise nothing new. In the next
section, however, we will explore how subsequent promises to pay existing debts may restart a statute of
limitations that has not yet expired, or remove the bar of a statute of limitations that has expired. Since these
cases typically lack evidence of an intention to affect the statute of limitations, there is no bargained-for-
exchange. Nonetheless, such promises are enforced.
When a number of goods are sold or services rendered at different prices, each of which are then computed to
produce a total amount due, an express or implied promise by the recipient to pay the stated total will be
enforced as an “account stated” even though there was no prior dispute concerning the individual amounts
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owed. In such instances, the new promise must always be coextensive with the prior obligation. Thus, when a
contractor agreed to construct a building for $21,000 but, on completion, sent a bill to the owner for $29,000,
the owner paid the contract price of $21,000. The builder claimed that the owner’s failure to object to the bill of
$29,000 constituted an account stated that implied the owner’s promise to pay that amount. The trial court
agreed, but the appellate court reversed on the ground that any such agreement by the owner could not exceed
the amount of the past consideration. Remington v. Wren, 278 Or. 471, 564 P.2d 1025 (1977).
[2] Effect of Statutes

If a negotiable instrument (e.g., a check or promissory note meeting the requirements of the Uniform
Commercial Code (UCC)) is issued for an antecedent debt, it will be enforceable notwithstanding the absence
of consideration.) A New York statute states that a promise in a signed writing “shall not be denied effect as a
valid contractual obligation on the ground that consideration for the promise is past or executed … and would
be a valid consideration but for the time when it was given or performed.” N.Y. Gen. Oblig. § -110 (2008).
Hughes v. Std. Chtd. Bank PLC, 2010 U.S. Dist. LEXIS 38871 (S.D.N.Y. Apr. 14, 2010) (under New York Law,
a promise based on past consideration is invalid unless it is in a writing that clearly describes the past
consideration given for the new promise).
[3] Existing Debt of a Third Party Will Not Support a Promise

Consideration or promissory estoppel is necessary to enforce a promise to pay an existing debt owed by
another. If a local bank has already agreed to lend Ames $50,000, which Ames has promised to repay with
interest, a subsequent promise by Barnes to become Ames’s surety by promising to pay the bank if Ames fails
to pay is unenforceable since there is no consideration or detrimental reliance to support Barnes’s promise. If,
however, Barnes’s suretyship promise had been made to the bank at the same time Ames promised to repay
the bank, the bank’s single consideration of lending the $50,000 to Ames would support both promises.
Practice Resources:
• Corbin § .1 (past consideration); § .2 (an existing indebtedness or obligation
supports a new co-extensive promise); § . (promises in excess of the existing
debt or duty); § . (existing debt of a third person will not support a promise).

End of Document
OBLIGATION
§ .02 New Promise to Pay a Debt Barred by the Statute of Limitations

A new promise to pay an existing debt appears to promise nothing. Nonetheless, many courts have held that the
effect of such a promise restarts the statute of limitations. See, e.g., Slater v. Stith, 2008 U.S. Dist. LEXIS 27871 (D.
Ariz. Mar. 25, 2008) (applying New York law); Jenkins Props. v. Doane, 2006 U.S. Dist. LEXIS 4900 (W.D.N.C. Jan.
24, 2006). If the old debt was already barred by the statute of limitations, a new promise to pay it is enforceable
without any consideration or detrimental reliance to support the new promise. The rationale for such holdings
included the notion that no new duty has arisen—the debtor has simply “waived” the defense of the statute of
limitations. The “waiver of defense” theory, however, is no longer viewed as viable. The new promise must be made
to the creditor, an agent of the creditor or a third party with an intent that it should be communicated to the creditor.
Bureaus Inv. Group, No. 2, LLC v. Harris, 2013 Haw. App. LEXIS 672 (Nov. 29, 2013).
The dominant basis for enforcing a subsequent promise exhibiting neither consideration nor detrimental reliance is
a theory of “moral obligation.” The criticism of “moral obligation” as a basis for enforcing promises is the breadth
and amorphous nature of the theory, which lacks sufficient guidance for courts to distinguish promises that ought to
be enforced from those that ought not to be enforced. Promises to perform prior obligations that had been
enforceable at law, however, do not admit of that criticism since the enforcement of the new promise merely
removes a technical bar to allow enforcement of an earlier promise that had been supported by consideration.
Neverthless, to be effective, such promise must be in writing, and “in order to start the limitations period running
anew, a party’s written acknowledgment of the debt must be ‘clear, distinct, direct, unqualified, and [amount to an]
intentional admission of a present, subsisting debt on which a party is i e. . Such affirmation must be ‘more
than a hint, a reference, or a discussion of an old debt; it must amount to a clear recognition of the claim and liability
as presently e isti . Koyle v. Sand Canyon Corp., 2016 U.S. Dist. LEXIS 29616 (D. Utah Mar. 8, 2016). “Under
Tennessee law, ‘a defendant may revive a plaintiff’s remedy that has been barred by the statute of limitations either
by expressly promising to pay the debt or by acknowledging the debt and expressing a willingness to pay it. In re
Shippy, 2016 Bankr. LEXIS 916 (Bankr. M.D. Tenn. Mar. 23, 2016).
Practice Resource:
• Corbin § . (new promise to perform an obligation barred by statute of limitations).

End of Document
OBLIGATION
§ .03 New Promise to Pay a Debt Discharged in Bankruptcy

At common law, a promise to pay a debt discharged in bankruptcy was treated in the same fashion as a promise to
pay a debt barred by the statute of limitations. The new promise removed a technical bar and the moral obligation to
perform the promise voluntarily made was enforced. Dunning creditors, however, were often successful in
persuading parties to make new promises to pay debts that had been discharged. The Bankruptcy Reform Act of
1978 added certain protection for debtors such as: requiring the promise to be made before the debt was
discharged in bankruptcy, and the agreement manifesting this promise must be filed with the bankruptcy court to
allow for judicial oversight; if represented by an attorney, the debtor’s attorney must file a declaration or affidavit
stating that the debtor was fully informed of the law in this area and made the promise voluntarily; the agreement
must contain a clear statement that the debtor is free to rescind this promise any time before discharge in
bankruptcy or within 60 days of the filing of the agreement and no rescission has occurred; and, if the debtor was
not represented by an attorney, the court must approve the debtor’s agreement to pay a debt discharged in
bankruptcy. 11 U.S.C.A. § 2 c .
Practice Resource:
• Corbin § .1 (new promise to pay a debt discharged in bankruptcy).

End of Document
OBLIGATION
§ .04 New Promise to Pay a Barred Tort Claim

If a statute of limitations expires on a tort claim, a new promise to pay it will not revive the statute. If, however, a
tortfeasor promises to settle the claim or not to plead the statute of limitations, reliance on that kind of promise may
make the promise enforceable. See Eddings v. Sears Roebuck & Co., 2002 Tenn. App. LEXIS 514 (July 19, 2002).
Practice Resource:
• Corbin § .12 (a barred action for a tort is not revived by a new promise).

End of Document
OBLIGATION
§ .05 New Promise to Pay Barred Judgments

When a promise to pay a debt has been held enforceable and a judgment rendered, the prior claim is said to be
merged into the judgment. There are statutes of limitations that bar judgment debts. It is not a simple matter of
raising the technical statute of limitations or bankruptcy bar to the enforcement of the promise. A writ of execution is
necessary to execute on the judgment and that writ will not be granted if the judgment is barred by the statute of
limitations.
Practice Resource:
• Corbin § .11 (new promise to pay a barred judgment).

End of Document
OBLIGATION
§ .06 A Debtor’s Acknowledgment of an Existing Debt May Be Sufficient to

Imply a Promise to Pay It
A debtor’s acknowledgment of an existing debt may be sufficient to imply a promise to pay it notwithstanding the
statute of limitations. Some courts continue to insist that only a promise will be sufficient, but even those courts may
find a sufficient implied promise from an acknowledgment. An acknowledgment of a debt must be unequivocal in
order to restart or remove the statute of limitations. Huntingdon Fin. Corp. v. Newtown Artesian Water Co., 442 Pa.
Super. 406, 659 A.2d 1052 (1995). If it is accompanied by expressions that the debtor did not intend to pay the
debt, it is insufficient. Gianetti v. United Healthcare, 99 Conn. App. 136, 912 A.2d 1093 (2007). A statement in a will
providing for payment of the decedent’s debts was held to be an insufficient acknowledgment of a specific debt
where the statute of limitations had expired. A specific reference to such a debt and an implied promise to pay it
would have lifted the bar of the statute.
Practice Resource:
• Corbin § . (new promise may be implied from an acknowledgment of a debt as
existing).

End of Document
OBLIGATION
§ .0 Effect of Partial Payment

A debtor’s voluntary part payment of a debt barred by the statute of limitations if sufficiently identified to the original
debt will make the entire original obligation enforceable. See Christen v. Guettler, 2007 Wash. App. LEXIS 930
(May 7, 2007). The payments must be voluntary. In one case, the defendants neither authorized payments nor had
any control over them. The payments were not voluntary. Joslin v. Gregory, 2003-NMCA-133, 134 N.M. 527, 80
P.3d 464.
The mere fact that a debtor sends a check to a creditor that is cashed does not manifest an intention to pay the
entire original debt unless there is evidence of that intention. If the debtor manifests an intention to make only a part
payment and no more, the balance of the original debt is not revived. If the amount of the debt is doubtful or
disputed, the payment of a specific sum tendered as full payment for the entire obligation will not revive the original
debt. Rather, such a payment that is accepted by the creditor to settle a good faith dispute constitutes an accord
and satisfaction, discharging any amount that the debtor allegedly still owes.
When the evidence is sufficient to infer an intention to pay the full amount, the part payment restarts the statute of
limitations. If the statute has expired, the part payment is evidence of an implied promise to pay the balance due,
which will be enforced on the same rationale as an express promise to pay a debt barred by the statute of
limitations.
Practice Resource:
• Corbin § . (revival of remedy by part payment).

End of Document
OBLIGATION
§ .0 Requirement of a Writing
Many states require promises to pay or acknowledgments of debts barred by operation of law to be evidenced by a
writing. A voluntary payment of part of what is owed accompanied by sufficient identification and application of that
payment to a specific debt, however, will perform the evidentiary function of a writing. The writing requirement may
be made part of the jurisdiction’s statute of frauds. See, e.g., Ga. Code Ann. § 1 - - 0 (2014). Or there may be a
separate statute requiring a signed writing. Fla. Stat. § .0 (2013).
Practice Resource:
• Corbin § .1 (must the new promise be in writing?).

End of Document
OBLIGATION
§ .0 A New Promise May Be Conditional

We previously explored cases allowing part payment of a specific debt to constitute an implied promise to pay the
entire amount. A new promise, however, may also expressly limit the payment to only the portion the debtor has
decided to pay. Such a limitation on payment of the debt only to the extent of the promise will be enforced. Debtors
may raise a statute of limitations and pay nothing; instead of paying nothing, they are permitted to condition any
partial payment as final. A debtor may promise to pay the entire debt currently barred by the statute of limitations,
but only over a period of time. Or payment may be conditioned on another occurrence, for example, if a particular
stock price hits a certain value. These and other conditions are enforceable. A new promise to pay a debt as soon
as the debtor is able to pay it places a major burden of proof on the creditor, but it is an enforceable condition
nonetheless. Where a taxpayer paid an overdue tax but consistently objected to paying six years accrued interest
thereon, the court cited the Corbin treatise in holding that the payment was not an unqualified acknowledgment of
the interest debt. Materials Dev. Corp. v. Comm’r of Revenue, 56 Mass. App. Ct. 593, 780 N.E.2d 87 (2002).
Practice Resource:
• Corbin § . (the new promise may be limited in amount or may be conditional).

End of Document
OBLIGATION
§ .10 New Promise After a Discharge

A surety promises to pay the debt of the principal debtor if the debtor fails to pay the creditor. When a creditor
makes a new arrangement extending the time for payment by the principal debtor without the agreement of the
surety, the surety is discharged. If, however, the surety then makes a new promise to pay if the principal debtor fails
to pay, that promise will be enforceable.
Similarly, a typical clause in a casualty insurance contract requires the insured to give notice of a loss within a
prescribed period as a condition to the insurer’s duty to pay the amount of the loss within the confines of the policy.
Either before or after a casualty has occurred, the insurer can promise that it will not insist on that requirement.
Such a “waiver” of a “technical” condition that is not a material part of the agreed exchange will be enforced without
any new consideration.
On the other hand, if a creditor has voluntarily surrendered an obligation, the obligor’s new promise to perform that
obligation is not supported by the “past consideration” it had previously received. This is because the original
voluntary surrender of the obligation constituted an executed gift which cannot be taken back. Thus, there is no
“moral obligation” to support the enforcement of the new promise.
Practice Resources:
• Corbin § .1 (new promise by an indorser after a technical discharge); § .1 (promise
to refund an over-paid judgment); § .1 (new promise after an effective voluntary
discharge).

End of Document
OBLIGATION
§ .11 New Promises to Perform Voidable Duties
[1] Promise of a Minor

The promise of a minor—a party who has not yet reached the statutory age of majority, which is typically 18—is
voidable. A minor has a power of disaffirmance predicated on the absence of mature judgment sufficient to
understand the implications of a serious promise in a contractual context. If the minor makes a new promise to
perform the same obligation after reaching 18, the new promise is not voidable. It is enforceable on the basis of
the “past consideration” the minor has received. His actions may also constitute an affirmance.
[2] Promise Induced by Fraud, Mistake, or Duress

A promise induced by fraud, mistake, or duress is also voidable. If the aggrieved party becomes aware of these
infirmities but nonetheless chooses to make a new promise to perform the same obligation after the last vestige
of fraud, duress, or mistake is no longer evident, the new promise is enforceable. It may be suggested that the
promisor has simply “waived” these defenses, but it is still necessary to discover the essential rationale for
enforcing the promise without any new consideration. The basis for enforcing the new promise is the “past
consideration.”
Practice Resources:
• Corbin § .1 (new promise to perform a contract voidable for infancy); § .1
(contracts voidable for fraud, mistake, or duress).

End of Document
OBLIGATION
§ .12 A Principal May Ratify an Unauthorized Promise Made on the

Principal’s Behalf
When an unauthorized party makes a contract on behalf of another as if the unauthorized party were the agent of
the principal, the principal is not bound. The principal may ratify the promise made on its behalf, however. Such a
ratifying promise will be enforced even if the other party has performed before the principal was aware of the
transaction and only later ratified the agent’s action.
Practice Resource:
• Corbin § .20 (ratification by principal of unauthorized contract by an agent).

End of Document
OBLIGATION
§ .13 Promises to Pay for Value Received Under an Illegal Bargain

When a past consideration has been received under a bargain that is void because of illegality, a court may
properly refuse to enforce a subsequent promise to pay for the benefit received if the illegality is inherently evil
(malum in se). The original bargain may not be inherently evil (malum prohibitum), in which case, the promise may
be enforceable. Usury is certainly illegal, but some usury statutes prevent only the collection of excessive interest;
others prevent the collection of the principal as well. A subsequent promise to repay the principal amount of the
loan may be enforced since the debtor has received the benefit of the loan.
Practice Resource:
• Corbin § .2 (promises to pay for value received under an illegal bargain).

End of Document
OBLIGATION
§ .14 The Historical View of Ratification of a Contract Made by a Married

Woman
The void/voidable distinction was particularly onerous with respect to the egregious common law view that a
married woman had no capacity to contract because she was the “property” of her husband. Unlike promises of
minors, which were deemed voidable, promises by married women were “absolutely void.” If a woman regained
contracting capacity through widowhood or divorce, questions arose as to whether her promise under the original
contract for benefits received was enforceable. Statutes overcame the common law prescription by giving married
women the same capacity to contract as if they were unmarried.
Practice Resource:
• Corbin § .2 (the historical view of ratification of a contract made by a married woman).

End of Document
OBLIGATION
§ .15 Effect of the Statute of Frauds

In subsequent chapters, we will explore the statute of frauds, which requires certain types of contracts to be
evidenced by a sufficient writing or an equivalent electronic record to be enforceable. Theses individual state
statutes are uneven in language. They may state that an oral contract or promise is “void” rather than “voidable” or
“unenforceable.” As will be seen later, modern courts tend to ignore these language differences. Absent express
statutory language to the contrary, courts recognize that the statute of frauds principally serves an evidentiary
function. An agreement does not have to be evidenced by a writing or record to be a contract. An oral agreement
that manifests mutual assent, consideration, parties with the capacity to contract, and is otherwise sufficiently
definite in its terms is a perfectly valid contract. If it is a contract for the sale of land or goods priced at $500 or
more, or another type of contract that falls within the statute of frauds, however, it is not an enforceable contract.
Nonetheless, it is made enforceable by a subsequent written or recorded promise.
Practice Resource:
• Corbin § .2 (new promise based on a past oral contract within the statute of frauds).

End of Document
OBLIGATION
§ .16 The Moral Obligation Doctrine

In 1782, the great Chief Justice of King’s Bench, Lord Mansfield, wrote:
Where a man is under a moral obligation, which no Court of Law or Equity can enforce, and promises, the
honesty and rectitude of the thing is a consideration.
Hawkes v. Saunders, 1 Cowper 289, 290, 98 Eng. Rep. 1091 [K.B. 1782].
Even after Mansfield’s death, moral obligation continued to find judicial support as a basis for enforcing promises,
although doubts concerning its utility arose. See, e.g., Littlefield v. Chee, 2 B. & Ad. 811 [1831].
By 1840, it became clear that moral obligation was not present consideration in any sense. Concerns that moral
obligation doctrine’s contours were so vague that courts could not determine its limits led to its repudiation.
Eastwood v. Kenyon, 11 A. & E. 438 [1840]. The new conventional wisdom insisted that because courts could not
distinguish moral obligations sufficient to make promises enforceable from moral obligations that were not
sufficiently compelling, any moral obligation should not be received as a basis for validating a promise.
The apotheosis of that view is found in a case in which the defendant’s wife sought to strike him with an axe. The
plaintiff intervened and suffered a mutilated hand. The plaintiff sued to enforce the defendant’s promise to pay the
plaintiff’s damages. The trial court sustained the defendant’s demurrer, which was affirmed on appeal in a per
curiam opinion.
The Court is of the opinion that however much the defendant should be impelled by common gratitude to alleviate
the plaintiff’s misfortune, a humanitarian act of this kind, voluntarily performed, is not such consideration as would
entitle her to recover at law. Harrington v. Taylor, 225 N.C. 690, 36 S.E.2d 227 (1945).
In another example, the defendant’s adult son became very ill during a journey. A Good Samaritan cared for the
son until he died. The defendant’s promise to pay for this care was deemed unenforceable. Mills v. Wyman, 20
Mass. 207 (1826).
Notwithstanding the demise of the Mansfieldian concept of moral obligation as a pervasive validation device, as
seen in previous sections, moral obligation continues to serve that role in isolated situations, especially ones that
involve promises to pay debts discharged in bankruptcy or barred by the statute of limitations. Even when moral
obligation is recognized as a worthy basis for enforcing certain promises, love, friendship, or a blood relationship
alone will not constitute moral obligation. A promise by a husband to carry out the wishes of his deceased wife
because of the love and affection for him during their marriage is not enforceable on the basis of moral obligation.
Schnell v. Nell, 17 Ind. 29 (1861).
Practice Resources:
• Corbin § .21 (the use and value of the moral obligation doctrine); § .22 (moral
obligation apart from economic benefit to the promisor); § .2 (love, friendship, blood
relationship).

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End of Document
OBLIGATION
§ .1 The “Material Benefit Rule”
[1] Promises to Pay for Past Services

When a performance is rendered by a party who reasonably expects to receive compensation for the benefits
conferred on the other party, the implication of a promise by the recipient to pay is clearly justified. Even when
the implication of such a promise is doubtful or dubious, the recipient may expressly promise to compensate the
promisee for the “past consideration.” In the early history of the common law action in assumpsit, these
promises were enforced, and there are modern illustrations of jurisdictions continuing the enforcement of such
promises.
In Wisconsin, a family friend received meals, transportation, and other benefits over many years. His express
promise to pay $25,000 for such past benefits was enforceable not only because it was evidenced by a
negotiable instrument, where consideration is implied, but because Wisconsin had adopted the “liberal rule” of
“moral consideration” that made the promise enforceable. In re Hatten’s Estate, 233 Wis. 199, 288 N.W. 278
(1940). In Illinois, a subsequent promise to pay a finder’s fee for benefits previously conferred was upheld
based on an exception called “beneficial” or “meritorious” consideration, which imposes a “moral obligation
yielding an implied consideration.” Worner Agency, Inc. v. Doyle, 133 Ill. App. 3d 850, 857, 479 N.E.2d 468,
473–474, 88 Ill. Dec. 855 (1985).
[2] Benefits Conferred Without the Request of the Recipient

When a benefit is conferred without the request of the recipient, the general assumption is that a subsequent
promise to pay for this past benefit will not be enforceable. Such was the case in Harrington v. Taylor,
discussed earlier, where the court refused to enforce a promise to pay for the medical expenses of the life-
saving neighbor.
There are cases, however, in which such promises are enforced. In one example, an employee, Webb, was
dropping large blocks of wood from an upper floor to the ground. Webb suddenly saw another employee,
McGowin, in the path of the wood blocks. To divert the flight of the 75 pound block from striking McGowin,
Webb fell with the block and sustained permanent injuries that prevented him from working. McGowin promised
to compensate him with payments every two weeks for life. After McGowin died, however, the payments
ceased. The court held:
[A] moral obligation is a sufficient consideration to support a subsequent promise to pay where the
promisor has received a material benefit, although there was no original duty or liability resting on the
promisor.
Webb v. McGowin, 168 So. 196, 198 (Ala. Civ. App. 1935).
In another case, the defendant’s bull escaped and was cared for by the plaintiff. The defendant’s subsequent
promise to pay for that care was enforced, even though there was no previous express or implied request to
provide such care. Boothe v. Fitzpatrick, 36 Vt. 681 (1864).
When such an unrequested benefit has occurred, there is no factual basis for implying a promise to pay. The
easier assumption is that the benefit was intended as a gift. The presumption of a gift when the unrequested
benefit is conferred by a family member or friend is particularly strong, but even there, it is not conclusive. It
may be rebutted by evidence that the relative or friend receiving the benefit knew or should have known that it
was being tendered with an expectation of reimbursement; this would give rise to a quasi-contractual obligation
to pay the reasonable value of the benefit conferred. See, e.g., Estate of Cleveland v. Gorden, 837 S.W.2d 68
(Tenn. Ct. App. 1992). The construction of a promise—a promise “implied-in-law”—is designed to avoid a
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recipient’s unjust enrichment by granting the performing party restitution. If the recipient may be said to be
under a quasi-contractual duty, a subsequent express promise to pay could be enforceable on the basis of the
“past consideration” from which the quasi-contractual duty arose.
[3] “Material Benefit” Under the Restatement (Second) of Contracts

The Restatement (Second) of Contracts reflects the “material benefit” rule in a section that eschews notions of
“past consideration” because it is inconsistent with the Restatement’s consideration concept. It also rejects a
“moral obligation” rationale on the traditional basis that, in one sense, every serious promise may be said to
imply a moral obligation to enforce it, but society does not and should not enforce all promises. The principle is
simply stated in terms of avoiding injustice:
A promise made in recognition of a benefit previously received by the promisor from the promisee is
binding to the extent necessary to prevent injustice.
Restatement (Second) of Contracts § 1.
The “injustice” to which this section refers is unjust enrichment—the protection of the restitution interest.
Section 86(2)(a) emphasizes that such a promise is not binding if the benefit to the promisor was “a gift or for
other reasons the promisor has not been unjustly enriched.” Comment b explains that the inherent limitations of
quasi-contractual recovery denying relief may be overcome in a proper case by enforcement of a subsequent
promise, which will preserve the policy of avoiding unjust enrichment. A consistent limitation is found in
§ 2 which prohibits enforcement of a subsequent promise “to the extent that its value is disproportionate
to the benefit.”
Practice Resources:
• Corbin § .2 (the “material benefit rule” and past services rendered at request
of subsequent promisor); § .2 (past unrequested services beneficial to
defendant).

End of Document
OBLIGATION
§ .1 Past Performance Under an Existing Contract Does Not Support a

New Promise
Two significant incursions on the pre-existing duty rule were previously addressed in Chapter 7 above. Under
Uniform Commercial Code (UCC) § 2-20 1 a good faith modification of a contract for the sale of goods is
enforceable without consideration. Restatement (Second) of Contracts § recognizes that a promise modifying a
contract that is not fully performed is enforceable when the promise is induced by a request to react to
unanticipated difficulties and its enforcement is fair and equitable. If the promise is made after the promisee has
fully performed, however, the promise is not enforceable. There is nothing to make the promise enforceable.
Even here, there is an exception under the UCC. At common law, a promise warranting a product after the sale was
unenforceable. The UCC, however, recognizes the creation of an express warranty “after the closing of the deal.”
UCC § 2- 1 cmt. 7. The precise time that words, samples, or models create an express warranty is not material.
If, for example, a buyer receives an additional statement of fact about the goods after the contract is made, it may
be treated as a good faith modification of the contracts under § 2-20 1 and needs no consideration to be binding.
Practice Resource:
• Corbin § .2 (past performance under an existing contract does not support a promise
of new compensation).

End of Document
OBLIGATION
§ .1 Judicial and Statutory Modifications of the Pre-Existing Duty Rule

The judicial and statutory modifications of the pre-existing duty rule manifest the spirit of the common law in
reacting to the felt needs of a changing society. The pre-existing duty rule is a paean to logic and consistency in
relation to the doctrine of consideration, but consideration, itself, is an historical accident arising out of the common
law writ system. The common law and related statutes that are interpreted and construed in a common law tradition
are not exercises in algebra. Rules of law are necessarily pliable, to be expanded to meet the needs of society, and
when they are insufficiently pliable, they are replaced. The current reaction to the pre-existing duty rule, like other
rules of contract law, will continue to evolve.
Practice Resource:
• Corbin § . 0 (a summation and caveat on restatements).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 10 CONTRACTS UNDER SEAL,

RECOGNIZANCES, NEGOTIABLE INSTRUMENTS, LETTERS OF CREDIT
CHAPTER 10 CONTRACTS UNDER SEAL, RECOGNIZANCES, NEGOTIABLE

INSTRUMENTS, LETTERS OF CREDIT
the subject matter.

End of Document

§ 10.01 History and Purpose of Formalities
[1] Philosophy Behind Formalistic Validation Devices

The seal is a device that makes a promise enforceable simply by its presence. A document with a seal attached
is a formal contract. It is dressed with the seal that makes the promise set forth in the document enforceable.
Although the current use of the seal has been greatly diminished, it is still viable for contracts in some
jurisdictions and retains a limited significance in other jurisdictions, as we will see later in this chapter. There
are also new formal validation devices that replace the seal in certain contexts. It is important to understand the
underlying philosophy of formalistic validation devices, starting with the seal.
The history of every society includes certain formalities. There are ceremonial formalities, such as a presidential
inauguration, which involves a sacred promise made by the new president to uphold the Constitution of the
United States. Wedding ceremonies involve a solemn exchange of vows before witnesses. Such formalities
provide evidence of important events. The time and preparation necessary to pursue a formal function also
allows time for reflection, clarification and caution to avoid improvident or unwelcome arrangements. Casual
social and other promises, however, are not made with an intention to be legally bound. The typical contract in
the twenty-first century, however, is the informal contract. An informal contract is not enforced because of the
form in which it appears; rather, it is enforced because it manifests mutual assent and consideration or
detrimental reliance. It is important to understand how the law will distinguish enforceable from unenforceable
promises to allow a party to make an enforceable promise and rely upon legal sanctions to enforce a promise
made to him or her.
[2] Evolution of the Seal
[a] Promises Were Enforced if They Met Certain External Formalities

The earliest validation of promises is not found in operative facts such as a bargained-for-exchange, which
would later come to dominate as “consideration,” or in reliance on a promise that made it enforceable under
what would become known as promissory estoppel. Neither consideration nor detrimental reliance
(promissory estoppel) is necessary for the enforcement of a sealed promise.
Promises were originally enforced if they were in a writing on paper or parchment that evidenced certain
external formalities. If the promise appeared in a writing in which the promisor manifested an intention to be
bound and a seal was attached, legal sanctions would attach to nonperformance. The sealed promise was
the English “covenant” that was enforceable prior to the reign of Edward I, which began in 1272.
The early seal consisted of heated wax impressed with the promisor’s symbol, for instance, a coat of arms
or even the King’s tooth mark. Those without a coat of arms would make their own impression in the wax or
wafer attached to the writing containing the promise. The writing had to contain a sufficiently clear promise
that identified the promisor and promisee. It had to be sealed, and it had to be delivered. The seal could be
a substitute for a signature since it was not uncommon for a promisor to be illiterate. Although modern
contracts under seal are almost always signed, they do not require a signature. The formalities of sealing
and delivery validate the promise. As we will see, however, “delivery” is not necessarily equated with simple
physical transfer of the sealed document.
[b] Functions of the Seal

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The heating of the wax and the preparation of the writing served a cautionary function in that they required
time that allowed the promisor to deliberate as to whether he really wanted to make the promise effective.
The most important function served by the seal, however, was evidentiary since a sealed promise was
immediately recognized as an enforceable covenant simply because it met the required formalities. It also
served a channeling function, separating sealed promises from other unenforceable promises. The delivery
of such a document manifested the promisor’s intention to be bound by his formal promise.
Once ordinary members of society became literate, the earlier formalities began to disappear. It was no
longer necessary to heat wax or attach a wafer to the document so that it could be impressed with a
distinctive mark. Pre-printed document forms contained a line for a signature, followed by the word “seal” or
the more elegant Latin locus sigilli (“the place of the seal”) or merely the abbreviation “L.S.” Instead of wax,
parties began to place a mark or scrawl around or near these printed “seals.” The absence of a wax
impression initially met with judicial resistance, but the desire for a more expeditious method of making an
enforceable promise prevailed through statutes or judicial recognition of the scrawl around “seal.”
The use of pre-printed forms as evidence of the seal eroded the genuine formal contract. The requirement
of “delivery” also began to wane as the emphasis shifted to whether the promisor intended the “sealed”
promise to be binding even without delivery. “Conditional” delivery was recognized to allow a promisor to
deliver and be bound by a sealed contract subject to the occurrence of an extrinsic event. The demise of
the sealed contract as a dominant device for validation of promises was inevitable once the intent of the
promisor became what matters rather than the form in which the promise was made.
[c] Seals Identified the Promisor

The early sealing process using melted wax impressed with a coat of arms or other distinctive mark from
the promisor’s signet ring identified the promisor. Even early uses of the seal, however, illustrate promises
made by adopting the seal of another party or by several parties using the same seal. The existence of the
seal alone, therefore, did not necessarily identify the promisor. Certainly, the modern pre-printed “seal” or
“L. S.” does not serve any identification function. Today, where the seal is still effective, delivery of a writing
under seal constitutes an adoption of the seal by all those signing the writing. Where the document contains
multiple seals but fewer signers, parol evidence is admissible to determine the intention of each signer with
respect to the seal. A party may, for example, have signed the document before any seal was affixed and
should be able to prove that he or she had no intention of making a sealed promise. There may be several
contracts relating to one transaction, but only one of the contracts contains the seal. Whether the signers
intended sealed promises as to the other contracts is, again, a matter of intention.
[d] A Signature Is Not Required for a Sealed Document

Since one of the functions of the seal was to validate a promise made by an illiterate promisor who could
not sign his name, signatures were unnecessary. The familiar phrase, “signed, sealed, and delivered” is
and always has been inaccurate since a signature is still not necessary to give effect to a sealed document.
In the next section, we will also explore the changes concerning “delivery” as a requirement, thereby further
undermining the accuracy of the “signed, sealed, and delivered” cliche.
[e] Recital of Sealing

The focus on intention rather than formalities made recitals in the document such as “signed, sealed, and
delivered” relevant to assure the promisor’s intentional adoption of the pre-printed seal. Some courts
concluded that such clauses were required to effect a contract under seal. While most courts do not require
a recital clause, in the absence of such a clause, a court may remain dubious as to whether a mere printed
“seal” or “L. S.” is sufficient evidence of a promisor’s intention to adopt the writing as a sealed contract.
Thus, a given jurisdiction may require a recital in the body of the contract that the parties intended the
promise to be under seal. Ripps v. Powers, 2009 U.S. App. LEXIS 27390, at *2–*8 (11th Cir. Dec. 15,
2009) (Alabama law). A recital alone, without the word “Seal” next to a signature, may not be sufficient in
another jurisdiction. Sunrise Ventures, LLC v. Rehoboth Canal Ventures, LLC, 2010 Del. Ch. LEXIS 47
(Mar. 4, 2010). The Restatement (Second) of Contracts recognizes that a recital clause is not essential in
most jurisdictions (Restatement (Second) of Contracts § 100 cmt. a), but neither is it conclusive (cmt. b).
Page 3 of 3
There are statutes in some jurisdictions giving a recital clause the effect of a seal where the writing does
not otherwise evidence a seal. Absent such a statute, however, such clauses should not have a conclusive
effect as a seal since they are “often false” (cmt. b).
Practice Resources:
• Corbin § 10.1 (formality and mystery in contract law); § 10.2 (function of
formalities and history of seals); § 10. (attachment or adoption of a
seal); § 10. (recital of sealing or delivery); § 10. (signature not required
for a sealed instrument); § 10.1 (consideration not necessary for a
sealed promise).

End of Document

§ 10.02 Delivery of a Sealed Instrument
[1] Delivery Does Not Require Physical Transfer of a Sealed Promise

Although physical transfer of a sealed promise to the promisee is the typical manifestation of the promisor’s
intention to be bound by the promise, such a transfer is not essential to constitute “delivery.” The concept of
delivery has been expanded to mean any overt act by the promisor indicating that the promisor intends to be
bound.
A plaintiff employed an agent to obtain insurance on a ship; the agent arranged for the policy, which remained
in the offices of the insurer. Although the insurer charged a premium to the agent who collected that amount
from the plaintiff, the court held that the physically undelivered policy was effective because the defendants had
sealed the document and set it aside for manual delivery when called for and had treated the premium as paid
by charging it to the account of the agent. Xenos v. Wickham, L.R., 2 H. L. 296 (1867). Similarly, an instruction
from a grantor to deliver deeds from a depository to a grantee will constitute delivery, as will mailing an
instrument to a promisee with the intention that it should have immediate effect.
It is important to understand that a manual transfer may occur without “delivery,” as where a promisor retains a
power of revocation, or where the sealed writing is delivered only for the purpose of inspection or safekeeping.
The physical act must be accompanied by the promisor’s intention that the sealed instrument is effective to
constitute delivery. The instrument does not take effect by signing nor is it effective from the date on the writing.
It becomes effective upon “delivery.” An incomplete document is not “delivered” but a new delivery upon
completing the blanks will be effective.
[2] A Promisee Need Not Assent to the Promise

It is not necessary for a promisee to assent to the sealed promise upon its delivery. Neither acceptance nor
knowledge by the promisee of the promise is necessary. The promisee may certainly reject the instrument,
however. Restatement (Second) of Contracts § 10 .
Acceptance by the promisee is required if the promise also contemplates a return promise by the promisee. For
instance, if a father conveys a deed under seal to his daughter, and the deed states that it is subject to a
mortgage that the daughter assumes and agrees to pay, the daughter is not bound until she undertakes to pay
the mortgage. Restatement (Second) of Contracts § 10 .
A sealed deed may be operative as either a unilateral or bilateral instrument. If it is designed to be operative as
the obligee’s sealed contract as well, the obligee should seal and deliver. Mere assent by the obligee is not
sealing and delivering unless the expression of assent is directed toward the execution of the document as well
as making the promise. It is possible for a promisee of a sealed promise to make an informal promise that
would create a contract with one sealed promise (from the promisor) and the promisee’s return (informal)
promise that would be supported by the consideration of the exchanged sealed promise.
[3] Conditional Delivery

If Ames asks Barnes to hold until the following day a sealed deed or a sealed contract containing a promise to
Carr, the physical delivery of the document to Barnes is a mere bailment creating no interest in Barnes nor any
power in Barnes to deliver it to Carr. As the promisor, Ames has revealed her intention accompanying the act of
physical transfer. Similarly, if Ames transfers the instrument to Carr saying, “Please tell me if this instrument is
well drawn,” again, it is a bailment. If Ames handed it to Carr saying, “This is for your inspection and, if you pay
me $10,000 immediately, your acceptance,” Ames has created a power of acceptance in Carr enabling Carr to
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make the sealed instrument his own if he pays the $10,000 immediately. A delivery to a promisee may be
subject to an oral condition.
Questions of interpretation often arise as to the intention of the parties when a deed or other instrument is
handed over to another party. The words of the document and oral instructions given to the holder of the
document must be interpreted in light of all surrounding circumstances to determine the legal effect of the
transaction. The interpretation issues, however, are no different from interpretation issues throughout contract
law. Among other determinations, the place of delivery will be ascertained from the obligor’s acts or
expressions as tested by their reasonable, objective meaning.
[4] Delivery in Escrow

Suppose that Ames hands a sealed writing to Barnes saying, “I deliver this to you to hold as an escrow and I
instruct you to deliver it to Carr on condition that he pays you $10,000 for my benefit within ten days.” An
escrow is a writing made by the person delivering it (Ames) to a third person (Barnes) who is neither the
grantee nor obligee named in the document (Carr), which is held by the third person, not merely as a custodian,
but as someone who will deliver it to the grantee or obligee on fulfillment of some condition. In David v. Town of
Webster, 2008 Mass. Super. LEXIS 181 (June 20, 2008), the parties entered into an escrow agreement to set
aside a certain portion of the purchase price of real estate to effect a proper sewer connection. The funds were
held by the buyer’s attorney who disbursed some of the funds to allow a contractor to start the work.
Subsequently, however, the municipality made the connection. The seller claimed that the attorney had
improperly disbursed funds from the escrow account. Citing Corbin, the court explained that to deposit a fund in
escrow is simply to deliver the fund to a third party to be held until a certain condition occurs. The court noted
that the purpose of the fund was to effect a sewer connection that could only be initiated by a pre-payment of a
portion of the fund to a contractor. The disbursement, therefore, was quite proper.
Instead of a sealed instrument, money could be deposited with a third person such as Barnes for payment to
Carr on the occurrence of a condition. In order to create the escrow arrangement, the third party (Barnes) must
agree to perform in accordance with the instructions. If the escrow holder delivers the instrument before the
condition occurs, no delivery of the sealed promise will be recognized. If the escrow holder delivers upon the
occurrence of the condition, delivery has been effected because the promisor’s intent to deliver is recognized.
Since escrows involve two deliveries—one delivery of the sealed instrument to the escrow holder, and one of
the holder’s delivery to the grantee or obligee—lawyers of the Middle Ages and much later were disconcerted.
Immersed in the antinomies of early common law procedure, the issue was whether the document took effect at
the time of the first delivery or only at the time of the second delivery. The failure to focus on the purpose of
such an arrangement precluded an effective analysis. Delivery in escrow is a security device where the
promisor or grantor wants to be assured of receiving whatever value it deems necessary and the grantee or
promisee desires the security of knowing that it will not part with something of value without receiving what it
desires.
Legal theory is typically the creature of economic desires and the solution here is simply another illustration of
that fact. Courts made the escrow irrevocable from the time of the first delivery, but the sealed promise or grant
became enforceable only upon the second delivery. By the first delivery, the grantor loses the power of
revocation. Upon fulfillment of the condition, the grantee becomes the owner as if the sealed instrument had
been physically transferred by a grantor intending such delivery. If the document is a deed of conveyance, the
grantee has a property interest upon the first delivery.
It is important to note that it is not the second delivery, but the fulfillment of the conditions, that is critical. If the
second delivery never occurs but the conditions have been fulfilled, “delivery” to the grantee or promisee will be
deemed to have occurred as if physical transfer had been made with the necessary intention. If the second
delivery does occur without fulfillment of the conditions, “delivery” will not be recognized.
Practice Resources:
• Corbin § 10. (what constitutes delivery of a sealed instrument?); § 10.
(acceptance of the instrument by the obligee is not necessary); § 10. (delivery
“in escrow”); § 10. (year book views of escrow); § 10.10 (legal operation of a
Page 3 of 3
delivery in escrow before performance of the condition); § 10.11 (effect of

delivery to the promisee subject to an oral condition); § 10.12 (what is
“conditional delivery?”); § 10.1 (place of delivery); § 10.1 (unilateral and
bilateral sealed contracts).

End of Document

§ 10.03 Statutory Modifications Affecting Sealed Promises
[1] Most American Jurisdictions Have Changed the Common Law of Sealed Instruments Through
Legislative Action
Most American jurisdictions have changed the common law of sealed instruments through legislative action.
Legislative actions have ranged from abolishing the seal to retaining it with various limitations. The full Corbin
on Contracts provides a comprehensive exploration of these statutes as they appear in different jurisdictions.
Here we review a summary of the more important legislative changes that affect the seal.
The essential argument for the abolition of the seal is that it had become an empty formality. The essential
argument for the retention of the seal is that a party should be able to make a binding promise without
consideration or detrimental reliance on the part of the promisee. The first argument has prevailed. In a recent
illustration, the Supreme Judicial Court of Massachusetts noted that, “Despite its lengthy pedigree … the sealed
contract doctrine has been under heavy assault at least since the days of the Industrial Revolution.” Knott v.
Racicot, 442 Mass. 314, 320, 812 N.E.2d 1207, 1212–1213 (2004).
The Knott court noted that, although the changes have largely been statutory, the sealed contract had not
escaped erosion through the courts. Thirty years earlier, the same court had abolished the distinction between
sealed and unsealed contracts in the case of an undisclosed principal who argued that it could not be liable on
a sealed contract executed by its agent. Overruling the superior court, the court saw no merit in maintaining the
distinction between sealed and unsealed contracts in such cases.
In Knott, a purchaser of real property sought specific performance although a third party claimed a right of first
refusal (option contract) based on a sealed promise. The plaintiff asked the court to abolish the common law
presumption that option contracts under seal were binding. After a careful review, the court, quoting Corbin on
Contracts stated, “Seals [have] ceased to function as form and should now be jettisoned.” The court, however,
concluded that its decision should be prospective and not affect the defendant’s right of first refusal in the case
before it.
The criticism of the seal in Corbin is predicated upon the confusion created by the morass of statutory
modifications that have failed to produce uniformity or clarity. There is merit in the creation of a new validation
device that would allow the enforcement of promises without consideration, but such a device would have to be
carefully developed, drafted, and uniformly adopted. The treatise suggests such a statute that would be called
the Model Enforceable Promises Act.
[2] Summary of Legislative Changes

Louisiana and Puerto Rico never had the seal. Twenty-six states and the Virgin Islands have effectively
abolished the seal. Section 2-203 of the Uniform Commercial Code (UCC) makes seals “inoperative,”
precluding the application of the law of sealed instruments to contracts for the sale of goods. Thus, even if a
jurisdiction has not otherwise abolished the seal, its enactment of UCC Article 2 abolishes the seal for those
types of contract.
The language of statutes ranges from a simple statement that private seals are abolished to indirect elimination
by dismissing any differences between sealed and unsealed contracts.
Although otherwise retaining the seal, a dozen states have abrogated or made the seal unnecessary in property
conveyances. Eight states have reduced the seal to presumptive evidence of consideration. Such statutes,
however, appear to have been based on the fallacy that the seal imports consideration. To lessen the
importance of the seal, the promisor was enabled to rebut the presumption of consideration. Unwittingly,
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however, they have furthered the cause of enforcing gratuitous promises by placing the burden of proving the
absence of consideration on the defendant while the plaintiff neither alleges nor offers any proof of
consideration.
[3] Statutes Making Promises Enforceable Without Consideration
[a] Contract Rescissions and Modifications

At common law, to discharge a contract under seal by rescission or to modify such a contract, the
rescission or modification was required to manifest the same formality (under seal) as the original contract.
The First Restatement of Contracts, § 0 states that there is no reason for such a requirement. Promises
made in good faith to modify a contract for the sale of goods are enforceable under UCC § 2-20 1
without a seal or consideration. Such a promise must meet statute of frauds requirements. UCC § 2-20 .
Or the parties’ own “private” statute of frauds of a no-oral-modification clause in their original contract must
be met. UCC § 2-20 2 . A New York statute makes a modification enforceable if it is in writing. N.Y. Gen.
Oblig. Law § -110 .
[b] Irrevocable Offers in a Signed Writing

Under UCC § 2-20 a written offer by a merchant for the purchase or sale of goods that gives assurance it
will not be revoked is irrevocable for the time stated in the offer or a reasonable time, but in no event to
exceed three months. A written offer stating that it is irrevocable is effective in New York. N.Y. Gen. Oblig.
Law § -110 .
[c] Written Releases

The UCC allows any claim or right arising out of an alleged breach to be discharged in whole or in part
without consideration by an agreement in an authenticated record. UCC § 1- 0 (formerly § 1-10 . Several
state statutes make written releases effective without consideration.
[d] Written Guarantees of Pre-Existing Debts

The UCC provides that no consideration is necessary to validate commercial paper governed by UCC
Article 3 if the instrument (which must be in writing by definition) is given for an antecedent indebtedness.
UCC § - 0 (formerly § - 0 .
[4] Statutes Modifying the Form of Seals

Twenty-one jurisdictions have created or validated newer forms of the seal or substitutes for the seal where
language such as “covenant” or attestation clauses indicate an intention that the promise shall be enforceable
absent consideration or detrimental reliance. The “Model Written Obligations Act” created by the National
Conference of Commissioners on Uniform State Laws (NCCUSL) makes enforceable written promises stating
the promisor’s intention to be legally bound because of that expressed statement of intention. The Act was
originally called the Uniform Written Obligations Act, and NCCUSL contemplated widespread enactment
throughout the United States. But it was enacted only in Pennsylvania and Utah, and Utah later repealed it.
Rather than a new formalistic validation device, a number of states enacted statutes that presume
consideration for promises in writing. The presumption is rebutted by proof that consideration does not exist.
See, e.g., Clowdis v. Colo. Hi-Tec Moving & Storage, Inc., 2011 U.S. Dist. LEXIS 137380 (D. Colo. Nov. 3,
2011).
[5] Statutes of Limitations

Since promises under seal are evidenced not only by a writing but by a more deliberate manifestation of an
intention to be bound, a number of jurisdictions allow an action on a instrument or contract under seal to enjoy a
longer, often much longer, statute of limitations. For example, Massachusetts has a 20-year statute of
limitations (Mass. Gen Laws ch. 260 § 1 as do Pennsylvania (42 Pa. C. S. § 2 1 and Georgia (OCGA
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§ - -2 . A table of such statutes is found in Corbin on Contracts § 10.1 . Twenty-two American jurisdictions
currently recognize contracts under seal in their statutes of limitations.
Practice Resources:
• Corbin § 10.1 (rescission and modification of contracts under seal); § 10.1
(parties to a contract under seal—authority of an agent); § 10.1 (statutory
changes affecting sealed promises).

End of Document

§ 10.04 Recognizances
A recognizance is an acknowledgment of indebtedness made before a court or other duly authorized official. The
essential elements of a recognizance are the recognizor’s appearance before the tribunal and the acknowledgment
of the understanding of the obligation that he or she assumes. It is designed to create a binding obligation, thereby
providing security for the rendition of some performance and may be seen as contractual.
Practice Resource:
• Corbin § 10.1 (recognizances).

End of Document

§ 10.05 Bonds
The common law bond was a writing, sealed and delivered, binding the obligor to pay a certain amount of money.
Thus, it had the characteristics of a sealed contract, but, unlike the sealed contract, it had to be signed in addition to
being sealed and delivered. Where the seal has been abolished, its absence does not prevent it from being
enforced as a bond. Where the seal continues to be viable, the absence of a seal does not prevent it from being
enforced as an informal contract. This is true of simple or unconditional bonds, which bind the obligor to pay a
specific sum of money on a given day. They are often called debenture bonds (government, municipal, and private
bonds). They are viewed as property rather than mere evidence of an interest represented in the writing.
Conditional bonds, however, create a duty in the obligor but that duty is expressly dependent upon the
nonoccurrence of a conditioning event. There are numerous types of conditional bonds, including indemnity bonds
to save one harmless from loss, which requires the occurrence of a loss. There are also surety bonds, which will not
become enforceable unless the principal debtor fails to pay the debt. The debt under a bail bond will not be
immediately enforceable unless the accused fails to appear in court.
Practice Resource:
• Corbin § 10.20 (conditional and unconditional bonds).

End of Document

§ 10.06 Negotiable Instruments and Documents

The list of formal contracts also includes negotiable instruments and documents as well as letters of credit.
Restatement (Second) of Contracts § . They are subject to distinct and specialized rules of law that are predicated
on their formal characteristics and differ from rules governing contracts in general. They are the subject to
specialized texts and courses.
Negotiable instruments are drafts, checks, promissory notes, and certificates of deposit that become “negotiable”
when they meet certain formalities. They must be payable to order or bearer and the payment to such a named
payee must be a certain sum. The law of negotiable instruments is found in UCC Article 3; the formal requirements
needed to make a writing a “negotiable instrument” are found in UCC § -10 .
A negotiable instrument is a more desirable form of payment because it precludes certain defenses against a
transferee that would attend a mere assignment of a contract right. The transferee of the negotiable instrument
must qualify as a “holder in due course.” This means that the transferee must take the instrument for “value” (which
could be an antecedent debt), in good faith, and without notice that the instrument is overdue, contains an
unauthorized signature or alteration or is subject to other claims. UCC § - 02.
A warehouse receipt issued by a bailee with whom goods are stored or a bill of lading issued by a carrier charged
with transporting goods to a buyer may be “negotiable documents of title” governed by UCC Article 7 as well as by
federal legislation. The “negotiable” character of the document creates special rights and duties including, absolute
control over the goods that the document evidences.
A letter of credit is a promise by a bank or other party that issued the “letter” to honor drafts or other demands for
payment. It is governed by UCC Article 5, which defines formal requirements and provides that no consideration is
necessary to establish a letter of credit.
Practice Resource:
• Corbin § 10.21 (negotiable instruments and documents, and letters of credit).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 11 OPTION CONTRACTS AND RIGHTS OF FIRST
REFUSAL
CHAPTER 11 OPTION CONTRACTS AND RIGHTS OF FIRST REFUSAL

the subject matter.

End of Document
REFUSAL
§ 11.01 An Option Contract Bestows an Irrevocable Power of Acceptance in

the Offeree
The term “option” suggests a right to choose. In this broad sense of the term, it would be possible to characterize an
ordinary offer as granting an “option” to an offeree, who may choose to accept or not accept the offer. “Option”
could also be used to describe an offeree’s power to choose between alternatives in accepting an offer, for
instance, where Ames writes to Barnes, “I have two houses at 102 and 104 Charles Street. I will sell either one to
you for $100,000 (your choice) and retain the other one for my use.” Neither of these illustrations, however,
describes the use of the term “option” as it is used in contract law.
Assume that Ames offers to sell real property to Barnes for $100,000. Barnes is interested but he needs time to
ascertain that he can obtain financing. In the meantime, he does not want to lose this opportunity. The parties agree
to enter into a separate contract under which Barnes pays or promises to pay Ames $100 in exchange for Ames’s
commitment to allow Barnes 30 days to accept the offer. This is a separate option contract and has only one
purpose: to provide Barnes with sufficient time to determine whether he will have adequate finances to purchase
the property he desires. Until the thirtieth day, Barnes may exercise his irrevocable power of acceptance and form a
contract to purchase Ames’s property for $100,000, regardless of any attempts by Ames to revoke the offer or
otherwise fail to cooperate with Barnes. Like all contracts, the option contract includes implied covenants of good
faith and fair dealing.
Option contracts may be unilateral or bilateral. When Ames and Barnes enter into a separate option contract to
make Ames’s offer irrevocable, the option contract is bilateral. The same result could be obtained in a unilateral
contract where Ames’s offer states, “If you pay me $100 now, I promise to sell my property to you on condition that
you pay me $100,000 within thirty days.” Barnes’s payment of $100 creates a unilateral contract making the Ames
offer irrevocable for 30 days.
Where the option contract is separate, there were a few earlier cases that held the offer was not irrevocable. The
theory recognized that Ames’s promise not to revoke Barnes’s power of acceptance for 30 days created a duty in
Ames whose breach of that duty was actionable, but it did not preclude Ames’s exercise of a power to revoke the
offer. This theory was rejected more than a century ago. Mier v. Hadden, 148 Mich. 488, 111 N.W. 1040 (1907).
The better and unanimous view is that Ames not only has a duty not to revoke the offer; Ames has surrendered the
power to revoke the offer.
The subject matter of option contracts is limitless. A lease may contain an option to renew. A sale of land may
include an option under which the seller may repurchase the land at a certain price within a specified time. Various
service or employment contracts may include options to extend the original duration of the contract. Executive
employment contracts often contain stock options as an incentive. Options to buy shares of stock (“puts”) or sell
shares of stock (“calls”) are very common. This chapter will explore the various ramifications of true option contracts
and distinguish them from related contracts, such as those that allow a party a right of “first refusal” or other
contracts that have no relation to option contracts despite the fact that their captions may include the term “option.”
Practice Resources:
• Corbin § 11.1 (option contracts; irrevocable offers creating powers of acceptance);
Page 2 of 2
§ 11.2 (option contracts may be either unilateral or bilateral); § 11. (form of promise
made—promise to keep offer open).

End of Document
REFUSAL
§ 11.02 Rights of First Refusal Distinguished from Option Contracts
[1] A “Right of First Refusal” Is Not an Option Contract

A “right of first refusal” is not an option contract. As seen in the previous discussion, an option contract provides
the option holder with an irrevocable power of acceptance. The holder of a right of first refusal does not have an
irrevocable power of acceptance; he has a contract right subject to a condition that must occur to create an
irrevocable power of acceptance.
The paradigmatic right of first refusal occurs in certain leases of real property. In exchange for the rental
payments, the lessee is not only entitled to the use of the premises, the lessee also has a “right of first refusal”
that will be activated by the occurrence of a condition. The conditioning event is an offer made to the owner of
the property that the owner intends to accept subject to the lessee’s exercise of the right of first refusal. The
owner cannot accept an offer without first offering it to the holder of the right of first refusal on the same terms.
A failure to do so constitutes a breach. Pannell v. Banks, 79 Va. Cir. 556 (2009). The lessee exercises the right
by offering to purchase the property on terms that match the third party’s offer.
Thus, a right of first refusal may ripen into an irrevocable power of acceptance (an option) for the holder of the
right. Van Dam v. Spickler, 2009 ME 36, 968 A.2d 1040. It is not enough that a third party offers to purchase
the leased property. Unless the offer is one the offeree intends to accept, it will not trigger the lessee’s right of
first refusal. If the lease term ends with no third party offer to buy that the owner intends to accept, the right of
first refusal is simply one of the rights under the lease that has expired.
Whether an agreement is an option contract or a contract containing a right of first refusal is a matter of
interpretation. Parties often use different names that are confusing, such as “Right to Buy,” “Privilege to
Purchase,” “First Right to Buy,” or simply “Refusal.” A phrase such as “first option to buy” may be intended to
create a right of first refusal, but the use of the term “option” creates ambiguity that may suggest an intention to
create either an option or a right of first refusal.
A lease provided that, upon expiration of the lease term, the “[l]essee shall have the first right, privilege and
option to renew this lease for a period of fifty (50) years.” The lessee sent a timely notification of its intention to
renew the lease. The lessor replied that the language of the lease provided the lessee with only a conditional
right of first refusal. Relying on the Corbin treatise, the lessee argued that the lease provided the lessee with an
option rather than a right of first refusal. The court properly held that the lessee had an option because the right
to renew the lease was not conditioned upon the lessor receiving an offer from a third party. Cal. Or. Broad.,
Inc. v. United States, 74 Fed. Cl. 394 (2006). If the lessee had only a right of first refusal, the lessor would have
been under no obligation to renew the lease term unless there had been an offer from a third party that the
lessee agreed to match. The language of the lease was sufficiently clear to indicate such an intention.
A right of first refusal may necessarily omit certain terms. An agreement to sell shares in a business granted the
seller a right of first refusal to repurchase the shares. When the buyer sold the shares without first offering them
to the seller, the trial court granted the buyer’s motion for summary judgment. It found that the repurchase
agreement was void because it lacked definite price and duration terms as well as consideration. On appeal,
the court reversed. Citing Corbin, it distinguished option contracts which must contain definite terms, from rights
of first refusal, which necessarily must await price and duration terms in offers by third parties that the holder of
the right of first refusal may then match. The consideration supporting the plaintiff’s right of first refusal was part
of the contract under which the plaintiff had originally surrendered his shares to the defendant. Steinberg v.
Sachs, 837 So. 2d 503 (Fla. Dist. Ct. App. 2003).
Once the holder of a right of first refusal has sufficient information of the intended transaction with a third party,
however, the time for deciding whether to exercise the right is activated. In Paccar Inc. v. Elliot Wilson Capitol
Page 2 of 3
Trucks LLC, 923 F. Supp. 2d 745 (D. Md. 2013), EWCT sought to transfer its Peterbilt franchise to a third party.
The franchise agreement provided Peterbilt with a 30-day right of first refusal. Peterbilt received the first
notification EWCT’s intention to sell in August 2011 followed by more detail in October as well as some
additional information in November and December. Peterbilt sought to exercise it right of first refusal on
February 1 of 2012. EWCT claimed that such an exercise was untimely. The court cited Corbin’s treatise in
stating that the right of first refusal ripens into an option when the holder of such a right is notified of the terms
of the third party offer. The right must then be exercised within the time stated. The court found that more than
30 days prior to its attempted exercise, Peterbilt was made aware of the identity of the buyer, the terms of
payment, the operating structure of the new entity as well as details concerning its administration and
management. It knew that all assets including the Peterebilt agreement and Peterbilt parts would be included. It
also knew the lease price. The court found that this was sufficient information to trigger the 30-day period. By
the time Peterbilt attempted to exercise the right, it no longer existed.
[2] Four Separate Rights are Included in a Right of First Refusal

It is important to recognize four separate rights found within the generic right of first refusal. The holder has a
right to:
(1) purchase the property at the price the grantor is willing to sell to the third party;
(2) receive notice of the potential transaction and its material terms from the grantor;
(3) accept the grantor’s offer whether the grantor made an offer to the third party or received an offer from
the third party; and
(4) buy at a price listed by the grantor even though the grantor has not received an offer from a third party
to purchase the property at that price. Presumably, the grantor has listed the property at a maximum
price.
In connection with proceedings to dissolve a marriage, the trial court ordered that the former marital residence
be listed for sale. The order also granted husband “a right of first refusal for a bona fide offer acceptable to the
parties without paying a commission as long as Wife is paid all cash for her interest.” The parties received an
offer from a third party to purchase the residence for $600,000, which was acceptable to the parties, and the
next morning, April 24, 2014, husband’s attorney emailed wife’s attorney, notifying her that he was exercising
his right of first refusal. Among other things, the email stated: “This E-Mail is intended to be formal notice of Bill
Castelli’s intent to exercise his right of first refusal.” Wife’s attorney responded to the email at 11:21 a.m. on
April 24, 2014 by demanding that husband prepare, sign, and deliver a contract matching the third party offer,
as well as provide proof of his ability to comply with the offer, by 1:00 p.m. Wife’s attorney further stated that if
the contract and proof of assets were not completed by 1:00 p.m., she “fully expects and demands [husband] to
likewise execute that [third party] offer so we have a completely signed contract by 5:00 PM today.” Husband
did not meet Wife’s demands, and the court subsequently held that Husband’s attorney’s email of April 24,
2014 was a valid exercise of the Husband’s right of first refusal. The court held: “While … a right of first refusal
has not been exercised where a party attempts to change terms or conditions so as to render the exercise
different than the third party co t ct an attempted exercise that is silent on the terms of the acceptance
clothes itself in the language of the third party offer it seeks to match.” Upon husband’s exercise of his right of
first refusal, a binding contract between husband and wife was immediately created. Wife was not free to reject
the exercise of that right, and when wife imposed terms on husband that were not contained in the court order
granting the right of first refusal, she breached the contract. Castelli v. Castelli, 159 So. 3d 271, 2015 Fla. App.
LEXIS 3042, 40 Fla. L. Weekly D 570 (Fla. Dist. Ct. App. 4th Dist. 2015).
[3] A Contract May Contain Both an Option and a Right of First Refusal
A contract may contain both an option and a right of first refusal. Assume that Ames makes the following
proposal to Barnes. “In exchange for $1,000, I hereby grant you an option to purchase my land called
Amesland for $100,000 at any time during the next six months, and the right of first refusal for that same period
at any price I am offered and am willing to accept.” By paying Ames $1,000, Barnes has an irrevocable power
Page 3 of 3
of acceptance to purchase Amesland for $100,000 at any time during the next six months. Barnes also has the
right to purchase the land for any lesser amount in an offer from a third party that Ames is willing to accept.
There is nothing inconsistent about these rights, both of which may be granted for the same consideration. If
Ames receives an offer to purchase Amesland from a third party during the six months at $90,000, Ames would
have a duty to notify Barnes of that offer and provide Barnes with a reasonable time to exercise his right of first
refusal. If Barnes chooses not to match that offer, he has surrendered his right of first refusal, but he retains his
irrevocable power of acceptance under the option until the six-month period has expired.
The illustration is more complicated if, during the six months, there is an offer from a third party to purchase
Amesland for $110,000. Some courts hold that the option to purchase at the fixed price of $100,000 is not
affected since the right to purchase at a fixed-price option is separate and distinct from a right of first refusal
that Barnes will obviously not exercise at $110,000. Another line of cases, however, holds that the fixed-price
option is extinguished when the owner receives such a bona fide third-party offer, but the rationale in these
cases is often unsatisfactory. They may suggest an interpretation of the agreement that the parties intended
such a result. The failure of the agreement to expressly state the parties’ intention in such a situation may also
be blamed for deciding that the option right has been forfeited. The more logical presumption, however, would
recognize that, unless the parties express a contrary intention, a failure to exercise a right of first refusal does
not extinguish the fixed-price option for the full duration of the option. The split of authority is discussed in Smith
v. Bertram, 603 N.W.2d 568, 571–572 (Iowa 1999).
[4] Right of First Refusal Versus Right of First Offer

There is a distinction between a right of first refusal and a right of first offer. The court in MC Oil & Gas, LLC v.
Ultra Res., Inc., 2015 U.S. Dist. LEXIS 153796 (D. Utah Nov. 12, 2015) explained: “The right of first refusal
gives the grantee the right to meet an offer made by a third party, before the seller is free to sell to the third
party.” For a right of first offer, the seller, upon deciding to market its property, must first make an offer to the
grantee of the right of first offer. If the grantee does not accept that offer, the seller is then free to sell to anyone
else on the terms rejected by the grantee or on terms which are better—but not worse—for the seller; in other
words, no other buyer can get a better deal than that which was presented to the grantee.’ While the right of
first refusal requires a party to give the right of first refusal holder an opportunity to enter into a transaction on
the same terms and conditions after negotiating with third parties, a right of first offer obligates a seller, before
negotiating with third parties, to offer to sell to the holder of the right of first offer on specific terms.”
Practice Resources:
• Corbin § 11. (the “right of first refusal” is not an option contract); § 11.
(interpreting rights of first refusal); § 11. (contracts creating an option at one
price and a right of first refusal at another).

End of Document
REFUSAL
§ 11.03 Option-Validating Formalities
[1] Option Contracts Require a Validation Device to Be Enforceable

Since options are “contracts,” they require a validation device to be enforceable. Where the seal is still effective,
a promise under seal to make the offer irrevocable is enforceable. Beyond the seal, statutes may make a
written promise enforceable or make an offer “firm” (irrevocable) or allow a promisor to simply state in writing
that he or she intends to be legally bound. Any of these “substitutes” for the seal would be effective. A recital
clause stating that nominal consideration has been paid to effect an option will be effective. Restatement
(Second) of Contracts § goes further in adopting a minority view that the simple existence of such a clause is
effective even where the consideration for the option has not been paid. Under this view, a recital clause
becomes a modern “formality” with the effect of the seal.
[2] Consideration Will Render an Option Contract Enforceable

The payment for an option to purchase land may be intended to become part of the purchase price if the option
holder decides to exercise its irrevocable power of acceptance. In Starr v. Wilson, 11 So. 3d 846 (Ala. Civ. App.
2008), Wilson claimed that he had received a right of first refusal to purchase a lot adjoining the lot he had
purchased from Jones. Jones had sold the adjoining lot to another purchaser and stated that he simply forgot
he had provided Wilson with a right of first refusal. The trial court entered summary judgment for Jones on the
footing that there was no consideration for the right of first refusal. The appellate court reversed. Citing Corbin,
it noted that a contract for the sale of land containing an option to purchase adjoining land constitutes a single
contract. Where the option is simply a subsidiary part of a larger transaction, the consideration is seldom a
determinable part of the purchase price. It is not necessary for the parties or the court to make a separate
valuation of the option to make it enforceable.
If an option contract manifests even nominal consideration that has been paid or has been promised, the option
contract is enforceable. In McLamb v. T.P. Inc., 173 N.C. App. 586, 592, 619 S.E.2d 577, 582 (2005), the
contract language was clear but a dispute occurred over its effect. The plaintiffs each deposited $500 “as
consideration” to reserve certain lots in a real estate subdivision the defendant desired to develop. The contract
stated that each deposit would be refunded upon the depositor’s request or it would be part of the purchase
price if the depositor entered into a contract to purchase the real estate. The defendant claimed that it was
unable to secure the necessary permits to develop the subdivision and returned each of the deposits.
The plaintiffs sued, claiming they had entered into enforceable option contracts. The defendant claimed that a
deposit refundable upon the mere request of the depositor did not constitute consideration. The plaintiffs cited
cases in a sister jurisdiction holding that refundable deposits were viewed as consideration for an option
contract. The court rejected that line of cases and held that a deposit refundable on the whim of the depositor is
not consideration. The court quoted Corbin and stated that: “If no down payment were made and [an] option
holder merely promised to pay … in the event the holder exercised the option, there would have been no
sufficient consideration and the so-called ‘option’ would have been a revocable offer only.”
The court held:
[A]n option is not supported by sufficient consideration if its purported to be held open only by a deposit
which is (1) refundable at the behest of the depositing party, and (2) to be applied as payment towards the
object for which the option is offered if a sale occurs.
McLamb v. T.P. Inc., 173 N.C. App. 586, 592, 619 S.E.2d 577, 582 (2005).
Page 2 of 2
[3] Detrimental Reliance Serves as a Validation Device

Detrimental reliance (promissory estoppel) would also serve as a validation device to make an option promise
enforceable. For example, if an owner were to promise not to revoke an offer for a period of time to allow a
prospective buyer to make expensive explorations to determine whether the land would be suitable for the
buyer’s intended use, such foreseeable detrimental reliance is a sufficient validation device to make the offer
irrevocable during that period. See Restatement (Second) of Contracts § 2 . In such a case the remedy for
breach of the offeror’s promise may be limited (“as justice requires”) to the recovery of reliance losses. If there
is no consideration or other validation device, a purported option contract is a mere revocable offer.
Practice Resource:
• Corbin § 11. (validating options: seals, consideration and reliance).

End of Document
REFUSAL
§ 11.04 Form of the Acceptance
[1] The Exercise of an Irrevocable Power of Acceptance Created by an Option Contract Must Be
Unconditional
An option contract creates an irrevocable offer—an irrevocable power of acceptance in the offeree—for the time
stated in the option contract. As in any other contracts, the offeror may create whatever manner of acceptance
he or she desires within the bounds of accepted public policy. The option may state, “In consideration of $1,000
paid, Ames promises to sell Amesland to Barnes for $100,000.” Barnes’s payment of the $1,000 forms a
unilateral option contract. Ames could have required a promise by Barnes to pay $1,000 in exchange for a 30-
day option to purchase Amesland for $100,000. Barnes would be required to communicate the promise to pay
$1,000 to Ames to form a bilateral contract.
The exercise of the irrevocable power of acceptance created by an option contract must also be unconditional.
If Barnes notifies Ames that he is accepting the offer to purchase Amesland for $100,000 but states that his
promise is conditional on his ability to sell certain property, there is no acceptance of the offer. If Barnes
reserved the right to withdraw for stated reasons from the agreement to buy Amesland, there would be no
acceptance.
The general rule that the acceptance of a revocable offer must be unconditional is emphasized in option
contracts. An option may be exercised only by strict compliance with its terms. In Renewable Land, LLC v.
Rising Tree Wind Farm, LLC, 2013 U.S. Dist. LEXIS 17500 (E.D. Cal. Feb. 7, 2013), Rising Tree claimed an
option on 1000 acres of land. To exercise the option, Rising Tree had to provide written notice to extend the
option and the notice had to be delivered personally or by telefacsimile by a certain date. Rising Tree asserted
that it provided notice by its words, its writings or by its course of conduct. The court found this allegation of
notice to be vague. Citing Corbin, the court granted Renewable’s motion to dismiss Rising Tree’s claim noting
the general requirement that an option can only be exercised by strict compliance with its terms.
Though courts insist on strict compliance with the terms of an option contract, the grantor of the option may
waive its right to strict compliance by words or conduct. Matter of Lamberti v. Angiolillo, 73 A.D.3d 463, 905
N.Y.S.2d 560 (2010). Moreover, an initial rejection of the irrevocable offer created by an option contract may
not terminate the option holder’s power of acceptance. Where an option holder informed the offeror that he
would “pass” on the purchase of the offeror’s farm but subsequently changed his mind and tried to accept the
offer with time remaining in the option period, the court held that the option holder’s rejection did not terminate
the irrevocable power of acceptance created by the option in the absence of a material change of position on
the part of the owner. Ryder v. Wescoat, 535 S.W.2d 269 (Mo. Ct. App. 1976).
[2] The Power to Accept May Be Dependent Upon the Occurrence of a Condition
Although an acceptance must be unconditional, an offer may provide that a power of acceptance can be
exercised only upon the occurrence of a condition. Thus, an option to purchase property expressly conditioned
on the lessee not being in default may not be specifically enforced in the presence of default. Indeed, a court
cited Corbin in stating that conditions for the exercise of an option generally require a more strict degree of
adherence than conditions in bilateral contracts. Danvers-DCH, Inc. v. Hill, 2007 Mass. Super. LEXIS 128 (Mar.
5, 2007).
[3] Apart from the Statute of Frauds, There Is No Writing Requirement for an Option Contract
Page 2 of 2
If an option creates an irrevocable power of acceptance for the sale of land, there is a statute of frauds
requirement that such a contract must be evidenced by a writing. Apart from the statute of frauds with respect
to land or other contracts required to be evidenced by a record, however, there is no writing requirement for an
option contract. Even with respect to the statute of frauds, it has been held that where the offer by the option
giver is in writing, an oral acceptance by the option holder would be effective to enforce the promise of the
giver. Welsh v. Jakstas, 401 Ill. 288, 82 N.E.2d 53 (1948). Cf. UCC § 2-201 2 .
Practice Resource:
• Corbin § 11. (form of the acceptance and of the contract made thereby).

End of Document
REFUSAL
§ 11.05 Time for Accepting an Offer Is Almost Always “Of The Essence”
In earlier explorations of acceptance of revocable offers, we noted that in contracts by correspondence an
acceptance is effective when mailed. We also noted in Chapter 2 that the “mailbox” (“dispatch”) rule did not apply to
offers made irrevocable through option contracts. Therefore, for option contracts, an acceptance must be received
to be effective. An option contract, however, may expressly permit an acceptance to be effective upon dispatch.
See Scoville v. Shop-Rite Supermarkets, Inc., 86 Conn. App. 426, 863 A.2d 211 (2004).
This distinction raises an interesting possibility. The time for accepting an offer under an option contract is almost
always “of the essence” since the option giver almost invariably makes its promise expressly conditional on notice
by a stated time. A court may be willing to consider special circumstances—for instance, illness, inadvertence, or
honest mistake—where the strict enforcement of the time limit would result in a forfeiture and grant equitable relief.
It must be kept in mind, however, that the option giver assumed the risk of an irrevocable offer for only a stated
period and any judicial extension of that period enlarges that risk beyond the option giver’s contemplation.
If Barnes had a 30-day option to purchase Ames’s land that he attempted to exercise on the thirtieth day by mailing
an acceptance, the acceptance would not arrive until after day 30. The acceptance would be too late because the
mailbox rule does not apply to option contracts. Suppose a court found that because of the absence of
consideration or other validation device, there was no option contract, thereby leaving Barnes with only a revocable
power of acceptance. Unless the offer had been revoked, Barnes’s mailing of the acceptance on the thirtieth day
would be effective to form a contract for the land.
Practice Resource:
• Corbin § 11.1 (time is of the essence nearly always).

End of Document
REFUSAL
§ 11.06 A Power of Termination Is Not an Option Contract

Leases, employment contracts, and many other types of contracts may provide one or both parties with an “option”
of termination that is exercised simply by notice to the other party of an intention to end the contract. A power of
termination is not an option contract. It does not create a power of acceptance. It is not supported by separate
consideration since it is simply one of the bargained-for rights a party may have under any contract. Fifth Third
Bank v. Ducru Limited Partnership, 2006-Ohio-3860, 2006 Ohio App. LEXIS 3823 (1st Dist.).
“Termination” is sometimes confused with “cancellation,” which is available to an aggrieved party where the other
party has materially breached the contract. Although a contract may condition the exercise of the power of
termination on a “breach” by the other party, a breach is not a necessary condition for an enforceable power of
termination. Termination may be conditioned on the occurrence of an event that is not a breach, for instance, notice
being sent a certain period of time prior to the discharge of duties under the contract. Termination may be
conditioned on any other event, but unless its exercise is subject to a condition, it may be exercised at the
discretion of the party holding that power under the contract.
“Termination” also should not be confused with a power of disaffirmance (a power of avoidance), a power that is
made available to a party lacking the capacity to contract as a matter of law because of age or disability. It is also
available as a matter of law to a party who has been induced by fraud to enter into a contract. When a party attains
majority or otherwise recovers capacity, that party may choose to either disaffirm or ratify the contract made when
capacity was lacking. A defrauded party may also decide to ratify a contract notwithstanding the fact that it was
induced by fraud.
Practice Resource:
• Corbin § 11. (options to terminate or to disaffirm).

End of Document
REFUSAL
§ 11.0 Options to Buy, Sell, or Lease

An option to buy is typically part of a contract with a larger purpose. The classic example is the lease of real
property containing an option to purchase the property. The consideration for the option is an undivided portion of
the rent paid under the lease. The lessee has the right to use the premises and an option to purchase on the terms
of the option agreement. Similarly, an option to renew the lease is a common term in leases. Again, the lease
payments constitute the consideration for the use of the premises and the option to renew.
A contract for the sale of goods of a specified quantity may include an option allowing the buyer to purchase
additional quantities at the same contract price. The consideration for that option is an undivided portion of the price
payable under the original contract. Contracts for the sale of stock may contain a purchaser’s option to resell the
stock to the seller or an option for the seller to repurchase the stock from the buyer. Each option typically will
contain time and price terms and each is theoretically supported by some undivided part of the consideration in the
original transaction.
Practice Resource:
• Corbin § 11.10 (options to sell, to buy, or to lease).

End of Document
REFUSAL
§ 11.0 Service and Agency Options

An employment contract may provide the employer with an option on the services of the employee for an additional
period. The consideration supporting the option is some undivided portion of the salary paid under the original
contract. Similarly, an employee may have an option to extend his or her employment, just as a sales agent may
have an option to extend the agency.
Options under professional sports contracts have a long history. The phrase “option year” is customarily used to
describe the year during which a baseball player and club owner execute a new agreement without which the player
becomes a “free agent” to contract with other clubs.
Practice Resource:
• Corbin § 11.11 (options in service, agency, and other contracts).

End of Document
REFUSAL
§ 11.0 Double Options

In a single contract, Ames may grant an option to Barnes to buy Amesland for $100,000 in exchange for Barnes
granting Ames an option to buy Barnesland for $120,000, acceptance of either or both irrevocable offers within 30
days. Each promise granting an option is consideration for the other’s promise, regardless of whether one, both, or
neither party exercises an option.
Ames may promise to sell shares of stock to Barnes for $30,000 and also promise to buy them back at any time
within a year at the same price if Barnes so desires in exchange for a promise by Barnes to sell them back to Ames
at $40,000 at any time within a year that Ames desires.
Ames may agree to sell and Barnes may agree to buy goods with a price to be agreed upon within specified
maximum and minimum levels. Absent a subsequent agreement on price, Ames should have an option to sell at the
specified minimum price and Barnes to buy at the specified maximum price since both parties are irrevocably bound
to those prices.
Practice Resource:
• Corbin § 11.12 (double option contracts).

End of Document
REFUSAL
§ 11.10 Specific Performance of Option Contracts

If Barnes has paid Ames $10 for an option to purchase Amesland for $100,000 and Barnes exercises that option in
accordance with its terms, Barnes’s claim to specific performance of the contract should be granted. The
consideration for the option was clearly nominal and courts of equity in their discretion may inquire into the
“adequacy” of consideration (the relative values exchanged). The critical values, however, are not the value of the
option in exchange for $10, but whether $100,000 is shockingly low compared to the value of the land. Absent a
gross disproportion in those values or other aspects of the transaction involving overreaching or unconscionability,
the contract should be specifically enforced like any other contract for land or other unique subject matter.
Practice Resource:
• Corbin § 11.1 (specific performance of option contracts).

End of Document
REFUSAL
§ 11.11 Enforcement Against an Option Holder

When a lessee has an option to renew a lease, specific performance has been decreed even though the new rental
was left to be decided by the parties or to the determination of an appraiser. The justice of this result is made even
clearer when a lessee has made valuable improvements to the leased premises on the assumption that the lease
could be renewed under the option. If the option holder causes the option giver to understand that the option will not
be exercised and the option giver makes valuable improvements, the option holder may be estopped from claiming
the option rights because of the reasonable detrimental reliance of the option giver.
The holder of an option is not bound to any enforceable duty until the holder exercises the option. At that point, the
holder has formed a bilateral contract with the option giver. Once Barnes exercises his option by accepting Ames’s
offer to sell Amesland to him for $100,000, the option contract has been performed. The last remaining act was the
option holder’s act of acceptance of the offer. Since Barnes has assumed the contractual duty, Ames can enforce
normal contract remedies against Barnes. If it was clear that the only way Barnes could accept the irrevocable offer
was to pay the $100,000 to Ames, as in any other contract that limits the manner of acceptance to performance, the
contract for Amesland would not be formed until Barnes tenders the $100,000. Limitations on the manner of
acceptance, however, are rare. Offerors typically are indifferent as to how the offer may be accepted. Assuming
such an indifferent offer, Barnes could either promise to pay the $100,000 or tender the payment to form the
contract.
Practice Resource:
• Corbin § 11.1 (enforcement against the option holder).

End of Document
REFUSAL
§ 11.12 Option Holder’s Power to Assign

One of the principal differences between an ordinary offer that creates a revocable power of acceptance and an
offer made irrevocable by an option contract is that a revocable power of acceptance cannot be assigned, while an
irrevocable power of acceptance is a contract right that can usually be assigned. When Ames makes an ordinary
offer to sell Amesland to Barnes for $100,000, the power of acceptance is exclusively in Barnes and cannot be
exercised by any other person, in part because a party has the privilege of choosing with whom it wishes to
contract. If, however, Barnes has paid $100 to Ames in exchange for an option creating an irrevocable power of
acceptance to buy Amesland for $100,000, Barnes now has a contract right which, like other contract rights, is
generally assignable.
An assignment is a present transfer of a right with the effect of extinguishing the right in the assignor and recreating
the right in the assignee. If Barnes assigned his right to purchase Amesland to Carr, it should make little or no
difference to Ames. Words of assignability in the option are not necessary to make the right assignable, but an
option is granted to the option holder and the holder’s “assigns” that courts will honor. Absent any assignment, if
Barnes died, his option to purchase Amesland would pass to the executor or administrator of his estate. If a lessee
who had an option to purchase died, the option could be exercised by the lessee’s administrator, executor, or heir.
If the $100,000 price for Amesland is payable in 10 installments of $10,000, it would make a difference to Ames if
Carr’s credit rating was substantially lower than Barnes’s rating. Under these circumstances, Ames may have a
right to have Barnes’s commitment as a surety to pay the installments should Carr fail to pay. As will be seen in
later chapters dealing with assignments, the free assignability of contract rights is favored, but clauses prohibiting
assignments are also enforced.
Unlike an option contract, a right of first refusal is presumed to be personal and cannot be assigned unless the right
refers to successors or assigns or the instrument otherwise indicates that the right was intended to be transferable
or assignable. Jones v. Stahr, 16 Neb. App. 596, 746 N.W.2d 394, 399 (2008).
Practice Resource:
• Corbin § 11.1 (option holder’s power to assign).

End of Document
REFUSAL
§ 11.13 Option Holder’s Rights Against Third Parties

If Barnes has an option to purchase Amesland, Barnes has a conditional right to the conveyance of that land.
Barnes is immune from any power of revocation in Ames and, during the period of the option, Barnes also has a
right that the option giver, Ames, will not repudiate the option contract or create difficulties by conveying the land to
a third person. Barnes has “bought” this contract right from Ames. Since Barnes has an exclusive right to buy
Amesland, he could make contracts for the resale of the land or otherwise reasonably rely on his option contract
rights.
Suppose, however, that during the option period, Ames contracts to sell the land to Davis, who is unaware of
Barnes’s option to buy the land. If Davis gets a deed of conveyance, option holder Barnes has no action against
Davis, who is an innocent purchaser for value. Barnes is relegated to proving damages for Ames’s breach. If,
however, Davis had notice of Barnes’s option rights, Davis would take Amesland subject to Barnes’s rights. If
Barnes exercises his power of acceptance, Davis may be compelled to perform the contract to the same extent as a
buyer taking subject to an ordinary executory contract of sale. As an option holder, Barnes has priority over Davis
and may maintain a suit for specific performance against him.
The option holder (Barnes) has an equitable interest in the land under the doctrine of equitable conversion.
Although state recording statutes speak of “conveyance of interests in real estate” or similar language, contracts of
sale and other interests in land are considered recordable. If an option contract creates a mere contract right, the
option holder’s interest would not be recordable. Modern cases, however, regard options as granting recordable
interests in land. If the option contract is properly recorded, it constitutes constructive notice to all subsequent
purchasers; this would give the option holder priority over even innocent purchasers for value. Even if the option is
not recorded, a potential purchaser may have constructive notice of an unrecorded lease if a lessee is in
possession of the property. Possession of property subject to a lease is notice of an option to purchase in the lease.
Practice Resource:
• Corbin § 11.1 (option holder’s interest in land—rights against third parties).

End of Document
REFUSAL
§ 11.14 The Problem of Distinguishing Option Contracts from Sales

Contracts
We have seen the term “option” used inaccurately in a variety of situations; such inaccuracies provide compelling
evidence of the fact that a contract is not an “option contract” simply because the parties call it by that name.
Attempts to distinguish genuine option contracts from contracts to buy and sell real property often raise difficult
issues of interpretation.
If Ames executes a document in which she promises, in consideration of $1,000 received from Barnes (either as
“earnest money” or in part payment), to convey Amesland to Barnes for a price of $100,000 that must be received
within 30 days, Barnes has bought (for $1,000) an option to buy Amesland for that price. Since Barnes did not make
any promise to buy or to pay $100,000, there is no contract for sale; only an irrevocable power of acceptance in
Barnes for 30 days.
In one case, a document called a “real estate sales contract” provided for payment of a nonrefundable earnest
money deposit, designated a date, place, and manner of closing, and stated “Buyer agrees to purchase and seller
agrees to sell.” All of which made the document appear to be a contract for the purchase and sale of real estate.
There was, however, another clause in the contract that stated:
In the event that the buyer does not close on or before January 31, 2000, buyer agrees to pay interest at a rate
of 9 1/2 % per annum on the unpaid balance … continuing for a period not to exceed May 1, 2002, at that point
buyer must close or contract is null and void and buyer forfeits all moneys paid.
As used in this context, the court viewed this language as giving the buyers the freedom “to change their minds
about purchasing the property and walk away.” It concluded that the contract was an option contract— “a continuing
offer” supported by the defendants’ payment of a deposit and various fees as consideration for the promisor’s duty
to keep the offer open through the option period. Quoting Corbin on Contracts, the court stated:
If the written instrument purporting to be an ‘agreement’ to purchase and sell contains promissory words by
both parties, but further provides that the ‘purchaser’ shall be privileged to make no further payments if the
‘purchaser’ so desires, the ‘purchaser’s’ earlier words of apparent promise are nullified and the supposed
promise is illusory. The transaction is then an option to buy.
U.S. Gen., Inc. v. Jenson, 2005 UT App 497, 128 P.3d 56.
Just because the contract contains a provision for forfeiture, however, does not amount to a privilege not to
consummate the contract. Unlike the case just described, even the use of the phrase “null and void” in a different
context may not have been intended to allow the buyer to walk away.
Practice Resource:
• Corbin § 11.1 (interpretive problems distinguishing options from sales contracts).

Page 2 of 2
End of Document
Corbin on Contracts Desk Edition > CHAPTER 12 HISTORY AND LEGAL OPERATION OF THE
STATUTE OF FRAUDS
CHAPTER 12 HISTORY AND LEGAL OPERATION OF THE STATUTE OF

FRAUDS
the subject matter.

End of Document
STATUTE OF FRAUDS
§ 12.01 History of the Statute of Frauds
[1] The Statute Has Been Part of American Law for Over Three Centuries
Oral promises generally were not enforced in the early kings’ courts. The writ of covenant allowed only formal
promises under seal to be enforced. While the writ of debt would allow the enforcement of an oral promise, the
writ was limited to the return of something for value. The need for a writ that would allow the enforcement of
promises was met by the development of the writ of assumpsit and the heralded Slade’s Case that focused on
failed promises. It would end the use of the writ of debt and its notorious “wager of law” in contracts cases.
Slade v. Morley, 4 Co. Rep. 91a, 76 Eng. Rep. 1072 (1602).
Unfortunately, the seventeenth century trial-by-jury excluded best evidence and allowed jurors to arrive at
conclusions for personal or capricious notions. The system so easily allowed subornation of perjury that only a
legislative response would cure the evil.
The response came in a 1677 Statute for the Prevention of Frauds and Perjuries. Of its 25 sections, two of
them, Sections 4 and 17, list six types of promises that will not be enforceable unless they are evidenced by a
writing.
Section 17 of the original statute required written evidence of a contract for the sale of goods priced at “ten
pounds sterling or upwards.” The current version is found in Uniform Commercial Code (UCC) § 2-201. It
requires a signed writing for any contract for the sale of goods at a price of $500 or more unless one of the
stated exceptions to this requirement could be invoked to make the oral promise enforceable.
American replications of the original statute typically include the six types of promises found in the original, but
there are some variations in coverage and language, which will be discussed in subsequent chapters. The
statute of frauds, however, has been part of American law for over three centuries and has been interpreted
and construed in thousands of cases. Those interpretations and construction reveal a tension between two
conflicting policies.
[2] American Courts Typically Construe the Statute Narrowly

The statute of frauds raised numerous questions among the early judges. Could the defendant admit making
the contract but still raise the statute of frauds as a defense? If a defendant falsely denies making a contract,
could the defendant be held for perjury? What effect does full or part performance have on an oral contract that
is otherwise not enforceable? The original purpose of the statute was to prevent plaintiffs from fostering
obligations on innocent parties who never assented to alleged bargains. Such prevention, however, comes with
a corresponding cost of permitting persons who have made oral promises to avoid any liability by simply
denying they made the promises. With only two exceptions, this concern prompted the repeal of the statute of
frauds in 1954 in the country of its origin. While the statute has not been repealed in American jurisdictions,
courts have typically construed and interpreted it so narrowly that its meaning and application can only be
discerned through a careful study of the cases in which it has been raised.
[3] CISG Does Not Require a Writing

Beyond the basic policy tensions, it is disconcerting to require a contract for goods priced at $500 to be
evidenced by a writing but not require a writing for service contracts of any amount. As will be seen in later
chapters, requiring a signed writing for a contract not performable within one year from its making is seen as so
lacking in justification that its narrow constructions themselves lack credulity.
Page 2 of 2
The modern history of the statute has been punctuated by various calls for its repeal that often point to Great
Britain’s survival since 1954 without the statute of frauds. At the time of this writing, 80 nations have adopted
the United Nations Convention on Contracts for the International Sale of Goods (CISG), which, consistent with
the Civil Law, does not require such contracts to be “concluded or evidenced by writing.” CISG Article 11. See
TeeVee Toons, Inc. v. Gerhard Schubert GmbH, 2006 U.S. Dist. LEXIS 59455 (S.D.N.Y. Aug. 22, 2006).
The relatively rare defense of the statute of frauds is based on the pervasive literacy of the twentieth and
twenty-first centuries and the rationality of creating a permanent record for any significant agreement so as to
avoid less reliable recollections of what was agreed to at the time of formation. The ease of creating sufficient
writings has been further facilitated by the recognition of electronic records and electronic signatures as the
equivalent of writings and traditional signatures under the Federal Electronic Signatures in Global and National
Commerce (“E-Sign”) and the Uniform Electronic Transactions Act (UETA), sponsored by the National
Conference of Commissioners on Uniform State Laws (NCCUSL), which has been enacted in 48 states. These
developments will be further explored in Chapter 23 below.
Practice Resources:
• Corbin § 12.1 (introduction); § 12. (views of early judges as to operation of the
statute).

End of Document
STATUTE OF FRAUDS
§ 12.02 The Legal Operation of the Statute
[1] An Oral Contract Whose Enforceability Depends Upon Compliance with the Statute of Frauds Is
“Within” the Statute
A certain terminology has developed in discussions of the statute of frauds. An oral contract whose
enforceability depends upon compliance with a given statute of frauds is said to be “within” the statute;
otherwise it is “not within” the statute, or it might be referred to as “without” the statute at the time of formation.
[2] Formal Contracts Generally Are Not Subject to the Statute

A formal contract such as a written promise under seal would obviously appear to meet the writing
requirements of a statute of frauds. A given statute, however, may require certain terms—such as
consideration—to be found in the writing and a sealed promise may not contain them. Even there, however,
formal promises such as those under seal, recognizances, and negotiable instruments are not subject to the
statute of frauds assuming the promisor is the party who executes such instruments. Promises to execute
formal contracts are not, in themselves, formal contracts and may be subject to a given statute of frauds.
[3] Effect of Failure to Comply

As enacted in different jurisdictions, statutes of frauds differ in how they state the effect of a failure to comply
with the statute. The original statute of frauds stated that “No action shall be brought” on an oral contract. Other
statutes may use terms such as “void” or “voidable” to denote the failure to evidence a particular type of
contract in writing.
Because courts have been dealing with statutes of frauds for more than 300 years, however, there is a
tendency to view them as part of the common law, which allows considerable judicial flexibility. Regardless of
the statutory language, statutes of frauds are generally viewed as dealing exclusively with the enforceability of
otherwise valid contracts.
A contract “within” the statute at formation is a perfectly valid contract if it manifests an offer, acceptance, and
consideration or another validation device. The statute is an affirmative defense that must be proved by a
preponderance of the evidence to preclude the enforcement of a promise. When the statute is raised, such a
valid contract may be “taken out of” the statute of frauds and made enforceable by a subsequent signed writing
evidencing the contract. The writing need only be signed by the party against whom enforcement is sought.
UCC § 2-201 2 finds a writing sent by one merchant to another merchant confirming a contract for the sale of
goods to be effective against the recipient who has not signed the writing but who does not object to it within 10
days from its receipt.
The evidentiary function may also be satisfied without a writing. Full performance of an oral contract will make
the contract enforceable. See Egan v. Herb Chambers I-93, Inc., 2007 Mass. App. Div. LEXIS 61 (Nov. 16,
2007), citing Corbin on Contracts in recognizing that an oral contract unenforceable under the statute of frauds
is not devoid of legal effect. Part performance of certain oral contracts will make a contract enforceable as well.
Other exceptions to the writing requirement based on reliance and estoppel may also apply to make the
contract enforceable absent any writing. When a contract is unenforceable under the statute of frauds, a party
is not deprived of a tort action by the statute if the facts constituting the tort are independent of those required to
prove a contract.
[4] A Contract May Be Subject to More than One Statute of Frauds

Page 2 of 3
It is possible for a contract to be subject to more than one statute of frauds. It could be a contract for the sale of
land in consideration of marriage that could not be performed one year from the time it was made. It could be a
contract for both the sale of land and the sale of goods. It could be a suretyship promise in exchange for land or
goods or a promise by an executor or administrator of an estate that could not be performed within one year
from its formation. But see In re Estate of Brecheisen, 2015 Kan. App. Unpub. LEXIS 461 (Kan. App. 2015),
where an alleged oral agreement to make weekly payments was going to take well more than 1 year, but the
court rejected the argument that this meant it was within the statute of frauds: “This provision of the statute of
frauds—concerning agreements not to be performed within 1 year—has consistently been understood to apply
only when it is impossible to perform the contract within 1 year. See … Murray on Contracts § 2 (4th ed. 2001).
No testimony in this case suggested that Brecheisen was precluded from paying off the balance owed at any
time. Thus, the contract could have been performed within 1 year . The court held the contract was within
the UCC’s statute of frauds, which includes an exception that allows enforcement of an oral agreement “with
respect to goods … which have been received and accepted.” K.S.A. 84-2-201 (3)(c). The good in question
here—a trailer—was delivered to and accepted by the buyer, so the exception applied. The court erroneously
suggested without explanation that if the UCC statute of frauds applies, the statute of frauds governing
contracts to be performed within one year is inapplicable.
A given writing may satisfy more than one statute of frauds, but there are differences. The writing to satisfy the
UCC statute in a sale of goods contract may be sufficient with fewer terms than the writing required in other
types of contracts. The exceptions that will “take a contract out” of the statute of frauds may also differ
depending upon the type of contract. Each of these types of contracts and the relevant exceptions will be
explored in later chapters.
[5] Writing Requirements Imposed by Statutes Other than the Statute of Frauds
Writing requirements may be imposed for other types of contracts, including promises to pay debts barred by
the statute of limitations or by a discharge in bankruptcy; such requirements may appear in a separate statute
rather than the jurisdiction’s traditional statute of frauds. Contracts with land brokers and real estate agents are
typical of additional types of contracts required to be evidenced by a writing. If the statute requiring oral
contracts to be evidenced by a writing is enacted after the contract has been made, most courts have held that
the statute does not render the oral contract unenforceable.
In addition to UCC § 2-201 which requires a writing for contracts for the sale of goods priced at $500 or more,
the UCC includes a similar requirement for leases of goods in UCC § 2 -201 and security agreements in UCC
§ -20 . An early version of UCC Article 8 required a writing to evidence the sale of securities, but that
requirement has been excised. Under UCC § 2-20 the “firm offer” section, a merchant’s irrevocable offer for
up to three months without consideration or other validation device must be in writing.
A residual UCC statute of frauds was designed to cover contracts for intangible property not otherwise covered
by UCC sections such as contract rights, royalty rights, patents, and copyrights. As of 2008, 35 jurisdictions had
enacted revised Article 1, which deleted this section on the ground that these types of contracts were not
appropriate for statutory regulation by the UCC. Revised UCC § 1-20 Legislative Note states that the deletion
of the former section does not constitute a recommendation to legislatures as to whether such sales
transactions should be covered by a statute of frauds.
Practice Resources:
• Corbin § 12.2 (meaning of “within the statute”); § 12. (statute of frauds is not
part of common law); § 12. (legal operation of the statute; effect in tort actions);
§ 12. (statute of frauds not applicable to formal contracts); § 12. (operation in
equity and common law compared); § 12. (operation of statutes declaring a
contract “void” or “invalid” if no memorandum); § 12.10 (effect of full performance
by both parties); § 12.21 (extent to which oral contracts are barred as a defense).

Page 3 of 3
End of Document
STATUTE OF FRAUDS
§ 12.03 Development of Estoppel to Bar the Statute of Frauds Defense
[1] If the Principal Contract Is Within the Statute, a Promise to Memorialize Also Requires a Writing
An alleged oral promise or agreement to execute a writing that would satisfy the statute of frauds is
unenforceable for the obvious reason that it would emasculate the purpose of the statute of frauds. If a party is
willing to make a false claim that an oral contract within the statute has been formed, the same party should not
flinch from making an ancillary claim that the other party agreed to reduce the promise to writing. But when
there is reliance on a promise to reduce a promise or agreement to writing and the promisor had no intention of
performing that promise, there is a considerable history of cases lifting the bar of the statute through the
doctrine of equitable estoppel.
Equitable estoppel, however, requires evidence of misrepresentation. As early as 1909, a California court
concluded that reliance on a promise to reduce an oral agreement to writing was enforceable without any
misrepresentation. Seymour v. Oelrichs, 156 Cal. 782, 106 P. 88 (1909). The First Restatement of Contracts
supported this position. First Restatement of Contracts § 1 cmt. f. A later California case would be the
catalyst for a major breakthrough.
In Monarco v. Lo Greco, 35 Cal. 2d 621, 220 P.2d 737 (1950), oral promises were made by the mother and
stepfather to their 18-year-old to induce him to remain at home and participate in a family agriculture venture.
When the son later sought further assurances upon his marriage, additional oral assurances convinced him to
continue to remain and work on the property. Wills were executed leaving virtually all of the property to him. He
relied on these promises and spent 20 years working on the farm. The stepfather changed the will and left all of
the property to his grandson who took the property. In an opinion by Justice Traynor, the court imposed a
constructive trust on the grandson through an extension of the doctrine of equitable estoppel to prevent
unconscionable injury to the son and unjust enrichment of the plaintiff.
[2] Restatement (Second) of Contracts Applies Promissory Estoppel to Enforce Promises that Induce
Action
Monarco was particularly influential in the later recognition of the promissory estoppel doctrine to satisfy the
statute of frauds. Not only was there no misrepresentation, there was no promise to reduce the oral promises to
writing. Restatement (Second) of Contracts § 1 applies the doctrine of promissory estoppel to enforce
promises that were expected to and did induce action or forbearance, “notwithstanding the Statute of Frauds if
injustice can be avoided only by enforcement of the promise.” Comment a explains that § 1 “is
complementary to § 0 which dispenses with the requirement of consideration if the same conditions are met
. How, then, does it differ? “Like § 0 this Section states a flexible principle, but the requirement of
consideration is more easily displaced than the requirement of a writing.” Restatement (Second) of Contracts
§1 cmt. b (emphasis supplied).
The statement is a recognition of the concern of courts that a simple adoption of the promissory estoppel
principle to satisfy the statute of frauds may have the effect of emasculating the statute. Notwithstanding the
common law ambience surrounding it, the statute of frauds is still a statute. Some courts may still insist on a
separate (ancillary) unperformed promise to execute a writing; others will insist on an unconscionable injury,
unjust enrichment, or both. See, for example, InCompass IT, Inc. v. XO Communs. Servs., 2012 U.S. Dist.
LEXIS 1512 (D. Minn. Jan. 5, 2012), where the court recognized precedent that would allow the promise to be
enforced based on detrimental reliance of such a character that a refusal to enforce the contract would permit
one party to perpetrate a fraud. A mere refusal to perform a contract “unaccompanied by unconscionable
Page 2 of 2
conduct,” however, was not such a fraud as to justify disregarding the statute of frauds. Other courts may
require some manifestation of deception or bad faith to recognize a promissory estoppel exception to the
statute of frauds. Packgen v. BP Exploration & Prod., 754 F.3d 61 (1st Cir. 2014).
Section 139 provides a basis for a more stringent standard than § 0. Section 139 not only includes in comment
language that it is more difficult to displace a writing requirement, it also provides a black letter statement of the
principle in § 1 2 which lists the circumstances to be considered in determining whether the injustice is
sufficient. The reaction to the Restatement (Second) position has been mixed; a number of courts have rejected
it and others have adopted it. Alaska Democratic Party v. Rice, 934 P.2d 1313 (Alaska 1997), adopts the
Restatement position and reviews the split of authority, citing cases. For example, Mississippi recognizes that
either equitable estoppel or promissory estoppel may satisfy the statute of frauds, though establishing
promissory estoppel would limit recovery to the reliance interest. Sukup Mfg. v. Rushing, 634 F. Supp. 2d 694
(S.D. Miss. 2009). In Olympic Holding Co., L.L.C. v. ACE Ltd., 122 Ohio St. 3d 89, 2009 Ohio 2057, 909 N.E.2d
93, however, the Supreme Court of Ohio expressly declined to adopt a promissory estoppel exception that
would remove an agreement from the statute of frauds. The court explained that allowing such an exception
would erode the predictability afforded by the statute of frauds and open contract negotiations to the very type
of fraud the statute was designed to prevent. But the court in Centennial Plaza III Inv., L.L.C. v. Centennial
Plaza I Inv., L.L.C., 2016-Ohio-273, 2016 Ohio App. LEXIS 248 (Ohio Ct. App., Hamilton County Jan. 27, 2016)
distinguished the holding in Olympic Holding Co., and held that reliance on an unsigned document containing
an easement was actionable under a promissory estoppel theory. Olympic Holding was addressing a breach of
contract action and was not addressing a situation where a party asserts a promissory-estoppel cause of action
to obtain reliance damages in connection with an oral promise. Ohio law recognizes a promissory estoppel
claim in that situation. “One explanation for this arguable inconsistency is that the interest to be protected by the
statute of frauds is not as significant when only reliance damages are sought and not the specific performance
of the promise,” the court opined.
[3] Specially Manufactured Goods Not Suitable for Sale to Others in the Seller’s Ordinary Course of
Business
UCC § 2-201 1 is the modern counterpart to the original Statute of Frauds Section 17. Section 2-201 provides
that there are four stated exceptions to the writing requirement. The exceptions will be explored in a later
chapter. For the purposes of determining the reliance exception, however, it is necessary to introduce one of
these exceptions at this point—the exception for specially manufactured goods not suitable for sale to others in
the seller’s ordinary course of business.
If the seller has made either a “substantial beginning” to manufacture such goods based on a buyer’s oral
promise to pay for them, or if the seller has made “commitments” to procure such special goods so that the
seller can resell them to the buyer, this kind of very narrow seller’s reliance will satisfy the statute of frauds. This
is the sole mention of reliance among the exceptions, and it clearly indicates that the drafters were well aware
of the possibility of reliance and deliberately chose to limit reliance satisfaction of the statute to the specially
manufactured goods exception. While a number of courts agree, another group of courts points to a section in
Article 1 that states that, unless displaced by the Code, principles of law and equity including “estoppel”
supplement its provisions. UCC § 1-10 (revised version of Article 1). Columbus Trade Exchange, Inc. v.
AMCA Int’l Corp., 763 F. Supp. 946 (S.D. Ohio 1991) lists cases on both sides.
Practice Resource:
• Corbin § 12. (promissory estoppel; equitable estoppel; promises to execute a
sufficient memorandum).

End of Document
STATUTE OF FRAUDS
§ 12.04 Oral Promise as Consideration

It is important to remember that the statute of frauds has nothing to do with offer, acceptance, consideration, or
other validation devices. The most comprehensive signed writing will not make an agreement enforceable if it lacks
mutual assent or a validation device. Statutes of frauds require writings to be “signed by the party to be charged” on
the logical footing that, if a plaintiff has to prove a promise that must be in writing under the statute of frauds, the
plaintiff must demonstrate a writing signed by the defendant or a recognized exception to the statute. If the plaintiff
has not signed any writing, he may argue that there is no consideration cannot be sued successfully, and unless
both parties are bound, neither is bound. The argument is redolent of the highly criticized “mutuality of obligation
doctrine,” which is not, in fact, a doctrine, since it merely suggests the absence of consideration.
There is no absence of consideration simply because a promise is unenforceable under the statute of frauds. The
fact that a promise is within the statute of frauds does not make it a void or invalid promise. If a party seeks to
enforce such a promise, the defendant may raise the statute of frauds to preclude its enforcement, just as a party
may choose to rely upon a privilege of avoiding a contract because that party lacks capacity. Moreover, if the non-
signing party brings an action to enforce a contract against a party who has signed a sufficient writing to comply
with the statute, the non-signing party will also be bound by the writing. Turner v. Cmty. Homeowner’s Ass’n, 62
Mass. App. Ct. 319, 816 N.E.2d 537 (2004).
Notwithstanding general agreement with this analysis, there is a curious line of cases holding that an agreement to
rescind an oral contract within the statute of frauds is not enforceable because of the absence of consideration.
Such cases are apparently based on the notion that the absence of a writing makes the contract “void” and they
mark instances where the use of “void” rather than “unenforceable” in a given statute may be significant, since
otherwise courts generally treat “void” to mean unenforceable. The decisions holding that the surrender of one’s
rights in a contract of rescission do not constitute consideration because such rights are “void” under a statute of
frauds are clearly erroneous.
Practice Resources:
• Corbin § 12.10 (effect of full performance by both parties); § 12.11 (oral promise is
sufficient consideration; mutuality of obligation); § 12.12 (rescission of an oral contract
as consideration for a promise).

End of Document
STATUTE OF FRAUDS
§ 12.05 The Statute Is Not a Rule of Evidence

The statute of frauds serves an evidentiary function among others, but it is not a rule of evidence. Even though an
oral contract may not be enforceable because it fails to comply with the statute of frauds, evidence of that contract
may be admissible for other purposes. Restatement (Second) of Contracts § 1 . For example, though an oral
contract cannot be enforced, it may be admitted into evidence in a quasi contract action to prove that the benefits
conferred on the defendant were not conferred gratuitously. An oral contract could also be admitted to reform a
mistaken writing to ascertain the true intention of the parties. See Kofmehl v. Baseline Lake, LLC, 177 Wn.2d 584,
305 P.3d 230 (2013). An oral agreement may be admitted to prove that there was a condition precedent to the
formation of a contract allegedly represented by a signed writing. Oral contracts may also be shown where the
contract has been partly performed. These are just some illustrations of the validity and admissibility of an otherwise
unenforceable contract under the statute of frauds.
Practice Resource:
• Corbin § 12.1 (does the statute lay down a rule of evidence?).

End of Document
STATUTE OF FRAUDS
§ 12.06 The Unenforceability of a Contract Because of the Statute Does Not

Affect Its Validity Against Third Parties
The unenforceability of a contract because of the statute of frauds does not affect its validity against third parties. A
party in possession of real property under an unenforceable oral contract that has not otherwise become
enforceable through the buyer’s part payment or making valuable improvements may maintain a tort action against
third parties injuring the property. A third-party insurance company that is not a party to a contract may not raise the
defense of the statute of frauds. The defense of the statute of frauds is available only to a party to the contract.
If a party to an unenforceable contract chooses not to raise the statute of frauds as a defense, a third-party stranger
has no right to complain. Similarly, third-party creditors cannot successfully attack the validity of a contract made by
a debtor on the ground that the requirements of the statute of frauds were not met. When, for example, a tax
collector ignored an otherwise valid contract to operate a bus terminal on a nonprofit basis because it failed to
comply with the statute of frauds, the court stated:
[I]t is elementary that only parties to the contract may invoke the statute of frauds . There is no basis in law
or in reason for permitting the government, in order to tax nonexistent income, to invoke the statute of frauds
and repudiate, on the basis of the statute, contracts which a taxpayer has made in good faith.
Charlotte Union Bus Station, Inc. v. Commissioner, 209 F.2d 586, 589 (4th Cir. 1954).
Successors in title, such as grantees, heirs, and personal representatives, may take advantage of the statute of
frauds. If Ames orally agrees to sell Amesland to Barnes for $100,000 but then conveys Amesland to Carr for
$100,000, the conveyance to Carr is effective against Barnes even if Carr was aware of the previous oral contract
between Ames and Barnes. Barnes’s contract is not enforceable against Ames, who had the privilege of keeping
the land regardless of the oral contract, and Ames can convey a like privilege to grantee Carr. If Ames would
subsequently sign a writing evidencing the contract with Barnes that satisfied the statute of frauds, Barnes could
then seek damages against Ames. But the conveyance to Carr would not be affected. It is important to recognize a
different result if Carr had only a written contract when Ames delivered a deed of conveyance to Barnes pursuant to
the oral contract. Barnes’s deed would take precedence over Carr’s executory contract.
Practice Resources:
• Corbin § 12.1 (operation of oral contract as to third parties); § 12.1 (operation of oral
contract as to creditors of the contractor); § 12.1 (postnuptial settlements may be
avoidable by defrauded creditors); § 12.1 (privies in title).

End of Document
STATUTE OF FRAUDS
§ 12.0 Choice-of-Law Issues

If an oral contract is made and to be performed in the same jurisdiction, the statute of frauds of that jurisdiction will
determine whether it is enforceable in that jurisdiction. If, however, the contract is formed in one jurisdiction to be
performed in another, a choice-of-law issue may arise. For example, in one case an offeree in New York
telephoned an acceptance to the offeror in Pennsylvania. The defendant later raised the statute of frauds as a
defense, and a conflict arose over the specific statute of frauds to be applied. The oral contract could not be
performed within one year from its making, which made it unenforceable in New York. Pennsylvania, however, was
one of only two jurisdictions in America whose statute did not include a one-year provision; thus, the contract would
be enforceable under Pennsylvania law. Linn v. Employers Reinsurance Corp., 392 Pa. 58, 139 A.2d 638 (1958).
The traditional conflict-of-laws rule applied at the time of the case determined the choice of law based on where the
contract was made. A contract is “made” when the offer is accepted, but here the acceptance was spoken into the
telephone in New York and heard in Pennsylvania. The issue then became whether the “mailbox” rule that applies
to contracts by correspondence should apply to telephone offers and acceptances. Although recognizing the
theoretical desirability of treating the medium of the telephone as if the parties were in each other’s physical
presence, where acceptances are effective when heard, the court opted to retain the “mailbox” application to such
exchanges for the sake of consistency.
Linn illustrates the choice-of-law problem that courts have yet to solve. The Restatement (Second) of Conflict of
Laws has a multi-factor test that replaces the older lex loci contractus vested rights view; factors include where the
contract was made; where it was to be performed; in a land contract, the state in which the land is located; and the
law of the state that the parties to the contract expressly or impliedly indicated should apply.
Most states have adopted the multi-factor choice of law rules on the assumption that the statute of frauds is
“substantive” rather than “procedural.” If the statute if substantive, it is viewed as determining the legal relations of
the parties created by the transaction—the “rights” that must be recognized by any court. If the statute is viewed as
procedural, it would merely determine how the courts of the enacting state were to perform their judicial function
and what remedies would be available. Regardless of the language of a given statute of frauds (“void,” “voidable,”
“illegal,” “unenforceable”), the applicable statute of frauds should be chosen on the footing that the statute is
substantive, which allows for the use of the multi-factor test.
If foreign law is sought to be applied, notice of the intent to rely upon such law must be given. Failure to plead or to
give notice as required may result in the application of the law of the forum state or in an adverse ruling. An
example is Bruno Rimini Furniture Ltd. v. Connor Mktg., 2015 U.S. Dist. LEXIS 98501 (E.D. Cal. 2015). Bruno
Ramini, a United Kingdom company, brought an action against a U.S. company, Connor Marketing, to recover the
price of goods delivered. Both parties cited the United Nations Convention on Contracts for the International Sale of
Goods (“CISG”) in their discussion of contract law, but CISG could not apply since only one of the parties to the
contract, Connor, was from a “contracting state” under CISG. The court noted Federal Rule of Civil Procedure 44.1,
which requires a party “who intends to raise an issue about a foreign country’s law must give notice by pleading or
other writing.” Neither cited to United Kingdom law nor suggested that the law of the United Kingdom applied. Per
Ninth Circuit precedent, the court assumed that the parties acquiesced to the application of California law.
Practice Resources:
Page 2 of 2
• Corbin § 12.1 (conflict of laws; choice of laws); § 12.1 (substance versus procedure—
statutes of frauds, however worded should be described as substantive law).

End of Document
STATUTE OF FRAUDS
§ 12.0 Oral Contracts Used As Defenses
[1] A Defendant Who Has Signed a Memorandum Satisfying the Statute May Raise Any Defense
Available on the Contract
When a defendant has signed a sufficient memorandum to satisfy the statute of frauds, the plaintiff may
succeed in an action even if the plaintiff has signed nothing. Nonetheless, by bringing the action, the plaintiff is
bound by that contract according to its terms. Though the defendant could not have succeeded in an original
action against the non-signing plaintiff, the defendant can insist that all of the terms of the contract are
recognized, including express or constructive conditions to the defendant’s duty. As in any other action, the
plaintiff may enforce the contract only in accordance with its precise terms and the defendant may raise any
defense available on that contract. If sued on an independent claim, however, a defendant cannot successfully
defend by asserting an oral executory contract within the statute as a basis for a set-off, recoupment, or
counterclaim in response to the independent cause of action.
[2] Oral Contract’s Role in Defense on an Action for Restitution

Assume that Ames, under an unenforceable oral contract, has conferred benefits in terms of work and labor on
Barnes who refuses to pay and when sued, raises the statute of frauds. The issue is whether Ames may bring
an action in quantum meruit to recover the reasonable value of the benefit conferred on Barnes. The oral
contract is unenforceable, but it provides evidence that Ames was not conferring the benefits of his services as
a gift. Quantum meruit actions are simply ways of pleading quasi contract to secure restitution for a plaintiff,
thereby preventing the unjust enrichment of Barnes at Ames’s expense. See Harrison v. Pritchett, 682 So.2d
650 (Fla. 1st. App. Dist. 1996).
Suppose, however, Ames did not pursue the oral contract because it was a losing contract under which the
value of the benefit he conferred exceeded the contract price. He decided to ignore the contract and sue in
quasi contract. When a party is suing on a non-consensual basis such as quasi contract, such a claim must be
consistent with good faith and fair dealing. If Barnes is willing and able to perform the oral contract, Ames will
not recover the greater amount in quasi contract. Restatement (Second) of Contracts § 1 1 illus. 1.
[3] An Oral Contract May Be Effective as a Defense in a Tort Action

An unenforceable oral contract may be effective as a defense in a tort action. Assume that Ames has orally
agreed to sell Amesland to Barnes for $100,000 and Barnes takes possession of the land but has not yet paid
Ames or made valuable improvements. While the contract is unenforceable and Ames could have Barnes
ejected from the property, Ames’s action in trespass against Barnes for taking possession of the land would be
defeated by the showing the oral contract. Restatement (Second) of Contracts § 1 2.
[4] An Executory Oral Contract of Sale Would Not Be a Good Defense in an Action to Recover
Possession of Land
In an action to recover possession of land, an executory oral contract of sale or lease would not be a good
defense. If the executory oral contract were accompanied by part performance in the form of the defendant’s
possession of the land with the plaintiff’s consent, the defense might be effective. If the oral contract was
accompanied not only by possession with the plaintiff’s assent but also by part payment of the price or the
rental, such a defense would clearly be effective.
Page 2 of 2
Practice Resources:
• Corbin § 12.21 (extent to which oral contracts are barred as a defense); § 12.22
(in an action to enforce a contract, its own terms and conditions may afford a
defense); § 12.2 (oral contract’s role in defense of an action for restitution);
§ 12.2 (oral contract as a defense in tort actions); § 12.2 (oral lease as
defense in action for possession of land).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 13 STATUTE OF FRAUDS—ORAL VARIATION OR

RESCISSION—CONTRACTS PARTLY WITHIN
CHAPTER 13 STATUTE OF FRAUDS—ORAL VARIATION OR RESCISSION—

CONTRACTS PARTLY WITHIN
the subject matter.

End of Document

§ 13.01 Effect of the Statute When Contracts Are Modified
[1] Agreements of Rescission

Parties to an executory contract who intend to surrender their respective rights under the contract may effect
that intention by forming a contract of rescission. The only purpose of a contract of rescission is to discharge
the prior executory contract. The formation of the contract of rescission and the discharge of the original
contract as well as the contract of rescission itself are simultaneous. The parties are contractually freed from
each other.
If the contract has not been performed in part on either side, an oral rescission will be effective since a
rescission contract is not within the statute of frauds. Restatement (Second) of Contracts § 1 . In Sokaitis v.
Bakaysa, 2010 Conn. Super. LEXIS 1086 (May 11, 2010), two sisters signed an agreement to share lottery
winnings. Before any performance occurred under this agreement, the sisters had a falling out and orally
agreed that they would no longer be partners. When one of the sisters then won the lottery, the other sued for a
share of the winnings. The court upheld the oral rescission since the statute of frauds does not apply to such an
oral rescission of an unperformed written contract. Similarly, if Ames signed a contract to work for Barnes for
two years and the parties orally rescind that contract prior to the time for performance, the rescission is not
within the statute. Restatement (Second) of Contracts § 1 illus. 1. The Uniform Commercial Code (UCC)
recognizes provisions in the original written contract excluding oral modifications or rescissions. UCC § 2-
209(2).
The interface with the statute of frauds may arise when the parties have partially performed. For example, if
there is a written contract for the sale of land and the seller has delivered a deed of conveyance to the buyer, a
rescission of that contract will require satisfaction of the land contract provision of the statute of frauds since the
rescission has converted the original buyer into a seller of land. There is an argument that even an executory
contract for the sale of land cannot be rescinded orally because such a contract is specifically enforceable and
equity would regard the buyer as having an equitable property interest in the land as of the time the contract
was formed. That view, however, has not prevailed. See Restatement (Second) of Contracts § 1 cmt. c.
Under a written contract for the sale of goods, if the goods have been identified to the buyer, an oral rescission
will be unenforceable if the buyer has received and accepted the goods since the rescission suggests a transfer
of the goods back to the seller. If, however, the goods are still in the seller’s possession, the oral rescission may
be effective on the footing that the seller would then be deemed to have received and accepted the “returned”
goods.
[2] There is No Generally Applicable Rule that a Modification Must Comply with the Statute
Instead of rescinding the contract, the parties to an executory contract may decide to modify it with the intention
of changing some terms while retaining the unchanged terms of their original contract. Whether a contract is
modified or unmodified should be irrelevant for the purposes of the statute of frauds, however. Nonetheless, if
the original contract is within the statute of frauds and evidenced by a writing, there are many cases stating that
such a contract cannot be varied or modified by an oral agreement. This misleading generalization creates
confusion concerning the parol evidence rule as well as the statute of frauds.
The parol evidence rule is limited to issues concerning the admission of evidence based on an alleged
agreement prior to or contemporaneous with the execution of the writing evidencing the contract. Evidence of
subsequent modification of a contract is beyond the purview of the parol evidence rule. The confusion
Page 2 of 2
concerning the statute of frauds is traceable to the failure to focus exclusively on the contract as modified since
that is the contract the plaintiff is attempting to enforce.
If the original contract as modified is within the statute of frauds and the only writing evidencing the contract is
the original writing, the issue will be whether that writing is sufficient to evidence the contract as modified. An
original contract not within the statute of frauds may be modified with terms that bring it within the statute. A
written contract of employment for a term of six months at a salary of $10,000 per month is not within the “one
year” provision of a typical statute of frauds. If, however, the parties modified the agreement to extend the
duration to two years at the same or different salary, the contract as modified could not be performed within one
year of its making and would be unenforceable unless it met the requirements of a writing or an alternate
satisfaction device under the applicable statute of frauds. The original writing stating a six-month duration would
not suffice. If, however, the original contract had a term of two years and the parties orally modified the term to
six months, the contract as modified would not be within the statute. Restatement (Second) of Contracts § 1
illus. 1. These fundamental distinctions, however, have not always been assimilated. This is particularly true of
modifications under the UCC.
[3] Modification of the Mode of Performance

Some older cases suggested that an oral modification of the mode of performance should be enforceable
notwithstanding the statute of frauds. Again, the issue is whether the contract as modified is within the statute. If
a written contract for services to be completed within three months of the time of formation required payment of
$50,000 at the completion of the service, an oral modification changing the mode of payment from money to the
conveyance of land would have to be evidenced by a writing to satisfy the land contract section of the statute of
frauds.
Practice Resources:
• Corbin § 1 .1 (effect of the statute when a contract has been modified); § 1 .2
(agreements of rescission); § 1 . (no different rule for agreements varying time
or “mode of performance”).

End of Document

§ 13.02 Application of the UCC Statute to a Modified Contract
[1] UCC § 2 20 3 Includes an “Express” Application of the Statute of Frauds to Modified Contracts
Though the language of UCC § 2-20 appears clear on its face, like any other statutory or contract language,
it can spawn great confusion. It reads:
The requirements of the statute of frauds section of this Article (Section 2-201) must be satisfied if the
contract as modified is within its provisions.
The comment to this subsection supports its exclusive purpose.
The Statute of Frauds provisions of this Article are expressly applied to modifications by subsection (3).
UCC § 2-20 cmt. 3 (emphasis supplied).
It is unusual for a statute to create nothing new. Assuming this subsection had not been included, would a
modification of a price from $490 to $500 in a contract for the sale of goods be enforceable without a writing?
The question scarcely survives its statement. If § 2-20 did not exist, such a modified contract would have to
be in writing since the price change brought the contract within the statute. Any other modification would also
have to meet statute of frauds requirements. If that is so, why did the drafters bother including § 2-20 The
comment answer is that the drafters did not wish to rely on an implied application of § 2-201 to the contract as
modified. They included an “express” application of the basic statute of frauds provision to modified contracts. It
is, therefore a reminder that § 2-201 applies to the contract as modified.
Courts have not understood the simple purpose of this statute. Simply because it is included in a UCC section
dealing with modifications, they have created the incredible notion that there is a special application of the
statute of frauds to modifications going beyond the requirements of § 2-201. Again, however, the “requirements”
of § 2-20 are the requirements of § 2-201 applied to modifications.
The writing under § 2-201.
need not contain all the material terms of the contract . All that is required is that … the offered oral
evidence rest on a real transaction . It need not indicate which party is the buyer and which the seller.
The only term which must appear is the quantity term which need not be accurately stated but recovery is
limited to the amount stated. The price, time and place of payment or delivery, the general quality of the
goods, or any particular warranties may all be omitted.
UCC § 2-201 cmt. 1 (emphasis supplied).
The terms of a writing that satisfies § 2-20 should be coextensive with this description. If parties otherwise
intend to be bound, a court will enforce a contract without a price. UCC § 2- 0 . The place and time of delivery
terms may also be supplied by the UCC. UCC §§ 2- 0 and 2-309. The modified contract consists of the terms
of the original contract that satisfied the statute of frauds and any orally modified terms that the statute does not
require to be in writing in the modification any more than they were required to be in the writing evidencing the
original contract.
A change in the subject matter, the parties, or the quantity term would necessitate a writing to evidence such a
new term; but a modification of the price (except a raise in price from less than $500 to $500 or more) or
method of payment, the time or place of delivery, or any other new term that the statute of frauds would not
require to be in writing should not be required to be in writing in the modified contract. The comment to § 2-20
notes that § 2-201 limits the enforceability to the quantity term stated in the writing. Thus, it is a reminder that
any change in that term would require new authentication. This would not, however, be true of a change in a
written price term that was not a necessary part of the original writing. If, therefore, the parties orally modify a
written price term, a new signed writing should not be necessary to make that modification enforceable.
Page 2 of 4
Even the venerable Restatement (Second) of Contracts, however, would refuse enforcement of oral
modifications of the time for delivery and payment for goods absent reliance. Restatement (Second) of
Contracts § 1 illus. 5. Moreover, the majority of courts that have addressed this issue have concluded that
any modification of a contract for the sale of goods priced at $500 or more must be evidenced by a writing;
“these courts have provided little analysis” for that view, however. Zemco Mfg., Inc. v. Navistar Int’l Transp.
Corp., 186 F.3d 815, 819 (7th Cir. 1999). Notwithstanding the absence of analysis in the majority case law and
strong scholarship to the contrary that the Zemco court expressly acknowledges, it felt compelled to adopt this
view in applying Indiana law even though Indiana had not spoken directly to this issue. Rather, the court
pursued the “presumption” that Indiana would adopt the majority view.
[2] “No-Oral-Modification” Clauses

Such an uninformed view based on “little analysis” is particularly onerous in light of § 2-20 2 . That section
states that a provision in the original agreement that excludes modifications or rescissions except by a signed
writing is enforceable. Such no-oral-modification (NOM) clauses are created by the contract. As a UCC
comment indicates, the parties “in effect,” are permitted “to make their own Statute of Frauds … which
expressly requires any modification to be by signed writing.” UCC § 2-20 cmt. 3 (emphasis supplied).
The distinction between subsections (2) and (3) is abundantly clear. If the contract as modified has an original
writing satisfying the so-called “public” statute of frauds under § 2-20 no new or additional writing
evidencing that modification is necessary. If, however, the parties have included a NOM clause, such a “private”
statute of frauds would require a writing, since the clause requires any modification to be evidenced by a
writing.
That distinction, however, is obliterated by case law that requires any modification to be evidenced by a writing
under § 2-20 . In effect, the prevailing view reads § 2-20 2 out of the Code since there is no need for a
NOM clause if § 2-20 requires any modification to be evidenced by a writing. See John E. Murray, Jr., The
Modification Mystery: Section 2-209 of the Uniform Commercial Code, 32 Vill. L. Rev. 1 (1987).
There is a California statute stating that “A contract in writing may be altered by a contract in writing or by an
executed oral agreement, but not otherwise.” Cal. Civ. Code. § 1 (2010). The statute had been modified to
assure compliance with UCC § 2-20 .
[3] Contracts for the International Sale of Goods

Since there is no statute of frauds under the United Nations Convention for Contracts for the International Sale
of Goods (CISG), it is not surprising that CISG recognizes that, “[a] contract may be modified or terminated by
the mere agreement of the parties.” CISG Article 29(1).
When a contract in writing contains a provision requiring a modification or termination to be in writing, CISG
requires that provision to be enforced, although “a party may be precluded by his conduct from asserting such a
provision to the extent that the other party has relied on that conduct.” CISG Article 29(2). When one is
precluded from asserting a provision in a contract, one is often said to be “estopped” from such an assertion,
which would be triggered by conduct in reliance on an oral modification or termination of the contract. This
concept and its phraseology are highly reminiscent of the remaining provisions that appear in UCC § 2-20 that
we now consider.
[4] Waiver of Conditions and Estoppel to Assert Them
[a] Waiver Is the Voluntary Relinquishment of a Known Right

The concepts of “waiver” and “estoppel” will be explored in a later chapter dealing with conditions in the law
of contracts. Nonetheless, they must be introduced at this stage to consider their use in the UCC relating to
modifications. It is possible to discover various definitions of “waiver” in the case law. The traditional
definition suggests the voluntary relinquishment of a known right.
UCC § 2-20 states:
Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or
(3) it can operate as a waiver.
Page 3 of 4
Such an “attempt” is an oral modification that violates (2) or (3), but “can” (not “does”) operate as a waiver.
A comment explains that this provision seeks to recognize “the parties’ actual later conduct,” which would
not be recognized under subsections (2) or (3). UCC § 2-20 cmt. 4.
[b] The Term “Waiver” Should Be Limited to the Elimination of Conditions

It is useful to limit the use of the term “waiver” to the elimination of conditions. A party may choose to
perform a conditional duty even if the condition has not occurred. A seller’s duty to deliver goods may be
conditioned on a buyer’s pre-payment. If the seller notifies the buyer that the goods will be delivered even in
the absence of that pre-payment, the seller has voluntarily surrendered that condition to that duty. If the
seller’s notification is viewed as a modification, it needs no consideration to be enforceable, since good faith
modifications are enforceable without consideration in a contract for the sale of goods. Modifications,
however, are agreements. The waiver is a unilateral promise seeking nothing in exchange. Absent
consideration or reliance, waivers may be retracted if the time for the occurrence of the condition has
passed and the waived condition was not a material part of the agreed exchange.
[c] A Waiver May Be Retracted Unless the Retraction Would Be Unjust in View of Reliance on the
Waiver
Section 2-209(5) recognizes the importance of reliance by permitting a waiver to be retracted unless the
retraction would be unjust in view of reliance on the waiver, which could be called an “estoppel.” The
confusion attending the difference between subsections (4) and (5) of § 2-20 inspired a disagreement
between two well-known members of a court who rarely manifest such disagreement. In Wisconsin Knife
Works v. National Metal Crafters, 781 F.2d 1280 (7th Cir. 1986), the supplier of goods sought to be
excused from the delivery date in a contract containing a NOM clause on the basis of an oral modification.
Writing the majority opinion for the court, Judge Posner suggested that such an attempt that fails to satisfy
either subsection (2) or (3) operates as a waiver only if it is accompanied by reliance. His colleague, Judge
Easterbrook, disagreed, and insisted that a waiver can exist without reliance under subsection (4), although
it is a retractable (revocable) waiver under subsection (5). The Easterbrook analysis accords with Corbin on
Contracts and it has prevailed in the subsequent case law. See, e.g., BMC Indus. v. Barth Indus., 160 F.3d
1322 (11th Cir. 1998).
Consider a simple illustration of a contract for the sale of goods to be delivered 30 days after the contract is
made. Two days after it is made, the buyer orally asks the seller to delay delivery for 45 days. The seller
agrees and delivers on the forty-fifth day at which time the buyer rejects the goods on the ground that the
delivery was late. The seller’s claim that the delivery date was modified would confront the prevailing
interpretation of § 2-20 that any modification must be evidenced by a writing. Even if an enlightened
court would not find such a modification to violate subsection (3) because the time of delivery is not a
required written term under § 2-201 if the parties inserted a NOM clause in their original written agreement
there would be a violation of subsection (2). The delivery term, however, could be said to have been waived
by the willingness of the seller to delay delivery. Moreover, by waiting until the forty-fifth day to deliver the
goods, the seller relied on the buyer’s request for a delay and that reliance made the waiver irrevocable
under § 2-20 .
This analysis may give rise to protestations that it is the oral modification that is being enforced under the
guise of “waiver” and “reliance,” notwithstanding a violation of § 2-20 2 (3), or both. If, however, the oral
agreement alone were viewed as the “waiver,” it could and undoubtedly would be retracted absent reliance.
The oral agreement was a promise of waiver. It furnished the circumstances by which the defendant’s own
representations and conduct caused the seller’s failure to perform in accordance with the original delivery
schedule. The irrevocable waiver precludes the buyer’s assertion that a constructive condition to its duty
failed.
The analysis is indistinguishable from a common law analysis that would arrive at the same conclusion
under the rubric of “estoppel.” See Congress Factors v. Malden Mills, Inc., 332 F. Supp. 1384 (D.N.J.
1971). When a party is sued for breach of contract, it is nearly always a good defense that the defendant’s
nonperformance was caused by the plaintiff. Notwithstanding the statute of frauds, courts will discover ways
Page 4 of 4
to achieve fundamental justice using somewhat amorphous terms such as “waiver, “estoppel,” “reliance,”
and even “justice.”
A contract for the purchase of a helicopter included a NOM clause. The seller orally agreed to extend the
closing date in exchange for the payment of $100,000 which was part of an escrow payment. The $100,000
was paid. The court held that the performance of the oral modification manifested the parties’ intent to
waive the NOM writing requirement under § 2-20 . Sociedad Aeronautica De, Santander S.A. v. Weber,
2010 U.S. Dist. LEXIS 71349 (D. Mont. July 14, 2010). Since the modification had been executed, it was
irrevocable under § 2-20 .
Practice Resources:
• Corbin § 1 . (is a contract as modified within the statute?); § 1 .
(enforceability of the new agreement by satisfaction of the statutory
requirements); § 1 . (application of UCC statute of frauds to a modified
contract); § 1 . (oral waiver of conditions and estoppel to assert them);
§ 1 .10 (effect of executory oral agreement as a defense when sued on
the written one).

End of Document

§ 13.03 Effect of Executory Modification

If a modification of a contract is unenforceable under the statute of frauds, the original contract is unaffected. It is
neither varied nor rescinded. It is enforceable as if no modification had been attempted. As noted earlier, parties
may orally rescind their contract, notwithstanding the statute of frauds. If, however, they merely attempt to modify it
orally, their failed attempt at modification will be a nullity.
Practice Resource:
• Corbin § 1 .11 (effects of modification: rescission and substitution).

End of Document

§ 13.04 Effects of Performance

If an executory oral modification has been fully or partially performed, the performance will take the modification out
of the statute of frauds. The rights and duties of the parties under the contract are then determined by the
performed oral agreement insofar as it different from the original written agreement, which is discharged pro tanto.
In a very real sense, such an analysis is nothing more or less than the part performance exception to contracts for
the sale of land or contracts for the sale of goods.
Practice Resource:
• Corbin § 1 . (performance by plaintiff may make defendant’s oral promise enforceable).

End of Document

§ 13.05 Effect of Substituted Performance

If the parties make an oral executory contract in variation and substitution for the original contract, it is
unenforceable. If, however, the substitute contract is performed with the assent of the other party, the parties have
effected an accord and satisfaction, discharging the promisor’s duty. If Ames promises to convey Amesland to
Barnes followed by the parties’ oral modification for Ames to convey his property called Blueacre instead, the oral
agreement is unenforceable; but if Ames conveys Blueacre with Barnes’s oral assent, Barnes has no cause of
action on the Amesland contract. The substituted performance discharged Ames’s duty.
Practice Resource:
• Corbin § 1 . (effect of substituted performance as a defense—discharge by accord and
satisfaction).

End of Document

§ 13.06 Divisibility of Contracts
[1] Contracts Partly Within the Statute

When an oral contract contains promises within and not within the statute of frauds and the statute has not
been satisfied as to the former, it is generally said that the entire contract is unenforceable. Restatement
(Second) of Contracts § 1 . To enforce only the promises not within the statute would create a bargain the
parties never made since their entire contract was predicated on the enforcement of all promises. If, however,
the contract is severable, i.e., susceptible to division and apportionment, courts have enforced a divisible part
that is not within the statute of frauds. Courts recognize that the issue of severability is not susceptible to any
precise rule. Dumas v. Auto Club Ins. Ass’n, 437 Mich. 521, 473 N.W.2d 652 (1991).
It is particularly important to remember that the statute of frauds applies only to executory and not executed
promises. An executory 18-month oral contract is unenforceable, but an executed 18-month oral contract is
enforceable. The conveyance and acceptance of a deed under an oral contract for the sale of land eliminates
any statute of frauds defense just as the receipt and acceptance of goods under an oral contract for the sale of
goods is an exception to the UCC statute of frauds. UCC § 2-201 c . The same concepts apply to multiple
promises.
In exchange for Ames’s oral promise to perform services for Barnes over the next three months, Barnes orally
promises to pay Ames $5,000 each month and to transfer ownership of Barnes’s sports car to Ames. The only
promise within the statute of frauds is Barnes’s promise to transfer the car. If that promise is performed or
excused or is deemed divisible, Barnes’s remaining executory promise to pay $5,000 monthly is enforceable
because it is not within the statute of frauds. If the promise to deliver the sports car is not performed but Ames
waives her right to receive the car, Ames may enforce Barnes’s promise. If, however, the promise to transfer
the car remains unenforceable under the statute of frauds, the general rule applies that the entire contract is
unenforceable. Restatement (Second) of Contracts § 1 illus. 6.
[2] Alternative Performances

When Ames has promised to convey Amesland or to pay $50,000 to Barnes and the $50,000 payment is a true
alternative performance rather than a mere agreement to pay liquidated damages, the choice of performance
lies exclusively with Ames, the promisor. Barnes could not enforce the promise to convey the land, but there is
no statute of frauds basis for a refusal to enforce the promise to pay $50,000. While such a promise has been
held to be within the statute of frauds, the better-considered cases enforce money judgments. If Barnes, the
promisee, had the exclusive right to choose between Amesland and the $50,000 alternative, the contract would
be within the statute of frauds since the contract would permit Barnes to compel the alternative of conveying the
land. If the $50,000 was intended to operate as a liquidated damages clause, such a payment is not a true
alternative and the statute of frauds would apply to the oral promise to convey land.
[3] Divisibility of Contracts to Leave Property by Will

A number of states have enacted statutes requiring promises to leave property by will to be in writing. Such oral
promises often involve land or goods that make them also susceptible to the general statute of frauds
provisions on contracts for the sale of land and contracts for the sale of goods. The typical claim is that the
promisee has completed the performance that was the consideration promised in exchange for the decedent’s
promise to include a provision for real or personal property in the decedent’s will. Notwithstanding such
performance, courts generally deny recovery on the decedent’s promise.
Page 2 of 2
Courts refuse enforcement of the land contract on the footing that there has been insufficient part performance
to take the contract out of the land section of the section. They refuse to enforce the promise to bequeath
personalty on the ground that the contract is not divisible—although the indivisible nature of the contract is
nothing more than a conclusion. Because of a governing statute of wills, courts may not feel comfortable
enforcing these contracts, particularly since they may compensate the promisee in restitution to avoid unjust
enrichment of the estate. If the true rationale is to be found in policy reasons, however, courts should be willing
to state those reasons rather than relying on what Professor Karl Llewellyn would call “cover tools,” which are
not reliable tools.
Practice Resources:
• Corbin § 1 .12 (contracts partially within the statute); § 1 .1 (divisibility of
contracts to leave property by will); § 1 .1 (divisibility of bilateral contracts);
§ 1 .1 (divisibility of alternative contracts).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 14 MANNER OF RAISING DEFENSES—

RESTITUTION AND REFORMATION
CHAPTER 14 MANNER OF RAISING DEFENSES—RESTITUTION AND

REFORMATION
the subject matter.

End of Document

§ 14.01 The Statute of Frauds Is an Affirmative Defense That Is Waived

Unless It Is Raised
The statute of frauds is an affirmative defense that will be waived unless it is raised. A perfectly valid oral contract
within the statute will not be denied enforcement unless the defendant raises the statute of frauds at the trial level.
The defense cannot be raised for the first time on appeal and a court will not raise the statute on its own motion.
Dynegy, Inc. v. Yates, 422 S.W.3d 638, 56 Tex. Sup. J. 1092, 2013 Tex. LEXIS 679 (Tex. 2013).
Generally, the defense of the statute of frauds must be specially pleaded. The older form of pleading the statute by
way of demurrer has been largely replaced by a motion to dismiss or, even before filing an answer, a motion for
summary judgment or judgment on the pleadings. Since the statute may be satisfied by writings or performances
that occur after the oral contract was formed or, as the next section demonstrates, by judicial admissions, there is a
plausible argument for allowing discovery before summarily dismissing the plaintiff's action. Citing the Corbin
treatise in Sysco Food Servs. of Conn., Inc. v. Delectable Devs., Inc., 16 Misc. 3d 1138(A), 851 N.Y.S.2d 61 (Dist.
Ct. 2007), the court noted that a complaint on its face based on an oral contract for the sale of goods states a valid
cause of action subject to being defeated by a proper statute of frauds defense. A plaintiff is not required to allege
compliance with the statute of frauds.
Practice Resource:
• Corbin § 1 .1 (asserting the statutory defense: pleading the statute and waiver by failure
to plead).

End of Document

§ 14.02 The “Judicial Admissions” Exception to the Statute
[1] A Judicial Admission May Remove the Contract from the Operation of the Statute
On its face, a suggestion that a party may simultaneously admit the making of a contract and defend against its
enforcement on the ground that it violates the statute of frauds seems absurd. The statute was designed to
prevent rather than to promote fraudulent practices and this was the early common law view. By the close of
the eighteenth century, however, this view was rejected on the basis that compelling the defendant to admit or
deny making the contract left him with only two choices: admit under oath that he made the contract, thereby
losing the statute of frauds, or lie under oath that he did not make the contract and be subject to perjury
charges. This “dilemma” induced courts to permit the incredible practice of allowing a party to admit making the
contract while still raising the statute of frauds. The twentieth century saw a return to sanity in this regard.
[2] The UCC Removes the Statute When the Party Against Whom Enforcement Is Sought Admits That a
Contract Was Made
The Uniform Commercial Code (UCC) addresses this unethical notion by removing the statute of frauds when:
the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a
contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of
goods admitted.
UCC § 2-201 .
The stated purpose of this provision is simply to prevent a simultaneous admission of the contract and a statute
of frauds defense. UCC § 2-201 cmt. 7. Like any other statute, however, the language requires interpretation
and construction. Moreover, because it is limited to what are generically called “judicial admissions,” its
interface with procedural rules is complex.
When the statute of frauds was raised as a preliminary objection in the nature of a demurrer, such a pleading
did not constitute an “admission” that would activate the UCC admissions exception. Moreover, no party would
ever be compelled to admit or deny the contract for the purposes of the exception. These conclusions had the
effect of eliminating § 2-201 . Noting such a “defect” in procedure, a court held that the statute of frauds
could no longer be pleaded in that fashion. Duffee v. Judson, 251 Pa. Super. 406, 380 A.2d 843 (1977).
Another court arrived at the same analysis and precluded the use of a demurrer that admits the facts pleaded in
the complaint but only for the purposes of the demurrer which is not a judicial admission. Garrison v. Piatt, 113
Ga. App. 94, 147 S.E.2d 374 (1966).
Other courts, however, worried that precluding the pleading of the statute by demurrer or other bare motions
would create unjust burdens for a defendant. While agreeing with the Corbin on Contracts analysis that
permitting a defendant to admit the existence of the contract and still obtain the protection of the statute of
frauds “is a triumph of pure formalism,” these courts were concerned that insisting on discovery to allow for the
possible admission that the contract was made could lead to badgering a defendant. See Triangle Marketing,
Inc. v. Action Industries, Inc., 630 F. Supp. 1578, 1583 (N.D. Ill. 1986).
A compromise approach would not preclude the use of a motion to dismiss or similar answer, but unless such a
bare answer was supplemented by sufficient evidentiary materials, a court could order discovery. Thus, an
answer accompanied by a sworn affidavit that there was no contract would preclude discovery. Though
discovery even in the face of a sworn affidavit might induce a defendant to “blurt out” an admission that the
contract was really made, under this view, such a tiny possibility would not justify wholesale discovery. DF
Activities Corp. v. Brown, 851 F.2d 920 (7th Cir. 1988) (Posner, J.).
Page 2 of 3
An illustration of the confusion sometimes engendered by the UCC admissions exception is seen in Prof’l Sales
v. Estate of Joseph S. Brehaut, 2015 Pa. Super. Unpub. LEXIS 2220 (Pa. Super. 2015), where, in considering
a demurrer, the court held that the admissions exception was applicable because the plaintiff’s complaint
alleged that the defendant—“the party against whom enforcement is sought”—admitted the existence of an oral
agreement. The dissent pointed out that the defendant did not admit the existence of an oral agreement in a
pleading, so the admissions exception was inapplicable. Another judge wrote a concurring opinion—which was
joined by the author of the majority—that the resolution to the question whether the contract was subject to the
admissions exception should await defendant’s testimony at trial.
[3] Admissions May Be Involuntary

A dissenting opinion in DF Activities Corp. noted that admissions under § 2-201 may be involuntary and
involuntary admissions would never be heard absent discovery. Although the dissent would not make discovery
available in every case of a sworn denial of the contract, it would allow the trial judge the discretion to grant
discovery and to limit it under all of the circumstances. DF Activities Corp. v. Brown, 851 F.2d 920 (7th Cir.
1988) (Flaum, J.).
[4] Indirect Admissions

A defendant may deny under oath the making of a contract, but a truthful description of the facts may clearly
demonstrate that the defendant has made a contract. The denial is based upon a mistake of law. Such an
admission is sometimes called “involuntary” or “indirect.”
The classic example is Lewis v. Hughes, 276 Md. 247, 346 A.2d 231 (1975). In Lewis, the defendant testified at
trial that he had no intention of making a binding agreement to purchase the plaintiff's house trailer in one
payment of $5,000. He intended to pay the full price of $5,000, but he testified that he intended to pay the price
in installments, although this condition to payment existed only in his own mind. The court had no difficulty in
determining that his undisclosed intention was irrelevant and that he had admitted making the contract. Thus, it
is possible for a defendant to attach a sworn affidavit denying the existence of a contract to a motion to dismiss
which, absent discovery, would not unearth the kind admission seen in this case. The view of allowing limited
discovery in the discretion of the trial court appears to be the sounder approach.
[5] “Otherwise in Court” Is Strictly Construed

The statutory language insisting on an admission in “pleadings, testimony or otherwise in court” is designed to
reject other alleged admissions where credibility may be strained. Courts have generally been strict in their
construction of “otherwise in court.” If the defendant was a party in a separate litigation in which he or she
admitted that he or she made the contract, a court has rejected such an admission as satisfaction of the statute
in the action on the contract. While depositions are statements under oath that may be extensions of the judicial
process, unless such deposition testimony is properly filed, several courts have held that such an admission is
not sufficient to satisfy the statute.
[6] An Admission of a Contract for the Sale of Goods Must Contain a Quantity Term
An admission that satisfies the statute of frauds is a substitute for the required writing under the applicable
statute. It is an alternate satisfaction device requiring only terms that are coextensive with the terms of a writing
that would have satisfied that statute. Thus, an admission of a contract for the sale of goods must contain a
quantity term. The quantity term in the admission will limit the enforceability of the contract to that quantity since
there is no other admissible quantity term. The admission must evidence a contract for identifiable subject
matter and identity of the parties though, like the writing, it is not necessary to designate either of the named
parties as the buyer or seller.
[7] Some Courts Have Extended the Admissions Exception to Other Contracts Within the Statute
Influenced by the UCC, some courts have extended the admissions exception to other contracts within the
statute of frauds. Other courts have returned to the position of the English courts in the first century after the
statute was enacted to engraft the exception. A judicial admissions exception may be limited with respect to
Page 3 of 3
certain types of contracts subject to the statute of frauds. For example, an admission that a contract for the sale
of land was made absent a legal description that would meet statute of frauds requirements was deemed
insufficient to constitute an exception to the writing requirement. Key Design, Inc. v. Moser, 138 Wn.2d 875,
882, 983 P.2d 653, 658 (1999).
Practice Resource:
• Corbin § 1 .2 (judicial admissions exception; procedural implications).

End of Document

§ 14.03 The Remedy of Restitution
[1] A Plaintiff Who Has Fully Performed a Contract That Is Unenforceable Under the Statute Can
Enforce the Defendant's Express Promise
There are many cases in which a plaintiff who has fully performed a contract that is otherwise unenforceable
under the statute of frauds can enforce the express promise of the defendant as if there were not a statute of
frauds issue. As will be seen, performance by a seller of a contract for the sale of goods within the statute will
make the contract enforceable to the extent of the seller's performance. A contract for the sale of land can be
made enforceable if the buyer does more than simply pay the purchase price by taking possession of the land
or making valuable improvements on the land. Performance of oral promises may also satisfy the marriage
provision of the statute of frauds, but it will not satisfy the requirement of a writing in a promise to answer for the
debt of another where the promisee has performed. See Dynegy, Inc. v. Yates, 2010 Tex. App. LEXIS 3556
(May 12, 2010), rev’d on other grounds, Dynegy, Inc. v. Yates, 422 S.W.3d 638, 56 Tex. Sup. J. 1092, 2013
Tex. LEXIS 679 (Tex. 2013). If an express promise can be enforced, there is no justification for providing the
plaintiff with an alternative remedy in restitution.
When a party has repudiated a contract that is otherwise unenforceable under the statute of frauds after the
other party has partly performed, the contract cannot be enforced, but the partly performing party can bring an
action in quasi contract for restitution. Indeed, restitution of any payments or other value conferred on a seller or
lessor of land is the only remedy available to a buyer or lessee under an unenforceable oral contract. If the
buyer has conveyed land in exchange for the seller's unenforceable promise to convey land, the buyer may
recover the value of the land already conveyed. Where services are provided but the contract is unenforceable
under the one-year clause or under an unenforceable agreement to make a provision in a will for a caretaker,
the plaintiff may recover the value of the benefit conferred, irrespective of whether it is in the form of money,
services, or property.
Neither the expectation nor reliance interest is recoverable. The protection of the restitution interest deprives
the defendant of the unjust enrichment the defendant would otherwise enjoy at the expense of the partly-
performing plaintiff. The one exception involves alleged oral promises to pay commissions to real estate
brokers. Such promises were not part of the original statute of frauds. To allow a restitution recovery by the real
estate broker would undermine the essential purpose of these special statutes.
[2] Evidence of the Oral Contract Is Admissible to Determine the Value of the Benefit Conferred
Evidence of the oral contract is admissible to aid the court in determining the value of the benefit conferred in
an action for restitution. When full performance has occurred but the contract remains unenforceable, the use of
the express oral agreement as evidence of the value conferred may often result in an award indistinguishable
from enforcing the oral contract. The plaintiff, however, is not suing for the expectation interest, and the jury
should be instructed on the difference between the expectation and restitution interests.
[3] Forms of Pleading

Restitution may be pursued under common counts in assumpsit depending upon the exigencies of the case.
The count for the recovery of money was “money had and received.” The count for services performed was
quantum meruit, and for goods sold and delivered, it was quantum valebat. When used to recover the
reasonable value of the benefit conferred, thereby preventing the unjust enrichment of the defendant, they are
simply ways of pleading quasi contract where the “promise” is a fiction and the “contract” is constructed by the
Page 2 of 3
court to achieve the just result of protecting the restitution interest. The modern civil action allows the same
relief without the complication of the separation between law and equity. Courts are not always clear
concerning the nature of such pleading devices. While quantum meruit may be relegated to actions in quasi
contract by some courts, (see Cent. States Mech., Inc. v. Agra Indus., Inc. (In re Cent. States Mech., Inc.), 2014
U.S. App. LEXIS 9425 (10th Cir. May 21, 2014)), it may also be found in actions on implied-in-fact contracts.
[4] Statutes of Limitations

The statute of limitations period for a quantum meruit action is typically the same statute applicable to an
express contract. The statute of limitations for an action in restitution under an unenforceable oral contract,
however, does not arise until there has been a repudiation of that contract. If an unenforceable oral promise is
made to a party that that party's lifetime of services will be paid for by a provision in the promisor's will, the
cause of action in restitution cannot arise until the promisor dies without making such a provision, thereby
repudiating the promise. The statute of limitations begins to run from the time of the repudiation.
[5] Specific Restitution May Be Available if the Part Performance Consists of a Conveyance of Land
If the part performance consists of the conveyance of land to the repudiating defendant, the plaintiff may
choose specific restitution in lieu of a monetary recovery unless it would unduly interfere with title to land or
otherwise cause injustice. Restatement (Second) of Contracts § 2 1 . Yet, a misunderstanding of the
restitutionary nature of the remedy of constructive trusts led to the perplexing view that such a remedy would
not be granted to assure restitution of the land to the partly performing plaintiff.
[6] Sale of Goods Under the UCC

Part performance of an oral contract for the sale of goods used to take the entire contract out of the statute of
frauds. UCC § 2-201 c however, makes a contract enforceable to the extent goods have been received and
accepted or where the payment for goods has been received and accepted, but only to the extent of the part
performance.
If the buyer has made payments and the seller has delivered nothing, there is no question that the buyer may
recover the payments made, which would not deprive it of other UCC remedies had the contract been
otherwise enforceable. UCC § 2- 11 1 . If, however, the buyer has made a part payment accepted by the seller,
who has delivered a pro rata share of the goods equivalent to that partial payment, UCC § 2- 11 1 recognizes
restitution only when there is a breach of the whole contract. Since the buyer did not make a contract for only
the part of the goods delivered, however, the buyer may have good reason for desiring restitution of the amount
paid upon the return of the part of the goods to the seller. The argument for the buyer in this situation is found in
the common law right to restitution, which presumably has not been displaced by the UCC and, pursuant to the
UCC itself, continues unabated. UCC § 1-10 (formerly § 1-10 .
If the seller of goods has partially performed, there is no recognized right to restitution under the UCC. Once
goods have been “accepted” (as defined in UCC § 2- 0 the seller is relegated to a monetary remedy except
where the buyer has received goods while insolvent. UCC § 2- 02 2 . Sellers may also insist on a security
interest in the goods under UCC Article 9 that will allow them to foreclose on that interest and repossess the
goods.
[7] A Defaulting Plaintiff May Bring an Action for the Part Performance That Has Been Rendered
A defaulting plaintiff may bring an action for the part performance that has been rendered. The plaintiff's action
could not be on the contract the plaintiff breached. The plaintiff would bring the action in quasi contract for
restitution. If the defaulting plaintiff were not permitted to bring the action, the plaintiff would suffer a forfeiture—
a penalty. If the contract met statute of frauds requirements, the defendant could establish a ceiling on any
recovery by the defaulting plaintiff of a pro rata share of the contract price and further diminish that recovery by
proving any damages caused by the plaintiff's breach.
Under UCC § 2- 1 2 when a seller withholds delivery of goods because of the buyer's breach, the breaching
buyer may seek restitution of any prior payment to the seller which exceeds an amount to which the seller is
entitled under a valid liquidated damages clause, or absent such a clause, 20 percent of the value of the total
performance of which the buyer is obligated or $500, whichever is smaller. This provision has encouraged a
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trend allowing a defaulting plaintiff to recover and not permitting the defendant to establish the plaintiff's breach
of the oral contract as a complete defense.
If the contract does not satisfy the statute of frauds, a party may breach it and sue for the part performance
rendered, seeking restitution. The issue then becomes whether the defendant who was ready to perform the
oral contract may establish the unenforceable contract as a pro rata limit on the plaintiff's cause of action even
though the reasonable value of the part performance has benefited the plaintiff beyond that level. Fortunately,
there are decisions recognizing that such a plaintiff may not use the oral contract he or she breached to prove
that he or she was not performing gratuitously while simultaneously seeking to preclude the same evidence
proffered by the defendant.
[8] Avoiding Monetary Restitution

There is a curiosity that attends restitutionary recovery when the contract is unenforceable under the statute of
frauds. If a party partly performed an unenforceable oral contract that allowed an action in restitution for the part
performance, the First Restatement of Contracts recognized a right in the other party to avoid payment of
restitution damages by making specific restitution of what was received before suit was brought. Since a
defaulting plaintiff could not avoid a monetary remedy when there was no statute of frauds issue, the basis for
the First Restatement position was unclear. Restatement (Second) of Contracts § 2 lessens the injustice
by allowing specific restitution to avoid monetary damages regardless of the statute of frauds.
[9] Failure to Perform

When a party fails to perform rather than repudiating the contract, such a breach may discharge the other party
and provide a right to restitution if it is a total breach or one that is so significant that it would be unjust to
require any further performance by the aggrieved party. This rule remains applicable when the contract is
unenforceable under the statute of frauds.
Practice Resources:
• Corbin § 1 . (restitution is available against a repudiating defendant); § 1 .
(default in a form other than repudiation); § 1 . (right to specific restitution
against a defendant in default); § 1 . (does the contract breaker have power to
avoid restitution in money by making specific restitution?); § 1 . (restitution for
repudiation of a contract for the sale of land); § 1 . (contracts other than land
contracts); § 1 .10 (use of the oral contract to prove reasonable value); § 1 .11
(statute of limitations); § 1 .12 (form of pleading); § 1 .1 (restitution in favor of
plaintiff who has fully performed). § 1 .1 (restitution in favor of a plaintiff in
default); § 1 .1 (refusal of a recovery operates as a penalty); § 1 .1 (modern
trend to allow a noncontractual recovery by a plaintiff in default).

End of Document

§ 14.04 Equitable Remedies
[1] Reformation Requires “Clear and Convincing” Evidence

The contract of the parties may be evidenced by a deed of conveyance, a writing under seal, or an integrated or
unintegrated writing designed to evidence their executory contract. If a party seeks enforcement of a written
document, there is no question that enforcement will be denied at law or in equity upon a proper showing that
the writing was induced by fraud or mistake or that the writing was incorrect because of fraud or mistake. It is
not necessary for a defendant to seek reformation of the contract to assert such a defense. When the writing is
mistaken in a material way that does not represent the “true intentions” of the parties, enforcement of a contract
according to the true intentions requires the equitable remedy of reformation, which asks a court to correct the
document to state the true intentions.
A court will not reform a writing on the basis of a mere preponderance of the evidence that the writing is
mistaken. Reformation requires “clear and convincing” evidence so that the court, sitting in the Chancellor's
seat, is convinced that a mistake in the writing was made and the court knows what the parties really intended.
If a court reforms a writing, it is enforcing the parties' true agreement, one that has not been reduced to writing.
This, of course, raises the specter of the statute of frauds.
[2] Deeds of Conveyance

If the writing is a deed of conveyance, courts will reform such documents and the statute of frauds issue is
answered by recognizing that the parties have not simply made an oral contract; they have reduced their oral
contract to writing, albeit an incorrect or mistaken writing. The statute does not require the writing to be
absolutely correct.
With respect to a contract for the sale of goods, a bill of sale may contain mistakes, but the UCC expressly
states that the writing is not insufficient merely because it omits or incorrectly states a term agreed upon. UCC
§ 2-201 1 . Although this express recognition is qualified by the language, “but the contract is not enforceable
beyond the quantity of goods shown in such a writing,” there is nothing in this qualification that would
necessarily preclude reformation of a mistaken quantity term by clear and convincing evidence since the
principles of equity have not been displaced by the UCC § 1-10 formerly § 1-10 .
A similar limitation is found in cases in which courts have been willing to grant reformation of a deed and grant
specific performance of the reformed writing, but only if such a reformed document does not convey more land
or a greater estate than is evidenced in the mistaken writing. The fear is that the buyer may be unjustly
enriched. The possible unjust enrichment of the seller, however, is ignored if the reformation results in a lesser
estate. The overwhelming majority of courts have realized that the sounder approach is to ignore this artificial
limitation since reformation requires convincing evidence of a mistake and should be granted whether it results
in an increase or decrease in the size of the subject matter.
[3] Reformation Applies to Executory Contracts

Part performance of an oral contract may be sufficient to satisfy the statute of frauds typically in contracts for
the sale of land, but the remedy of reformation is not so limited. It applies to any type of contract within the
statute whether the contract is partly performed or executory. The reformation of a writing evidencing an
executory contract encounters the usual argument that specifically enforcing the reformed writing has the effect
of enforcing an oral contract within the statute of frauds.
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When reformation of a writing has been decreed, a court has the power to enforce the reformed writing in the
same proceeding. “Reformation,” however, is not synonymous with “enforcement.” A reformed writing may still
be an insufficient memorandum to satisfy the statute. The writing may not be mistaken; it may be the very
writing that the parties intended. When a writing is said to be mistaken because a term has been omitted, the
omission must result from the mistake of both parties who mistakenly assumed that the writing contained that
term. Otherwise, the writing would not be a sufficient memorandum to satisfy the statute of frauds. Restatement
(Second) of Contracts § 1 cmt. a.
Reformation is granted when a high standard of proof is met convincing a court that the writing does not state
the true intention of the parties. The indispensable element of reformation is the clear and convincing evidence
of the intention of the parties. The great majority of courts see no contradiction in enforcing a writing that the
court has reformed to state true, as contrasted with false, intentions.
[4] Reformation Is Not Restricted to Any One Clause of the Statute of Frauds
It is clear that reformation is not limited to a particular class of contracts within the statute of frauds. It applies to
contracts for the sale of land and goods, contracts in consideration of marriage, contracts not performable
within one year from the time they are made, and contracts of suretyship. Suretyship contracts are executory
contracts that are often validated by the creditor's reliance, which may not be sufficient, in itself, to take the
contract out of the statute. Reformation of a writing evidencing a suretyship promise, however, is granted for the
same fraud or mistake reasons that reformation is granted in other types of contracts within the statute. In
summary, the view espoused by the Restatement (Second) of Contracts § 1 is the better view, one adopted
by the great majority of courts: “If reformation of the writing is otherwise appropriate, it is not precluded by the
fact that the contract is within the statute of frauds.”
Practice Resources:
• Corbin § 1 .1 (equitable remedies—reformation of documents in the case of
contracts within the statute); § 1 .1 (mistake as ground for reformation and
specific performance); § 1 .1 (reformation of deeds and other documents of
title); § 1 .20 (reformation and specific performance of executory contracts);
§ 1 .21 (mistake as ground for cancellation or rescission and as a defense);
§ 1 .22 (reformation granted for mistake, but not to remedy incompleteness or fill
intentional gaps); § 1 .2 (part performance and fraud or mistake as
independent grounds for such equitable relief); § 1 .2 (“executed” and
“integrated” contracts); § 1 .2 (reformation of executory contracts of
suretyship); § 1 .2 (reformation and enforcement in the same proceeding);
§ 1 .2 (evidence necessary to prove mistake as a basis for such equitable
reformation).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 15 STATUTE OF FRAUDS—DEBTS OF

ANOTHER—SURETYSHIP AND GUARANTY
CHAPTER 15 STATUTE OF FRAUDS—DEBTS OF ANOTHER—SURETYSHIP

AND GUARANTY
the subject matter.

End of Document

§ 15.01 Promises to Answer for the Debts of Another
[1] Suretyship Promises

Before lending money, delivering goods, providing services, or performing other acts for a party requesting
them, a creditor may discover that the requesting party’s credit rating is not acceptable. The creditor will not
suffer the detriment of promising to perform without assurance from a third party. A surety (S) is a party who
promises the creditor (C) that the surety will pay the debt of another, called the principal debtor (P), if P does
not pay. The surety’s promise is always conditional although its conditional nature need not be expressly stated
in the contract so long as the creditor knew or should have been aware of the suretyship.
P has received the loan, goods, land, or services and he should pay the debt; but if he does not pay and S
pays, C is satisfied and S will be subrogated to the right C has against P to avoid P’s unjust enrichment. In
1677, if P could not pay, C’s desperation may have led him to create an alleged promise by S. This nefarious
practice led to the second category of promises under the original statute of frauds: promises to answer for the
debt, default, or miscarriage of another. We open this discussion with the second category because, as will be
seen shortly, the first category is a species of this more generic second category—suretyship promises.
[2] A Promise Within the Suretyship Clause of the Statute of Frauds Requires an Already Existing or
Subsequent Obligation of a Third Party to the Promisee
A promise within the suretyship clause of the statute of frauds requires an already existing or subsequent
obligation—a legal duty—of a third party to the promisee. Promises of indemnity such as a promise to
indemnify the promisee against business losses is not within the statute even though the losses may be caused
by a third party because the promise is not being made to discharge a third party’s debt to the promise. Zurich
Am. Ins. Co. v. Mack Indus., 2015 U.S. Dist. LEXIS 167829 ( E.D. Mich. Dec. 8, 2015) explained that a promise
to pay the debt of another (not a contracting party) for which, after the promise, the other still remains liable,
must be in writing in order to be enforceable. Thus, a promise by B to A to pay A’s debts is not covered under
the statute of frauds. Where an indemnification clause would require a seller to “defend, indemnify and hold
harmless Buyer, Buyer’s successors and assigns, and the Owner of the Project, against all damages, claims or
liabilities and expenses,” this is not a promise to pay the debts for a third party but a promise to pay the debts of
a contracting party. A direct indemnification is not a surety, and it is not covered by the Statute of Frauds.
The duty need not be unconditional or immediate; it may be contractual, quasi-contractual, or arising from a
tort. It may even be voidable or unenforceable, but not void. The promise of S, however, must be a real promise
although it need not be made in words; it may be a promise implied from conduct, which is just as real a
promise as a promise in words. A suretyship promise could not be “implied-in-law,” i.e., a quasi (constructed)
promise to avoid unjust enrichment.
Since formal contracts such as contracts under seal, recognizances, or negotiable instruments are evidenced
by writings, the statute would ordinarily be satisfied by such writings. When such a formal writing would not be a
sufficient memorandum, the statute will still not apply.
[3] Surety’s Promise Must Be Supported by Consideration

The surety’s promise, like any other informal promise, must be supported by consideration. S and P may
simultaneously promise C to pay for a new debt or other obligation. A typical situation would be C’s promise to
lend $10,000 to P in exchange for P’s promise to repay the loan with interest and S’s promise to pay the
amount of any outstanding obligation on this contract to C if P does not pay. There is consideration for the
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promise of S since C was unwilling to suffer the detriment of lending money or delivering goods or services to P
on P’s credit alone. If C has made the loan or conferred other benefits on P prior to the promise by S, there was
no consideration to support the promise of S and it is unenforceable even if it is evidenced by a writing that
would satisfy the statute of frauds.
To come within the suretyship provision, the promise must be one to discharge the debt of the principal debtor.
Thus, a promise to get another to sign as surety, to pay a sum of money if the creditor would forbear from suing
for a month or any other promise other than one to discharge a debt or other obligation of the principal obligor is
not within the suretyship provision. In Hartford Fire Ins. Co. v. C. Springs 300, Ltd., 287 S.W.3d 771, 778 (Tex.
App. 2009), the defendant argued that the statute of frauds does not apply to a promise to enter a surety
relationship as contrasted with a surety relationship itself. The court disagreed, citing § 11 of the Restatement
(Second) of Contracts in holding that a promise to sign a written contract as surety is within the statute of
frauds.
If S makes a promise to C for the benefit of P (not primarily for S’s benefit) that will discharge P’s duty to C and
C knows or should know that S’s promise is a suretyship promise, the promise is within the statute. A promise
by S to C to perform what S believed to be P’s existing duty to C is not within the statute if P has no duty to C.
[4] “Debt” is Not Limited to Monetary Obligations

While “debt” sounds like a monetary obligation, the original statute’s inclusion of “default” and “miscarriage”
were designed to make it clear that the section applied beyond monetary debts to any obligation for which a
surety promised to pay as well as to unmatured debts. A promise to pay the debt of another is within the
suretyship provision whether the debt or other obligation of P is mature or has yet to mature. It could be a duty
to pay liquidated or unliquidated damages that already have been caused by P’s breach of contract or tort or
may be caused by P’s action or inaction at a later time. A surety’s promise could assure the delivery of goods or
guarantee a vendor’s implied warranty to C.
One of the classic examples of a suretyship promise occurred when the foreman of workers on a construction
project failed to pay the bill he had created at a local restaurant. The owner of the construction company,
Johnson, paid the bill. Later, when the foreman was again in arrears, Johnson told the owner of the cafe, “Go
ahead and let him continue to have his meals and I will pay if he doesn’t.” The cafe continued to allow the
foreman to have meals on credit. When Johnson refused to pay, the court held that Johnson’s promise was
within the statute of frauds and was, therefore, unenforceable. Johnson Co. v. City Cafe, 100 S.W.2d 740 (Tex.
App. 1936).
[5] Promises of Executor or Administrator

The first type of promise listed under the original statute of frauds is the promise of an executor or administrator
of an estate to pay the debt of the estate from his or her own pocket. It is analyzed under suretyship since the
promise is the same as a suretyship promise with one major exception: at the time the promise is made, there
are only two parties, since the third is dead. If the debtor died without a sufficient estate from which all of his
debts could be paid, there is no legally collectible debt. The promise, therefore, is a promise to pay the debt of
another who is impervious to an action on the debt. The creditor has no interest in suing the estate that is
incapable of paying the decedent’s debts. This is why it is tempting to feign a promise by the decedent’s
representative of the estate to pay the debt from his or her own pocket. Requiring evidence of such a promise
in writing, particularly when writings by literate people were the exception, was a major impediment to
subsequent lying, although eventual changes in the judicial and jury systems would present an even greater
deterrent.
[6] “Guaranty” Contracts

The term “guaranty” is often used synonymously with “surety” although some courts may make one or more
distinctions. “Guaranty” is used as a synonym for “surety” in Restatement of Security § 2 cmt. g. In some
jurisdictions, “guaranty” may denote some type of surety contract.
Pennsylvania courts describe the principal difference as allowing a creditor to seek an immediate payment from
the surety upon the principal debtor’s default while the creditor must first seek payment from the debtor if the
promise to pay was a promise of guaranty. In general, the terms are used interchangeably. McIntyre Square
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Assocs. v. Evans, 827 A.2d 446, 452, 2003 PA Super. 214, n.7. A recent case quotes the Restatement (Third)
of Suretyship and Guaranty noting that differences between sureties and guaranties have been the subject of
extended debate, not all of which is illuminating. A ‘surety’ is typically jointly and severally liable with the
principal obligor on an obligation to which they are both bound, while a “guarantor” typically contracts to fulfill an
obligation upon the default of the principal obligor.
The Restatement (Third) of Suretyship and Guaranty pursues the functional approach of referring to parties and
“obligors” and “obligees.” Bank Mut. v. S.J. Boyer Constr., Inc., 2010 WI 74, 326 Wis. 2d 521, 785 N.W.2d 462.
Practice Resources:
• Corbin § 1 .1 (promises of an executor or administrator); § 1 .2 (promises of
suretyship and guaranty); § 1 . (obligation of another person, present or future);
§1 . (future obligations); § 1 . (antecedent and subsequent debts
distinguished); § 1 .11 (principal debtor’s obligation voidable or unenforceable);
§ 1 .1 (surety’s duty is always conditional, though the promise may not be so
worded); § 1 .1 (formal contracts are not within the statute); § 1 .1 (promised
performance must discharge the debtor).

End of Document

§ 15.02 “Original” vs. “Collateral” Promises
[1] The Form of the Words Used Does Not Determine the Application of the Statute
The form of the words used in making the promise will not determine the application of the statute. It is not
necessary that the word “surety” be used. The promise may be stated as a “guarantee,” an “assurance,” or any
other term so long as it is a promise to pay the debt or perform the obligation of a principal debtor or obligor.
Surety promises are conditioned on the failure of the principal debtor to pay, but the promise need not
expressly state that condition. A promise such as “I will pay” does not appear to be a promise to pay if another
(P) does not pay. The form of the promise, however, is not dispositive to determine whether the promise is
“original” or “collateral.”
If C agrees to lend money or to provide goods or services to P on the understanding that only S will be obliged
to pay C, no credit is being extended solely to P and C will not look to P for payment. Such promises are often
called “original” since they are not promises to answer for the debt of another within the suretyship provision of
the statute. When C understands or has reason to understand that S is promising to pay the debt of P, S’s
promise may be called “collateral” because it is “additional” or “secondary” to P’s promise to pay and it is within
the statute. The labels “original” and “collateral” are mere conclusions. Whether a promise is “original” or
“collateral” is a question of interpretation that requires an analysis of all of the surrounding circumstances and
not merely the form in which the promise was made.
A classic illustration is found in a case involving an auto accident. In that case, a promise by a daughter of the
victim to a physician was in the form of an “original” promise—“I will pay.” The court, however, found that the
promise was understood by the physician to be “collateral” since the physician attempted to collect his fee from
the estate of the deceased victim before attempting to collect from the daughter. The form in which the promise
is made, therefore, is certainly not conclusive. Lawrence v. Anderson, 108 Vt. 176, 184 A. 689 (1936).
The interpretation of whether a creditor extended credit solely to one party for the loan of money or providing
goods or services can be difficult. The party to whom goods are delivered is evidence of the intention of the
seller (creditor) to deal exclusively with one party. If goods are delivered to S, unless S is simply holding the
goods for P, S appears to be the debtor with whom C dealt. The statements of C, however, have a considerable
bearing on these issues. While the subjective intention of the creditor should be irrelevant, the creditor’s
statement that it extended credit exclusively to S even though the performance benefited P will be admissible
for a jury to consider. This possibility allows a criticism that the statute may be easily avoided, and the criticism
finds support in cases in which courts seemed inclined to support avoidance of the statute when a sense of
justice suggested the desirability of enforcing the surety’s oral promise.
[2] Promise Must Be Made to the Creditor

To determine the scope and application of any statute, it is of primary importance to determine the purpose of
the statute. When Barnes owes or is about to owe a debt of $10,000 to Carr and Ames promises Barnes, the
principal debtor, that Ames will pay Barnes’s debt to Carr if Barnes fails to pay, Ames’s promise is not within the
statute of frauds. The evil that the suretyship provision sought to address was a false allegation by a creditor
that a third party had made a promise to the creditor to pay the debt of the principal debtor if the principal debtor
did not pay. Thus, for the statute to apply, the promise must be made to the creditor and the creditor must or
should be aware that it is receiving a suretyship promise regardless of the form in which the promise is made.
[3] “Leading Object” Rule

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Similarly, the basic evil at which the suretyship provision of the statute of frauds is aimed is the false allegation
of a promise by a third party to answer for the debt of another although the promisor will receive no discernible
benefit from the promise. An alleged promise for which a promisor receives no benefit but from which a
stranger promisee will benefit creates a suspicion that the promise may not have been made. When, however,
the “main purpose” or “leading object” of the promisor is to benefit the promisor, even though the performance
of the promise will have the incidental effect of discharging the debt of another, it is much more likely that such
a promise was made. It is still a suretyship promise in form, but it does not fall within the purpose of the statute
and need not be evidenced by a writing. A complete exploration of the “leading object” rule is found in Chapter
16 below.
[4] Novation Distinguished

Another distinction based on the purpose of the statute is clear when Barnes owes $10,000 to Carr and Ames
promises Carr that Ames will assume that indebtedness to Carr in exchange for Carr’s immediate discharge of
Barnes. At the moment Ames agrees, Barnes is discharged. The consideration supporting Carr’s promise is the
promise of a new debtor in Ames. Ames’s promise is supported by Carr’s immediate discharge of Barnes. It is a
novation and it is not within the statute of frauds since at the moment the novation was formed Barnes was
discharged. Thus, there was no promise to answer for the debt of “another” because there was no “other” for
whom Ames promised to pay a debt. If the parties have not agreed to discharge Barnes simultaneously with the
formation of the novation, however, the “other” still exists and Ames’s promise would be within the statute of
frauds.
Practice Resources:
• Corbin § 1 . (collateral or original); § 1 . (goods sold or service rendered on
credit); § 1 . (meanings of “sole credit”); § 1 . (promises to pay for service
rendered to a third person); § 1 .10 (“title” does not determine who is principal
debtor); § 1 .12 (promise must be to creditor or obligee); Corbin § 1 .1 (form of
promise); § 1 .1 (surety’s duty is always conditional, though the promise may
not be so worded); § 1 .1 (suretyship relation not known to promisee); § 1 .20
(novations not within the statute).

End of Document

§ 15.03 Joint Obligations

If two parties make a “joint promise” to pay for goods or services, there is an emphasis on the form of the words
used, and it is treated as an indivisible obligation that does not involve the statute of frauds. A “joint purchase”
involves two or more people who are buying goods with each receiving a property interest in the goods. Each buyer
is a debtor. The suretyship provision does not apply. In a sale on “joint credit,” however, neither the form of the
words nor the granting of a property interest control. The suretyship provision will apply if the facts and
circumstances show that the seller understands that it is extending credit to one party as principal debtor, which it
would not have done were it not for the other party’s promise to pay if the principal debtor does not pay.
Modern statutes have converted joint obligations into “joint and several” obligations so that terms like joint promise,
joint purchase, and joint credit would rarely be used and their use would not be precise.
Practice Resource:
• Corbin § 1 .1 (joint obligations).

End of Document

§ 15.04 Promises to Pay Out of Funds of the Principal Debtor

If a third party (S) is holding funds of the principal debtor (P) out of which that third party promises P to pay P’s
obligation to the creditor (C), such promises are not within the statute of frauds. Certainly, if P has delivered funds
to the third party and directed the third party to pay P’s debt to C from those funds, the third party is not a surety; it
is operating as a trustee of these funds, and the promise to pay C is simply performance by a trustee. The creditor
is a beneficiary of the trust.
The same analysis applies if a third party is holding P’s property and promises to pay P’s debt to C from the
proceeds of the property. If P lends $10,000 to S in exchange for S’s promise to pay $10,000 to C, there is no trust,
but C is a classic third-party creditor beneficiary of the contract between P and S for the benefit of C. S’s promise to
pay C is made to P, not to C. For that reason alone, it would not be within the suretyship provision of the statute of
frauds.
There is a situation where S’s funds that would have been payable to the principal debtor will be paid to C pursuant
to a promise by S to C. It occurs where P has agreed to construct a building for S and contracted with C to provide
the materials. At some point in the building process, P’s financial irresponsibility causes C to refuse to deliver any
more materials on credit. To induce C to resume deliveries, S assures C of payment from amounts S will owe to P.
While this promise appears to be a suretyship promise, it will not be barred by the statute of frauds for one of two
reasons: (1) S’s main purpose or leading object appears to be for S’s own primary benefit, or (2) though not
directed by P, the payments will be made from funds P will earn in completing the construction project.
Practice Resource:
• Corbin § 1 .1 (promises to pay out of funds of the principal debtor).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 16 DEBTS OF ANOTHER—LEADING OBJECT

RULE—INDEMNITY CONTRACTS
CHAPTER 16 DEBTS OF ANOTHER—LEADING OBJECT RULE—INDEMNITY

CONTRACTS
the subject matter.

End of Document

§ 16.01 The “Leading Object” Rule

An oral promise to answer for the debt or obligation of another who will continue to be primarily liable is within the
statute of frauds unless the “leading object” or “main purpose” of the promisor was to benefit the promisor. An early
statement of the rule comes from the Supreme Court of the United States:
[W]henever the main purpose and object of the promisor is not to answer for another, but to serve some
pecuniary or business purpose of his own, involving either a benefit to himself, or damage to the other
contracting party, his promise is not within the statute, although it may be in form a promise to pay the debt of
another, and although the performance of it may incidentally have the effect of extinguishing that liability.
Emerson v. Slater, 63 U.S. 28, 43, 16 L. Ed. 360, 22 How. 28 (1860), quoted in Davis v. Patrick, 141 U.S. 479, 488,
12 S. Ct. 58, 35 L. Ed. 826 (1891).
This was not the earliest statement of the rule. The Emerson opinion cites cases in Massachusetts and New York
including Leonard v. Vredenburgh, 8 Johns 29 (1811). What is sometimes called the “leading object” exception is
found in all jurisdictions, with the exception of New York. See Worlock Paving Corp. v. Camperlino, 207 A.D.2d 975,
617 N.Y.S.2d 87 (1994).
The early decisions explored the purpose of the statute to determine whether a particular promise fell within its
scope. The same court suggested that the purpose of the statute is “obvious.” When a creditor alleges a promise by
a third party to pay the debt of a “party alone receiving the benefit,” while the alleged promisor is “without interest in”
the transaction, “it is impossible to solve the conflict of memory or testimony in any manner certain to accomplish
justice.” When, however, the promisor has a personal, immediate, or pecuniary interest in the transaction “the
reason which underlies and which prompted this statutory provision fails, and the courts will give effect to the
promise.” Davis v. Patrick, 141 U.S. 479, 487–488, 12 S. Ct. 58, 35 L. Ed. 826 (1891).
The lack of any discernible benefit to an alleged promisor, combined with a creditor's desire to be paid by
somebody when the real debtor is incapable of paying, taxes the credulity of the creditor's allegation that a third
party with no interest in the transaction became a surety. The alleged promisee may simply have a very favorable
recollection of mere words of encouragement or other expressions that did not amount to a promise. The doubt that
smothers the creditor's recollection, however, is lifted when it becomes clear that the promisor was eager to benefit
himself and was not interested in extinguishing the debt of another although his performance would have this
incidental effect. There is no longer the same need for the cautionary or evidentiary formality required of suretyship
promises. See Restatement (Second) of Contracts § 11 cmt. a. Lascano v. Huser Huser Constr. Co., 2015 Tex.
App. LEXIS 5289 (Tex. App. 2015).
In Dynegy, Inc. v. Yates, 422 S.W.3d 638 (Tex. 2013), the attorney (Yates) for a former officer of the Dynegy
corporation who was convicted of securities fraud claimed that Dynegy had made an oral promise to pay his fees
through the entire trial. After making early payments, the corporation refused to pay the remainder. Yates claimed
that Dynegy’s was within the leading object (“main purpose”) exception that took the promise out of the suretyship
provision of the statute of frauds. To fit within that exception, the court explained that Yates had to prove (1) that
Dynegy intended to create primary responsibility for the fees in itself; (2) there was consideration for the promise,
and (3) the consideration given was for Dynegy’s own use and benefit, i. e., the benefit it received was its main
purpose in making the promise. The court determined that Yates had failed to satisfy this burden.
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Various phrases found in the case law to establish a test to determine the application of the leading object rule
include the “true nature of the promise,” whether the surety's promise was an “original obligation,” or whether the
promise was “absolute.” These phrases, however, provide no genuine analysis to determine the critical question of
whether the promisor made the promise with little or no concern for the interests of the principal debtor. In this
regard, the consideration for which the surety bargained is an important dimension to be considered.
Practice Resources:
• Corbin § 1 .1 (“leading object” or “main purpose” rule); § 1 . (benefit need not come
from the promisee); § 1 .11 (ignorance of third person that promise is being made);
§ 1 .12 (principles underlying the “leading object” rule).

End of Document

§ 16.02 Requirement of Consideration
[1] A Suretyship Promise Must Be Supported by Consideration

Even when a suretyship promise meets the requirements of the statute of frauds, it will not be enforceable if it is
not supported by consideration. An oral promise to answer for the debt of another that induces a creditor to
provide benefits to the principal debtor finds consideration in the bargained-for detriment suffered by the
creditor. When the consideration is beneficial only to the principal debtor, it is virtually certain that it is a
suretyship promise made for the benefit of another within the statute of frauds.
Even if there is some discernible benefit to the surety who makes an oral promise, that determination alone is
not enough to invoke the main purpose rule, since oral promises of commercial sureties that receive benefits
would not be enforceable. Commercial sureties issue written bonds that fully satisfy the statute of frauds. In the
rare situation of a given writing that would not be sufficient because, for instance, the issuer failed to sign the
bond, the question of the enforcement of an oral surety promise may suggest the application of the “leading
object” exception. Such bonds, however, are sought by the principal debtor (for instance, a building contractor
procuring a performance bond) who is clearly the principal obligor. The bonding company has an intermediate
object of procuring the benefit the principal obligor requires although the bonding company's ultimate objective
is the premium paid on the bond. Thus, the commercial surety's promise is within the statute although its
ultimate desire is to benefit itself.
The application of the rule, however, does not require the consideration to have been actually profitable to the
promisor. When the consideration comes from the principal debtor rather than the creditor, the leading object
rule may apply. When, for example, a defendant orally promised to pay the debts of his two brothers to their
creditor in exchange for the brothers' conveyance of property to the defendant, the defendant's suretyship
promise to the creditor was not required to be evidenced in writing because the defendant's “primary object”
was to secure the property for himself. Frumkin v. Mayer, 139 Pa. Super. 139, 11 A.2d 767 (1940).
The test to determine the application of the rule can be best understood by revisiting the fundamental test of
“bargained-for-exchange” emphasized by Justice Holmes. In general, consideration not only requires the
promise to induce the detriment; the detriment must also induce the promise. For the purposes of the leading
object rule, the critical focus is the detriment that induces the surety's promise. The detriment must not only be
what the surety desired, since the surety may simply desire the accommodation or benefit to the principal
debtor. The detriment inducing the surety's promise must be such that the surety would have made the promise
in exchange for the detriment apart from any benefit to the principal debtor although the principal debtor will be
an incidental beneficiary of the promise. It is important to consider illustrations of this test.
[2] Illustration—Protection of Property Interest

When a surety (S) has a an interest in property on which a creditor (C) holds a lien as security on the debt of a
third party (principal debtor P), where S has no interest in benefiting P, S's oral promise to discharge P's debt in
exchange for C's forbearance to enforce the lien is a suretyship promise that it not within the purpose of the
suretyship provision. S's leading, main, and sole purpose was to rid his property of C's security interest in the
property. If S had no interest in the property and made his oral promise to prevent the financial ruin of his friend,
P, the promise would be unenforceable.
Bailey was ready to enter a judgment against a debtor named Pennock. Marshall, who also had a judgment on
which he had levied execution, did not want Bailey bidding on Pennock's property, which Marshall planned to
procure at a fraction of its worth. Marshall promised to pay Pennock's debt to Bailey if she would forbear from
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pursuing her judgment and bidding at the sheriff's sale. Bailey did so, but Marshall refused to pay her, denying
the promise was made. The court expressed no opinion on the credibility of the witnesses, but held that the
promise would be enforceable if the jury believed Bailey since Marshall's “sole purpose was to silence her as an
antagonistic bidder.” Marshall had no intention of benefiting Pennock; his intention was to purchase Pennock's
property at lower price. Bailey v. Marshall, 174 Pa. 602, 604, 34 A. 326 (1896).
[3] Illustration—Subcontractors
A common illustration of the leading object rule occurs when a general contractor with whom the owner
contracted has failed to make payment to its supplier of materials that are necessary to complete the
construction. In such a situation, the owner's promise to pay if the contractor fails to pay is typically made to
assure the completion of the project. The owner is not induced to make such a promise for the benefit of the
contractor.
When a general contractor promised to pay the debt of a subcontractor to the supplier of crane services, the
court held that the promise was made to assure the completion of the project on schedule. Morrison-Knudsen
Co. v. Hite Crane & Rigging, Inc., 36 Wash. App. 860, 678 P.2d 346 (1984). When, however, there is nothing to
show that the owner will not receive the building for which it contracted, a promise by the owner to a supplier of
labor or materials will typically be viewed as a promise to assist the contractor even though the labor and
materials are continued on the faith of the owner's promise.
[4] Shareholder Interest in Corporation

If an officer or shareholder of a corporation orally promises to pay a debt of the corporation, the promisor has
an interest in the success of the corporation. The fact that the surety's promise will result in some advantage to
the company that indirectly benefits the surety as an officer or shareholder raises the question of whether the
leading object rule exception to the statute of frauds applies.
Hutchins owned 75 percent of Alternative Energy Inc. (AEI), which had a controlling interest in a joint venture
that owned a power plant. Fitzgerald had formerly sold power plants for AEI. Hutchins asked Fitzgerald to do
him “a favor” by showing the joint venture power plant to prospective buyers. He promised Fitzgerald a
commission if the sale went through. Fitzgerald showed the plant to buyers, one of whom agreed to purchase it,
but Hutchins refused to pay Fitzgerald a commission. Because Fitzgerald was aware that the plant was owned
by the joint venture, the trial court concluded that the promise of a commission by Hutchins was a promise to
answer for the debt of another. The appellate court, however, noted that, assuming Hutchins's promise was to
answer for the debt of another, as a substantial stakeholder in AEI and the joint venture, he stood to earn a
substantial pecuniary gain from the sale. Thus, there was a material question of fact as to whether Hutchins's
main purpose was to benefit himself in making the promise to Fitzgerald. The summary judgment granted
below was unwarranted. Fitzgerald v. Hutchins, 2009 ME 115, 983 A.2d 382.
When a contractor discovered that the land on which he was to construct a building for a fledgling corporation
was not owned by the corporation, a one-third shareholder's promise to guarantee payment to the contractor
was held enforceable under the leading object exception. Citing the analysis in Corbin on Contracts, the court
noted that the promise was not within the exception simply because the promisor owned a one-third interest in
the corporation since the percentage of ownership should never be the sole criterion. The court focused on the
fact that the corporation was in the embryonic stages of development. The promise was not made merely to aid
a proven business; it was made to insure the very survival of the business, which the promisor viewed not in its
formal legal posture as a separate entity, but more as a dependent extension of himself. Thomas A.
Armbruster, Inc. v. Barron, 341 Pa. Super. 409, 491 A.2d 882 (1985).
Inghram, president and sole shareholder of Assurance Exteriors, personally, and orally, guaranteed the debts
of his defunct business, Assurance Exteriors, Inc., to Willoughby Supply Company. Inghram did not pay, and in
the ensuing litigation, the court held that the leading object rule took Inghram’s personal guarantee out of the
Statute of Frauds. Where the promisor owns all, or substantially all, of the stock in the corporation, his oral
promise to pay the debt of the corporation is based on a sufficient consideration running to him personally as to
make the promise original and hence to take it out of the st t te. The court explained that “as sole owner of
Assurance Exteriors, Mr. Inghram clearly benefited by being able to purchase materials on credit from
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Willoughby Supply.” Willoughby Supply Co. v. Inghram, 2015-Ohio-952, 2015 Ohio App. LEXIS 902, 30 N.E.3d
230 (Ohio Ct. App., Lake County 2015).
A contractor alleged that the CEO of Cilicorp personally and orally guaranteed that Cilicorp would pay its debt
to the contractor. In the litigation that followed, the court held that there was no evidence the alleged
guarantor’s principal motivation for guaranteeing the debt was to serve his own interests. The court held that
even if the CEO had a financial investment in Cilicorp, he might not have acted in his own interest—the cases
go “both ways” in that situation, depending on the facts. Sapta Global, Inc. v. Cilicorp, LLC, 2015 U.S. Dist.
LEXIS 40186 (D.N.J. Mar. 30, 2015).
[5] From Whom Did the Consideration Move?

When a promise is made by S for S's own benefit and not to accommodate or benefit the principal debtor (P),
the consideration for S's promise may emanate from the creditor (C), by P, or by a fourth person. If the
consideration is from C and was not made to benefit P, upon full satisfaction of the claim, S simply has C's
rights against P as if S were an assignee of those rights. The statute is not applicable. If the consideration to
support S's promise came from P, P will usually be a promisee, and a promise to the debtor is not within the
statute. If S's promise is made to both P and C, C is both a promisee and a creditor beneficiary to whom the
statute should not apply. S would be under a duty to P to pay the debt and could not, therefore, be a surety.
When the consideration for S's promise comes from a fourth person, the suretyship provision should not apply.
Thus, when a shareholder (fourth person) promises consideration to S in exchange for S's promise to the fourth
person and to C to pay P's debt to C, is not a surety. P is a beneficiary who has a right to be discharged by the
performance of S's promise.
Practice Resources:
• Corbin § 1 .2 (“leading object” and “consideration”); § 1 . (illustrations of
beneficial consideration constituting the “leading object”); § 1 . (promises to
pay debts due subcontractors); § 1 . (further illustrations of “leading object”);
§ 1 . (promises of commercial surety companies); § 1 . (benefit to promisor
may be too remote or too slight); § 1 . (consideration beneficial to third person
only); § 1 . (benefit need not come from the promisee); § 1 .10 (consideration
from a fourth person neither the creditor nor the debtor); § 1 .12 (principles
underlying the leading object rule).

End of Document

§ 16.03 Tests of Suretyship
[1] Common Law Writs

The history of early common law writs provides some insight into how courts determined whether a promise
was within the suretyship section of the statute. When the transaction evidenced a quid pro quo in which the
promisor received a benefit, the writs of debt and indebitatus assumpsit would lie. When, however, the promisor
received no benefit, but the promisee suffered a detriment, the action would be brought in special assumpsit.
Thus, the proper form of action for a surety promise was special assumpsit.
When the promisor received a quid pro quo, the action of debt would lie and the promise would not be within
the statute of frauds. This may be of some historical significance in explaining the origins of the leading object
rule. To apply a modern test based on whether the actions for debt or only special assumpsit would lie,
however, merely changes the form of the question. Even if it were an otherwise desirable aid, the inconsistency
in its application would quickly augur its elimination.
[2] “Remedy Over” Test

Before Texas adopted the main purpose test, it suggested a simple test in Todd v. Victory, 277 S.W. 705 (Tex.
Civ. App. 1925). Todd involved a buyer of personal property who granted a chattel mortgage to the seller to
assure payment of the price. Just weeks after the contract was formed, the buyer, a minor, turned the goods
over to his father, who made an oral promise to the seller to pay for them. The father made payments, but a
balance remained unpaid. In an action by the seller, the court held for the son on the footing that he was a
minor when he made the contract. The trial court found the father's promise to be unenforceable under the
statute of frauds.
The court of appeals, however, determined that, as between the son and the father, the father should pay the
debt because it was their intention that the father own the property; this made the father's oral promise
enforceable. This simple test, however, is over-inclusive. In effect, the father had become the assignee of the
seller-creditor's right against the son. That would certainly provide the father-assignee with a right against the
son (obligor), but the promise was not a suretyship promise. Moreover, the test would leave within the statute
most of the cases to which the leading object rule applies. Fortunately, Texas later adopted the leading object
test.
[3] “Continued Liability” Test

Still another old test suggested that the application of the statute did not depend upon the consideration for the
promise, but on whether the original party remained liable. Forth v. Stanton, 1 Wms. Saunders 220. This test,
however, would leave within the statute a promise to the principal debtor to purchase from him whatever the
creditor was providing as the quid pro quo for the debt.
There is no simple test that will substitute for a careful examination of all the relevant facts and circumstances
to determine whether a promise to answer for the debt of another who continues to be primarily liable may still
be enforceable under the leading object rule.
Practice Resources:
• Corbin § 1 .1 (existence of a remedy over is not a sure test); § 1 .1 (Serjeant
Williams's rule: continued liability); § 1 .1 (common law forms of action as a
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test of suretyship).

End of Document

§ 16.04 Contracts of Indemnity
[1] An Indemnity Agreement Involves Only Two Parties

The definition of “indemnity” has caused confusion in relation to the suretyship provision of the statute of frauds.
An agreement of indemnity involves a promise to save another party harmless from losses or liability. It involves
only two parties. As such, it is impossible for it to be within the suretyship provision of the statute of frauds. The
term “indemnity,” however, is often misused. If a promise is made to a creditor for the benefit and
accommodation of a principle debtor where the performance of either promise will discharge the original debt, it
is not an “indemnity” promise although it may be expressed as a promise “to indemnify.” In that unfortunate
usage, the term is used to mean “guarantee” or “become surety for” the principal debtor.
[2] Oral Promises to Indemnify a Surety

Assume that Ames has asked Barnes to become a surety for Paul so that Paul can obtain a $50,000 loan from
Carr. Ames orally promised to indemnify Barnes against any loss arising from becoming a surety. Ames makes
her surety promise to Carr in writing. Paul also signs a writing promising to repay Carr with interest but he fails
to do so. After paying Carr, Barnes seeks payment from Ames, who raises the statute of frauds, claiming that
her promise was a promise to answer for the debt of another. A simple solution is to recognize that Ames made
no promise to Carr, the creditor. While she made no promise to Paul, the principal debtor, she did make a
promise to a debtor. Barnes is a debtor to Carr, conditional, to be sure, on Paul's failure to pay, but a debtor to
Carr nonetheless. Thus, a simple solution is suggested: promises to debtors are not within the suretyship
provision of the statute of frauds. Unfortunately, the solution is more complicated.
Barnes is a debtor (obligor) to Carr, but he is also a creditor (obligee) to Paul. If Barnes pays the debt that Paul
should have paid, Paul is indebted to Barnes. The prevailing view, sometimes referred to as the “Corbin rule” is
that an oral promise of indemnity made to a surety or guarantor is not a promise to answer for the debt of the
principal, either to the creditor or to the surety. The Corbin analysis emphasizes that the contrary (minority) view
would allow a horrid injustice based upon a technical reading of the statute of frauds. The statute of frauds is
designed to protect parties in the position of Barnes. In an action by a surety such as Barnes against an
indemnitor such as Ames, Barnes, the surety, is the plaintiff. Moreover, a promise of indemnity is broader than
the liability of the debtor. While Barnes is both a debtor and a creditor, the parties contemplated that Barnes
would be a debtor since his performance required him to become a surety. Not of least importance is the fact
that courts construe the statute of frauds in each of its provisions to avoid technical defenses that may promote
rather than prevent fraud.
The prevailing view also applies to reinsurance contracts when an insurance company is a surety but seeks to
“reinsure” a part of all of its risk with another surety company. Reinsurance contracts are invariably in writing. If
a rare exception occurred, however, such an oral promise would not be within the statute. Similarly, while bail
bonds in civil cases are no longer common, an oral promise to indemnify the bondsman is not within the statute.
Neither is it within the statute in criminal cases although the policy considerations may be different.
Practice Resources:
• Corbin § 1 .1 (contracts of indemnity); § 1 .1 (oral contract to indemnify a
surety).
Page 2 of 2

End of Document

§ 16.05 Liability Insurance Is Not Within the Suretyship Provision of the

Statute
Liability insurance involves a promise by an insurer to a potential debtor to pay its liability; it falls within the
unanimous rule that a promise to a debtor is not within the suretyship provision of the statute of frauds. Similarly,
casualty insurance policies are promises to the insured to pay for losses that have nothing to do with suretyship.
Unlike suretyship contracts, promises by an insurance company to pay for losses by an insured through the acts or
inactions of third parties (such as tortfeasors) are not within the suretyship provision because the contract is not
made for the benefit of such unidentified third parties.
A “del credere” agent takes possession of a seller's goods for the purpose of reselling them and promises the seller
that it will guarantee accounts of the customers who purchase the goods. The agent clearly makes such a promise
for its own benefit. Thus, if it is an oral promise, it is enforceable under the leading object exception.
Practice Resources:
• Corbin § 1 .1 (insurance promises are not within the statute); § 1 .1 (del credere
agency).

End of Document

§ 16.06 Guaranty by Assignor of Debt or by a Party Already Bound

When a contract right is assigned, the assignor may promise the assignee that the obligor will perform its correlative
duty. Such a promise may appear to be a promise to answer for the debt of another, but it falls within the “main
purpose” exception since it is made for the benefit of the assignor, who is eager to effect the assignment at the
highest possible price and not to benefit the obligor.
When a promisor (S) is already otherwise bound to either the creditor or to the principal debtor to render the
promised performance to the creditor, a guaranty promise by S to C is not within the statute. Thus, if S is a partner
in a partnership already indebted to C, and S promises to pay the whole debt of the partnership, the promise is not
within the statute. S was already bound for the full amount of C's claim and the new promise does not increase S's
duty except that C may now be able to sue S separately rather than jointly.
Practice Resources:
• Corbin § 1 .20 (guaranty by assignor of debt); § 1 .21 (guaranty by party already
bound).

End of Document

§ 16.0 Suretyship Distinguished from Purchase

If a party purchases a contract right from a creditor, the party becomes an assignee of that right and does not
promise in any fashion to answer for the debt of another. The suretyship provision of the statute of frauds does not
apply to such assignments. Sales of “accounts,” which are contract rights to deferred payments by customers who
have purchased goods from the assignor, must comply with the writing requirements of Uniform Commercial Code
(UCC) Article 9, which deals with secured transactions. UCC § -20 . The distinction between a security
interest in accounts and the sale of accounts was often blurred. Thus, Article 9, which governs security interests,
governs sales of accounts.
Practice Resource:
• Corbin § 1 .22 (suretyship distinguished from purchase).

End of Document

§ 16.0 A Debtor's Subsequent Contract

If a party is a principal debtor who subsequently contracts with a third person to pay the debt, the contract has the
characteristics of a suretyship contract. Such a contract, however, does not bring the debtor's original promise
within the statute of frauds since a promise is within the statute at the time it was made or never within the statute at
all.
Practice Resource:
• Corbin § 1 .2 (debtor's promise is not brought within the statute by means of a
subsequent contract).

End of Document

§ 16.0 Transfer of Property to Secure the Debt of Another

If a promise is made to pay the debt of a principal debtor for the benefit of that debtor and a gold bracelet is
delivered to the creditor as security for the debt, the suretyship provision of the statute of frauds applies to the
promise, but not to the transfer of property. The transfer creates a possessory security interest in the bracelet under
the UCC, which substitutes for the writing requirement of such a security agreement under Article 9 of the Code.
UCC § -20 . The security interest is perfected by possession under § - 1 .
Practice Resource:
• Corbin § 1 .2 (transfer of property to secure the debt of another).

End of Document

§ 16.10 General Summary of Rules to Determine the Applicability of the

Statute
I. A promise to answer for the debt of another is within the suretyship provision if it meets the following
requirements:
A. It is made to the creditor (obligee);
B. Its performance will discharge a present or future duty owed by the principal obligor;
C. It is conditioned on the failure of performance by the principal obligor;
D. It has been made primarily for the benefit of the principal obligor who is under a duty to exonerate and
indemnify the obligor;
E. The promisee (creditor) must know or have reason to know of the suretyship relation between the promisor
and principal debtor.
II. A promise is not within the suretyship provision of the statute of frauds in any of the following situations:
A. There is no other obligor bound for the same performance, i.e., no “another” exists either because:
1. No other party was ever bound, or
2. Another was bound, but was discharged by novation as part of the new promise, or
3. Another is still bound, but for a different performance.
B. The promise was not made to a creditor (obligee) of the “other”;
C. The promisor is not entitled to exoneration by the third person who is bound, but owes that third person a
duty of indemnity;
D. The promisor made the promise at least primarily for the promisor's own benefit and not for the benefit of
the indebted third person (the “leading object” rule). These promises will often not discharge the duty of the
debtor since payment by the promisor will make the promisor an assignee of the creditor's right against the
debtor;
E. The promise was to pay the creditor from a fund supplied by the third person.
Practice Resource:
• Corbin § 1 .2 (general summary of rules to determine the applicability of the statute).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 17 STATUTE OF FRAUDS—INTERESTS IN LAND
CHAPTER 17 STATUTE OF FRAUDS—INTERESTS IN LAND

the subject matter.

End of Document
§ 1 .01 Scope and Application of the Land Provision
[1] The Statute Applies to Both Parties to a Contract for the Sale of Land
Section 4 of the original 1677 Statute of Frauds states, “[N]o action shall be brought … upon any contract or
sale of lands, tenements or hereditaments, or any interest in or concerning them.” The phrase “contract or sale”
is troublesome since a sale is a conveyance to which the law of property applies. This section of the statute of
frauds has been construed to read “contract of sale.” At common law, “tenements” referred to land and other
inheritances held in freehold as well as rents. “Hereditaments” included real or personal property capable of
being inherited. More than three centuries later, neither term is in common use though they may still be found in
a given statute of frauds.
To further assure complete coverage, the statute reads “or any interest in or concerning them.” Among the
“interests” in land, the statute clearly includes all of the traditional “estates” in land such as fee simple, fee tail,
estates for life and for years, freehold, leasehold, reversions, and remainders.
Since a “contract” for the sale of land involves not only the seller promising to sell an interest in land, but also a
buyer who is promising to pay the price, the statute applies to both. Some statutes of frauds, however, are
unusual in requiring a writing signed only by the vendor, grantor, or lessor of an interest in land rather than the
typical requirement that the writing must be signed by the party to be charged. In a few other states where the
statute includes the usual requirement of a writing signed by the party to be charged, with respect to land
contracts, courts require only the signature of the vendor, on the footing that the statute was created to protect
landowners and not land buyers. In these jurisdictions, the vendor may enforce a contract under a writing not
signed by the purchaser, but the purchaser may not enforce a contract without a writing containing the vendor’s
signature.
To insert “mutuality” into this analysis, these courts require some manifestation that the vendor’s signed writing
was delivered to and accepted by the buyer. Where a statute contains the usual requirement of a signature by
the party to be charged, the buyer’s manifestation of acceptance of the writing is viewed as the equivalent of a
signature. See, e.g., Chase v. Nelson, 507 N.E.2d 640, 643 (Ind. Ct. App. 1987). There may be considerable
uncertainty in the determination of the buyer’s acceptance of a vendor’s document. That fact alone augurs a
change in these jurisdictions to a simple requirement of a purchaser’s signature along with the vendor’s
signature.
With respect to the requirement of a signature, see Ruggieri-Lam v. Block, 2015 U.S. Dist. LEXIS 99332 (D. Vt.
2015), where an email specifically referenced the agreement attached to it, and the agreement contained all the
necessary terms. The email was signed electronically, and the court held that an electronic signature suffices
for purposes of the statute of frauds.
[2] Contract to Devise by Will

Since there is no specific provision in the 1677 Statute of Frauds dealing with contracts to devise property by
will, numerous states enacted separate statutes requiring a writing to evidence such contracts. There are,
however, many cases holding that such a contract is within the land provision of the original statute of frauds.
The land need not be owned or even identified at the time of the promise. A contract stating that a promisor will
leave the promisor’s entire estate to the promisee or to a third party designated by the promisee such as child
will be within the land section of the statute if the promisor owns the land at the time of the promisor’s death.
A promise to bequeath money is not within the land provision of the statute even though the promisor’s estate
consists wholly of land either at the time of promise, the time of death, or both. The sale of land will be
necessary to carry out the wishes of the testator, but a promise to pay money is not a promise to convey land.
Page 2 of 2
[3] Contract to Transfer Land to or from a Third Person

A contract between Ames and Barnes under which Barnes agrees to transfer land to a third party, Carr, is
within the land provision of the statute. If Ames orally promises Barnes that Ames will buy land from Carr,
Ames’s promise is within the statute. If Barnes promises Ames that he will see to it that Carr transfers Carr’s
land to Ames, Barnes’s promise is also within the statute. Restatement (Second) of Contracts § 12 1 reads:
“A contract to procure the transfer of an interest in land by a person other than the promisor is within the Statute
of Frauds.” If Ames and Barnes own land jointly and Ames promises to transfer his interest land to Ames for the
purpose of filing in bankruptcy with reconveyance after debts are paid, this is an agreement for the sale of land
that is within the statute of frauds. Simons v. Simons, 134 Idaho 824, 11 P.3d 20 (2000).
If, however, Barnes is a real estate broker and promises to use his best efforts to procure a transfer of Carr’s
land to Ames for which Ames will then pay Barnes a commission, Barnes’s promise is not within the land
provision of the statute of frauds. Many states, however, have added statutes requiring a writing to evidence
any contract to pay a broker a real estate commission. Restatement (Second) of Contracts § 12 2 .
Practice Resources:
• Corbin § 1 .1 (application of the land clause); § 1 .2 (promises by the purchaser
are within the statute); § 1 . (contracts to leave property by will); § 1 .
(contracts to transfer land to or from a third person); § 1 . (interests in land—
estates, property).

End of Document
§ 1 .02 Trusts
When land is held in trust for the benefit of another, the former is a trustee and the latter is a beneficiary (cestui que
trust). Section 7 and 8 of the 1677 Statute of Frauds required a writing to evidence an express trust. Three-fourths
of the states have enacted similar legislation requiring a writing. Trusts created by operation of law—constructive
trusts—are excepted from the statutes, however. Just as a quasi contract cannot fall within the land provision of the
statute of frauds since it is not a real (express or implied-in-fact) contract that a plaintiff is seeking to enforce, a
constructive trust is created by a court essentially to protect the restitution interest in the avoidance of unjust
enrichment. If land is conveyed subject to an oral trust that is unenforceable, the unjust enrichment of the grantee is
palpable. Courts will avoid that injustice in equity by declaring the grantee a constructive trustee with a duty to
reconvey the property to the grantor. Modern applications of the constructive trust device, however, often have the
effect of ordering specific performance of the unenforceable express trust.
The statute does not prevent enforcement of the oral trust if actual fraud is proved, but it cannot be shown in most
cases. In the absence of fraud, modern courts often find a “confidential relation” between the grantor and grantee.
Restatement of Restitution §§ 1 2 and 183(b). A better theoretical foundation may be found in the use of
promissory estoppel which underlies a grantor’s reliance on a promise of a grantee to hold the conveyed land in
trust.
Practice Resource:
• Corbin § 1 . (interests in land—trusts and constructive trusts).

End of Document
§ 1 .03 Oral Contracts to Lease

A contract to lease real property is within the land provision of the statute of frauds, but short term leases, up to a
maximum term of one year, are binding without a writing. When parties orally contract for a lease for one year, the
critical question will be when the lease term is to begin if it does not begin immediately. The statute may provide
that the year is to be measured from the time the contract is made. Even if the oral lease for one year is to begin
immediately, which would normally allow it to be enforced, if the parties have also orally agreed that the lessee has
options to renew for longer terms, the lease will be within the statute. A contract by the lessee to assign the lease is
within the statute since it is transferring an interest in land. An oral contract to surrender an unexpired portion of the
lease term will be enforceable if it is less than a year, even though the original lease was for more than a year. If the
oral contract surrendered is for a longer term, it is unenforceable unless the oral agreement is fully executed by
delivery of possession of the leased premises to the lessor.
Practice Resource:
• Corbin § 1 . (oral leases and oral contracts to lease).

End of Document
§ 1 .04 Mortgages and Liens

An oral agreement for a mortgage on land is unenforceable since it is a contract for an interest in land within the
statute of frauds. An actual advance of money to purchase the land in reliance on the borrower’s promise to
execute a mortgage, however, creates an equitable lien on the land for the lender though the contract is within the
statute. The lender can seek restitution of the advancement absent any equitable lien, but in what amounts to a
liberal application of the part performance doctrine, courts recognize that an unsecured claim against an insolvent
borrower is not an adequate remedy.
A contract extending the time of payment or redemption of a mortgage is not within the statute, but the court in
Wells Fargo Bank Minn., N.A. v. Dougherty, 2003 Conn. Super. LEXIS 2342 (Aug. 21, 2003) held that a promise to
forbear foreclosure was within the statute of frauds. The court noted that Connecticut had not previously addressed
the question, but courts in other jurisdiction had held such a promise to be within the statute. In Duarte v. Wells
Fargo Bank, N.A., 2014 U.S. Dist. LEXIS 19029 (D. Nev. Feb. 12, 2014), the court found that a promise to forbear
foreclosure which the promisee sought to enforce on grounds of promissory estoppel was not within the statute of
frauds since the statute of frauds applies only to “contracts” which are supported by consideration. A contract by a
mortgagee to assign the debt secured by the mortgage is not a contract to sell an interest in land. It is a contract to
sell a chose in action. A contract to assign the mortgagee’s interest in the real property, however, is within the
statute.
A mortgagor’s interest in land is its “equity of redemption.” The promise to convey the interest is within the statute
though the oral promise could become enforceable through part performance, just as in other cases. A promise by
a grantee from the mortgagor to assume the mortgage indebtedness is not within the statute because it is not a
promise to convey land. Incidentally, it is not unenforceable under the suretyship clause of the statute of frauds
because it is a promise to the debtor (mortgagor).
An oral agreement that a document evidencing an absolute conveyance of land was agreed to only as security for a
loan can be shown by oral testimony. Uniform Commercial Code (UCC) § -20 cmt. 3, emphasizes that the Code
does not change the doctrine that a bill of sale for goods that is absolute on its face may be shown by parol
testimony to have in fact been given as security. Although such an agreement seriously affects the interest that the
deed purports to transfer, the agreement itself purports to transfer nothing.
Practice Resource:
• Corbin § 1 . (interests in land—mortgages and liens).

End of Document
§ 1 .05 Licenses
A license excuses what would otherwise be a trespass on the owner’s land. It is a privilege to use the land
revocable at the will of the grantor. Often called a “mere license,” it is of such slight value that it not viewed as an
interest in land and does not invoke the land provision of the statue of frauds. If Ames allows a neighbor child to
play on Ames’s land, the child is a mere licensee. Licenses are revocable, but there is considerable confusion in the
case law as to whether substantial reliance on a license makes it irrevocable.
Practice Resource:
• Corbin § 1 . (interests in land—licenses).

End of Document
§ 1 .06 Servitudes
[1] An Easement Is Subject to the Statute Because It Is a Contract to Convey an Interest in Land
An easement is an interest in land and subject to the provision of the statute of frauds requiring contracts for the
sale of land to be evidenced by a writing. Hedgepeth v. Parker’s Landing Prop. Owners Ass’n, 2010 U.S. App.
LEXIS 13652 (4th Cir. July 2, 2010) (noting N. C. Gen. Stat. § 22-2 (2010)). When the owner of building agreed
to give an advertising agency the “exclusive right and privilege” to maintain an advertising sign of certain size
on the wall of the building, a court held that this exclusive right was more than a mere license that would have
created no interest in land. This right was an “easement in gross” because it was for the benefit of a particular
party rather than an easement “appurtenant” for the benefit of owners of adjoining lands who, for example,
agreed to a right of way to access each other’s land. Either type of easement is subject to the statute of frauds
because it is a contract to convey an interest in land. Baseball Pub. Co. v. Bruton, 302 Mass. 54, 18 N.E.2d 362
(1938).
[2] A Restrictive Covenant Can Create an Interest in Land

Restrictive covenants create interests in land according to a majority of courts. Unless there has been part
performance or reliance preventing the application of the statute of frauds, an oral restrictive covenant is
unenforceable. The specific “interest” in land such covenants create, however, is unclear. Though they certainly
affect the value of land, restrictive covenants do not create the traditional “estate” in land; nor is there any
“transfer” of rights in land. If Ames agrees not to build a garage on his land, he is surrendering his privilege to
do so, but he is not transferring a property right to Barnes who paid him not to build the garage. Oral restrictive
covenants may become enforceable because of part performance or reliance on the oral promise.
[3] A Contract for Buying or Selling a “Profit” Is Within the Statute

Profit a prendere—or just “profit”—constitutes an interest in land when one is legally privileged for a
considerable period of time to enter the land and to take valuable items such as stone, minerals, landfill, fish,
game, or other property from the land belonging to the owner. A contract for buying or selling such an interest in
land is a contract within the land provision of the statute of frauds. If the seller catches the fish, unearths the
stone, or otherwise severs the goods and contracts for their sale, it is a contract for the sale of goods that falls
within the UCC statute of frauds, a distinction that is explored in the next section.
Practice Resource:
• Corbin § 1 .10 (interests in land—servitudes).

End of Document
§ 1 .0 Applying the Land Clause of the Statute or the Statute for the Sale of
Goods
A contract for things attached to or part of the land raised the question of which section of the statute of frauds
applied—the provision for land contracts or the provision dealing with contracts for the sale of goods. A contract for
the sale of growing crops, standing timber, oil, natural gas, or other things that were part of the land when the
contract was made would be severed to perform the contract. Whether the subject matter was land or goods, the
contract was subject to the statute of frauds, but the writing requirements and exceptions to these provisions were
different. To determine the proper classification of land or goods, courts considered numerous questions such as
which party was to sever the goods and whether the goods were fructus naturale (natural to the land) or fructus
industriales (the product of human industry).
The UCC provided clarity and simplicity to this distinction. Under § 2-10 1 a contract for the sale of minerals or
the like (including oil and gas) or its materials to be removed from realty is a contract for the sale of goods if the
contract requires them to be removed by the seller. If the buyer is to sever, as where a buyer of coal or other
minerals has a license to enter the land to mine and remove the coal, the parties have made a contract for the sale
of land.
Under UCC § 2-10 2 if the contract is for the sale of growing crops or other things attached to the land that are
“capable of severance without material harm thereto but not described in subsection (1),” the parties have made a
contract for the sale of goods, regardless of who is to sever. The UCC originally classified standing timber as a
“mineral” under subsection (1), but the practices of the timber industry in harvesting timber and creating tree farms
induced a revision of the Code section to treat timber as goods, regardless of which party was to sever the timber.
“Fixtures” that could be removed without material harm to land were classified as goods, but the Code drafters
avoided the use of that term in light of its diverse definitions. UCC § 2-10 cmt 1. The unborn young of animals
which may be contracted for prior to birth are goods. UCC § 2-10 1 .
The classification of property as goods or fixtures is also important for agreements in which a creditor takes a
security interest in such property. Such an interest is governed by UCC Article 9. UCC § -20 . Comment 3
explains that, under § -20 “enforceability requires the debtor’s security agreement and compliance with an
evidentiary requirement in the nature of a Statute of Frauds,” including the debtor’s authentication. The comment
emphasizes that nothing in Article 9 rejects the “deeply rooted doctrine that a bill of sale, although absolute in form,
may be shown in fact to have been given as security.”
Practice Resource:
• Corbin § 1 .11 (interests in land? or personalty?).

End of Document
§ 1 .0 Partnership Property
The Uniform Partnership Act (UPA), adopted in virtually all states, does not require a writing to establish a
partnership. A partnership interest is viewed as personalty. Thus, the assignment of such an interest is a transfer of
a chose in action that is not within the land provision of the statute of frauds regardless of the fact that the
partnership owns land. The fact that the partnership contemplates owning or dealing in real property should not
invalidate a partnership agreement. Where an oral partnership was created for the purpose of developing the
mining of pumice on a tract of land, the court held that the contract was not within the statute of frauds. Wirth v.
Sierra Cascade, LLC, 234 Or. App. 740, 230 P.3d 29 (2010). Where land was held as partnership property but the
title to the property was in the name of one partner, the court noted that partnership property may be held in the
partnership name or in the name of one or more partners. The statute of frauds does not preclude a partner’s claim
that another partner is holding legal title to the property for the benefit of the partnership. Finch v. Raymer, 2013
Tenn. App. LEXIS 319 (May 6, 2013). A contract for the sale of land between a partnership and third parties,
however, is like any other contract of that kind. It is within the land provision of the statute of frauds. When a partner
acts within the scope of his or her authority as the partnership’s agent in purchasing land, however, there is no
requirement of written authorization of such agency. This view is consistent with the underlying policies of the UPA.
A contract by one partner to convey realty to another partner is within the statute and many cases have held that a
contract for the conveyance of land from a partner to the partnership is also within the statute, although the UPA’s
acknowledgment of oral partnerships may be read to suggest a contrary result. An agreement to compensate a
partner with realty is within the statute, but a contract distributing partnership money as proceeds from the sale of
land is not within the land provision.
Practice Resource:
• Corbin § 1 .12 (partnership property).

End of Document
§ 1 .0 Boundary Line Contracts and Partition Agreements by Tenants in

Common
If Ames agrees to move a fence to recognize a strip of land conveyed to Barnes in exchange for compensation, the
new boundary resulted from a contract to buy and sell land within the statute of frauds. If, however, Ames and
Barnes have a bona fide dispute about the location of the boundary between their properties but orally agree on a
dividing line, such a contract is enforceable only if the parties have executed the agreement by taking possession of
property on either side of the line. While courts justify this result on the basis of the part performance doctrine,
Restatement (Second) of Contracts § 12 considers reliance to be the better analysis.
When land is owned in common, the co-owners can contract to partition the land without a writing if they actually
take possession of the partitioned land. The supporting analysis suggests that there is no conveyance since they
were each the owner of the land prior to the partition; this is a fiction, however. After the partition, each party has
new rights and powers in dealing with the allotted portion of the land. Again, however, an oral agreement between
such co-owners followed by possession is not deemed to be within the statute.
Practice Resources:
• Corbin § 1 .1 (boundary line contracts); § 1 .1 (partition agreements by tenants in
common).

End of Document
§ 1 .10 Contract Rights to a Conveyance

A party who has a right under an enforceable contract to the conveyance of land may specifically enforce that right.
As such, it constitutes an equitable interest in land and a contract to assign such an interest in land is within the
land provision of the statute of frauds. A promise by the vendor to assign the purchase price, however, is not within
the land provision since it is simply an assignment of a chose in action.
There are some cases holding that the same analysis should apply to an agreement to rescind an executory land
contract since, again, such contracts involve an equitable interest in the land. Restatement (Second) of Contracts
§1 cmt. c, regards this reasoning as circular since an oral contract to rescind is a defense to a suit for specific
performance of the executory land contract. Thus, there is no equitable interest. When, however, the land contract
has been executed by a conveyance of the land, a contract of rescission is seeking a reconveyance of an interest in
land, which is within the statute.
If a party has an executory duty to sell land under a written and signed contract and the buyer orally assigns the
correlative right to an assignee who sues for specific performance, the seller is a stranger to the assignment and
should not be able to use the statute of frauds to invalidate the contract evidenced by his or her own signed writing.
Practice Resource:
• Corbin § 1 .1 (interests in land—contract rights to a conveyance).

End of Document
§ 1 .11 Types of Contracts That Fall Within the Land Provision of the Statute
Courts have found certain promises not to be within the land provision. They include: a promise to construct a
building or do work on land; a seller’s warranty that the tract of land contains a certain number of acres; a promise
to lend money to buy land; a promise to repay a loan used to purchase the land from the proceeds of sale of timber
cut from the land; and a promise by a vendee to assume a mortgage debt and indemnify the vendor against other
lien claims.
Agreements found to be within the land clause include contracts to sell shares in a cooperative apartment;
agreements between a devisee of land and another person not to probate a will; and contracts for the release or
conveyance of a widow’s dower interest, or a spouse’s community interest in land, or a husband’s courtesy, or a
rent charge.
A pre-marital agreement that each of the parties will retain his or her separate properties may be within the
marriage provision of the statute of frauds, but it should not be within the land provision. A promise to convey real
property after marriage, however, is within the land provision though it may become enforceable without a writing
through performance.
Practice Resource:
• Corbin § 1 .1 (interests in land—miscellaneous cases).

End of Document
§ 1 .12 Commission for Negotiating a Sale of Land

A contract between a buyer or seller of land and a real estate agent who is to be paid for negotiating a sale of land
is not within the land provision of the statute of frauds because the promised performances of the principal and
agent do not involve conveyances of land. Several states, however, have enacted additions to the original statute of
frauds requiring contracts to pay commissions to real estate agents to be in writing, presumably based on a belief
that fraudulent claims for such commission are frequently made. Such statutes typically apply only to contracts
between the owner of the land and the broker claiming commission. If land is to be purchased in the agent’s own
name, the contract is within the statute as is a promise by an agent that if the buyer is dissatisfied, the agent will
assume the contract duties and take the land off the buyer’s hands.
When the owner’s contract with a seller involves not only the agent’s promise to use best efforts to find a buyer
meeting certain expectations, but also a promise by the owner to convey to such a buyer, it appears to be a
promise to convey land within the statute. The promise to the agent, however, remains only a promise to pay a
commission, which is enforceable without any writing. The promise to convey to a proper buyer is simply excused.
Pelis was a salesperson working under the aegis of Otto’s license as a real estate broker. He claimed that Otto had
orally promised that he would receive 60 percent of any commission induced by his efforts. Pelis succeeded in
finding a buyer for a listed property but, before the sale was completed, Otto terminated Pelis’s employment, closed
the sale, and collected the entire commission. Pelis sued, and Otto claimed that his alleged promise was
unenforceable under the statute of frauds. The court held that the traditional land provision of the statute did not
apply to a promise to pay a commission, and the statute requiring a writing to evidence payment for real estate
services applied only to contracts between the agent and the owner of the real estate. Otto v. Pelis, 640 N.E.2d
712, 715 (Ind. Ct. App. 1994).
Practice Resource:
• Corbin § 1 .1 (contracts for a commission for negotiating a sale of land).

End of Document
§ 1 .13 Option Contracts for the Purchase of Land Are Within the Statute
An option contract creates an irrevocable power of acceptance—an irrevocable offer—in the option holder for the
time specified in the option. An option contract for the sale of land creates a right of conveyance conditioned only on
the option holder’s decision to exercise that right and tender the payment set forth in the option. Such an option is
specifically enforceable. If the option giver breaches the option contract and sells the land to a third party who has
notice of the option, the option holder can compel surrender of the property upon acceptance and tender of the
price within the option period. Option contracts for the purchase of land, therefore, are within the land provision of
the statute of frauds. Agreements extending the time specified in the option are also within the statute of frauds.
Best v. Edwards, 217 Ariz. 497, 176 P.3d 695 (2008).
Since the option holder has a conditional contract right that is specifically enforceable against the seller, the option
holder has an equitable interest in the property. A contract to assign such a right is a contract to assign an interest
in land that must be evidenced by a writing because it is within the land provision of the statute of frauds.
Practice Resources:
• Corbin § 1 .1 (options to buy land are contracts); § 1 .1 (options to buy land create an
interest in land).

End of Document
§ 1 .14 Effect of Conveyance of Land on Enforceability of Purchaser’s Oral

Promise
Although an oral contract for the sale of land will be unenforceable under the land provision of the statute of frauds,
if the seller conveys the land, a court is not going to allow a buyer to keep the land without paying for it. If the land
was conveyed to a third party as required by the oral contract, a strict application of the remedy of quasi contract
would be inadequate since the promisee received no benefit. Whether the land is conveyed to the promisee or a
third party, courts will enforce the contract for the agreed contract price. One justification is that the promise to pay
the purchase price is not a promise to convey land. Earlier it was noted that in any executory contract for the sale of
land, the buyer’s promise to pay is within the statute. Thus, the essential rationale is that the conveyance of the land
is sufficient to allow evidence of the oral contract to pay for it.
It is important to distinguish the “part performance” rule that arose as a rule in equity when the buyer partly
performed an oral contract for the sale of land and the remedy was specific performance. By contrast, the rule here
allows an action at law to recover the price in money damages against the buyer. If the parties had agreed on the
mutual exchange of lands, this rule could not apply since the defendant’s promise to convey is as much within the
statute of frauds as the plaintiff’s promise. In this situation, the only adequate remedy is specific performance.
Parthenon Constr. & Design, Inc. v. Neuman, 166 Or. App. 172, 999 P.2d 1169 (2000).
Practice Resource:
• Corbin § 1 .20 (effect of conveyance of land on enforceability of purchaser’s oral
promise).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 18 INTERESTS IN LAND—EFFECT OF PART

PERFORMANCE OF ORAL CONTRACT
CHAPTER 18 INTERESTS IN LAND—EFFECT OF PART PERFORMANCE OF

ORAL CONTRACT
the subject matter.

End of Document

§ 1 .01 Part Performance Doctrine as It Affects Land Contracts
[1] Part Performance Doctrine Originated in Equity Courts

The statute of frauds states that no action shall be brought to enforce a contract for the sale of land. There is no
exception recognizing part performance of oral contracts for the sale of land. In the last chapter we noted that a
vendor who has fully performed its oral promise to convey land will be able to sue in an action at law for the
contract price. An action for damages for such full performance does not make an oral contract enforceable
under the “part performance” doctrine.
The part performance doctrine was not recognized at common law. It was a creature of equity courts. There is
reason to believe that the drafters of the original statute of frauds did not intend the statute to be operative in
courts of equity and the chancellors granting equitable relief in the form of specific performance, reformation, or
constructive trusts on the basis of part performance were conscious of the drafters' intention. In an effort to
adhere to the strict language of the land provision, it has been argued that a court of equity is not enforcing the
oral contract; rather it is a recognition in equity of a duty arising from the part performance. It is, however, more
accurate to recognize that the court is enforcing the oral contract because of the equities engendered by part
performance.
[2] Restatement View

The part performance doctrine as it affects land contracts may be seen as evidence of a change of position in
justifiable reliance on an oral promise. The Restatement (Second) of Contracts views the doctrine in this
context. Restatement (Second) of Contracts § 12 is a specific application of § 1 which complements the
general promissory estoppel section § 0 in viewing sufficient detrimental reliance as a basis for enforcing an
oral promise within any section of the statute of frauds. Owens v. M.E. Schepp P’ship, 218 Ariz. 222, 182 P.3d
664 (2008). Courts may justify enforcing the oral contract on the footing that repudiation after part performance
constitutes “virtual fraud,” but the Restatement suggests that the more accurate statement is that courts may
use equitable powers in recognition of a promisee's reliance.
[3] Part Performance May Occur in Acceptance of an Offer

Part performance may occur in the acceptance of an offer. Where an offer is made to leave property by will in
exchange for services, a contract is formed when the services begin, conditioned on the completion of the
services under theory of § of the First Restatement of Contracts. Under the Second Restatement § the
beginning of performance would create an option contract making the promisor’s offer irrevocable. Whether the
contract is bilateral or unilateral has no effect on the recognition of the part performance doctrine.
[4] Part Performance in Favor of a Vendor

While part performance cases usually find the buyer seeking specific performance, the seller may also be
entitled to a remedy on that basis. Full performance by the seller in conveying land under an oral contract will
allow the seller to sue for the price in an action at law, but such an action is not based on the equitable part
performance doctrine. If a purchaser has sufficiently performed an oral contract to allow the remedy of specific
performance, the rule of mutuality of remedy can be applied in favor of a vendor, even when there has been no
part performance by the vendor.
Page 2 of 2
Practice Resources:
• Corbin § 1 .1 (part performance as ground for enforcement of contract to
transfer land); § 1 .2 (does equity abrogate the statute?); § 1 . (part
performance doctrine inapplicable in common law actions); § 1 . (part
performance in process of acceptance of offer); § 1 . (part performance
doctrine applicable in favor of vendor).

End of Document

§ 1 .02 Requisites of Part Performance
[1] Three Essential Elements to Invoke Part Performance

The essential requisites to invoke the part performance doctrine are:
• The performance must manifest pursuit of and reliance on the oral contract without awareness that the
other party has repudiated the contract.
• The remedy of restitution is an inadequate remedy.
• The performance must evidence the alleged contract and not be explicable on other grounds.
Each of these requisites must be elaborated since they occur in different combinations with varying degrees of
importance.
[2] Reliance on Oral Contract Is Required

The notion that part performance must be part of the agreed exchange is not accurate. For example, in an oral
contract for the sale of land, the buyer's acts in taking possession of the land and making valuable
improvements in reliance on the contract are not required by the oral contract, which only requires the buyer to
pay for the land. Yet, such acts are viewed as quintessential acts of “part performance.” It is, therefore, more
accurate to suggest that there is a requirement of reliance on the oral contract. Restatement (Second) of
Contracts § 12 .
While courts continue to suggest that granting specific performance of an oral contract based on the repudiation
of that contract after part performance by the aggrieved party prevents “virtual fraud,” there is no fraud, “virtual,”
“quasi,” or “constructive.” While the phrase “virtual fraud” may continue to appear in such cases, there is a
growing recognition of the more accurate reliance concept as the basis for enforcing oral contracts for the sale
of land under the “part performance” doctrine.
In one case, a plaintiff made a small down payment under an oral contract for the sale of land. The plaintiff took
possession and made extensive renovations of the land. He sought specific performance on the basis of
promissory estoppel. The court held that promissory estoppel was not necessary where the statute of frauds is
satisfied through the part performance doctrine. The court, however, recognized that the part performance
doctrine was grounded in equitable estoppel, which requires clear and convincing evidence that the parties
entered into the contract, that there was part performance by the party seeking to enforce it, and that the part
performance was induced by the defendant's misrepresentations. The court found all of these elements,
including misrepresentations by the defendants in continued assurances that they would honor the contract.
Sullivan v. Porter, 2004 ME 134, 861 A.2d 625.
[3] A Party May Repudiate Contract Prior to Reliance

A showing of reasonable and justifiable reliance necessarily indicates that the action was taken without
knowledge of any repudiation by the other party. Before reliance, the other party may repudiate a true oral
contract with impunity because of the view that greater harm would follow from subjecting the innocent to
allegations of false oral contracts. The doubts concerning that view have engendered many efforts to narrow
the application of the statute, including the part performance exceptions.
[4] Contract Need Not Be Enforced if Adequate Restitution Is Available

Page 2 of 3
Where restitution of benefits conferred on the defendant is an adequate remedy, it is generally held that there is
no necessity to specifically enforce the contract. A buyer's payment of part or even the whole price of the land
under an alleged oral contract does not satisfy the statute of frauds because there is an adequate remedy in
quasi contract for restitution of the purchase price, a remedy that does not disregard the statute of frauds.
Where, however, a buyer not only paid the purchase price but paid the real estate taxes on the property for
more than 30 years, the court cited the Corbin treatise in finding the statute satisfied through the part
performance doctrine because it is a doctrine to prevent a formal statute from doing grave injustice. Greene v.
McLeod, 156 N.H. 724, 942 A.2d 1254 (2008).
Restitution requires that a measurable benefit has been conferred on the unjustly enriched party. A buyer who
has relied on the contract by moving from a former residence to take possession of the land confers no benefit
on the seller. While the value of any improvements made on the land by such a buyer may be recoverable in
restitution, courts have not viewed that remedy as adequate to deny specific performance if the other requisites
of “part performance” have occurred.
An action in quasi contract is subject to the contract statute of limitations that could bar recovery for services
rendered under a contract of long duration; the statute, however, will not begin to run until there is a breach of
the oral contract. A promise to devise property by will in exchange for lifetime services, therefore, would not be
breached until the promisor dies without a will devising the property to the plaintiff.
[5] Part Performance Must Be “Referable” to the Oral Contract

The statement that part performance must be “referable” or even “unequivocally referable” to the oral contract
requires explanation. The essential concept is that the performance is such that it is not reasonable to assume
that it would have occurred without a contract and there is no other reasonable explanation for it. If the alleged
part performance is in the form of services already compensated in some fashion, the evidence of part
performance is severely weakened because it is explicable on grounds other than part performance of the oral
agreement.
When the performance is forbearance, such inaction is less likely to meet this requirement than performance
consisting of an affirmative act. In one case, the alleged part performance was inaction on a pre-existing written
agreement relying on the other party's oral promise. The district court granted a motion to dismiss for failure to
meet the requirements of the statute of frauds. While not precluding the possibility that part performance in the
form of inaction might suffice, the court of appeals noted that such inaction would have to be pleaded as
unequivocally referable to the alleged oral agreement, coupled with an element of detrimental reliance. The
court found that the plaintiff's inaction was not shown to have resulted from an effort to satisfy the terms of the
purported oral agreement and that the plaintiff also failed to plead detrimental reliance. Messner Vetere Berger
McNamee, Schmetterer Euro RSCG, Inc. v. Aegis Group PLC, 93 N.Y.2d 229, 689 N.Y.S.2d 674, 711 N.E.2d
953 (1999). Satisfaction of the statute becomes more difficult when the alleged part performance consists of the
surrender of property (rather than taking possession), the release of claims, or forbearance to secure rights or
exercise powers because such non-action may not be strong enough to evidence the alleged contract.
Affirmative acts performed by a relative or close friend may be attributable to the relationship between the
parties rather than an oral contract. Such a relationship is not dispositive; it is relevant to consider whether the
part performance is explicable on other grounds. Courts do not require the part performance to supply the exact
terms of the contract. Part performance creates an inference that the parties made the contract. When the oral
testimony is not subject to dispute or where it is convincing, courts will be more inclined to find the inference
arising from part performance to be satisfactory. Similarly, when other possible remedies are grossly
inadequate, courts will be inclined to grant specific performance on part performance evidence that, in other
contexts, would not be sufficient.
Practice Resources:
• Corbin § 1 . (requisites of sufficient part performance); § 1 . (part
performance must be in reasonable reliance); § 1 . (inadequacy of restitution
as a remedy), § 1 . (restitutionary remedy barred by statute of limitations);
§ 1 .10 (inadequacy of other remedies to prevent a “virtual fraud”); § 1 .11 (part
Page 3 of 3
performance must be referable to oral contract); § 1 .12 (payment of money not

sufficient); § 1 .1 (part performance already compensated or beneficial to the
plaintiff); § 1 .21 (forbearance or change of position in reliance as part
performance).

End of Document

§ 1 .03 Payment of Money or Services as Part Performance
[1] Payment of Money Generally Can Be Recovered in Restitution

A buyer's payment of part or all of the price of the land is part performance, but such payment alone will not be
sufficient to make the oral contract enforceable. The remedy of restitution of the payment will avoid the unjust
enrichment of the breaching seller and place the buyer in the position he or she was in prior to the contract.
The same analysis applies to the payment of rent, which, without more evidence of part performance, is not
enough to take a lease contract out of the land provision of the statute. If the oral contract required the plaintiff
to pay the price to a party other than the defendant who was not unjustly enriched, the remedy of restitution is
not available and a court may decide that the only adequate remedy is specific performance.
[2] Value of Services Generally Can Be Recovered in Restitution

When the oral agreement requires the performance of services as payment for land, the services constitute the
price; if part or all of this price in services rather than money is rendered, courts are generally consistent in
refusing to specifically enforce the contract without additional evidence of part performance. The value of the
services can be recovered in restitution just as the price in money can be recovered. An isolated case may
arise where the services are onerous and performed over a long period and their value in money may be
difficult to estimate. In these circumstances, a court may decide that the defendant should not be permitted to
hide behind the statute of frauds.
Practice Resources:
• Corbin § 1 .12 (payment of the price in money not sufficient); § 1 .1 (oral
contracts to transfer land for services).

End of Document

§ 1 .04 Part Performance in Reliance on Oral Promise to Devise Land

When a promise is made to devise land in exchange for services rendered, the typical case involves personal care
of a promisor who is ill or aged. Actions for specific performance are brought after the promisor dies since there is
no breach until the failure to devise the land becomes known. Courts have been particularly skeptical of such
promises and legislatures have enacted statutes concerning them. If the promisee has rendered the services, and
has also taken possession of the land and made valuable improvements (for instance, as where the promisor has
remained at the homestead to care for an aged parent), there is sufficient part performance. The rendering of the
services alone, however, will typically be insufficient.
If reasonable compensation for service can be ascertained, the quasi-contractual remedy should be available.
Services involving intimate personal relations such as boarding and nursing care, however, may be difficult to
ascertain, making the restitutionary remedy inadequate. Though the absence of possession and valuable
improvements to the land may still be a bar to specific performance, that remedy will continue to be available to
avoid manifest injustice. See, e.g., Skurat v. Kellerman, 53 Ill. App. 3d 361, 368 N.E.2d 966, 11 Ill. Dec. 358 (1977).
Practice Resources:
• Corbin § 1 .1 (part performance in reliance on oral promise to devise land); § 1 .1
(service not capable of valuation in money); § 1 .1 (necessity of possession in addition
to rendition of services).

End of Document

§ 1 .05 Taking Possession of Land
[1] Most Courts View Possession Alone as Inadequate

Some jurisdictions consider the taking of possession of land in itself sufficient part performance to satisfy the
statute of frauds. Most courts, however, view possession alone as insufficient. Taking possession is a more
important manifestation of performance than payment of the price. It often involves a material change of
position by the possessor. If part payment is added to possession, many courts would find such part
performance sufficient.
Sufficient possession is often said to require taking possession anew; a mere continuance of possession under
a prior lease would not be sufficient. The Restatement (Second) of Contracts takes a different view. A party
already in possession under a lease orally contracts to purchase the property. The party remains in possession,
pays the property taxes and insurance while making higher monthly payments on the purchase than the former
rental payments. Such a party is entitled to specific performance. See Restatement (Second) of Contracts
§ 12 illus. 6.
[2] The Combination of Possession and Sufficient Valuable Improvements Will Make a Contract
Enforceable in Most Jurisdictions
If the kind of improvements made on the land would have been improvident to make absent a contract for the
sale of the land, such evidence is often viewed as the strongest part performance evidence in making an oral
contract enforceable. The combination of possession and sufficient valuable improvements will make the
contract enforceable in almost all jurisdictions. Where the parties orally agreed to exchange parcels of land and
one party had relied by constructing a new building to which the other party implicitly assented by silent
observation throughout the construction, the court cited Corbin for this proposition in holding the agreement
enforceable despite the failure of the parties to otherwise comply with the Statute of Frauds. Hurtubise v.
McPherson, 80 Mass. App. Ct. 186, 951 N.E.2d 994 (2011).
The addition of the payment of some part of the price would make the part performance even stronger, but the
improvements and possession are the more important elements. Again, it is important note that such
improvements are not actual “part performance” of the contract since the buyer would not be required to make
them. Rather, they manifest the buyer's reliance on the existence of the oral contract.
Improvements must be valuable, substantial, and permanent. Improvements that are easily removable or of
slight value will not be sufficient. The cumulative effect of possession and payment plus improvements that
would otherwise be of insufficient value or permanence may still allow for specific performance of the contract.
There are myriad types of sufficient improvements in the case law—they include dwelling house, barn, factory,
outbuildings, fencing, erection of a party wall, and cultivation of the land. A storage shed costing $39,360 was
an obviously valuable improvement of commercial land. Hurtubise v. McPherson, 80 Mass. App. Ct. 186, 951
N.E.2d 994 (2011). The underlying test remains whether the improvement is of a kind that would not have been
made absent an existing contract.
Practice Resources:
• Corbin § 1 .1 (taking possession of the land may be sufficient, especially with
payments); § 1 .1 (possession and making permanent improvement).
Page 2 of 2

End of Document

§ 1 .06 Contracts of Adoption and Filial Service

There are contracts under which a promisor agrees to adopt a child, provide support and education, and to transfer
real property to the child by will. If the child is the promisee, the consideration is the child's filial service and
obedience as a member of the family. If the promise to adopt is made to the parent or guardian of the child, the
consideration is the parent or guardian's surrender of the child. The child is then a third-party beneficiary of the
promise to devise property by will, but the child's right is conditioned on filial service and obedience. In either case,
the filial service constitutes part performance that is not measurable in money. The restitutionary remedy of
quantum meruit is inadequate. If the oral contract is satisfactorily proved, specific performance will be decreed.
Practice Resource:
• Corbin § 1 .20 (contracts of adoption and filial service in reliance).

End of Document

§ 1 .0 Parol Gifts of Land

A promise to give land is unenforceable under the statute of frauds because there is no consideration for the
promise. If the promisee takes possession of the land and makes sufficient valuable improvements to constitute
part performance to satisfy the statute of frauds, the only remaining question is whether the reliance is sufficient to
validate the promise in the absence of consideration. If the reliance meets the promissory estoppel requirement, the
grantor's promise should be validated. It is important to note that the same facts or events constitute two forms of
reliance: part performance reliance to satisfy the statute of frauds, and promissory estoppel reliance to make the
promise to give the land enforceable.
Practice Resource:
• Corbin § 1 .22 (parol gifts of land).

End of Document

§ 1 .0 Quality of Proof Required for Enforcement of Oral Contract

Innumerable cases have held that the type of evidence required for the enforcement of an oral contract to convey
land must exceed a mere preponderance of the evidence. Most courts apply a standard of clear and convincing
evidence. There are no mechanical rules by which such evidence must be weighed. Clear and convincing direct
testimony will lessen the burden of the accompanying circumstantial evidence. The standard that the performance
must be “referable” to the contract and not explicable on other grounds is of utmost importance. The delivery of
possession and the making of valuable improvements with the consent of the owner are critical in this regard. The
rendition of services is less likely to be a convincing circumstance because it may be explicable on other grounds,
such as friendship, economic dependence, or blood relationship. When part performance evidence has been held
insufficient, it often due to the conflicting character of direct, human testimony.
Practice Resource:
• Corbin § 1 .2 (quality of proof required for enforcement of oral contract).

End of Document

§ 1 .0 Part Performance Doctrine in Minority Jurisdictions

North Carolina, Mississippi, and Tennessee remain at least ostensibly in the minority, in that they do not recognize
the part performance doctrine to satisfy the land provision of the statute of frauds. Nonetheless, these states apply
the doctrine of promissory estoppel and a flexible variant of equitable estoppel which appear to be available to
preclude the harshest consequences of the statute of frauds. Kentucky courts have adopted the part performance
doctrine, though it is limited to situations in which the value of the plaintiff's part performance services cannot be
measured in money.
Practice Resource:
• Corbin § 1 .2 (part performance doctrine in the minority jurisdictions).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 19 STATUTE OF FRAUDS—CONTRACTS NOT

PERFORMABLE WITHIN ONE YEAR
CHAPTER 19 STATUTE OF FRAUDS—CONTRACTS NOT PERFORMABLE

WITHIN ONE YEAR
the subject matter.

End of Document

§ 1 .01 The One-Year Provision is Given the Narrowest Possible

Construction
The 1677 English Statute of Frauds states, “No action shall be brought … upon any agreement that is not to be
performed within the space of one year from the making thereof.” With the exception of North Carolina and
Pennsylvania, what is typically called the “one-year” provision is replicated in state statutes of frauds. While the
entire statute of frauds in its original or replicated forms has been subjected to pervasive criticism, the one-year
provision has been condemned as manifesting no redeeming virtue. It is generally assumed that the evil to which it
was addressed is that contracts of long duration are susceptible to the inaccurate or “favorable” memory of
witnesses that cannot be trusted. The provision, however, fails of that essential purpose.
The one-year measurement of the contract starts “from the making thereof,” commencing on the date of formation
(the acceptance of the offer) and ending on midnight of the anniversary of the day of formation. (Fractions of a day
are disregarded. See Restatement (Second) of Contracts § 1 0 cmt. c.) Thus, an oral contract for one year to
commence the day after it is made is unenforceable because it is within the one-year provision even if it is breached
moments after it is made when it is fresh in the minds of the parties. If the same contract commenced on the day it
was made, it would not be within the statute; if it were breached moments later, it would be subject to an action
brought up to six years later under a typical statute of limitations, at which point it would certainly not be fresh in the
minds of the parties or other witnesses.
If the purpose of the statute was simply to assure reliable evidence for contracts of long duration, that purpose also
fails since a contract with a duration of one day to be performed a year and a day later is within the statute, while a
contract with a duration of a full year to commence on the day it is made is not within the statute. This analysis from
the work of Alan Farnsworth (Farnsworth, Contracts, § . (1990)) is set forth in what has become the landmark
criticism of the one-year rule, C. R. Klewin, Inc. v. Flagship Properties, Inc., 220 Conn. 569, 575, 600 A.2d 772, 775
(1991). The case notes that the one-year provision “has caused the greatest puzzlement among commentators.” Id.
at 575, 600 A.2d at 775. See Leon v. Goodman, 618 F. Supp. 2d 1334 (D.N.M. 2008), for a confirming analysis of
this “majority” view.
Since there is no satisfactory rationale, it not remarkable that courts have generally afforded the one-year provision
the narrowest possible construction. An agreement “not to be performed within the space of one year from the
making thereof” is deemed to apply only to contracts that cannot possibly be performed within one year. If there is
the slightest possibility that a contract could be performed within one year from its making, the great majority of
courts hold that it will not be within the statute. In Kohanowski v. Burkhardt, 2012 ND 199, 821 N.W.2d 740, an oral
$10,000 loan agreement was payable in 36 installments over three years. There were no provisions for
prepayment. Citing the Corbin treatise, the court held that where the express terms of the agreement preclude
performance within one year from the making of the contract, the contract is unenforceable. In Ocwen Loan
Servicing, LLC v. Delvar, 2015 Fla. App. LEXIS 18411, 40 Fla. L. Weekly D 2720 (Fla. Dist. Ct. App. 4th Dist. Dec.
9, 2015), an alleged modification of a loan to be repaid in regular monthly payments over the course of thirty years
was within the statute of frauds. To be within the statute of frauds, the court held, “it must be shown that neither
party’s performance was intended to be complete within one year.”
In JAB, Inc. v. Naegle, 2015 Minn. App. LEXIS 46 (2015), Naegle, an employee of JAB, signed an agreement
during the term of her employment providing that during, and for 24 months after, her employment, Naegle would
not solicit any customer or potential customer of JAB to cease doing business with JAB or to do business with
Page 2 of 2
former employees. The agreement did not express any basis for the consideration Naegle would receive. When
Naegle left the company and JAB alleged she violated the non-solicitation agreement, the court held the one-year
provision of the statute of frauds barred its enforcement. The contract could not be performed within one year from
its making, and because the agreement (which contained an integration clause stating that it “contain[s] the entire
understanding between and among the parties”) did not express the consideration for the purported exchange, the
court held it could not be enforced.
While an isolated decision may require the parties to have contemplated the possibility of performance within one
year, in the absence of a stated duration, most courts hold that when no time is stated for the performance but the
parties clearly expect a performance to exceed one year, the contract is not within the statute. Even when the entire
performance will extend beyond one year, some courts will resort to construing the contract as divisible and
enforceable for the first year but not subsequent years.
The one-year provision applies to any contract, regardless of the subject matter. It applies to other types of
contracts within the statute of frauds. If, for example, a contract for the sale of goods is satisfied not by a writing, but
by an exception stated in that particular provision that would not be an exception under the one-year provision, the
contract is still unenforceable. Contracts in consideration of marriage are within the statute of frauds and will be
explored in the next chapter. Such contracts are also subject to the one-year provision. If an oral contract of
engagement specifies a date more than year from its making, it is within the statute of frauds.
Practice Resources:
• Corbin § 1 .1 (statutory words very narrowly interpreted); § 1 . (restatement of terms of
agreement at beginning of work); § 1 .12 (contracts of engagement to marry).

End of Document

§ 1 .02 Conditional Promises
[1] The Provision Is Not Applicable if a Condition Can Occur Within a Year
If the performance of a promise is subject to a condition activating a performance that could occur within a year
from the time the contract was made, the contract is not within the one-year provision. A promise to perform
when the promisor marries or to devise property when the promisor dies is not within the one-year provision,
though the latter promise would be within the land provision. Life insurance contracts are not within the statute
since they could be performed within one year if the condition—the death of the insured—occurs. Neither are
indemnity contracts within the statute unless they are applicable to events that could not possibly occur within a
year of their making.
Similarly, a promise to employ a promisee for “life” is not within the statute since the duration of the promisee's
life is uncertain and could end within a year. A “permanent” contract may be interpreted to be a contract for
“life.” It is important, however, to make a distinction between the “permanent” employment of a specific
individual and a “permanent position,” which is interpreted to mean that the position itself is permanent and not
temporary. Advertisement of a “permanent position” does not suggests lifetime employment. See Chapter 4
above.
If Ames promises to work for Barnes at a stated salary for 14 months, the contract is within the one-year
provision since it is impossible to perform a 14-month contract within 12 months from the making of the
contract. If he promised to work until retirement, the promise is not within the statute since he could retire within
one year, no matter the absence of an intention of retiring with a year. Mackay v. Four Rivers Packing Co., 145
Idaho 408, 179 P.3d 1064 (2008). A negative promise, such as a promise to forbear competing with a buyer of
one's business for life, is not within the statute since, like an affirmative employment promise, it is one of
uncertain duration.
[2] Contracts of Certain Duration

Unlike a contract for “life,” a contract of employment with an expressed term of 13 months or any period longer
than one year from its making is within the statute of frauds. Although the employee could die within a year,
such an event would not constitute performance of the 13-month contract. The employee and his or her estate
would be excused from full performance. When a seller of a business orally promises not to compete with the
buyer for five years, there are cases holding such a promise to be enforceable since the promisor may die
within a year. See Restatement (Second) of Contracts § 1 0 illus. 9. The prevailing view, however, treats such
contracts as having a specified duration beyond one year so that death or other excuses for not performing do
not do not constitute possible “performance” within one year.
A departure from this generally recognized distinction is found in promises to support a person for a specific
duration. An oral promise to support a person for life, like any promise with “life” as a measuring period, is not
within the statute of frauds. But a promise to support a person for five years or some other specified period
exceeding one year is also held not to be within the statute of frauds on the footing that the support is
conditioned on the continued life of the promise. That rationale, however, would be true in employment or other
service contracts with specified durations exceeding one year where the promise is held to be within the
statute. A promise to support another for five years is not “performed” if the promisee dies within the first year,
but the prevailing view is otherwise. The holdings in the support cases can be criticized for inconsistency. But
the general rule—that employment contracts for life that may proceed for decades are not within the statute
Page 2 of 2
while a contract for twelve months and one day or a contract for 12 months beginning the following day are
within the statute—is hardly an exemplar of rationality.
Practice Resources:
• Corbin § 1 .2 (promises conditional on an uncertain event); § 1 . (performance
to continue for an uncertain time); § 1 . (contracts of personal service for a
definite time); § 1 .10 (contracts in the negative, requiring forbearance).

End of Document

§ 1 .03 Contracts with Powers of Termination

If the specified term of a contract exceeds one year but the contract expressly provides that one or both parties has
a power of termination that could be exercised within the first year of the contract, is the contract with the one-year
provision of the statute of frauds? If power of termination were to be exercised within the first year, was the contract
“performed,” or was the remaining performance discharged by the exercise of the power of termination? The case
law is split on this question, with the prevailing view holding that the contract is within the one-year provision.
The Restatement (Second) of Contracts position is disappointing in its attempt to reconcile inconsistent holdings. It
suggests that an employment agreement under which either party may terminate the contract on 30 days' notice is
not within the statute, while a contract stating that the employee may quit at any time is within the statute.
Restatement (Second) of Contracts § 1 0 illus. 6 and 7. The Restatement appears to have “resolved” the conflict
by including illustrations of inconsistent holdings. John E. Murray, Jr., Murray on Contracts § 2.
A contract allowing either party to terminate by providing 30 days' notice may be seen as a contract conditioned on
either party not exercising that power within 30 days. Under this interpretation, it is a contract of uncertain duration
that is not within the statute. The notion that providing an employee with an express power to “quit” at any time is
different must be based on the assumption that “quitting” is different from “termination” or that providing such a
power to only one party somehow should affect the application of the statute. A line of New York cases views a
power of termination in a defendant as overcoming the one-year provision of the statute of frauds. If only the plaintiff
has a power of termination, however, these cases hold that contract is within the statute since the defendant's
liability could continue indefinitely. See South Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98 (2d Cir.
2009). Generally, however, courts do not place any significance on whether one or both parties has a power of
termination, and the use of the forthright term “quit” instead of the more euphemistic “terminate” does not change its
legal operation.
While it is otherwise unhelpful, a comment to the Restatement (Second) of Contracts suggests an important focus:
This distinction between performance and excuse for nonperformance is sometimes tenuous; it depends on the
terms and circumstances, particularly on whether the essential purposes of the parties will be attained.
Restatement (Second) of Contracts § 1 0 cmt. b (emphasis supplied).
There is no escape from seeking the parties' dominant intention concerning the duration of the contract. An
effective illustration is found in a case comparing the majority and minority views on this issue throughout the
country. Hedda Hopper alleged a detailed oral agreement under which she would perform radio broadcasts for 10
26-week periods in exchange for compensation that would increase at specified rates at the conclusion of 26-week
periods throughout the contract. The defendant had a power to terminate the contract by written notification to
Hopper four weeks prior to the end of any 26-week period. Before any performance occurred, the defendant
repudiated the contract and Hopper sued for the entire contract compensation over five years. The court held that
the defendant could be bound to a period exceeding 26 weeks only at its discretion. Thus, the contract was not
within the one-year provision. Hopper v. Lennen & Mitchell, Inc., 146 F.2d 364 (9th Cir. 1944).
Practice Resource:
Page 2 of 2
• Corbin § 1 . (contracts with an express defeasance clause or option to terminate).

End of Document

§ 1 .04 Contracts with an Option to Renew or Extend

The critical question is how the parties in the Hopper case discussed in the last section envisioned the duration of
this contract. Both parties had to understand the contract was one of uncertain duration with a minimum duration of
26 weeks and maximum duration of five years. Such a contract should be indistinguishable from a contract with an
option to renew or extend an oral contract with a duration not exceeding one year from its making. The Hopper
contract could have required the defendant to renew it four weeks prior to the end of any 26-week period. While
such an option is an affirmative act, it is a necessary condition to the renewal or extension, just as exercising the
power of termination is a condition to the completion of the contract prior to the maximum period. The cases
deciding this issue are few, but they manifest the same kind of split of authority that exists with powers of
termination.
Practice Resource:
• Corbin § 1 . (contracts with an option to renew or extend).

End of Document

§ 1 .05 Contracts for Alternative Performances

It is clear that if a contract contemplates alternate performances, any one of which will complete the contract, and
one of the alternative can be performed within one year from the making, the “contract” can be performed within
one year and is not within the statute of frauds. It makes no difference whether the promisor, promisee, or even a
third party is to choose the performance or that a performance requiring more than one year is chosen. Prof'l Bull
Riders, Inc. v. Autozone, Inc., 113 P.3d 757 (Colo. 2005). The interesting question is whether a contract with a
power of termination or an option to renew may be characterized as a contract with an alternate performance.
It would not be unreasonable to characterize the Hopper contract as consisting of a duration of 26 weeks or any
combination of 26-week periods up to a total of 10, allowing alternate performances to be chosen by the defendant.
In a case in which the defendant promised to sponsor an event for two years under an agreement stating that the
defendant “may, at its option, elect to terminate this agreement and its sponsorship” by giving notice, the court
relied on Corbin on Contracts in emphasizing the purposes of the parties. Though couched in terms of a power of
termination, the court construed the agreement as one for alternative performances—sponsorship for one year or
two years—as chosen by the sponsor and held that the contract was not within the statute. The court found it
unnecessary to decide whether an option to terminate must always be construed as an alternative performance, but
its analysis invites that solution whenever the language of the contract can possibly be so construed. Prof'l Bull
Riders, Inc. v. Autozone, Inc., 113 P.3d 757 (Colo. 2005).
Practice Resource:
• Corbin § 1 .11 (contracts for alternative performances).

End of Document

§ 1 .06 Discharge by Rescission

Parties to an executory contract are free to enter into a contract of rescission under which they each surrender their
respective rights under the contract; the contract is discharged. If an oral contract that could not be performed within
one year of its making were held to be outside the statute of frauds because of the possibility that the parties might
rescind the contract within a year of its making, the one-year provision would be emasculated. Thus, the possibility
of rescission, accord and satisfaction, a sealed release, substitute contract, or novation does not take the contract
out of the statute. Such methods of discharge differ from an express power of termination in the original contract.
Practice Resource:
• Corbin § 1 . (discharge by rescission).

End of Document

§ 1 .0 Discharge by Impossibility of Performance

Contracts are also discharged by operation of law as when performance becomes impossible, impracticable, or
where the fundamental purpose of the contract is frustrated. It is always possible that a supervening contingency
may prevent performance in any contract. If, however, the mere possibility of such a discharge of a duty constituted
“performance” within a year, the one-year provision of the statute of frauds would be a nullity. The contemplated
purpose of the parties must always govern these issues. Thus, when an employment contract has a two-year
duration, it is assumed that the parties contemplated a full, two-year employment contract; the fact that death or
another unforeseen contingency may allow the contract to be discharged earlier will not take the contract out of the
one-year provision. An employment contract for “life,” however, manifests the parties' contemplation that the
duration of the contract is uncertain and could be ended within one year from its making.
Practice Resource:
• Corbin § 1 . (discharge by impossibility of performance).

End of Document

§ 1 .0 Bilateral and Unilateral Contracts

The one-year provision requires a “contract” to be performable within one year from its making. A bilateral contract
that is performable on one side within a year but not on the other is still a “contract” that cannot be performed within
a year within the statute of frauds. If, however, one side of the bilateral contract has been fully performed,
regardless of how long it took to achieve such complete performance, the overwhelming majority of courts hold that
the contract it taken out of the statute of frauds.
A unilateral contract is not formed until performance on once side is completed. If an offer is made to pay $100,000
at the completion of the offeree's two years of service, the promise in the offer is within the one-year provision. If the
services are completed at the end of two years, forming the contract, though the promise to pay $100,000 was
unenforceable when made, it became enforceable through the other party's completed performance. Restatement
(Second) of Contracts § 1 0 2 . See Forsythe v. Brown, 2011 U.S. Dist. LEXIS 125489 (D. Nev. Oct. 27, 2011).
Practice Resources:
• Corbin § 1 .1 (bilateral contracts performable within one year by one party but not by
the other); § 1 .1 (unilateral contracts; effect of full performance by one party).

End of Document

§ 1 .0 Effect of Part Performance and Promissory Estoppel

It is not unusual to find a court stating that part performance (as contrasted with full performance on one side) does
not take a contract out of the one-year provision of the statute of frauds. Where a country club sought specific
performance of an agreement with the City of Orlando to receive reclaimed water for 20 years, the City did not sign
the agreement and claimed it violated the one-year provision of the statute of frauds. The club argued that its
receipt of water for five years should make the contract specifically enforceable. The court disagreed since the
amount of water the club received for five years was “not even close” to the amount set forth in the alleged contract.
Enforcement based on the part performance, therefore, would violate the principle that a court should not make a
new or different contract for the parties. Moreover, the court was not convinced that the part performance principle
should ever be applied to a case where a shorter duration would bind the other party to continue performance for
years in the future. City of Orlando v. West Orange Country Club, Inc., 9 So. 3d 1268 (Fla. Dist. Ct. App. 2009).
As suggested by one court, part performance will not take a contract out of the one-year provision, but it does apply
to overcome the statute of frauds in an action for specific performance of a contract. Marciano v. Crowley, 2009
U.S. Dist. LEXIS 89450 (W.D.N.Y. Sept. 25, 2009). If a party who has partly performed a contract not performable
within one year is seeking a remedy of damages for breach in a court of law, such a remedy will not be available. A
quasi contract remedy to prevent unjust enrichment, however, may be available.
Modern courts have also enforced partly performed personal service contracts under a promissory estoppel theory
as it is found in the Restatement (Second) of Contracts § 1 . It is unremarkable to find judicial remedies fashioned
to avoid manifest injustice in determining whether to grant a remedy for part performance under a section of the
statute of frauds that is hardly known for its rationality, much less consistency.
Practice Resource:
• Corbin § 1 . (effect of part performance by the plaintiff; promissory estoppel).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 20 STATUTE OF FRAUDS—CONTRACTS IN

CONSIDERATION OF MARRIAGE
CHAPTER 20 STATUTE OF FRAUDS—CONTRACTS IN CONSIDERATION OF

MARRIAGE
the subject matter.

End of Document

§ 20.01 Promises of a Pecuniary Nature Are Within the Marriage Provision of

the Statute of Frauds
[1] Marriage Settlement Agreements

The third provision of Section 4 of the 1677 Statute of Frauds states, “no action shall be brought … to charge
any person upon any agreement made in consideration of marriage.” Marriage or a promise to marry
constitutes consideration, but at a very early time, courts concluded that the provision did not include mutual
promises to marry. That view has been uniformly adopted. The statute was essentially designed to war against
perjured testimony of fortune hunters who would allege pecuniary oral promises in exchange for marriage.
Promises of a pecuniary nature in consideration of marriage are within the marriage provision. Marriage
settlement agreements of myriad types include a promise by one of the partners to establish a trust for the
other, a promise to make a will leaving certain property to the other, promises to pay an annuity or adopt a
child, and mutual promises that marriage will not affect the existing property rights of either partner. A promise
by a third party, Bill Ames, to pay Jennifer Barnes $100,000 if she will marry Frank Carr is also within the
statute.
[2] Prenuptial Agreements

Antenuptial (premarital) agreements that deal with the distribution of property and support rights upon
separation or divorce had been viewed as contrary to public policy prior to 1970. Since then, however, courts
have been willing to enforce these agreements and legislation such as the Uniform Premarital Agreements Act
has made such agreements commonplace. Legislation invariably requires premarital agreements to be
evidenced by a writing, which may be held to replace the requirement of the original marriage provision while
retaining the exceptions of the former law. See Hall v. Hall, 222 Cal. App. 3d 578, 271 Cal. Rptr. 773 (1990). In
one case, however, the Supreme Court of California provided less than a ringing endorsement for this
construction: “Whether or not Hall reached a correct result under the statute [the Uniform Premarital
Agreements Act] there at issue, its analysis has no application here.” In re Marriage of Benson, 36 Cal. 4th
1096, 1110, 32 Cal. Rptr. 3d 471, 116 P.3d 1152, 1161 (2005).
[3] Unmarried Cohabitants

Courts have refused to apply the original marriage provision to support or separation agreements made by
unmarried persons who hold themselves out as married. New legislation, however, may require agreements
between unmarried cohabitants to be evidenced in writing. See, e.g., Tex. Bus. & Com. Code Ann.
§ 2 .01 (2010); Minn. Stat. § 1 .0 (2009).
Practice Resources:
• Corbin § 20.1 (form and purpose of the marriage clause; antenuptial
agreements), § 20.2 (application of one-year clause to promises to marry), § 20.
(marriage settlement contracts).

Page 2 of 2
End of Document

§ 20.02 Full Performance of an Oral Contract Will Take the Contract Out of
the Marriage Provision
[1] The Fact That the Marriage Ceremony Has Taken Place Is Not Sufficient to Make the Promise
Enforceable
As in contracts under other sections of the statute of frauds, full performance of an oral contract in
consideration of marriage will take the contract out of the marriage provision of the statute. The mere fact that
the marriage ceremony has taken place, however, is held not to be sufficient to make the promise enforceable.
The rationale suggests that marriage alone cannot take the contract out of the statute since it is marriage that
brings the case within the statute. The rationale does not consider the fact that it is not the execution of the
marriage promise that brings the contract within the statute since an executory bilateral contract to marry is
within the statute.
Other than the marriage itself, the part performance doctrine will take a marriage contract out of the statute of
frauds and it is not relegated to part performance of a promise to convey land. When an oral premarital
agreement stated that each party’s income and property would be treated as separate property and for 19
years of marriage the parties had meticulously retained separate bank accounts and held numerous
investments and real property in separate names, the court stated:
Although we hold that the statute of frauds applies to the agreement in question, we conclude that it is
enforceable under the part performance exception to the statute of frauds. The doctrine of part
performance is an equitable doctrine which provides the remedies of damages or specific performance for
agreements that would otherwise be barred by the statute of frauds.
Dewberry v. George, 115 Wn. App. 351, 62 P.3d 525, 529 (2003).
The court added the usual requirements that part performance must be proven by clear, cogent, and convincing
evidence and the acts relied upon to demonstrate part performance must “unmistakably point to the existence
of the claimed agreement. If they … may be accounted for [by] some other hypothesis, they are not sufficient.”
Id. at 529.
In another case, the court refused to enforce an alleged oral promise that the parties would never force the sale
of the marital residence the husband had constructed on the land with building materials for which the wife had
paid. The husband’s construction efforts could not be considered part performance referring unequivocally to
the purported oral agreement since the husband’s efforts were equally explainable as performance of a
husband’s traditional marital duty to provide housing. Rossiter v. Rossiter, 4 Haw. App. 333, 339, 666 P.2d 617,
621 (1983).
If substantial reliance on an oral promise in consideration of marriage can be demonstrated, courts are likely to
find a basis for enforcing the promise either under part performance concept or simply under promissory
estoppel. See Hall v. Hall, 222 Cal. App. 3d 578, 271 Cal. Rptr. 773 (1990).
[2] Effect of Writing Prepared After Marriage

The memorandum or other writing sufficient to evidence a contract under any provision of the statute of frauds
need not exist at the time the oral agreement is made. While there are cases to the contrary with respect to the
marriage provision, they are based on faulty premises including use of the term “void” in the applicable statute
of frauds. A subsequent writing is sufficient to satisfy statutes using the term “void” with respect to other classes
of contracts within its provisions. There is no basis for different treatment of contracts within the marriage
clause.
Page 2 of 2
The subsequent writing must simply evidence the prior oral agreement. If it is a new agreement, like any other
agreement, it must be based on consideration. New post-nuptial agreements between the married parties are
not within the marriage provision since they are obviously not in consideration of marriage.
Practice Resources:
• Corbin § 20. (executed marriage as part performance), § 20. (effect of
memorandum prepared or written contract made after marriage), § 20. (part
performance doctrine—effect of performances in addition to the marriage).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 21 STATUTE OF FRAUDS—CONTRACTS FOR

THE SALE OF GOODS
CHAPTER 21 STATUTE OF FRAUDS—CONTRACTS FOR THE SALE OF

GOODS
the subject matter.

End of Document

THE SALE OF GOODS
§ 21.01 Scope of UCC § 2 201
[1] “Goods” Defined

Section 17 of the original Statute of Frauds required any contract for the sale of goods for the price of 10
pounds sterling or more to be evidenced by a writing. Section 4 of the 1907 Uniform Sales Act, which was
widely enacted, required any contract for the sale of goods with a value of $500 or more to be evidenced in
writing. Uniform Commercial Code (UCC) Article 2 returns to a price threshold of $500 or more. In this chapter,
we focus on the scope of Article 2 coverage in the determination “goods” versus services or real property, the
content of the writing (memorandum) required to satisfy the Article 2 statute of frauds, and what are typically
called “exceptions” to the statute but may be more accurately characterized as alternate ways to satisfy the
statute.
The UCC definition of “goods” encompasses all things (including specially manufactured goods) that are
“movable” at the time of their identification to the contract of sale. UCC § 2-10 1 . “Identification” is defined in
§ 2- 01 as a designation of the goods by marking or otherwise for a particular buyer at which point the buyer
has an insurable interest in the goods though they have yet to be shipped. The “goods” definition expressly
excludes money, investment securities (to which UCC Article 8 applies), and choses in action. “Goods” includes
things attached to realty. See § 1 .11 above.
The UCC does not apply to contracts for the transfer of an interest in real property nor to a contract for services
such as building contracts or employment contracts. The distinction between goods and real estate was
explored in Chapter 17. Problems arise, however, when the subject matter of the contract involves goods and
real property, goods and services, or all three.
[2] The “Predominant Purpose” Test Determines Which Statute of Frauds Applies in the Case of
Hybrid Contracts—Computer Software
If the price of goods is payable in real estate, UCC § 2- 0 2 recognizes that it applies to the goods aspect of
the transaction and not to the transfer of realty. If the contract is severable, it is possible to apply appropriate
statutes of frauds to divisible parts of the contract. If the contract is “entire,” however, courts must choose.
A “predominant purpose” test has evolved to determine whether a contract is one for goods to which the UCC
and its statute of frauds would apply, and services which typically involves no statute of frauds unless the
contract cannot be performed within one year from the date of contract formation. If the evidence indicates that
the “predominant factor,” the “thrust,” or “primary purpose” is the transfer of realty or the rendition of services,
the UCC statute of frauds does not apply. See Bonebrake v. Cox, 499 F.2d 951, 960 (8th Cir. 1974) (identified
in Princess Cruises v. GE, 143 F.3d 828, 833 (4th Cir. 1998), as the “seminal” case stating the “predominant
purpose” test). In Duro Bag Mfg. v. Printing Servs. Co., 2010 U.S. Dist. LEXIS 93941 (S.D. Ohio. Sept. 9,
2010), Duro, the world’s largest manufacturer of paper bags claimed a breach of warranty under the UCC when
it was dissatisfied with performance of a contract under which Printing Services (PSC) performed the printing
job on thousands of bags using sheets of paper and artwork supplied by Duro. Applying the “predominant
purpose” test, the court concluded that PSC had received the sheets from Duron on which it performed work,
labor and services necessary to reproduce the artwork supplied by Duro. PSC was not selling sheets or other
goods; it was providing services by printing Duro’s images on Duro’s sheets. The subject matter of the
transaction was services to which the UCC and its implied warranties did not apply.
Where the parties are in different countries which have adopted the United Nations Convention on Contracts for
the International Sale of Goods (CISG), a similar test is found in Article 3(2): “The Convention does not apply to
Page 2 of 2
contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the
supply of labor or other services.” Moreover, where the party ordering goods supplies “a substantial part of the
materials necessary” for manufacture or production, the contract is not one for the sale of goods to which CISG
applies (Article 3(1)). Even if CISG does apply, there is no statute of frauds under CISG (Article 11) though
there are implied warranties similar to UCC warranties (Article 35).
Building contracts require huge amounts of “things” that are goods before they are assembled and affixed to the
land by the builder. Nonetheless, building contracts are contracts for services that are not within the land or
goods sections of the statute of frauds; they could be, however, within the one-year provision if the performance
were to be expressly stated as having a duration of more than one year from the making of the contract.
Repair contracts, though often requiring new parts, are typically service contracts even though the replacement
parts may be expensive. If the “repair” requires the total replacement of a piece of operating equipment such as
a new water heater, the characterization of the contract as predominantly one for the purchase and sale of
goods would be appropriate notwithstanding an installation cost that constitutes a major part of the total price.
Although the allocation of the goods versus the service portions of the total price is relevant in the determination
of the primary or predominant purpose of the transaction, such an allocation is not conclusive. The more
important test is whether reasonable parties would regard the transaction as predominantly one for the
purchase and sale of goods with the rendition of services merely incidental to the transaction.
The determination of whether Article 2 applies to computer software transactions raises unique questions.
Contracts to “buy” software are typically licenses for the use of copyrighted information. Disks are the
containers of the information that is sought when licensing the software. Efforts to revise Article 2 to address
these and other unique issues failed. The subsequent Uniform Computer Information Transactions Act
continued that effort, but after initial enactments in Maryland and Virginia, the Act proved to be very
controversial and saw no further enactment. Currently, courts generally recognize that computer software
qualifies as a “good” for purposes of the UCC and the fact that it is an intangible good that is licensed rather
than sold will not preclude the application of Article 2. This is certainly true of “off-the-rack” software. Some
courts may view a contract to develop new software as a contract for services to which the UCC would not
apply. For a case providing a sample of how various jurisdictions deal with such issues, see Dealer Mgmt. Sys.
v. Design Auto. Group, Inc., 355 Ill. App. 3d 416, 822 N.E.2d 556, 290 Ill. Dec. 971 (2005).
Many computer software transactions involve services such as installation, training, and continuous “help
desks.” These services are generally viewed as “incidental” to the predominant subject matter of the contract,
the software. The “predominant purpose” test, however, is not a panacea. The decision to apply one provision
of the statute of frauds versus a different provision or none at all in a mixed contract will require an exploration
of subtle differences and a careful exploration of the context in which one application or another will be made. A
cogent analysis is found in the opinion by Judge Posner writing for the court in Monetti, S.P.A. v. Anchor
Hocking Corp., 931 F.2d 1178, 1183 (2d Cir. 1991). The general reluctance of courts to allow the statute of
frauds to prevent enforcement of otherwise provable contracts can also influence judicial choices in mixed
contracts.
Practice Resource:
• Corbin § 21.1 (scope of UCC § 2-201 .

End of Document

THE SALE OF GOODS
§ 21.02 Writing Requirement of UCC § 2 201
[1] A Writing Must Be Sufficient to Indicate That a Contract for Sale Has Been Made Between the
Parties
Formal and substantive matters concerning the necessary writing under UCC § 2-201 1 such as the signature,
the nature and timing of the writing, and admissibility of oral evidence to supplement the writing are explored in
the next two chapters. As elaborated upon in Chapter 23, the widely enacted Uniform Electronic Transactions
Act and Federal Electronic Signatures in Global and National Commerce Act equates electronic records with
traditional writings. See Phone Card Am., Inc. v. Quality Discount Equip. Sellers, LLC, 27 Misc. 3d 1212(A), 910
N.Y.S.2d 408 (Sup. Ct. 2010) (e-mail). This section addresses the necessary contents of such a writing or
record.
In terms of content, UCC § 2-201 1 requires only a “writing sufficient to indicate that a contract for sale has
been made between the parties.” A comment elaborates:
The required writing need not contain all the material terms of the contract and such material terms as are
stated need not be precisely stated. All that is required is that the writing afford a basis for believing that
the offered oral evidence rests on a real transaction.
UCC § 2-201 1 cmt.1 (emphasis supplied).
The section and comment language is an emphatic reminder that the writing requirement of any statute of
frauds is not the contract. Any writing is mere evidence of a contract. Unlike other statutes of frauds, however,
§ 2-201 suggests a dramatic departure by allowing a writing that does not contain all of the “essential terms” of
the contract to be sufficient. The assumption is that many if not most of the essential terms will be proved by
“oral evidence” and that the writing must only provide a “basis for believing” that such evidence is “real.” Prior
requirements that the writing include every essential term could allow a defendant to escape the bargain simply
because the writing was incomplete. The explicit acceptance of such a frugal writing to satisfy the statute
conforms to the underlying philosophy of Article 2 that wars against technical rules of pre-Code law that would
preclude the recognition of the “true understanding” of the parties. See UCC § 2-202 cmt. 2, which, speaking of
the parol evidence rule, notes that evidence should be admissible “in order that the true understanding of the
parties as to the agreement may be reached.”
A § 2-201 1 writing must identify the subject matter of the contract—what it is that will be bought and sold—and
the identity of the parties, though they need not be identified as the buyer or seller. Allowing the time and place
of delivery to be omitted was not a radical change from pre-Code law, but allowing a writing to satisfy the
statute of frauds without a price term was radical. This change, however, was essential since Article 2
otherwise allows a contract to be formed absent a price term if the parties so intend. UCC § 2- 0 .
[2] Courts Generally Require the Quantity Term to Be in Writing

It is often said that the only essential term that must be in the writing is the quantity term, though even an
incorrect quantity term will satisfy the statute of frauds requirement while limiting the enforcement of the
contract to the stated quantity term as suggested in the last sentence of UCC § 2-201
A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract not
enforceable under this paragraph beyond the quantity of goods shown in such writing.
While this language can be read to indicate that even the quantity term may be omitted, but if a quantity term is
stated, the contract will not be enforceable beyond the stated term. The comment dealing with the content of
the memorandum, however, states:
Page 2 of 2
The only term which must appear is the quantity term which need not be accurately stated but recovery is
limited to the amount stated. UCC § 2-201 cmt. 1.
The “official” comments are not part of the enacted law and they may be disregarded. While there is no
question that pursuant to UCC § 2-20 a sufficiently definite quantity term is essential for a court to recognize
any contract, the issue for statute of frauds purposes is whether the writing evidencing the contract must state
that term. The fact that output and requirements contracts do not state a definite quantity term at the inception
of the contracts does not aid either interpretation since in such contracts the parties have agreed to the method
of measuring the quantity: the actual good faith production of the seller and the actual good faith requirements
of the buyer. UCC § 2- 0 . Although there is some judicial recognition of the view that the omission of a
quantity term should not necessarily be fatal if the writing otherwise manifests an intention to be bound and
identifies the subject matter and parties, courts continue to insist on a quantity term in the writing. See, e.g.,
Rosenfeld v. Basquiat, 78 F.3d 84, 93 (2d Cir. 1996); Advent Sys. v. Unisys Corp., 925 F.2d 670, 677 (3d Cir.
1991).
Practice Resource:
• Corbin § 21.2 (the § 2-201 memorandum).

End of Document

THE SALE OF GOODS
§ 21.03 The “Between Merchants” Exception
[1] In Contracts “Between Merchants,” a Signed Confirmation That Is “Sufficient Against the Sender”
Satisfies the Statute of Frauds
Contracts for the sale of goods are often made orally, in person or by telephone, and followed by confirmations
that serve as permanent records of the transaction while satisfying the statute of frauds. Prior to the UCC, if a
seller sent to a buyer a confirmation that constituted a signed writing sufficient to satisfy § 2-201 the seller
could be held to an enforceable contract. If the buyer in the same transaction did not send a confirmation,
however, the seller could not hold the buyer because the buyer signed no writing evidencing the contract. The
buyer, therefore, could speculate at the expense of the seller by waiting to see whether the contract was
favorable in terms of changing market conditions.
This malady was one of the factors in the English decision to repeal the statute of frauds. To confront such
injustice in contracts for the sale of goods “between merchants,” the UCC allows a signed confirmation that
would be “sufficient against the sender” to satisfy the statute of frauds if the recipient “has reason to know its
contents … unless written notice of objection to is contents is given within 10 days after it is received.” UCC § 2-
201(2). Prior to the UCC, the recipient of such a confirmation was not required to object to it in order to retain
the statute of frauds defense. To avoid the evil of the unscrupulous recipient, however, the UCC requires
objection to be made within 10 days to a confirmation of a contract to preserve the statute of frauds affirmative
defense.
[2] A Writing Constituting a Confirmation of a “Contract” Is Required

The “between merchants” exception requires a writing constituting a confirmation of a “contract.” A writing
confirming that an offer was made does not confirm a contract. Thus, a mere purchase order that is no more
than a buyer’s offer will not be sufficient. When, however, a purchase order is supplemented by other writings,
handwritten notations, or other indications that the “purchase order” reflects a prior contract, a court may find
that the writings afford a basis for believing that they reflect a real transaction between the parties. See, e.g.,
Bazak Intern. Corp. v. Mast Industries, Inc., 73 N.Y.2d 113, 538 N.Y.S.2d 503, 535 N.E.2d 633 (1989).
It is certainly possible for a buyer or seller of goods to send a false confirmation of an alleged oral contract for
the sale of goods, but such a practice is unlikely. Moreover, the recipient may object by simply denying the
contract was ever made. While the exception in § 2-201 2 does impose a “duty to speak” on the recipient who
wants to retain the statute of frauds defense, it is a small burden that overcomes the unjust advantage the
recipient enjoyed under pre-UCC law. As a matter of practical reasoning, if a confirmation of a contract is
received and the recipient remains silent, the sender may rely on the contract in the absence of any objection. It
is not necessary, however, for the sender to prove reliance to take advantage of the statutory exception.
The definition of “merchant” as used in this section is broad, resting on normal business practices that ought to
be familiar to any person in business. See UCC § 2-10 1 and cmt. 2 (referring to the kind of “merchant”
contemplated in § 2-201 2 . Both parties must be merchants for this exception to apply. Thus, a confirmation
received by a consumer would not affect the consumer’s use of the statute of frauds defense.
In Brooks Peanut Co. v. Great S. Peanut, LLC, 322 Ga. App. 801, 746 S.E.2d 272 (2013), Brooks contacted a
broker to find a seller of peanuts without identifying Brooks as the buyer (not an unusual practice in this
industry). The broker solicited offers from several sellers including GSP. Brooks asked the broker to
communicate a counter offer to GSP which GSP accepted. The broker prepared a writing faxed to both Brooks
and GSP which identified Brooks as the buyer (a competitor of GSP) and stated, “We confirm a Sale and
Page 2 of 2
Purchase transaction as described below.” This was followed by all of the terms of the transaction. No
objections were raised to the confirmation sent to both parties. GSP argued that the contract was
unenforceable because the confirmation was not signed by Brooks. The court held that GSP had received the
confirmation within a reasonable time of the sale and did not object to it within 10 days from its receipt. There
was evidence from which the jury could infer that the broker operated as agent for both parties to this
transaction. The contract was enforceable.
[3] A Writing Must Be Received Within a Reasonable Time of the Making of the Contract
The writing must be received within a reasonable time of the making of the contract. The sender is wise to
ascertain proof of such receipt to meet the reasonable time requirement. Whether the requirement has been
met that the recipient has “reason to know [the] contents” of the writing depends upon all of the facts and
circumstances, including the type of writing, its caption or title, and the context of the transaction.
A seller’s e-mail to a merchant buyer captioned “Total Inventory Purchased” was sufficiently specific to put the
recipient on notice of the e-mail’s contents given the recipient’s contemporary role in a transaction to purchase
the seller’s inventory of apparel. “[A] jury could find it unlikely [that the recipient] would think that an e-mail so
titled was spam and did not require his personal attention.” Bazak Int’l Corp. v. Tarrant Apparel Group, 378 F.
Supp. 2d 377, 388 (S.D.N.Y. 2005).
An objection that denies that a contract exists between the parties preserves the statute of frauds defense, but
an objection is not effective if it denies only the legal effect of an agreement but does not deny the facts on
which the claim is based. An objection that acknowledges the contract but on terms other than those described
in the confirmation is an effective rejection to deprive the sender of the “between merchants” exception, but the
acknowledgment of a contract, albeit on the recipient’s terms, will satisfy the original writing requirement of § 2-
201(1). The case will be tried as a UCC case since omitted or misstated terms do not deprive the writing of its
effectiveness in satisfying the statute of frauds.
[4] A Written Notice of Objection to the Sender’s Confirmation Must Be Made Within Ten Days of
Receipt
The “between merchants” exception under § 2-201 2 recognizes a writing sent and signed by only one party to
be effective against the other party who neither sent nor signed the writing. The recipient’s silence, therefore,
constitutes ratification of the writing although, like any other writing, it need only manifest a reason to believe
the parties made the contract and need not include all essential terms to satisfy the statute of frauds. The
recipient can nullify this entire effort, however, by giving written notice of objection to the sender’s confirmation
within 10 days of its receipt. One “gives notice” by taking reasonable steps to inform the other party whether or
not the other party actually comes to know it. UCC § 1-202 (formerly § 1-20 . Thus, the “dispatch” rule
applies to such notice. See § .0 above.
There is a case holding that notice given of objection to an alleged contract prior to the sending of the
confirmation is ineffective since the statute contemplates a notice of objection in response to the confirmation.
Continental-Wirt Electronics Corp. v. Sprague Electric Co., 329 F. Supp. 959 (E.D. Pa. 1971). That analysis
appears unsound since there is no justifiable basis for sending a confirmation after receiving a notice of
objection. It would be similar to requiring objections to successive confirmations. After objecting to the first
confirmation, the recipient should be able to ignore subsequent confirmations of the same alleged contract.
Practice Resource:
• Corbin § 21. (merchant exception of UCC § 2-201 2 .

End of Document

THE SALE OF GOODS
§ 21.04 The Specially Manufactured Goods Exception
[1] Exception Applies if Goods Are Not Suitable for Sale to Customers in the Ordinary Course of the
Seller’s Business
An oral contract for the sale of goods will be enforceable without a writing:
if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the
ordinary course of the seller’s business and the seller, before notice of repudiation is received and under
circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial
beginning of their manufacture or commitments for their procurement.
UCC § 2-201 .
To fall within this exception, the threshold requirement is that the goods be “specially manufactured.” The
subsection itself provides a test to determine its applicability: when the goods are not suitable for sale to other
customers in the ordinary course of the seller’s business. Such goods, therefore, are custom-made goods that
the seller would not produce or procure for sale absent an agreement with a particular buyer. If a seller does
not produce goods for inventory for sale to the public in general but only makes custom products pursuant to
individual contracts, it has been held that such specially manufactured goods fall within the exception.
If the oral contract is divisible because the specially manufactured goods can be severed from goods that are
ordinarily sold, a court may apply the exception to the specially manufactured goods portion. Thus, when a
court found that a product was suitable for sale to others in the ordinary course of the seller’s business, but the
product was contained in silk-screened bottles carrying the buyer’s brand name that allegedly constituted 40
percent of the total cost, the court denied the defendant’s summary judgment motion on the oral contract with
respect to the containers. RIJ Pharm. Corp. v. Ivax Pharms., Inc., 322 F. Supp. 2d 406 (S.D.N.Y. 2004).
The requirement that the plaintiff must show that the goods were manufactured “for the buyer” can also be seen
as another prong of whether the goods were specially manufactured. Genuine custom products are made only
for individual buyers. Unless the seller can show evidence that demonstrates a reasonable reference of specific
goods to a specific buyer, the exception does not apply. The obvious instance is one where the product
contains the buyer’s name or other identification, as in the case of the silk-screened bottles. A contract to print
the annual report of a multinational corporation would be a specially manufactured product because of the
name and the logo on the publication as well as the unique content of the report. A less obvious illustration
would be the creation of equipment of unusual dimensions or specifications that could be shown as useful by a
particular buyer.
[2] Exception Is Predicated on Reliance

The “specially manufactured goods” exception is predicated on reliance, which may also be seen as part
performance of the oral contract. The reliance must take the form of either a “substantial” beginning of
manufacture or a substantial commitment for the procurement of a product that the seller would not have
undertaken absent an oral contract. While it is possible for a seller to make substantial commitments to produce
or procure a product based on an entirely fictitious oral contract, it is highly unlikely that sellers assume such
risks with the hope of winning lawsuits. Moreover, the successful application of this exception to the
requirement of a writing only satisfies the statute of frauds. A jury may still find that no such contract was ever
made.
The recognition of reliance in § 2-201 is not unique in statutes of frauds. As recognized in this subsection,
however, the reliance is very limited since it may only be recognized in the context of specially manufactured
Page 2 of 2
goods. When combined with the opening phrase in § 2-201 1 “Except as otherwise provided in this section,”
the use of reliance exclusively in this limited exception can be read as rejecting a general application of the
reliance concept to satisfy the statute of frauds. See Chapter 12 above. The case law demonstrates a split of
authority.
The requirement that the reliance—substantial beginning of manufacture or procurement—must occur “before
notice of repudiation” is essential since any reliance after the buyer has announced that it is not bound by any
alleged oral contract could not be justifiable reliance.
Unlike the limitation in § 2-201 limiting enforcement to the extent the contract was admitted or § 2-
201(3)(c) limiting enforcement to the part performed, nothing in the § 2-201 exception limits the
enforceability of the whole contract. The seller may not have begun the manufacture at all for such a custom
product absent the oral contract. Although reliance takes the contract out of the statute, once the statutory
prohibition is removed, there is no reason to preclude recovery of the expectation interest, which would include
the profit on the entire contract with appropriate mitigation for the unperformed portion of the contract.
Practice Resource:
• Corbin § 21. (specially manufactured goods).

End of Document

THE SALE OF GOODS
§ 21.05 The Part Performance Exception
[1] UCC Allows Enforcement of the Contract Only to the Extent of the Part Performance
An oral contract for the sale of goods is enforceable under UCC § 2-201 c “with respect to goods for which
payment has been made and accepted or which have been received and accepted.” Either the buyer or seller
may enforce the contract on the basis of the part performance exception.
Part performance took the entire contract out of the original statute of frauds. The UCC version, in contrast,
marks a sharp departure from pre-Code law in allowing enforcement of the contract only to the extent of the
part performance. If a shipment of 5,000 units has been received and accepted under an alleged oral contract
for 10,000 units, the contract will be enforceable only to the extent of 5,000 units. Similarly, if the units were
priced at $1 each, a partial payment of $5,000 that was been accepted by the seller would make the contract
enforceable only to the extent of 5,000 units.
The otherwise more liberal statute of frauds appears more stringent in this regard. The change is consistent
with the requirement that a contract evidenced by a writing will only be enforced to the extent of the quantity
stated in the writing, notwithstanding allegations that the written quantity term was incorrect. See § 2-201 1 (“A
writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not
enforceable under this paragraph beyond the quantity of goods shown in such writing.”). The oft-stated
requirement in non-UCC statutes of frauds that the part performance must be unequivocally referable to the
oral contract at issue, however, is significantly relaxed under § 2-201 c.
Precision sued Ipc Eagle over an oral distribution agreement whereby Precision would market and sell Ipc
Eagle’s cleaning equipment and machines. Precision claimed that at the time the parties entered into their
agreement, Ipc Eagle agreed not to sell to any of Precision’s customers directly. Precision claimed Ipc Eagle
breached that promise, and the court held that since the contract was for the sale of goods for over $500, it
needed to be in writing, and the part performance exception could not salvage it. “Even assuming that
defendant made a promise not to sell to plaintiff’s customers, plaintiff has failed to set forth any evidence that
defendant affirmatively enforced that promise at any time during the parties’ relationship.” Precision Indus.
Equip. v. IPC Eagle, 2016 U.S. Dist. LEXIS 5166 (E.D. Pa. Jan. 14, 2016).
[2] “Receipt” Is Not “Acceptance” of Goods

Delivery of part of the goods to the buyer is not sufficient to trigger this exception. “Receipt” means only that a
party has taken physical possession of the goods. UCC § 2-201 c . “Receipt” is not “acceptance” of goods.
Acceptance occurs under the UCC when (a) after a reasonable opportunity to inspect the goods, the buyer
signifies to the seller that the goods conform to the contract, or (b) having received the goods, the buyer fails to
make an effective rejection of the goods within a reasonable time, or (c) the buyer uses, sells, or performs other
acts inconsistent with the seller’s ownership of the goods. UCC § 2- 0 1 . Assuming both receipt and
acceptance of part of the goods has occurred, the contract is enforceable to that extent.
The part performance exception may be effected without any delivery of the goods if there has been part
payment by the purchaser and acceptance of that part payment by the seller. The payment may occur in goods
or services as well as money. While payment by check is only conditional payment until it is paid by the drawee
bank (UCC § 2- 11 it is still “accepted” payment. UCC § 2- 11 . Even when a check is dishonored by the
bank on which it is drawn the check has been “accepted” as part payment for the purposes of the statute of
frauds. Indeed, even if the check is simply retained by the seller, and is neither negotiated nor indorsed, it
should be viewed as “accepted” for the purposes of applying the exception. For a contrary view, see Integrity
Page 2 of 2
Material Handling Sys. v. Deluxe Corp., 317 N.J. Super. 406, 722 A.2d 552, cert. denied, 160 N.J. 91, 733 A.2d
496 (1999).
When a buyer has orally agreed to have a bank issue a letter of credit that will guarantee payment to the seller
upon the presentation of certain documents to the bank, the letter of credit may contain sufficient terms to
constitute a memorandum satisfying the statute of frauds. If it is not sufficient for that purpose, it should be
sufficient to constitute part payment since the bank’s obligation is presumed to be irrevocable.
The limitation to enforcing part performance only to the extent of the quantity for which payment has been
received and accepted has caused consternation with respect to a single, indivisible product or unit where a
part is not severable. Cases holding that the part payment exception does not apply in such situations have
been criticized. See, e.g., W.I. Synder Corp. v. Caracciolo, 373 Pa. Super. 486, 541 A.2d 775 (1988). The
judicial resolution finds courts enforcing divisible portions where that is feasible, but enforcing the entire
contract where it is not feasible.
Practice Resource:
• Corbin § 21. (part performance).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 22 SUBSTANCE OF THE MEMORANDUM—

NATURE AND CONTENTS
CHAPTER 22 SUBSTANCE OF THE MEMORANDUM—NATURE AND

CONTENTS
the subject matter.

End of Document

NATURE AND CONTENTS
§ 22.01 A Sufficient Writing Removes the Bar of the Statute of Frauds
[1] Context Is Key in Determining Whether a Writing Contains the “Essential” Terms of the Contract
The original statute of frauds did not require the “contract” to be in writing; it merely required “some
memorandum or note thereof.” That phrase may be repeated in later statutes of frauds. The language
concerning the nature of the writing must be carefully considered in each statute. While complete and fully
integrated writings will obviously satisfy the statute, the statute does not require a writing to embody the
contract; it need only evidence the contract, which will still have to be proven. A signed writing not made for the
purpose of evidencing the contract may still satisfy the statute of frauds. Thus, where a statute of frauds
required a writing to enforce a promise to pay a real estate broker's commission, the lease between the lessor
and a tenant that evidenced this promise was sufficient to satisfy the statute. Uhar & Co. v. Jacob, 710 F. Supp.
2d 45 (D.D.C. 2010). An agreement between a nephew and his uncle was sufficiently evidenced in papers filed
by the uncle in his earlier divorce action. Welch v. Welch, 2009 Mass. App. Unpub. LEXIS 595 (July 27, 2009).
Similarly, a debtor's listing of a loan on a financial statement filed in her divorce action was sufficient to satisfy
the statute of frauds in the plaintiff's action. Zwidra v. Mazurek, 2009 Mass. Super. LEXIS 278 (Aug. 14, 2009).
A sufficient writing simply removes the bar of the statute of frauds. Unlike an integrated writing, a writing
satisfying the statute does not invoke the parol evidence rule. Since the purpose of the statute is to prevent
fraud that would seek to enforce a contract never made, a note or memorandum sufficient to achieve that
purpose should be sufficient for the statute.
A writing repudiating a contract will satisfy the statute of frauds if it states the essential terms. A writing
disputing a certain term of a contract may otherwise be a sufficient written acknowledgment of the contract.
There are numerous statements in the case law requiring the “essential terms and conditions” of the contract to
be in writing to satisfy the statute of frauds. The question of which terms are so “essential” that they may not be
supplied by parol evidence is not susceptible to a mechanical answer. The context is critical. The more
convincing the corroboration found in the surrounding circumstances or oral testimony, the less will be required
to determine the writing is sufficient.
[2] The Writing Must Identify the Contracting Parties

The writing must identify the parties, although not formally. In a contract for the sale of goods, a writing is not
insufficient just because it fails to state which party is the buyer and which party is the seller. Parol evidence is
admissible to supplement an informal memorandum to assist in identifying the parties. If an authorized agent
signs a contract that does not name the principal, the undisclosed principal may sue and be sued on the
contract.
The modern view is illustrated by a case in which handwritten writings purporting to evidence a contract for the
sale of real estate were signed by the general partner of the seller (partnership) but failed to identify the other
partners or the partnership. The property was identified only by street addresses without mentioning the city,
and the reference to the price was ambiguous. The California Court of Appeals cited Corbin on Contracts in
noting the modern trend of introducing extrinsic evidence wherever its exclusion is not essential to preserve the
essential purposes of the statute of frauds. Parol evidence was admissible to identify the undisclosed principal.
The name of the city could be supplied by parol evidence and, so long as the writing showed the property
agreed on, the court quoted Corbin's suggestion that “little time should be wasted in listening to the argument
that the written description is inadequate.” The court also held that even the “confusing and ambiguous” price
term could be cured by parol evidence. Sterling v. Taylor, 113 Cal. App. 4th 931, 6 Cal. Rptr. 3d 836 (2003).
Page 2 of 2
The case was finally reviewed by the California Supreme Court, which cited Corbin extensively in disapproving
statements in California cases barring extrinsic evidence to determine the sufficiency of a writing. While
otherwise approving the court of appeals analysis, the court reversed because the extrinsic evidence offered to
clarify the price term was at odds with the writing. The evidence, therefore, was insufficient to show with
reasonable certainty that the parties understood and agreed to the price alleged by the plaintiffs. Sterling v.
Taylor, 40 Cal. 4th 757, 55 Cal. Rptr. 3d 116, 152 P.3d 420 (2007).
[3] Requirement That Consideration Be Stated in the Writing

Whether it was necessary to state consideration in a writing to satisfy the statute of frauds had been a
controversial topic. Some statutes were amended to require consideration to be expressed in the writing while
others provided that it need not be stated. Contracts for the sale of land require price to be stated, but there is a
difference between “price” and “consideration” that is often neglected. When a seller signed a writing promising
to sell the land for $7,000, the consideration for that promise, the buyer's oral promise to purchase the land,
was not mentioned. Upon proof that he made the promise, the purchaser was entitled to a decree of specific
performance. Swanson v. Priest, 95 N.H. 64, 58 A.2d 207 (1948).
Writings evidencing contracts for real property must identify the parties, the price, and the land. Nothing need
be said about closing, deeds, or other matters to satisfy the statute. In Shellabarger v. Shellabarger, 317
S.W.3d 77 (Mo. Ct. App. 2010), the court reversed the district court, which held that a writing was insufficient in
a contract for the sale of land because it failed to state a date for performance. In contracts for the sale of
goods, the Uniform Commercial Code (UCC) has reduced the requirements to identification of the parties
(albeit not necessarily as buyer or seller), the identification of what is to be sold, and a quantity term. No price
or time for performance need be stated. The focus is on sufficient evidence to indicate that a contract was
made since that will serve the purposes of the statute of frauds.
Practice Resources:
• Corbin § 22.1 (memorandum, not written contract, required by the statute),
§ 22.2 (informal memorandum—degree of completeness in detail), § 22.
(memorandum must identify the contracting parties); § 22. (must the
memorandum state the consideration for every promise?).

End of Document

NATURE AND CONTENTS
§ 22.02 Delivery Unnecessary—Writing Evidencing Promise of Guarantor

Enforceable Though It Does Not State the Price or the Amount of Goods
A deed may evidence a contract for the sale of land even if the deed is undelivered. Delivery of any document
providing evidence of the contract is not necessary. Barry v. Homecare New Eng., LLC, 2010 Mass. App. Unpub.
LEXIS 177 (Feb. 24, 2010). A will that could be revoked prior to the testator's death may nonetheless manifest
sufficient written evidence of a formed contract to satisfy the statute of frauds.
A writing evidencing the promise of a guarantor will be enforceable even though it does not state the price to be
paid or the amount of the goods for which the price is to be paid. Even the debt of another that the guarantor is
promising to pay may be indefinite. Accommodation parties to negotiable instruments were recognized by their
mere signature. The UCC has eliminated the statute of frauds with respect to such parties.
Practice Resources:
• Corbin § 22. (memorandum of a promise of guaranty), § 22. (deeds and wills may be
sufficient), § 22. (memorandum repudiating contract).

End of Document

NATURE AND CONTENTS
§ 22.03 Time of Making the Note or Memorandum

If Ames prepares and signs a contract to sell land or goods to Barnes, which Barnes signs and returns to Ames, the
parties may refer to the writing as their “contract.” The writing is not the “contract.” It is evidence of the contract and
it would clearly satisfy the statute of frauds. What Ames originally sent to Barnes, however, is an offer. Barnes may
communicate his acceptance orally in person or by telephone. The writing signed by Ames would be sufficient to
satisfy the statute of frauds in Barnes's action against Ames, who signed the writing. Barnes's acceptance may be
proved by parol evidence. Similarly, a written option contract is a sufficient memorandum even though the
acceptance by the option holder is not in writing.
A letter of instruction or a power of attorney sent to an agent that provides the agent with authority to make a
contract on specified terms does not, in itself, evidence a contract, but such a writing combined with the agent's
testimony that the contract was then made should be sufficient to satisfy the statute of frauds. Written preliminary
negotiations however, are otherwise insufficient to satisfy the statute unless it can be shown that a preliminary
writing was later adopted as evidence of the contract. Preliminary writings may also prove useful in providing
extrinsic evidence to supplement other writings.
Practice Resources:
• Corbin § 22. (time of making note or memorandum), § 22. (letters of preliminary
negotiations), § 22.10 (pleadings and depositions filed in court).

End of Document

NATURE AND CONTENTS
§ 22.04 Writing Generally Will Not Be Effective as an Extension or Renewal of

the Contract
By itself, a writing satisfying the statute of frauds will not be effective as evidence of an extension or renewal of that
contract. If a lessee remains after a lease of five years has expired, the implication is that the new leasehold will not
exceed the statutory period permitted for an oral lease. A writing evidencing an employment contract of five years
will not support an oral renewal of more than one year. If, however, the writing contains an express option for
renewal, the original writing will suffice since courts will allow evidence that the option was orally exercised.
Although a writing is silent concerning renewal, the parties may easily write “renewed” on the original for whatever
period they choose; this will satisfy the statute.
Practice Resource:
• Corbin § 22.11 (can a written instrument serve as a memorandum of its extension or
renewal?).

End of Document

NATURE AND CONTENTS
§ 22.05 Sufficiency of Description in Contracts for the Sale of Land

Cases ruling on the descriptions necessary to satisfy the land provision of statutes of frauds cover a wide range and
are not reconcilable. A court of appeals recognized as sufficient a street address without the city being identified.
Sterling v. Taylor, 113 Cal. App. 4th 931, 6 Cal. Rptr. 3d 836 (2003). This holding was regarded as sound by the
Supreme Court of California. This is certainly not unusual. A description of land by metes and bounds is clearly
sufficient but so is describing property as “my house” or “my estate” absent proof that it could be equally applied to
more than one property. The modern view is that only reasonable certainty is necessary in the ascertainment of the
land to be conveyed. C-470 Joint Venture v. Trizec Colo., Inc., 176 F.3d 1289 (10th Cir. 1999).
Practice Resource:
• Corbin § 20.12 (sufficiency of description in contracts for the sale of land).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 23 FORMAL REQUIREMENTS— WRITING—

RECORD— SIGNATURE—ORAL EVIDENCE
CHAPTER 23 FORMAL REQUIREMENTS— WRITING—RECORD—

SIGNATURE—ORAL EVIDENCE
the subject matter.

End of Document

§ 23.01 Writing Requirement of the Statute of Frauds
[1] The Required “Note or Memorandum” May Take Many Forms

There is no prescribed form of the “note or memorandum” necessary to evidence the fact that a contract was
made as required by the statute of frauds. It may appear in a traditional document setting forth the terms of the
contract. It may appear in other documents that have other purposes: receipts, invoices, letters to either party
or third persons, the minutes of a corporation meeting, wills, trusts, or any number of other forms. Wells Fargo
Home Mortg., Inc. v. Spaulding, 2007 ME 116, 930 A.2d 1025. It is now clear that it may also appear in various
electronic forms such as faxes, computer generated messages, or e-mail. It may appear as a recording of a
message on an answering device.
[2] Electronic Record and Signature May Meet the Requirement

The requirement of a “signed writing” may now be met by an electronic “record” and an electronic signature.
The digitalized revolution of the last decade of the twentieth century included the common use of electronic
contracting through the internet. Statutes of frauds that required “writings” were seen as obstacles to the
development of electronic commerce. Isolated cases manifested willingness to recognize electronic records as
equivalent to traditional writings. See, e.g., In re RealNetworks, Inc. Privacy Litig., 2000 U.S. Dist. LEXIS 6584
(N.D. Ill. May 11, 2000). The accelerated use of electronic media to make contracts, however, could not await
the necessarily deliberate judicial process evolution.
Commercial law statutes have traditionally been state laws, but initial state legislative attempts to address the
challenge augured a disparate set of statutes dealing with interstate electronic contracts. Congress enacted the
Electronic Signatures in Global and National Commerce Act (15 U.S.C. § 001 et seq.) (E-Sign). The National
Conference of Commissioners on Uniform State Laws (NCCUSL) reacted to diverse state legislative efforts
through the production of the Uniform Electronic Transactions Act (UETA), which was rapidly enacted in 48
jurisdictions. E-Sign and UETA have the common purpose of ascertaining that a record relating to a transaction
should not be denied effect or validity solely because it is in electronic form. The wide and rapid enactment of
UETA was encouraged by a provision of E-Sign that state law in this area would not be preempted by E-Sign if
the state enacted UETA without substantial modifications.
Both statutes define “record” as “information that is inscribed on a tangible medium or that is stored in an
electronic or other medium and is retrievable in perceivable form.” UETA § 2 1 E-Sign § 10 . While the
parties must “agree” on the use of an electronic medium, “agree” is broadly defined. An e-mail address in a
letter or on a business card would be a manifestation of such consent. There must, however, be an intent to
execute the record and signature as a contract. A plaintiff claimed that her audio tape recording of an
agreement was sufficient under E-sign to satisfy the statute. The court noted that E-Sign (15 U.S.C. § 001
states that a contract will not be denied legal effect “solely” because the record and signature of the contract
are in an electronic form. Merely identifying the voice of the defendant, however, is insufficient. The recorded
voice must be adopted by the party with an intent to sign the record. In this case, the recording was made
surreptitiously without the knowledge of the recorded party, Thus, there could not have been any intent to
execute the recording as evidence of a contract. The situation is akin to procuring a traditional signature by trick
or artifice where there is no intent on the part of the signer to execute a document as a contract. Thus, E-Sign
could not make this surreptitious recording effective for statute of frauds purposes. Sawyer v. Mills, 295 S.W.3d
79 (Ky. 2009).
Page 2 of 2
Whether parties have agreed to conduct transactions by electronic means is a question of fact determined from
the context and surrounding circumstances, including the parties’ conduct. A party who sent an email
acknowledging a debt claimed the email was not legally operative since it was necessary to find an
“independent” agreement showing he agreed to conduct business transactions electronically. The court
rejected this assertion. “… evidence of Parks’ conduct in sending the e-mails, the content of those e-mails, and
the context and circumstances under which those e-mails were sent constitute more than a scintilla of evidence
that Parks agreed to conduct the business contained therein electronically.” Parks v. Seybold, 2015 Tex. App.
LEXIS 7685 (Tex. App. Dallas July 23, 2015).
Neither E-Sign nor UETA apply to wills, codicils, or testamentary trusts, which continue traditional “writing”
requirements. Statutes such as Uniform Commercial Code (UCC) Articles 3 through 9, which contain their own
electronic transaction rules, are excluded. Both statutes pursue a minimalist approach that avoids any
interference with substantive law. They also wisely avoid stating any technology requirements in light the
accelerating pace of technological change.
UETA is more comprehensive than E-Sign. It expressly provides that a record will not be denied admissibility
into evidence because it is in electronic form. It also deals with “attribution” of the record to individuals or their
agents as well as errors or changes in electronic records. Both statutes recognize contracts between “electronic
agents”: computer programs making contracts with no human intervention, as where one electronic agent
orders additional inventory and the receiving electronic agent activates a shipment pursuant to that order. The
statutes also deal with electronic contracting between humans and electronic agents when the human clicks the
“I agree” button in an online transaction.
[3] Delivery of a Writing Is Not Required

Cases that say delivery of a writing is required to satisfy the statute of frauds reveal a gross misunderstanding
of the purpose of the statute. “Delivery” is essential to convey property by deed or to communicate acceptance
of an offer to form the contract, but the statute of frauds has nothing to do with contract formation or the
conveyance or property. Indeed, conveyance of the property will operate to satisfy the statute of frauds without
any writing.
Delivery of a writing is not required to satisfy the UCC statute of frauds in contracts for the sale of goods or in
any other type of contract within the statute. UCC § 2-201 2 allowing a writing or record sent by one merchant
to another to satisfy the statute against a non-signing party who does not object with 10 days from its receipt, is
not a general delivery requirement under § 2-201 1 which requires no delivery. Rather, it is an exception to the
normal requirement of a writing or record signed by the party to be charged.
The statute of frauds requires a sufficient writing or record of the contract as evidence that it was really made to
prevent fraud. This evidence may appear in any number of writings or records that have not been delivered.
They may be in the possession of the party to be charged, but they also may be in the possession of parties
who have no interest in the transaction.
Practice Resources:
• Corbin § 2 .1 (what is a writing?); § 2 .1 (electronic writings and signatures);
§ 2 .2 (delivery not required).

End of Document

§ 23.04 Use of Oral Testimony to Supplement Writing and Oral Proof of

Usage of Trade
As noted in earlier sections, parol evidence may be admitted to explain and supplement a writing that will then meet
the requirements of the statute of frauds. In land contracts, the description of the land may be supplemented by
such evidence if the evidence is genuinely supplementary to incomplete statements of description in the writing.
Cases holding that abbreviations may be explained suggest that a record evidenced by electronic text messaging
could be sufficient.
Evidence of trade usage, course of dealing, and course of performance is clearly admissible to supplement writings
for the purposes of the statute of frauds. Under the UCC, such evidence is admissible even in fully integrated
writings, notwithstanding the parol evidence rule. UCC § 2-202. Both usage of trade and evidence of the parties’
prior course of dealing are assumed to be part of the contract unless such evidence is “carefully negated.” UCC § 2-
202, cmt. 2. Course of performance evidence, which is the strongest evidence of the parties’ intention other than
their express terms, is always admissible. It does not violate the parol evidence rule since it is evidence of the
conduct of the parties in their performance of the prior written contract. Course of performance evidence can,
therefore, constitute particularly strong evidence of the parties’ intention though it did not constitute sufficient part
performance to satisfy the statute of frauds without a writing.
Practice Resources:
• Corbin § 2 . (use of oral testimony to explain and supplement a written memorandum)
§ 2 . (usage of trade; course of dealing; course of performance).

End of Document

§ 23.05 Lost or Erroneous Memorandum

If the writing evidencing the contract is allegedly lost or destroyed, clear and convincing evidence of its existence
and terms will be admitted to satisfy the statute of frauds. See Criswell v. Criswell, 2012-Ohio-3065, 2012 Ohio App.
LEXIS 2694 (3d Dist.) (testimonial evidence that the statute of frauds was satisfied by a lost memorandum was
sufficient to deny a motion for summary judgment); Drake v. Mallard Creek Polymers, Inc., 2014 U.S. Dist. LEXIS
161535 (W.D. N.C. 2014) (when defendant apparently lost the second page of a two page arbitration agreement
that contained signatures, proof of the lost writing’s contents had to be clear, strong and unequivocal). Since a party
who was previously willing to commit fraud or perjury in falsely alleging a contract may only have to add the lie that
there was a perfectly fine and complete writing that was lost, courts weigh that risk against the hardship and
forfeiture that would otherwise ensue. If, however, courts are willing to accept clear and convincing evidence to
meet the risk of fraud and perjury, it would seem simple enough to elevate the necessary proof level to “clear and
convincing” when no writing ever existed.
As contrasted with no writing at all, a memorandum signed by the party to be charged should be effective to admit
the existence of the contract even though the signer claims that it is erroneous. The statute of frauds is satisfied by
such a writing and the only dispute is over its terms. Since the parties are no longer disputing the existence of a
contract, clear and convincing evidence should permit reformation of the writing to allow the “true intention” of the
parties to be enforced. There is no violation of the parol evidence rule in the admission of such evidence.
Practice Resources:
• Corbin § 2 .10 (contents of a lost memorandum provable by parol); § 2 .11 (effect of an
erroneous memorandum).

End of Document

CHAPTER 23 FORMAL REQUIREMENTS— WRITING—RECORD—

SIGNATURE—ORAL EVIDENCE
the subject matter.

End of Document

§ 23.01 Writing Requirement of the Statute of Frauds
[1] The Required “Note or Memorandum” May Take Many Forms

There is no prescribed form of the “note or memorandum” necessary to evidence the fact that a contract was
made as required by the statute of frauds. It may appear in a traditional document setting forth the terms of the
contract. It may appear in other documents that have other purposes: receipts, invoices, letters to either party
or third persons, the minutes of a corporation meeting, wills, trusts, or any number of other forms. Wells Fargo
Home Mortg., Inc. v. Spaulding, 2007 ME 116, 930 A.2d 1025. It is now clear that it may also appear in various
electronic forms such as faxes, computer generated messages, or e-mail. It may appear as a recording of a
message on an answering device.
[2] Electronic Record and Signature May Meet the Requirement

The requirement of a “signed writing” may now be met by an electronic “record” and an electronic signature.
The digitalized revolution of the last decade of the twentieth century included the common use of electronic
contracting through the internet. Statutes of frauds that required “writings” were seen as obstacles to the
development of electronic commerce. Isolated cases manifested willingness to recognize electronic records as
equivalent to traditional writings. See, e.g., In re RealNetworks, Inc. Privacy Litig., 2000 U.S. Dist. LEXIS 6584
(N.D. Ill. May 11, 2000). The accelerated use of electronic media to make contracts, however, could not await
the necessarily deliberate judicial process evolution.
Commercial law statutes have traditionally been state laws, but initial state legislative attempts to address the
challenge augured a disparate set of statutes dealing with interstate electronic contracts. Congress enacted the
Electronic Signatures in Global and National Commerce Act (15 U.S.C. § 001 et seq.) (E-Sign). The National
Conference of Commissioners on Uniform State Laws (NCCUSL) reacted to diverse state legislative efforts
through the production of the Uniform Electronic Transactions Act (UETA), which was rapidly enacted in 48
jurisdictions. E-Sign and UETA have the common purpose of ascertaining that a record relating to a transaction
should not be denied effect or validity solely because it is in electronic form. The wide and rapid enactment of
UETA was encouraged by a provision of E-Sign that state law in this area would not be preempted by E-Sign if
the state enacted UETA without substantial modifications.
Both statutes define “record” as “information that is inscribed on a tangible medium or that is stored in an
electronic or other medium and is retrievable in perceivable form.” UETA § 2 1 E-Sign § 10 . While the
parties must “agree” on the use of an electronic medium, “agree” is broadly defined. An e-mail address in a
letter or on a business card would be a manifestation of such consent. There must, however, be an intent to
execute the record and signature as a contract. A plaintiff claimed that her audio tape recording of an
agreement was sufficient under E-sign to satisfy the statute. The court noted that E-Sign (15 U.S.C. § 001
states that a contract will not be denied legal effect “solely” because the record and signature of the contract
are in an electronic form. Merely identifying the voice of the defendant, however, is insufficient. The recorded
voice must be adopted by the party with an intent to sign the record. In this case, the recording was made
surreptitiously without the knowledge of the recorded party, Thus, there could not have been any intent to
execute the recording as evidence of a contract. The situation is akin to procuring a traditional signature by trick
or artifice where there is no intent on the part of the signer to execute a document as a contract. Thus, E-Sign
could not make this surreptitious recording effective for statute of frauds purposes. Sawyer v. Mills, 295 S.W.3d
79 (Ky. 2009).
Page 2 of 2
Whether parties have agreed to conduct transactions by electronic means is a question of fact determined from
the context and surrounding circumstances, including the parties’ conduct. A party who sent an email
acknowledging a debt claimed the email was not legally operative since it was necessary to find an
“independent” agreement showing he agreed to conduct business transactions electronically. The court
rejected this assertion. “… evidence of Parks’ conduct in sending the e-mails, the content of those e-mails, and
the context and circumstances under which those e-mails were sent constitute more than a scintilla of evidence
that Parks agreed to conduct the business contained therein electronically.” Parks v. Seybold, 2015 Tex. App.
LEXIS 7685 (Tex. App. Dallas July 23, 2015).
Neither E-Sign nor UETA apply to wills, codicils, or testamentary trusts, which continue traditional “writing”
requirements. Statutes such as Uniform Commercial Code (UCC) Articles 3 through 9, which contain their own
electronic transaction rules, are excluded. Both statutes pursue a minimalist approach that avoids any
interference with substantive law. They also wisely avoid stating any technology requirements in light the
accelerating pace of technological change.
UETA is more comprehensive than E-Sign. It expressly provides that a record will not be denied admissibility
into evidence because it is in electronic form. It also deals with “attribution” of the record to individuals or their
agents as well as errors or changes in electronic records. Both statutes recognize contracts between “electronic
agents”: computer programs making contracts with no human intervention, as where one electronic agent
orders additional inventory and the receiving electronic agent activates a shipment pursuant to that order. The
statutes also deal with electronic contracting between humans and electronic agents when the human clicks the
“I agree” button in an online transaction.
[3] Delivery of a Writing Is Not Required

Cases that say delivery of a writing is required to satisfy the statute of frauds reveal a gross misunderstanding
of the purpose of the statute. “Delivery” is essential to convey property by deed or to communicate acceptance
of an offer to form the contract, but the statute of frauds has nothing to do with contract formation or the
conveyance or property. Indeed, conveyance of the property will operate to satisfy the statute of frauds without
any writing.
Delivery of a writing is not required to satisfy the UCC statute of frauds in contracts for the sale of goods or in
any other type of contract within the statute. UCC § 2-201 2 allowing a writing or record sent by one merchant
to another to satisfy the statute against a non-signing party who does not object with 10 days from its receipt, is
not a general delivery requirement under § 2-201 1 which requires no delivery. Rather, it is an exception to the
normal requirement of a writing or record signed by the party to be charged.
The statute of frauds requires a sufficient writing or record of the contract as evidence that it was really made to
prevent fraud. This evidence may appear in any number of writings or records that have not been delivered.
They may be in the possession of the party to be charged, but they also may be in the possession of parties
who have no interest in the transaction.
Practice Resources:
• Corbin § 2 .1 (what is a writing?); § 2 .1 (electronic writings and signatures);
§ 2 .2 (delivery not required).

End of Document

§ 23.02 Multiple Writings or Records

The statute of frauds does not require a writing or record to appear on one page or in one document. It may be
evidenced by numerous pages or documents. If each of these documents is “signed” by the party to be charged,
the statute is satisfied. The challenge arises when one or more documents are signed and other documents that will
complete the necessary writing or record to satisfy the statute are unsigned.
If the signed document expressly incorporates the unsigned document, the statute will be satisfied. If a document is
physically attached to the signed writing, it becomes part of the writing that will satisfy the statute. See, e.g.,
Roberts v. Enter. Rent-A-Car Co. of Boston, 438 Mass. 187, 779 N.E.2d 623 (2002). The fact that the signed and
unsigned writings that together will satisfy the statue are enclosed in the same envelope lends credibility to the
assertion that they were all intended to refer to the same transaction. Where a party signed and returned only the
signature page rather than the entire signed document and sent unsigned e-mail attachments, the defendant
claimed the e-mails were not effective because they were not attached to the signed agreement. The court replied,
“that the single factor separating what this Court can and cannot consider in evaluating the validity of the [writings]
is what was held together by a staple at the moment they were signed, is, in the opinion of the Court, an impractical
and absurd application of a rule that is based on practical concerns.”
Preston Exploration Co. v. Chesapeake Energy Corp., 2010 U.S. Dist. LEXIS 12915 (S.D. Tex. Feb. 16, 2010).
The trend is to abandon any requirement that the signed writing must include an express reference to the unsigned
writings that will complete the necessary evidence of the contract. If there is clear evidence that the unsigned
writings on their face refer to the same transaction, the statute should be satisfied. When the nexus from the
writings alone is not clear, some courts allow evidence of the surrounding circumstances to support that nexus. This
is the view of Restatement (Second) of Contracts § 1 2 which emphasizes the quality of the evidence rather than
the form in which it is found. The trend is clearly in this direction, whatever the language of the standards applied in
different jurisdictions. No court excludes parol evidence entirely. As a court stated in quoting Corbin on Contracts:
The determination is not to be made mechanically, but is a matter of evidentiary sufficiency. What is required is
that the writings sufficiently evidence the fact that a contract was made and what its terms are, so that under
the circumstances of the particular case, there is no serious possibility that the assertion of the contract is false.
Elec. Wholesalers, Inc. v. M.J.B. Corp., 99 Conn. App. 294, 303, 912 A.2d 1117, 1123 (2007).
Practice Resource:
• Corbin § 2 . (multiple writings; necessity and nature of internal reference; physical
connection).

End of Document

§ 23.03 Signature Requirement
[1] There Must Be a Writing Signed by the Party to Be Charged

Statutes of frauds commonly require a writing or record to be signed by the party to be charged or the party’s
agent. Unlike the typical statute of frauds, the UCC defines “signed.” Under UCC § 2-102 (revised Article 1)
“signed” includes “using any symbol executed or adopted with present intention to adopt or accept a writing.”
Former UCC § 1-201 stated the definition as manifesting a “present intention to authenticate a writing.”
The UCC and its statute of frauds applies only to contracts for the sale of goods, but its definition of “signed” is
replicated in Restatement (Second) of Contracts § 1 which emphasizes the intention to authenticate the
writing as that of the signer. Modern decisions also support the “authentication” test.
UCC § 1-201 cmt. 37, explains that a “complete signature” is not necessary. The symbol may be printed,
stamped, or written; it may be by initials or thumbprint on any part of the document including a printed
letterhead or billhead. Whether a printed letterhead or billhead should constitute a “signature,” however,
depends upon how and for what purpose it is used. Most uses in a commercial setting will disclose an intention
to authenticate the writing. In White v. BAC Home Loans Servicing, LP, 2011 U.S. Dist. LEXIS 109645 (N.D.
Ga. Sept. 26, 2011), the court found the printed display of the defendant’s trade name and logo sufficient
symbols to constitute the defendant’s signature. The essential inquiry always returns to the question of
intention. Whether it is the sale-of-goods section or other sections of the statute of frauds, the essential purpose
of a signature is simply an effort to insure that the writing or record was made by the party to be charged.
An electronic signature is defined in both the UETA and E-Sign statutes as:
[A]n electronic sound, symbol or process attached to or logically associated with a record and executed or
adopted by a person with the intent to sign the record.
UETA § 2 E-Sign § 10 .
Inserting one’s name in an e-mail communication or a firm’s name in a fax will suffice. Even a voice mail on an
answering machine will suffice if the requisite manifested intention is present. UETA provides that when a
signature appears on an electronic record, the named party is not bound unless the party produced the
signature, ratified it, or is responsible for the agent who produced it. UETA § . New York is one of the rare
jurisdictions that has not enacted UETA Under its electronic communication statute, several cases have
indicated that e-mails constitute signed writings, while other cases have found a pre-printed email signature to
be ineffective. A discussion of these cases appears in Bulldog N.Y. LLC v. Pepsico, Inc., 2014 U.S. Dist. LEXIS
42713, at *32–*33 (D. Conn. Mar. 31, 2014).
[2] Authentication of the Writing

A party has not “signed” a writing or record simply because that party’s name appears in the writing.
Uncontested evidence that the writing was in fact made by the defendant, however, should be sufficient to
authenticate the writing. Otherwise, it will be necessary to introduce sufficient evidence of the intention of the
named party to adopt the writing. As in other aspects of contract law, objective evidence of that intention
controls. Evidence will be admitted to explain the name or symbol on the writing and to show its purpose on the
writing. Regardless of its form, the essential questions are, why is the name there and by whom or by whose
authority was it inscribed?
[3] Location of the Signature

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Documents evidencing contracts are usually signed at the end of the document—they are “subscribed”—and a
given statute of frauds may require the signature to be “under” the statements that are to be authenticated. If
there is a formal document that the parties apparently intend as their statement of the contract terms and it
contains a signature line at the end, a party’s signature on that line alone raises the presumption of his or her
authentication of all that appears above that signature in the document. If the signature appears elsewhere in
the document, the contrary presumption arises, but it is not conclusive. The statute of frauds does not require
the signature in a particular location. When it fails to appear on the prefabricated signature line, however,
evidence will be necessary to convince the court that the signer still had the present intention to adopt the entire
writing. Where a document contained a space for a full signature after the phrase, “Acceptance of Offer to
Purchase,” the presence of initials on other pages without a signature in the prescribed location failed to meet
the requirement that the writing must be “signed.” 26 Beverly Glen, LLC v. Wykoff Newberg Corp., 2009 U.S.
App. LEXIS 11269 (9th Cir. May 26, 2009).
[4] Unsigned Writings May Be “Signed”

The specific terms of an oral separation agreement were put on the record at a final hearing with both parties
stating under oath that they understood the agreement. The hearing concluded with the attorneys agreeing to
complete the paperwork. The former wife refused to sign, claiming coercion. No coercion was found, but the
agreement involved the transfer of land. Noting that the interpretation of the statute of frauds had narrowed over
the years, the court considered a case in which school board minutes recited the sale of land. Though no
member of the board had signed the minutes, the court noted that such an “unsigned authentic record” met the
requirements of the statute of frauds. The court cited Corbin on Contracts in holding that the writing should be
effective if the court is convinced that no serious risk of fraud exists that the writing was adopted by the party to
be charged. Moreover, the court assumed the statements made by the wife during the hearing were probably
recorded and would constitute a sufficient “signed record” under UETA. In re Marriage of Takusagawa, 38 Kan.
App. 2d 401, 166 P.3d 440 (2007).
[5] Party Whose Signature Is Required

The typical statute of frauds requires a sufficient memorandum to be signed only by the “party to be charged,”
who will be the party whose promise is sought to be enforced. The statute of frauds operates as a bar to the
enforcement of that promise that can only be lifted by a sufficient writing signed by the promisor or an exception
to the statute.
The land section of a given statute of frauds may require a signature by the grantor—the owner and vendor of
the land. These statutes presume that it was necessary only to protect the owner against fraud and perjury.
When the signature of the vendor is required by the statute and nothing more, the vendor can succeed in an
action against the buyer who signed nothing, but the buyer would have to produce a signed writing by the
vendor. To mitigate this lack of “mutuality,” some courts insist that the vendor’s signed writing evidencing the
contract has to be delivered to and assented to by the purchaser, although the purchaser’s signature was not
necessary.
Apart from the land statutes, however, a writing signed by only one party will be sufficient to satisfy the statute
although the signing party would be barred by the statute from enforcing the contract against the nonsigning
party. Courts have generally abandoned any concern over the lack of “mutuality” in contracts other than land
contract provisions, where the statute requires only the vendor’s signature.
[6] The Signature of the Principal’s Agent Satisfies the Statute

The signature of either a principal or the principal’s authorized agent will be effective to satisfy the statute. If the
agent is authorized, the agent’s signature appearing as if the agent were the principal will allow the undisclosed
principal to sue and be sued. Parol evidence will be admissible to establish the signer’s agency. When the
agent’s signature does not purport to bind the agent and does not name or identify the principal, there is a split
of authority concerning the principal’s liability. The better view, advocated by the Restatement (Second) of
Agency, is that the undisclosed principal is bound.
A single agent may represent both the buyer and seller, as illustrated by an auctioneer who has the authority to
execute a memorandum binding both the buyer and seller of the auctioned item. If an agent no longer has
Page 3 of 3
authority to act for the principal, a writing signed by the agent will not be effective to bind the principal and the
writing will be insufficient to meet the requirements of the statute of frauds. Thus, the auctioneer’s power to act
as an agent lasts only for a reasonable time after acceptance of the final bid. Unless a given statute of frauds
states the contrary, however, the authority of an agent to sign an effective writing that will make the contract
enforceable against the principal need not be in writing.
Practice Resources:
• Corbin § 2 . (what is a signature?); § 2 . (party whose signature is required);
§ 2 . (when signature by agent is sufficient); § 2 . (must authority of agent be
in writing?).

End of Document

§ 23.04 Use of Oral Testimony to Supplement Writing and Oral Proof of

Usage of Trade
As noted in earlier sections, parol evidence may be admitted to explain and supplement a writing that will then meet
the requirements of the statute of frauds. In land contracts, the description of the land may be supplemented by
such evidence if the evidence is genuinely supplementary to incomplete statements of description in the writing.
Cases holding that abbreviations may be explained suggest that a record evidenced by electronic text messaging
could be sufficient.
Evidence of trade usage, course of dealing, and course of performance is clearly admissible to supplement writings
for the purposes of the statute of frauds. Under the UCC, such evidence is admissible even in fully integrated
writings, notwithstanding the parol evidence rule. UCC § 2-202. Both usage of trade and evidence of the parties’
prior course of dealing are assumed to be part of the contract unless such evidence is “carefully negated.” UCC § 2-
202, cmt. 2. Course of performance evidence, which is the strongest evidence of the parties’ intention other than
their express terms, is always admissible. It does not violate the parol evidence rule since it is evidence of the
conduct of the parties in their performance of the prior written contract. Course of performance evidence can,
therefore, constitute particularly strong evidence of the parties’ intention though it did not constitute sufficient part
performance to satisfy the statute of frauds without a writing.
Practice Resources:
• Corbin § 2 . (use of oral testimony to explain and supplement a written memorandum)
§ 2 . (usage of trade; course of dealing; course of performance).

End of Document

§ 23.05 Lost or Erroneous Memorandum

If the writing evidencing the contract is allegedly lost or destroyed, clear and convincing evidence of its existence
and terms will be admitted to satisfy the statute of frauds. See Criswell v. Criswell, 2012-Ohio-3065, 2012 Ohio App.
LEXIS 2694 (3d Dist.) (testimonial evidence that the statute of frauds was satisfied by a lost memorandum was
sufficient to deny a motion for summary judgment); Drake v. Mallard Creek Polymers, Inc., 2014 U.S. Dist. LEXIS
161535 (W.D. N.C. 2014) (when defendant apparently lost the second page of a two page arbitration agreement
that contained signatures, proof of the lost writing’s contents had to be clear, strong and unequivocal). Since a party
who was previously willing to commit fraud or perjury in falsely alleging a contract may only have to add the lie that
there was a perfectly fine and complete writing that was lost, courts weigh that risk against the hardship and
forfeiture that would otherwise ensue. If, however, courts are willing to accept clear and convincing evidence to
meet the risk of fraud and perjury, it would seem simple enough to elevate the necessary proof level to “clear and
convincing” when no writing ever existed.
As contrasted with no writing at all, a memorandum signed by the party to be charged should be effective to admit
the existence of the contract even though the signer claims that it is erroneous. The statute of frauds is satisfied by
such a writing and the only dispute is over its terms. Since the parties are no longer disputing the existence of a
contract, clear and convincing evidence should permit reformation of the writing to allow the “true intention” of the
parties to be enforced. There is no violation of the parol evidence rule in the admission of such evidence.
Practice Resources:
• Corbin § 2 .10 (contents of a lost memorandum provable by parol); § 2 .11 (effect of an
erroneous memorandum).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 24 INTERPRETATION OF CONTRACTS
CHAPTER 24 INTERPRETATION OF CONTRACTS

the subject matter.

End of Document
§ 24.01 Rules of Interpretation of Contracts
[1] Interpretation Is a Process of Ascertaining the Meaning of an Agreement or Any of its Terms
Interpretation is a process of ascertaining the meaning of an agreement or any of its terms. Restatement
(Second) of Contracts § 200. An agreement is evidenced by symbols, usually words, but also by conduct in the
acts or forbearances of the parties. It is not only essential to interpret the agreement; interpretation plays a
dominant role in the earlier determination of whether the parties have arrived at an agreement. Whether an
offer and acceptance have been manifested to form a contract is essentially an interpretation issue.
Courts are called upon to interpret a variety of documents. The interpretation of a will depends on the intention
of a single party, the testator. The interpretation of statutes is concerned with the intention of only one collective
party, the legislature, although debates leading to the enactment may be filled with different views.
Interpretation of a contract can be more difficult because it involves two or more parties, each manifesting
words or conduct with an individually-intended meaning, from which a court must distill a dominant singular
meaning to ascertain the legal effect of the agreement.
[2] Interpretation Distinguished from Construction

Courts must not only interpret the symbols used by the parties, they must also “construe” them. Unfortunately
the terms “interpretation” and “construction” are typically used interchangeably notwithstanding a fundamental
difference between them. Interpretation is a process by which the court seeks the meaning intended by the
parties from their words, their conduct, and all surrounding circumstances.
Once the process of interpretation is completed, the judicial process of construction determines the legal effect
to be given to the words and conduct previously ascertained through the interpretation process. In Godley v.
Rutherford County (In re Joan Fabrics Corp.), 2014 U.S. Dist. LEXIS 156319 (D. Del. Nov. 5, 2014), the court
explained that contract interpretation is a question of fact and, citing the Corbin treatise, that a court “is
interpreting language in a contract ‘when it determine[s] what ideas that language induces in other persons,’
and requires a court to ‘ascertain[ ] the intent of the ties. In contrast, construction “is a process by which
legal consequences are made to follow from the terms of the contract and its more or less immediate context.”
In Good Hope Missionary Baptist Church v. St. Louis Alarm Monitoring Co., 306 S.W.3d 185, 191 (Mo. Ct. App.
2010), the court explained that contextual interpretation precedes the construction of a contract. “Construction,”
therefore, is not concerned with the intention of the parties. Both of these processes are performed by all
courts, but they are not clearly distinguished. It is a rare court that will distinguish them by using terms
“interpretation” or “construction” in the precise identification of each process. [ the court seeks merely to
interpret a contract term, which is to discern the meaning of a term already contained in the contract, the
question of whether the parties intended their agreement to be integrated is not e e t. Alta Vista Props.,
LLC v. Mauer Vision Ctr., 855 N.W.2d 722, 2014 Iowa Sup. LEXIS 95 (Iowa 2014) (citing the Corbin treatise).
See also, Green Goblin, Inc. v. Simons (In re Green Goblin, Inc.), 2014 U.S. Dist. LEXIS 157899 (E.D. Pa.
2014) (explaining the difference between interpretation and construction and citing the Corbin treatise).
[3] “Strict” vs. “Liberal” Interpretation

The terms “strict” and “liberal” characterizing a particular interpretation are not uncommon, but they are
anything but precise. They have no consistent meaning. A “liberal” interpretation may be viewed as providing a
more generous meaning, while a “strict” interpretation suggests a narrow meaning. The critical question,
though, is why a court would broaden the meaning of a word or phrase in one situation and limit a contract term
in another situation.
Page 2 of 2
Insurance contracts are filled with many “standard” words and phrases (“boilerplate”) that are well known by the
insurer, but not very well understood by the typical insured. Indeed, the complexity of the standard terms of
insurance policies and the inability of the insured to negotiate any of these terms spawned the phrase “contract
of adhesion,” under which the insured has no reasonable choice but to adhere to the terms “dictated” by the
insurer. Thus, there are many cases stating that insurance policies will be interpreted liberally in favor of the
insured and strictly interpreted against the insurer. A corollary is that a choice between two interpretations that
are otherwise equal will be resolved by “construing” the contract against the drafter (contra proferentem) since
the drafter controlled and wrote the original language and should assume the risk of any doubts as to the
meaning of such language.
The law also has it favors and frowns. The law abhors forfeitures, which typically suggest that a party is
receiving something for nothing. Thus, an interpretation that a provision in a contract is a condition that would
result in a forfeiture may be avoided by a strict interpretation of the language of that provision. Similarly, a
clause precluding a former employee from entering employment with the former employer’s competitor will be
strictly construed to allow the employee to earn a living.
Practice Resources:
• Corbin § 2 .1 (rules of interpretation and construction); § 2 .2 (interpretation of
contracts distinguished from interpretation of statutes); § 2 . (interpretation
distinguished from construction); § 2 . (“strict” or “liberal construction”).

End of Document
§ 24.02 Determining the Meaning of Contract
[1] Interpretation of Contracts Is Neither Wholly Objective Nor Wholly Subjective

The cases are legion in which courts recognize their obligation to interpret words and conduct according to the
intention of the parties. After all, it the agreement of the parties the court is obligated to recognize, not an
agreement constructed by a court that the parties never made. Restatement (Second) of Contracts § 201 cmt.
c. Although this goal is easily stated, its achievement can be problematic.
Words or other symbols of intention may be understood through the eyes of a hypothetical reasonable
person—an objective test that courts may use to discern what such a reasonable third party would understand
by the outward manifestations of the parties in their words or conduct. Where a party to a broadly worded
release claimed that it did not cover a noncompetition agreement, the court stated, “Whether CorVel really
intended to release its rights under the Noncompetition Agreement is one of those subjective questions that the
Court neither can answer nor may even ask.” CorVel Enter. Comp v. Schaffer, 2010 Del. Ch. LEXIS 109 (May
19, 2010). Absent other evidence, where language has a generally prevailing meaning, it is interpreted in
accordance with that meaning, the meaning that would be attributed to it by a reasonable third party.
Restatement (Second) of Contracts § 202 . If words have a technical meaning, it is assumed that they
have that meaning when used within their technical field. Restatement (Second) of Contracts § 202 .
Hauge v. City of Lacey, 2014 Wash. App. LEXIS 2189 (2014).
It is clear that a purely subjective test to determine what each party actually intended the words or conduct to
convey is not feasible since courts do not possess the psychic power that would be necessary to discern what a
party is really thinking. Yet, a purely objective test that disregards any evidence of the parties’ individual
understanding and relies exclusively on what a reasonable third party (in the person of the court) would
understand words or conduct to mean could result in a contract that neither party intended. No contract should
be interpreted and enforced with a meaning that neither party gave it. Creatura v. Creatura, 122 Conn. App. 47,
998 A.2d 798 (2010).
If Ames and Barnes have a contract for certain goods at a stated price, from the perspective of a disinterested,
reasonable third person, substantial changes in the market price for such goods should have no effect on the
enforcement of the contract at the stated price. Indeed, such market changes are the predominant risks
typically assumed by the parties to a contract. Ames and Barnes, however, may have established a clear
course of dealing in prior contracts using identical language in which they always adjusted the price in
accordance with changes in market price beyond 10 percent; in such a case, enforcing the contract strictly on
the basis of the words as they would be understood by a reasonable third party would enforce a contract Ames
and Barnes never made. Such course of dealing evidence should be admissible to include the unwritten term in
the contract based on objective evidence of the parties’ course of dealing. The classic exposition of this concept
is found in Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (1971).
The process of interpretation entails several steps. First, the court is required to consider the provisions of the
contract in the context of the four corners of the document. Second, if the contract is ambiguous, the court
examines extrinsic evidence of the contracting parties' intent. Third, if ambiguity remains, the court resorts to
“appropriate maxims of construction.” Only if the third step is reached should a court apply the familiar maxims
of interpretation and construction, including the one that, “[i]n choosing among the reasonable meanings of a
promise or agreement or a term thereof, that meaning is generally preferred which operates against the party
who supplies the words or from whom a writing otherwise proceeds.” Northwest Bank v. McKee Family Farms,
Inc., 2016 U.S. Dist. LEXIS 16026 (D. Or. Feb. 9, 2016). CLS Prods., LLC v. ConTech Int'l, LLC, 2015 U.S.
Dist. LEXIS 53093 (D.Ore. 2015) (same).
Page 2 of 3
If the evidence is clear that each party understood the words of the agreement in exactly the way they would
have been understood by a reasonable third party, the agreement may be enforced in accordance with the
purely objective meaning, which will comport with the parties’ “subjective” meaning as shown by objective
evidence. When, however, the parties’ expression of agreement is susceptible of two or more meanings and
each party is claiming that its meaning should prevail, how does a court carry out the intention of the parties?
[2] Contracts Having a “Latent Ambiguity”

The nineteenth century case of Raffles v. Wichelhaus, 2 Hurl. & C. 906, 159 Eng. Rep. 375 (Ex. 1864), has
become the leading case dealing with this question. In Raffles, the defendant contracted to purchase cotton to
be sent from Bombay to Liverpool on a ship named “Peerless.” A ship named Peerless sailed from Bombay in
October, but it contained no cotton from the seller. A second ship named Peerless that sailed from Bombay in
December, however, contained the seller’s cotton, which the buyer refused to accept on the footing that he
intended to purchase the cotton at the agreed price earlier from the October Peerless. Presumably, the market
price had changed substantially.
There was no objective evidence in terms of trade usage, course of dealing, or any other standard that could be
applied to assist the court to find a contract. The parties’ announced subjective intentions were equally
supportable. Neither party knew or should have known that there were two ships named Peerless. What
appeared to a clear and ordinary contract for the sale of cotton on its face included a “latent ambiguity” that
allowed parol evidence to “be given for the purpose of showing that the defendant meant one ‘Peerless’ while
the plaintiff meant another.” Neither was at fault. The court held that there was no consensus ad idem and no
binding contract.
The Restatement (Second) of Contracts has elaborated on this analysis in § 20 pertaining to whether a
contract exists, and also in § 201 2 pertaining to the issue of whose meaning prevails. If neither party is aware
of such a latent ambiguity and not at fault, as in the Peerless case, no contract is formed. If both parties are
aware that each intends a different meaning from the other, both parties are at fault, but, again, the court has
no basis for choosing one interpretation over another. There is no contract.
When, however, the parties attach different meanings to words in the agreement, and the first party neither
knew nor should have known of the meaning attached by the second party, and the second party knew or
should have been aware of the meaning attached by the first party, there is a contract according to the intention
of the innocent first party. In Crux Subsurface, Inc. v. Black & Veatch Corp., 2011 U.S. Dist. LEXIS 134897 (D.
Kan. Nov. 22, 2011), the court ordered judgment pursuant to the parties’ agreement of $75,000 “plus accrued
costs.” The defendant claimed that there was a misunderstanding of whether “costs” included attorney’s fees
which prevented mutual assent as in Raffles v. Wichelhaus. While “costs” did not usually include attorney’s
fees, the court found that the defendant knew or should have known that the plaintiff’s meaning of “costs”
included such fees. Thus, there was a contract according to the plaintiff’s meaning of “costs.” Cf. United Nations
Convention on Contracts for the International Sale of Goods (CISG) Article 8(1), which states: “[S]tatements
made by and other conduct of a party are to be interpreted according to this intent where the other party knew
or could not have been unaware of what that intent was.”
[3] Objective Evidence of the Parties’ Subjective Intent Is Considered

Among other famous interpretation cases is Frigaliment Importing Co. v. B. N. S. International Sales Corp., 190
F. Supp. 116 (1960), a case that demonstrates the necessity of meeting both the objective reasonable third-
party test as well as objective evidence of the subjective element. The opinion begins with a direct statement of
the question before the court: “The issue is, what is chicken?” As the opinion clearly demonstrates, however,
the court was not asking for a dictionary definition of “chicken,” nor would the court be satisfied with the answer
provided only by a reasonable third party. Rather, the question was, what is “chicken” as understood objectively
in the contract between the parties under all of the surrounding circumstances.
A seller claimed that its contract to supply “chicken” included both young (frying) and older (stewing) chickens.
The buyer claimed that “chicken” meant only “young” chickens suitable for frying. A purely objective test may
have led to the simple conclusion that any kind of “chicken” is “chicken.” The seller had certainly supplied
“chicken,” but the court recognized that the issue before it was whether the chicken that had been supplied
accorded with the parties’ intention.
Page 3 of 3
The court considered expert testimony presented by each party and referred to the U.S. Department of
Agriculture definition to determine what an objective third party would understand by the contract language, “US
Fresh Frozen Chicken, Grade A.” Beyond that meaning of “chicken,” an interpretation that the parties intended
only young chicken required the buyer to establish that the seller knew or had reason to know that the buyer
intended to purchase only young chicken at the time the contract was formed.
The court concluded that a reasonable third party would objectively include both old and young chickens in the
definition of “chicken,” but that was no more than half the equation. It was even more important that the court
allowed the buyer to attempt to prove that the parties intended the narrower meaning of “young” chicken,
although the buyer failed to sustain that burden.
Practice Resources:
• Corbin § 2 . (which party’s meaning should govern?); § 2 . (interpretation is
neither wholly objective nor subjective).

End of Document
§ 24.03 The “Plain Meaning” Mode of Interpretation
[1] Parties May Employ Private Codes in Defining Contract Terms

A word or phrase is an imperfect conveyor of the meaning intended by the party or parties using such words.
The party using a word or phrase may have intended a meaning different from the understanding of the party to
whom the words were addressed. Even when a reasonable third party should understand a word or phrase in a
particular manner, the actual party may reasonably understand it differently because of the parties’ prior
relationship. Justice Holmes provided an important insight: “A word is not a crystal, transparent and unchanged,
it is the skin of a living thought and may vary greatly in color and content according to the circumstances and
the time in which it is used.” Towne v. Eisner, 245 U.S. 418, 425, 38 S. Ct. 158, 62 L. Ed. 372 (1918).
Notwithstanding this insight, Holmes would not recognize parties’ private codes that would give words a
meaning totally different and even opposite from their normal meaning. Modern courts would disagree. There is
no reason why convincing evidence may not be introduced to show that the parties’ expression of five meant 10
or that their expression of 500 feet was intended to mean 100 inches. As suggested by a modern court, if the
parties “wish the symbols ‘one Caterpillar D9G tractor’ to mean ‘500 railroad cars full of watermelons,’ that’s
fine—provided parties share this weird meaning.” TKO Equip. Co. v. C & G Coal Co., 863 F.2d 541 (7th 1988).
In the previous section, we considered a case that sought to determine the meaning of “chicken” and concluded
that it could mean both old and young chicken or only young chicken or old chicken, depending upon the
intention of the parties. In another well-known case, a commercial lender had agreed that, upon the completion
of construction, it would take over a construction loan made by a bank to the debtor conditioned on the debtor
not being insolvent. At the time of the original contract, the debtor was not insolvent. When the construction was
completed, however, a decline in the commercial real estate market resulted in only 7 percent of the complex
being leased, which made the debtor insolvent according to the usual definition of that term. The issue,
therefore, was not to determine the general, objective meaning of “insolvency”; rather, it was how the parties
understood or should have understood the meaning of that term as applied to their agreement. Mellon Bank,
N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001 (1980).
[2] Determining Whether Language Is Ambiguous

One of the shibboleths of contract interpretation is the prerequisite of finding language “ambiguous” before
extrinsic evidence of its meaning is admitted. The critical question, however, is, how is the finding of ambiguity
made? It is generally agreed that the parties’ mere disagreement concerning the proper interpretation of
contract language does not create ambiguity. The critical question is, by what method will a court determine
whether contract language is either clear or ambiguous?
Professor Corbin provides a critical insight:
It is sometimes said, in a case in which the written words seem plain and clear and unambiguous, that the
words are not subject to interpretation or construction. One who makes this statement has of necessity
already given the words an interpretation—the one that is to him plain and clear; and in making the
statement he is asserting that any different interpretation is perverted and untrue.
A. Corbin, The Interpretation of Words and the Parol Evidence Rule, 50 Cornell L. Q. 161-171-172 (1965).
If a court makes an initial determination that the language is clear on its face and concludes that no evidence is
admissible to interpret the language, the overriding requirement to ascertain the intention of the parties may be
undermined. There are times, of course, when the contract language cannot reasonably be read to be clear and
unambiguous. In Orlander v. Staples, Inc., 802 F.3d 289, 2015 U.S. App. LEXIS 16492 (2d Cir. N.Y. 2015), a
consumer purchased a computer from Staples along with the Staples Protection Plan. He subsequently
Page 2 of 4
experienced internet connectivity problems and brought the computer back to Staples for repair under the
Staples Protection Plan. Staples advised him that the Plan was not activated until the one year manufacturer’s
warranty expired. Orlander filed a putative class action against Staples, individually and on behalf of all others
similarly situated, for breach of contract and other claims. The language in the Staples Protection Plan
provided: “The plan term is inclusive of manufacturer's warranty and store return policy and does not replace
the manufacturer's warranty.” The Second Circuit stated: “… we have no idea what it meant. One permissible
interpretation might be that the manufacturer's warranty offers dual, alternative coverage, alongside the
protections offered by Staples. It certainly does not unambiguously communicate that Staples's plan gives no
protection while the manufacturer's warranty is in effect, or even that, while the manufacturer's warranty is
operative, the protection given by the Staples plan is limited to coverage not provided by the manufacturer's
warranty.”
In other cases, the language seems clear on its face, but a refusal to consider extrinsic evidence could thwart
the intent of the parties. The esteemed Judge Posner of the Seventh Circuit Court of Appeals wrote that
“[l]iteralism is not the only valid method of interpreting contracts (and sometimes it is invalid, because it can
produce unforeseen absurdities).” Donnawell v. Hamburger, 803 F.3d 912, 2015 U.S. App. LEXIS 18237 (7th
Cir. Ill. 2015). Posner explained that judges are not “mindless automata” and “[d]rafters of contracts are not
omniscient; they are not gifted with exact knowledge of what the future holds. Literal interpretation can produce
absurdities when applied to unforeseen occurrences, as when an ordinance forbidding unleashed dogs in a
park is sought to be applied to a statute of Lassie.” Id. In one case, a life insurance policy designated the
beneficiary as the “wife” of the insured, but the insured had much earlier feigned suicide and left his original,
lawful wife. Though the insured had only one lawful “wife,” the policy had been issued during the insured’s new
life where he held the second woman out as his wife. A plain meaning interpretation would be in favor of the
only lawful wife of the insured. The court, however, considered all of the surrounding circumstances in holding
that “wife” as used in the policy was ambiguous and evidence was admissible to show it was intended to mean
the second woman. In re Soper’s Estate, 196 Minn. 60, 264 N.W. 427 (1935).
A harvester made a promise to harvest 120 acres of peas. The peas had been staggered in planting to assure
different maturity dates. Weather conditions, however, proved so perfect that the entire crop matured
simultaneously. Neither additional equipment nor personnel could be obtained in time to harvest the entire crop
of peas. The harvester relied upon a clause in the contract excusing its performance due to “adverse weather
conditions.” The dictionary meaning of “adverse” is “unfavorable,” which would hardly describe the weather
conditions in this case. A plain meaning interpretation would lead a court to conclude that there was no excuse
for the harvester’s failure to harvest all of the crops. The court, however, interpreted the phrase in accordance
with reasonable industry custom and usage, which included temperature variations resulting in the unexpected
maturation of the entire pea crop that had been “systematically planted with the objective of partial maturation
over a period of time to allow for orderly harvesting.” Stender v. Twin City Foods, Inc., 82 Wn.2d 250, 256, 510
P.2d 221, 225 (1973).
If a contract between two United States parties states a price of “ten thousand dollars,” a strict “plain meaning”
interpretation would preclude evidence that the parties intended “dollars” to mean Canadian dollars. Such an
interpretation, however, could violate the overriding purpose of contract interpretation to effect the intention of
the parties instead of a construct of the meaning of words by a hypothetical third party who, in reality, is the
court making the interpretation.
The danger of such has been effectively noted:
A court must be careful not to “retire into that lawyers Paradise where all words have a fixed, precisely
ascertained meaning; where men may express their purposes, not only with accuracy, but with fullness;
and where, if the writer has been careful, a lawyer, having a document referred to him, may sit in his chair
inspect the text, and answer all questions without raising his eyes.”
Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1010 (3d Cir. 1980), quoting In re Estate of
Breyer, 475 Pa. 108, 379 A.2d 1305, 1309 n.5 (1977).
Rather,
An alternative approach is for the judge to hear a proffer of the parties and determine if there is objective
indicia that, from the linguistic reference point of the parties, the terms of the contract are susceptible of
differing meanings.
Page 3 of 4
Id. at 1011 as recently quoted in Ozarowsky v. Owens-Illinois, Inc., 2010 U.S. Dist. LEXIS 66814 (W.D. Pa. July
6, 2010).
A sizeable number of modern courts have rejected a “plain meaning” mode of interpretation. In Good Hope
Missionary Baptist Church v. St. Louis Alarm Monitoring Co., 306 S.W.3d 185 (Mo. Ct. App. 2010), the court
noted that it is entitled to look at more than the words of an agreement. It may examine the situation of the
parties and the context of the transaction. Courts recognize the importance of contextual interpretation that
seeks the meaning the parties intended under all of the surrounding circumstances including their preliminary
negotiations, any course of dealing, trade usage and course of performance evidence. Though the words of an
agreement remain the most important evidence of the parties’ intention, regardless of any facial ambiguity, the
contract must be interpreted in light of all surrounding circumstances. Echard v. Klinge, 2009 Iowa App. LEXIS
628 (June 17, 2009). In Benz v. Town Ctr. Land, LLC, 2013-NMCA-111, ___ N.M. ___, 314 P.3d 688, 695, the
court noted the abandonment of the plain meaning approach in New Mexico.
[3] UCC and Restatement (Second) of Contracts

A comment notes that Uniform Commercial Code (UCC) § 2-202 “definitely rejects” a requirement that a court
must find the contract language to be ambiguous before admitting evidence to interpret the language. UCC § 2-
201, cmt. (1)(c). UCC § 2-202 expressly permits the introduction of trade usage, course of dealing, or course
of performance evidence, regardless of how complete and final or fully integrated the writing evidencing the
contract.
The Restatement (Second) of Contracts’ “Rules in Aid of Interpretation,” “do not depend upon any interpretation
that there is an ambiguity . Restatement (Second) of Contracts § 202 cmt. a. Other statements in the
comments to this section clearly call for interpretation in context, requiring a court to place itself in the position
of the parties at the time the contract was made under all of the surrounding circumstances.
Notwithstanding these guidelines and precedent that illustrates their application, the tenacity of the plain
meaning rule lingers in the case law. In Geneva Int’l Corp. v. Petrof, Spol, S.R.O., 608 F. Supp. 2d 993 (N.D. Ill.
2009), the court suggests a major difference in the interpretation process under Illinois law depending upon
whether the UCC applies. If the contract is one for the sale of goods, only the trial court determines whether the
terms of the contract are ambiguous. The UCC, however, allows extrinsic evidence to explain the meaning of
even a fully integrated agreement. In such cases, the court uses the “more lenient approach” described in § 21
of the Restatement (Second) of Contracts that allows evidence of agreements and negotiations prior to the
writing to establish the meaning of the writing, whether or not it is integrated. There are concerns that
“interpretation” would be used as a device to admit evidence that would be otherwise inadmissible under the
parol evidence rule.
Another concern is that evidence of the subjective interpretation of one of the parties concerning the meaning of
a contract term would be admitted under the guise of interpretation. A “plain meaning” response to this concern,
however, is not only inapposite, the “rule” is meaningless per se. One opinion has cited the tension between the
view that “(1) a contract is not ambiguous … ‘if the court can determine its meaning without any guide other
than knowledge of the simple facts on which, from the nature of the language in general, its meaning depends,’
and (2) contractual terms that are clear on their face can be latently ambiguous.” The court suggests that this
tension is resolved:
by allowing only extrinsic evidence of a certain nature to establish latent ambiguity in a contract; a court
should determine whether the type of extrinsic evidence offered could be used to support a reasonable
alternative interpretation.
Bohler-Uddeholm Am., Inc. v. Ellwood Group, Inc., 247 F.3d 79 (3d Cir. 2001).
While this sensible accommodation has yet to be generally accepted, it is clear that the number of cases
recognizing the folly of the plain meaning rule have increased markedly. The general recognition that all
language is subject to latent ambiguity, however, remains an unachieved goal. Where parties share a common
understanding of certain language, one party should not be able to escape the contract on the footing that, in
the abstract, the language could support a different meaning. Donahoe v. Arpaio, 872 F. Supp. 2d 900 (D. Ariz.
2012).
Practice Resources:
Page 4 of 4
• Corbin § 2 . (are words ever so “plain” as to exclude extrinsic aids to

interpretation?); § 2 . (parties may adopt special codes and choose their own
definitions); § 2 .11 (interpretation of contracts distinguished from application of
the parol evidence rule).

End of Document
§ 24.04 Interpretation Distinguished from the Parol Evidence Rule and

Reformation
The parol evidence rule should not be confused with the interpretation process. When parties reduce their
agreement to writing and intend that writing to be their final expression of at least some of the terms of their
agreement (“partial integration”) or a complete and exclusive statement of their entire agreement (“full integration”),
evidence of alleged understandings prior to or contemporaneous with the execution of such a writing will not be
admitted to vary or contradict the terms of the writing. The essential purpose of the rule is to provide such a record
of agreement with the parties’ intended effect of finality and completeness. As a permanent record of their
understanding, it is entitled to greater weight than oral evidence resting on recollection that may be imperfect or
even “favorable.”
The application of the parol evidence rule, however, only determines which terms of the agreement a court will
deem to constitute “the contract” between the parties. It is not a rule of interpretation. Rather, it defines the subject
matter of interpretation. See Wachovia Bank, N.A. v. Dresdner (In re Brookland Park Plaza, LLC), 2009 Bankr.
LEXIS 3241 (E.D. Va. Oct. 13, 2009) and Philipello v. Taylor, 2012 Tex. App. LEXIS 3324 (Apr. 25, 2012), which
held that evidence of surrounding circumstances including the parties’ negotiations that inform and give context
rather than vary or contradict the terms of a writing is admissible whether the writing is integrated or not integrated.
Whether the court determines that a writing or record is either partially or fully integrated, such a determination
merely defines the parameters of the agreement. The terms of the agreement are manifested by words to which
meaning must be attached. The parol evidence rule has nothing to do with the process of determining the meaning
of the terms. Regardless of the finality and completeness of the writing, the extrinsic evidence may be introduced to
ascertain the meaning of its terms.
In Barker v. Price, 2015 Ind. App. LEXIS 774 (Ind. Ct. App. Dec. 29, 2015), Barker answered Price’s advertisement
to sell a 1994 Ford E-350 van. Barker and Price orally agreed to a price of $15,000. The parties’ written agreement
provided that Barker would make an immediate $2,000 deposit and Price would provide Barker “title by 4/14/14 or
deposit will be refunded in full.” The written agreement did not specify the model year or price. Subsequently, Price
provided Barker a certificate of title for the van that described the van not as a 1994 model but as a 1993 model.
Barker objected, and Price refused to refund Barker’s money, so Barker sued. The trial court granted Price’s motion
for summary judgment because the “agreement makes no reference to the year of the vehicle.” The appellate court
reversed, holding the written agreement was not an integrated agreement, evidenced by the fact it even omitted the
sales price of the van. Taking Price’s argument to its logical extreme, in effect he maintained he could have
produced a certificate of title for a Ford E-350 van manufactured in any year without affecting his deal with Barker.
That, obviously, was not correct. The court reversed and remanded.
When parties have reached an agreement that has been reduced to writing, if their written expression is mistaken
and therefore fails to manifest the true intention of the parties, a court may grant reformation of the writing to state
the true intention. Restatement (Second) of Contracts § 1 . Like the parol evidence rule, reformation has nothing
to do with the interpretation of the writing. Like the terms of any other writing evidencing a contract, the meaning of
the terms of the reformed writing require interpretation.
Practice Resources:
• Corbin § 2 .11 (interpretations distinguished from parol evidence rule); § 2 .12
Page 2 of 2
(distinction between integrated and unintegrated contracts is relevant not to

interpretation but to application of the parol evidence rule); § 2 .1 (reformation
distinguished from interpretation).

End of Document
§ 24.05 Interpretation Requires the Weighing of Evidence

Extrinsic evidence refers to evidence outside the terms of the contract, whether the contract is oral or written. The
familiar phrase, “all of the surrounding circumstances” is used to describe an almost limitless variety of evidence
that could be considered.
Evidence of the parties’ preliminary negotiations should be admissible without concern for violation of the parol
evidence rule when the evidence goes to the meaning of a contract term or phrase without adding to or varying a
written contract term in any fashion. Evidence of the parties’ purpose in forming the contract can be particularly
important. A court must pursue an awareness of the parties’ knowledge of the situation and understanding of any
relevant trade usage. The surrounding circumstances of a contractual relationship among family members may
differ from the circumstances of a contract between purely commercial entities. Such evidence is part of the context
in which a fact finder must place itself to assure that the particular understanding of these parties as objectively
manifested is carried out rather than the understanding of a hypothetical third party.
Unlike the parol evidence rule, interpretation requires the weighing of evidence rather than a decision concerning its
admissibility. The great Judge Cardozo noted that interpretation of a contract term raised the question of the weight
to be accorded to extrinsic evidence concerning its meaning. Appellate courts may question whether extrinsic
evidence in a given case adequately supports the finding of a jury. A court may consider evidence sufficient when
taken as a whole or when it is unrefuted. The UCC creates a hierarchy of the weights to be assigned evidence: it
views course of performance as the strongest evidence, followed by course of dealing, and then trade usage, which
is the weakest of the three. These important types of extrinsic evidence are discussed in the next section.
Practice Resources:
• Corbin § 2 . (interpretation requires the weighing of evidence); § 2 .10 (varieties of
extrinsic evidence).

End of Document
§ 24.06 Trade Usage, Course of Dealing, and Course of Performance
[1] Hierarchy of Evidence

The UCC expresses the hierarchy of evidence as follows: express terms, course of performance, course of
dealing, and trade usage. UCC § 1- 0 e (formerly § 2-20 2 . Restatement (Second) of Contracts § 20
agrees with these “Standards of Preference in Interpretation.”
Course of performance is a sequence of conduct with respect to the contract at issue that involves repeated
occasions for performance by a party, and the other party, with knowledge and opportunity to object,
acquiesces in that performance without objection. UCC § 1- 0 (formerly § 2-20 1 Restatement (Second)
of Contracts § 202 .
Course of dealing is a sequence of previous conduct between the parties that is fairly regarded as establishing
a common basis of understanding for interpreting their expressions and other conduct. UCC § 1- 0
(formerly § 1-20 1 Restatement (Second) of Contracts § 22 . An agreement required Wachovia to “maintain,
protect, and apply” any collateral given in connection with a loan of the plaintiff’s securities to certain authorized
borrowers including Lehman Brothers. After Lehman’s bankruptcy causing the plaintiff to suffer a major loss,
the plaintiff claimed Wachovia breached its contractual duties in failing to provide “red flag” information. The
court found the terms “maintain and protect” susceptible to different interpretations which allowed course of
dealing evidence to be used. While Wachovia never provided information concerning Lehman Brothers risk
factors, the court noted that such evidence did not establish, as a matter of law, that Wachovia was not
obligated to disclose such information in markets of unprecedented risks. Moreover, the plaintiff introduced
evidence that Wachovia had informed the plaintiff of other risky investments in its portfolio. The court denied
Wachovia’s motion for summary judgment. SCF Ariz. v. Wells Fargo Bank, N.A., 2011 U.S. Dist. LEXIS 99439
(S.D.N.Y. Sept. 1, 2011).
Trade usage is defined by the UCC as a practice “having such regularity of observance in a place, vocation, or
trade as to justify an expectation that it will be observed with respect to the transaction in question.” UCC § 1-
303(c) (formerly § 1-20 2 . Restatement (Second) of Contracts § 222 provides a definition that is virtually
identical.
Evidence of trade usage or course of dealing may assist a court in explaining the meaning of an express term
in the contract, but those factors are not limited to assisting the interpretation of the contract. Either may
supplement the language of the contract by including a term not otherwise expressed. Neither violates the parol
evidence rule since they are assumed to have been part of the contract upon its formation. Indeed, unless they
are “carefully negated” by the express terms of the contract, both trade usage and course of dealing “become
an element of the words used” by the parties. UCC § 2-202 cmt. 2.
Trade usage is the most general kind of evidence since it covers all who deal in a particular trade or industry.
Course of dealing is specific since it relates to the prior transactions between the contracting parties. Course of
performance is not only as specific as course of dealing, it is a present manifestation of the parties’ intention
through the performance of the very contract at issue. Except for express terms, it is preferred over course of
dealing and trade usage evidence since the parties to the agreement “know best what they meant, and their
action under it is often the strongest evidence of their meaning.” Course of performance evidence that is
inconsistent with one or more express terms of the contract, however, is “relevant to show a waiver or
modification” of any inconsistent term. UCC § 1- 0 (formerly § 2-20 .
[2] Trade Usage

Page 2 of 3
Ordinary dictionaries define terms in accordance with how they are used and, therefore, understood. They list
several meanings of each term. Trade usage may be viewed as simply an extrapolation of a dictionary
process—a more sophisticated dictionary—that is based on the usages of certain terms. As suggested in a
well-known case, interpretation requires a court not only to put itself in the shoes of the contracting parties; the
court “must also adopt their vernacular.” Hurst v. W. J. Lake & Co., 141 Or. 306, 16 P.2d 627, 629 (1932). The
court pointed to trade usage to explain contract terms such as a brick layer’s compensation stated at a certain
rate per “thousand” where the usage did not contemplate laying 1,000 bricks; rather it contemplated a wall of a
certain size. The delivery of 4,000 shingles could be satisfied by delivering 2,500 where the trade usage allows
a certain number of packs of shingles to meet that requirement.
Modern cases continue the use of trade usage to explain terms. Evidence of trade usage was admissible in
cases involving two-by-four lumber that actually measured less than two-by-four, the definition of “delinquency”
in the credit card industry (Capital Funding, VI, LP v. Chase Manhattan Bank USA, 2006 U.S. App. LEXIS
17262 (3d Cir. July 11, 2006)), the use of “program” in television marketing (Employment Television Enters. v.
Barocas, 100 P.3d 37 (Colo. Ct. App. 2004)), and the phrase “sudden and accidental” in an insurance policy
covering pollution that was gradual but unexpected (Sunbeam Corp. v. Liberty Mut. Ins. Co., 566 Pa. 494, 781
A.2d 1189 (2001)).
In Naiman v. Zoning Bd. of Appeals, 87 Mass. App. Ct. 1123 (2015), the court held that nothing in the deed or
the circumstances of its execution required the soils to be restored to their exact preconstruction composition
The court considered trade usage and concluded it would be “highly unusual” to impose an obligation to restore
soils in the disturbed areas to their exact preexisting profile, and therefore “this obligation could not be implied
by the deed language.”
Trade usage evidence may be used to supplement the express terms of a contract. One illustration was the
inclusion of a limitation of liability provision when the service was provided by an acquiring corporation that
included the provision merely on the back of a service ticket; the court found that evidence of the contract with
the predecessor was relevant trade usage to supplement the contract with the new service provider. See Great
N. Ins. Co. v. ADT Sec. Servs., 517 F. Supp. 2d 723 (W.D. Pa. 2007).
The mere subjective opinion of a party to the contract concerning the meaning of a contractual term is not trade
usage. The evidence of trade usage must be objective evidence of usage regularly observed in the industry.
The usage, however, may be localized and viewed as applicable only in a certain geographic region.
[3] Course of Dealing

One of the more dramatic illustrations of course of dealing evidence supplementing the terms of a contract
occurred in Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971). Columbia entered into a three-
year contract to purchase a minimum of 31,000 tons of phosphate annually from Royster at a stated price.
The contract contained an escalation clause, but was silent concerning a reduction of price or renegotiation of
the contract. When the phosphate market price plunged precipitously, Columbia sought to introduce evidence
of prior dealings over a six-year period between the parties when Royster had been the buyer and Columbia
the seller and Royster had, on four occasions, taken none of the goods it had ordered because of market
changes. Columbia had acquiesced notwithstanding a loss of some half million dollars in sales revenue.
Columbia argued that it had entered the new contract with Royster on the assumption that such a major market
change would be treated in the same fashion.
The trial court refused to admit course of dealing evidence, but the court of appeals reversed, recognizing that
the UCC required course of dealing and trade usage evidence to be admitted, notwithstanding the parol
evidence rule. The court found that the course of dealing evidence was not inconsistent with the express terms
of the contract, which dealt only with a price escalation.
The plaintiff provided soil analyses and surveys to a homebuilder (Crown) who would send work orders by
facsimile. The plaintiff would then complete the work and be paid. When Crown was working on a project with
another contractor (Cunningham), a meeting between the plaintiff, Crown, and Cunningham was followed by a
faxed work order from Crown to the plaintiff. The plaintiff completed the work and billed Crown who argued that
the plaintiff’s contract was with Cunningham. The court held that the contract was with Crown and cited the
Corbin treatise in recognizing that “the parties’ prior course of dealing is to be considered in determining
whether a tacit but still actual contract comes into existence.” Crown Custom Homes, Inc. v. Buchanan Servs.,
2009 Ark. App. 442, 319 S.W.3d 285 (2009).
Page 3 of 3
[4] Course of Performance

Other than express terms, course of performance evidence is the strongest evidence of the parties’ intention
because the parties’ performance of their own contract is a practical interpretation and construction of what
they, themselves, intended. Restatement (Second) of Contracts § 202 cmt. g, quoted in Julian v. Julian, 2010
Del. Ch. LEXIS 56 (Mar. 22, 2010); United States ex rel. Pioneer Constr. Co. v. Pride Enters., 2009 U.S. Dist.
LEXIS 110935 (M.D. Pa. Nov. 27, 2009). As noted earlier, it cannot violate the parol evidence rule because it is
post-formation evidence. To the extent that it is inconsistent with one or more express terms, it can operate as
a waiver or modification of such terms. In addition to being recognized by the UCC and Restatement (Second)
of Contracts, it is also recognized in the Vienna Convention. CISG Article 9(1).
A lease was terminated a year early under a provision that allowed the lessor to recover certain “costs” as
provided in the lease. The lessor claimed that the costs were recoverable in accordance with financial
accounting standards (FAS 87). The trial court held that the plain meaning of “costs” precluded such evidence.
The court of appeals reversed, finding that, during the lease, the lessee had reimbursed the lessor pursuant to
an FAS 87 calculation. The court emphasized that such course of performance evidence was entitled to great
weight in determining the parties’ intended meaning of “costs” in the lease. ConAgra, Inc. v. Country Skillet
Catfish Co., 2004 U.S. App. LEXIS 1395 (5th Cir. Jan. 29, 2004).
Where a franchise dealer contract did not state that the dealer had an exclusive franchise in a given territory,
but both the original and extended contracts were performed as if the franchise included a provision granting
territorial exclusivity to the plaintiff, the court found that the parties’ course of performance was admissible to
prove the addition of that term to the contract. Ralph’s Distributing Co. v. AMF, Inc., 667 F.2d 670 (8th Cir.
1981).
On a public works construction project, contrary to the parties’ written contract, they established a course of
performance whereby they could orally convey requests and responses and only later provide a writing
regarding the same issue. The court explained: “Even if parties have stipulated that modification of an
agreement may only occur by writing, ‘a modification or waiver can be established by clear and convincing
evidence that the parties mutually agreed to a modification or waiver of the contract,’… because ‘the parties
possess, and never cease to possess, the freedom to contract even after the original contract has been
e ec te . Thus, evidence of subsequent oral or written modifications of a contract are not excluded by the
parol evidence rule.” Diponio Contr. v. City of Howell, 2015 Mich. App. LEXIS 706 (2015).
Practice Resources:
• Corbin § 2 .1 (proof of trade usage to establish the meaning of the words);
§ 2 .1 (proof of trade usage to add provisions); § 2 .1 (against whom is trade
usage operative?); § 2 .1 (course of performance); § 2 .1 (course of dealing).

End of Document
§ 24.0 Courts Do Not Make Contracts for the Parties

Innumerable cases proclaim that a court’s function is to ascertain and enforce the intention of the parties. A court
may not create and enforce a contract that the parties have not made. It may grant a remedy of restitution to avoid
unjust enrichment in a quasi contract action, but such relief is not based on any manifestation of the parties to enter
into an agreement of any kind.
Courts, however, do not shrink from implying reasonable terms under the circumstances. UCC § 2-20 and
Restatement (Second) of Contracts § recognize default terms, such as the time and place of performance and
even the price term if there is otherwise a manifestation of intention to be bound to an agreement that is otherwise
sufficiently definite to allow a court to afford a remedy. The processes of interpretation and construction may be
used to discover a formed contract even though it may be necessary for a court to supply an essential omitted term,
the need for which the parties had not foreseen. In Ennis v. Chesapeake Appalachia, LLC, 2013 U.S. App. LEXIS
20119 (4th Cir. Oct. 2, 2013), the parties had signed an agreement on August 1, 2006, but the document stated the
starting date as June, 2006. The plaintiffs claimed that no contract existed since they assumed they had entered the
contract on an unspecified date in June and the defendant made an August counter offer. The trial court agreed. On
appeal, the court cited § 20 in reversing the lower court by supplying a reasonable essential term under the
circumstances. The court in Edwards v. Wyatt, 2009 U.S. App. LEXIS 10807 (3d Cir. May 20, 2009), quoted
Restatement (Second) of Contracts § 20 cmt. c: Under Pennsylvania law, a reasonable missing term will be
supplied based on “a tacit agreement or a common tacit assumption or where a term can be supplied by logical
deduction from agreed terms and circumstances.” In Murr v. Midland Nat’l Life Ins. Co., 2014 U.S. App. LEXIS
13400 (8th Cir. July 15, 2014), the court explained that a court is not interpreting a contract when it supplies a
missing term, but the same kind of evidence relevant to interpretation is relevant to supplying a missing term.
When nonprofit organizations were required “to enter into a bilateral agreement” in choosing a two-year or five-year
contract with an energy supplier, they chose the two-year contract. Later, they later sought to extend the contract to
five years. The supplier refused, claiming that they had made their choice since “a” meant they had only one choice.
The trial court agreed with that interpretation. The court of appeals found the trial court’s interpretation to be
plausible, but not the exclusive or even the most persuasive view of the contract language. The supplier’s alternate
interpretation was equally unconvincing. Since the agreement did not provide an answer, the court remanded the
case to allow the trial court to supply an essential term that the parties had not contemplated in accordance with
community standards of fairness and policy. President & Fellows of Harvard College v. PECO Energy Co., 57
Mass. App. Ct. 888, 787 N.E.2d 595 (2003), citing Restatement (Second) of Contracts § 20 cmt. d.
Practice Resource:
• Corbin § 2 .1 (courts do not make contracts for the parties).

End of Document
§ 24.0 Interpretation Should Be Guided by the Parties’ Principal Purpose

Interpretation is required to ascertain the purpose of the parties in making the contract, and once the purpose is
discovered, the remainder of the contract should be interpreted and construed in pursuit of that purpose. Where an
insurance policy dealt only with “accidental injury” and expressly disclaimed “sickness” or “infection” unless caused
by the accidental injury, the purpose of the policy was not designed to insure against pneumonia. Svensson v.
Securian Life Ins. Co., 706 F. Supp. 2d 521 (S.D.N.Y. 2010).
The novelist Norman Mailer assigned rights to his book The Naked and the Dead to a motion picture studio. If the
film was not “completed” within three years and six months, all rights reverted to Mailer. The film was substantially
completed within that period, during which time some two million dollars had been spent on the production. Since
the film was not fully completed, however, Mailer claimed that the rights reverted to him. The court found that the
reason for the time limitation was to avoid the studio’s abandonment of the film, something studios were known to
do. Mailer would then lose the substantial royalties from its showing. The evidence was clear that this fate would not
befall this film. In light of the substantial performance by the cut-off date, plus continuous efforts thereafter, the court
interpreted “completed” in the context of the purpose of the clause, and found that the studio had met the deadline.
Mailer v. RKO Teleradio Pictures, Inc., 332 F.2d 747 (2d Cir. 1964).
Practice Resource:
• Corbin § 2 .20 (when the principal purpose of the parties becomes clear, further
interpretation should be guided thereby).

End of Document
§ 24.0 Interpretation of the Contract as a Whole

A word changes meaning when it becomes part of a sentence, the sentence when it becomes part of a paragraph.
CardioNet, Inc. v. Cigna Health Corp., 751 F.3d 165 (3d Cir. 2014). “… to discern the parties’ intent, aside from the
words of the contract, the court can also consider the conduct of the parties along with extrinsic evidence such as
‘the situation and relations of the parties, the subject matter of the transaction, preliminary negotiations and
statements made therein, usages of trade, and the course of dealing between the ties. In addition: “Long ago
we abandoned the rule that extrinsic evidence cannot change the plain meaning of a contract. We now recognize
the rule in the Restatement (Second) of Contracts that states the meaning of a contract ‘can almost never be plain
except in a co te t. Pillsbury was Pro Commer., LLC v. K & L Custom Farms, Inc., 2015 Iowa App. LEXIS 432
(2015).
A trial court focused on only one sentence in a contract that required the buyer to purchase a minimum of 100
products in a specified year and concluded that the buyer had breached by not meeting that requirement.
Emphasizing that contracts must be read as a whole, the court of appeals noted another part of the contract that
allowed for an alternate way to perform the contract if the buyer had not met the minimum standard. The buyer had
not breached the contract. Sure-Trip, Inc. v. Westinghouse Eng’g, 47 F.3d 526, 533–534 (2d Cir. 1995). See also,
Detroit Pub. Sch. v. Conn, 308 Mich. App. 234, 863 N.W.2d 373, 2014 Mich. App. LEXIS 2325, 201 L.R.R.M. 3683,
23 Wage & Hour Cas. 2d (BNA) 1544 (Mich. Ct. App. 2014) (citing the Corbin treatise, the court explained that
“contracts are to be interpreted and their legal effects determined as a whole.”).
While the meanings of words and sentences change when read in context, a word used in a contract in one sense
will have the same meaning throughout the contract unless the party advocating for varying meanings can point to
countervailing reasons. Two Farms Inc. v. Greenwich Ins. Co., 2015 U.S. App. LEXIS 17940 (2d Cir. N.Y. Oct. 16,
2015).
In deciding a choice of law question, the court in Lipman Bros. v. Apprise Software, Inc., 2015 U.S. Dist. LEXIS
95301 (E.D. Pa. 2015) interpreted whether a paragraph with the heading “Governing Law” was narrow (to cover
only contract claims) or broad (to cover extra-contractual claims). The first sentence of the paragraph (“This
Agreement shall be governed, construed, and enforced in accordance of [sic] the laws of the Commonwealth of
Pennsylvania, USA.”) was narrow. The second sentence was broad—though it appeared to be in the nature of a
forum selection clause (“Both parties agree to personal jurisdiction therein, and agree that any suit brought to
enforce this Agreement or based on this Agreement or the business relationship between the parties will be brought
in the closest applicable court to Bethlehem, Pennsylvania, USA.”). The court read the second sentence in
conjunction with the first and held that the parties intended the choice of law provision to be read broadly. The court
noted the parties did not include a provision, seen in some contracts, that headings should be ignored in
interpretation of the contract.
Clear and unambiguous words should not be ignored or treated as mere surplusage. Pac. Mkt. Int'l, LLC v. TCAM
Core Prop. Fund Operating LP, 2015 Wash. App. LEXIS 759 (2015). Nor do courts “assume that the language of
the contract was chosen carelessly,” Knopick v. UBS Fin. Servs., 2015 U.S. Dist. LEXIS 48657 (E.D.Pa. 2015). TCI
Courtyard, Inc. v. Wells Fargo Bank, N.A. (In re TCI Courtyard, Inc.), 591 Fed. Appx. 256, 2015 U.S. App. LEXIS
962 (5th Cir. Tex. 2015) (courts should avoid treating a contractual provision as redundant or as surplusage, and
that every provision should, if possible, be given effect). If there is more than one writing or record, all that relate to
the same transaction should be read as evidence of the same contract and interpreted as a whole. When a later
contract incorporates an earlier one, it need not repeat the matter contained in the earlier one—the agreements
Page 2 of 2
must be read as one. Gatling Ohio, LLC v. Allegheny Energy Supply Co., LLC, 2015-Ohio-5548, 2015 Ohio App.
LEXIS 5364 (Ohio Ct. App., Franklin County Dec. 31, 2015).
A contract provided, inter alia, that “[c]laims, disputes, and other matters in question arising out of or relating to this
Contract . shall … be subject to mediation as a condition precedent to arbitration or the institution of legal or
equitable proceedings by either party.” (PIP Contract § .10.1. But the contract also stated that “[b]y mutual
consent, the parties may endeavor to resolve their disputes by mediation . (Id. § .10. . The parties
subsequently deiputed whether mediation was mandatory, and the court held it “must strive to give effect to both
[sectio s . The only way to do so in this case is to hold that the specific and mandatory language of section
9.10.1 controls over the general and permissive language in section 9.10.3.” Since the contract required plaintiff to
submit its claim against PIP to mediation as a condition precedent to pursuing litigation, the court dismissed the
claim without prejudice. GenopsGroup LLC v. Public House Invs. LLC, 67 F. Supp. 3d 338, 2014 U.S. Dist. LEXIS
129195 (D.D.C. 2014).
Where an oil drilling rig and vessel were destroyed by a hurricane, the issue was the interpretation of the phrase,
“estimated residual value” for which the lessee would be liable. The court noted that the contract must be
interpreted as a whole and multiple writings interpreted together. An interpretation that affords a reasonable
meaning to all parts will prevail over one that leaves a portion of the agreement meaningless, inexplicable or
achieves a weird or whimsical result. Applying these and other generally accepted guides to interpretation, the court
concluded that “residual value” is “the amount expected to be obtained when a fixed asset is disposed of at the end
of its useful life” (also called “scrap” or “salvage” value). The lessee’s proposed interpretation was consistent with
various terms of the agreement, while the owner’s proferred interpretation was inconsistent with other terms and
suggested an absurd result that the destruction of the property had increased its value. The court reversed the trial
court’s judgment that had accepted the interpretation of the owner. Rowan Cos. v. Wilmington Trust Co., 305
S.W.3d 698 (Tex. App. 2009).
While the contract should be considered as a whole, Brady v. Grendene USA, Inc., 2015 U.S. Dist. LEXIS 72551
(S.D. Calif. 2015), echoed the general rule that the language of the contract’s recital, preamble or “whereas” clause
has less contractual significance that the rest of the contract. The court refused to consider the “whereas” clause in
interpreting the contract, explaining that “this statement is not a ‘term’ of the Settlement Agreement. Under New
York law, which governs the Settlement eeme t statements in ‘whereas’ clauses do not ‘create any right
beyond those arising from the operative terms of the oc me t. The court cited precedent holding that “[t]he
recitals in a contract form no part thereof, and at most indicate but the purposes and motives of the parties.” The
court noted that “whereas” clauses may be useful in assisting the court to interpret an ambiguous operative clause,
but there was no such ambiguity in this case.
Practice Resource:
• Corbin § 2 .21 (interpretation of the contract as a whole).

End of Document
§ 24.10 A Valid, Lawful, and Reasonable Interpretation Is Preferred

When a collective bargaining agreement could have been interpreted in two ways, one that would violate the Taft-
Hartley Act and the other that would not violate the Act, the Supreme Court of the United States cited Corbin on
Contracts as authority for the rule that ambiguously worded contracts should not be interpreted to render them
illegal where the language of the contract lends itself to an interpretation that is lawful and makes the agreement
enforceable. Walsh v. Schlecht, 429 U.S. 401, 408, 97 S. Ct. 679, 50 L. Ed. 2d 641 (1977). The application of this
rule or guide to interpretation applies only where the language is in doubt and allows a court to choose an equally
plausible lawful interpretation.
A party claimed it was not bound by a forum-selection clause in an offer to which it had manifested acceptance. The
offer was in the defendant’s standard terms and stated that the plaintiff “agrees” to such terms. The offer, however,
also stated that a purchase order would evidence acceptance and no purchase order was sent. The plaintiff’s
interpretation would limit the power of acceptance to the submission of a purchase order. The court viewed that
interpretation as “redundant.” By interpreting the language as not requiring a purchase order as the exclusive
method of acceptance, the court held that a contract containing the forum selection clause was formed by the
plaintiff’s other manifestation of acceptance, thereby providing a reasonable, lawful, and effective interpretation to
all the terms of the agreement. X Techs., Inc. v. Marvin Test Sys., 2010 U.S. Dist. LEXIS 55516 (W.D. Tex. June 7,
2010).
Where a law firm was deceived into paying $110,500 from its client trust account, it restored that amount from its
own funds before any claims were made by clients that the fund had been mismanaged. The firm sought coverage
for this loss under a professional liability policy that covered “claims” which the insurer viewed as “demands.” It
rejected the firm’s claim since no “demands” had been made. The firm, however, was required to meet professional
responsibility standards. Applying the rule favoring a lawful interpretation over a violation of ethical standards, the
court held that the “demand” that lawyers adhere to ethical standards was sufficient to give the term “demand” a
broader meaning under the policy. O’Brien & Wolf, L.L.P. v. Liberty Ins. Underwriters, Inc., 2012 U.S. Dist. LEXIS
109089 (D. Minn. Aug. 3, 20120).
Practice Resource:
• Corbin § 2 .22 (courts favor an interpretation that makes the agreement valid, lawful,
and reasonable).

End of Document
§ 24.11 Reconciling Conflicting Terms
[1] Words of General Description Yield to More Specific Words

Contract terms, whether they are general, specific, printed, typed, or handwritten should be reconciled as
consistent with each other whenever possible. Where a clause in a contract stated that covenant were
independent but another clause stated that they were conditions precedent to each of the party’s obligations,
the court cited the Corbin analysis noting that the more specific clause prevails. Pure Earth, Inc. v. Call, 2012
U.S. Dist. LEXIS 38178 (E.D. Pa. Mar. 21, 2012). Where bank contract documents seemed to be in conflict as
to whether the bank could batch and reorder customers' transactions so as to maximize overdraft charges, the
court cited the Corbin treatise that the more specific provision should govern. Glaske v. Indep. Bank Corp.,
2016 Mich. App. LEXIS 121 (Mich. Ct. App. Jan. 21, 2016).
Where reconciliation is not possible, specific terms are preferred because parties are more likely to focus their
attention and understanding on the more specific term. Baeshen v. Arcapita Bank B.S.C.(c) (In re Arcapita
Bank B.S.C.(c)), 520 B.R. 15, 2014 Bankr. LEXIS 4749, 60 Bankr. Ct. Dec. 79 (Bankr. S.D.N.Y. 2014) (citing
the Corbin treatise). An employment contract contained a clause stating that the employer would pay all of the
employee’s reasonable legal fees and expenses incurred in disputing or contesting the contract. Another clause
stated that if the employee was terminated for cause, the employer would have no further obligation to the
employee. The court concluded that the latter provision was more specific and controlled the former. The
employee was not entitled to payment of attorneys’ fees and other expenses. Astra USA, Inc. v. Bildman, 455
Mass. 116, 914 N.E.2d 36 (2009).
Exact or technical specifications will displace inconsistent general language describing a product or samples or
models of the product. UCC § 2- 1 . This is because the exact specifications probably claimed the dominant
intention of the parties. There is, however, no escape from the critical determination of the dominant intention of
the parties. If a purchase order contains exact specifications that are inconsistent with the actual specifications
of a prototype product tested and approved by the purchaser, a court may find that the dominant intention of the
parties is to produce and deliver product precisely in accordance with the prototype.
[2] Printed Terms Are Modified by Handwritten Terms

Long ago, a majority of contracts made in America and the world began to employ the standardized printed
form containing the boilerplate clauses favoring the party whose lawyers drafted the form. The paper purchase
order of the buyer and acknowledgment form of the seller continue to be exchanged, although electronic
contracting continues the huge growth that began in earnest in the last decade of the twentieth century. The
printed “standard” terms are designed for all contracting parties in general. If there are typed provisions filling
the blanks of such forms that are inconsistent with printed provisions, the typed provisions that typically claimed
the dominant attention of one or both parties should prevail. The same rationale supports the preference of
handwritten words or phrases over typewritten terms.
Practice Resources:
• Corbin § 2 .2 (words of general description yield to more specific words);
§ 2 .2 (printed terms are modified by handwritten terms).

Page 2 of 2
End of Document
§ 24.12 Courts Favor a “Construction” in the Public Interest

When a contract is “construed” in the public interest, a court is not interpreting the contract. Interpretation seeks the
meaning of the contract according to the intention of the parties. Construction of the contract in the public interest is
designed to give the contract a legal effect that is most beneficial to the public. Notwithstanding this important
distinction, it is common to see a statement that “interpretation” should be in the public interest. Restatement
(Second) of Contracts § 20 is captioned, “Interpretation Favoring the Public.” Comment a to this section states, “It
is a rule of legal effect as well as interpretation, and rests more on considerations of public policy than on the
probable intention of the parties.” From this somewhat ambiguous statement, it can be gleaned that the
Restatement views this guideline more as one of construction than interpretation.
One of the more recent illustrations is the favorable view of arbitration as an alternate device for dispute resolution
found in the courts. Ambiguities in arbitration clauses are often resolved in favor of enforcing the arbitration clause
because of the public policy favoring that process. See Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52, 62–
64, 115 S. Ct. 1212, 131 L. Ed. 2d 76 (1995).
Practice Resource:
• Corbin § 2 .2 (courts favor a construction in the public interest).

End of Document
§ 24.13 Incorporation of Statutes by Implication

Contracts are construed to incorporate relevant laws in force at the time a contract is made. Ocean View Towers
Assocs. v. United States, 88 Fed. Cl. 169 (2009); Tackett v. M&G Polymers USA, LLC, 2016 U.S. App. LEXIS 998,
2016 FED App. 0014P (6th Cir.) (6th Cir. 2016) (citing the Corbin treatise); I.E.E. Int'l Elecs. & Eng'g, S.A. v. TK
Holdings Inc., 2015 U.S. Dist. LEXIS 97345 (E.D. Mich. 2015). The laws are automatically part of the contract as if
they had been expressly incorporated. Some statutes are expressly designed to incorporate terms in a contract
unless the parties otherwise agree. Thus, implied warranties of merchantability and fitness for a particular purpose
are deliberately designed to be incorporated into contracts for the sale of goods absent contrary agreement. UCC
§§ 2- 1 2-315. Other statutes may not expressly state their automatic inclusion but their purpose and design are
clearly intended to establish certain standards in relevant contracts. Thus, a contract to build a house incorporates
local and regional zoning laws and building codes.
An agreement may expressly incorporate statutory terms. A 1991 agreement to pay royalties on a patent “until the
patent expires” would have ended on May 22, 2007. A subsequent change in the patent law extended the duration
until May 30, 2009. The court held that the parties had intended to incorporate subsequent changes in the patent
law, at least as to the expiration date of the patent. BJM, Inc. v. Melport Corp., 18 F. Supp. 2d. 704 (W.D. Ky. 1998).
Practice Resource:
• Corbin § 2 .2 (contracts that incorporate statutes by implication).

End of Document
§ 24.14 Maxims of Interpretation
[1] Interpretation Against the Party Who Chose the Words

The party responsible for drafting the contract is more likely to be concerned about its own interests than the
interests of the other party. Moreover, to the extent the language of the contract is ambiguous or doubtful, the
drafter is typically responsible for the lack of clarity. Thus, in cases of doubt where other rules and guides to
interpretation fail to provide a satisfactory basis for choosing between two interpretations, the court will favor an
interpretation against the party who chose the words—contra proferentem.
It is important to emphasize the role of this maxim as nothing more than a “tie breaker,” a “last resort,” used
when other aids to interpretation have failed. See, e.g., Econ. Premier Assur. Co. v. Western Nat’l Mut. Ins. Co.,
839 N.W.2d 749 (Minn. Ct. App. 2013); Calogero v. Horizon/CMS Healthcare Corp., 2003 U.S. Dist. LEXIS
6989 (N.D. Ill. Apr. 24, 2003). When the contract is between sophisticated parties, courts may find the
application of contra proferentem to be inappropriate. Certainly, if the parties have discussed and negotiated a
clause that is later disputed, there may be no reason to fault a party who has simply performed the mechanical
task of writing the words resulting from such a negotiation.
There are innumerable illustrations of the application of the maxim. For instance, when a state highway
construction contract was terminated for convenience, the contractor argued that it was entitled to the actual
costs of idled equipment rather than the rental rates awarded by the state. Citing Corbin on Contracts, the court
held that, because the state had drafted the contract, no deference should be given to its narrow interpretation,
particularly since the clause allowed for an alternative reasonable interpretation. Quality Asphalt Paving v.
State, 71 P.3d 865 (Alaska 2003).
[2] The Meaning of an Unclear Word May Be Gleaned by Reference to Associated Words
Noscitur a sociis may be translated as “known by the company it keeps” or “known by its neighbors.” When a
word is unclear, its meaning may be gleaned by reference to other words in the contract associated with it. A
lease placed the duty of repairing the facility on the lessee except for damages caused by “fire, the elements,
floods, tornadoes … or by any act of God” where the duty was on the lessor. When damage was caused to the
facility by exposure to normal weather conditions, the court interpreted “elements” in the lease by reference to
the words associated with it. As used in the lease, the court held that “elements” referred to sudden,
unexpected, or unusual action of the elements, as colored by the associated terms “tornadoes,” “floods,” and
“other acts of God.” Sky Harbor Air Service v. Airport Authority of Omaha, 174 Neb. 243, 117 N.W.2d 383
(1962).
[3] The Meaning of a General Term Is Limited by Accompanying Specific Words

Ejusdem generis translates as of the same kind, class, or nature. It is logical to assume that, when words with
specific meanings are followed by general words, the general words should be interpreted to apply to the same
kinds of things or parties suggested by the specific words.
A guaranty agreement stated that the extension of time for payment or the renewal of accounts or extension of
time for performance “or any other indulgence” could be granted to the principal debtor without notice to the
guarantors. When the creditor entered into a stipulation in a bankruptcy proceeding in full satisfaction of the
principal debtor’s obligation, the guarantors claimed that they were discharged under the usual rule that full
satisfaction of the debt operates to discharge both the principal debtor and the guarantors. The creditor,
however, claimed that the language in the guaranty agreement, “or any other indulgence” included full
settlement with the principal debtor and reserved the liability of the guarantors. The court disagreed, holding
Page 2 of 2
that “or any other indulgence” was a general phrase following specific terms dealing with the time, method, and
manner of accounting for installments as they became due. Under the rule of ejusdem generis, the general
language did not extend to a settlement of the debt with the principal debtor. General Elec. Credit Corp. v.
Larson, 387 N.W.2d 734 (N.D. 1986).
To avoid an interpretation limiting a general term to a meaning of the same kind as specific terms, such a
clause may be prefaced by a phrase such as “including but not limited to.” In a well-known case where that
phrase was used in a clause listing acceptable excuses for delays in performance, the court rejected the
application of ejusdem generis and allowed the seller to rely on the general common law doctrine of commercial
impracticability to justify its delays in delivering jet airplanes. Eastern Air Lines, Inc. v. McDonnell Douglas
Corp., 532 F.2d 957 (5th Cir. 1976).
A law firm’s professional liability insurer determined that a claim relating to fee bill collection was not
encompassed by the firm’s policy, which required indemnification for claims “arising out of the rendering of or
failure to render Professional Legal Services.” The policy defined “Professional Legal Services” by using the
word “including” and then listing various enumerated tasks that required specialized legal skills. Non-
specialized tasks, such as billing and fee-setting, did not fall under the definition of “Professional Legal
Services.” The canon ejusdem generis suggested that any non-enumerated professional legal services should
be interpreted as having a reasonable degree of similarity to the items mentioned in the enumerated list.
However, the policy also used the phrase “arising out of,” which is interpreted to be “but for” causation. Since
the client’s claims had a “causal connection or relation” to the provision of professional legal services, the court
found the insurer had a duty to defend. Shamoun & Norman, LLP v. Ironshore Indem., Inc., 56 F. Supp. 3d 840,
2014 U.S. Dist. LEXIS 152803 (N.D. Tex. 2014).
[4] When Specific Items of a Larger Class Have Been Enumerated, Other Items in the Class Not
Mentioned Will Be Excluded
Expressio unius est exclusio alterius means “the expression of one is the exclusion of the other.” The maxim
suggests that, where the parties have listed several items of a larger class, they presumably intended to
exclude other similar items that have not been listed. When, for example, a lease expressly permitted the
lessee to make certain interior alterations of the premises, the court applied the maxim in support of its
interpretation that the lease did not permit the lessee to make other exterior alterations. Two Guys from
Harrison-N.Y., Inc. v. S.F.R. Realty Associates, 63 N.Y.2d 396, 472 N.E.2d 315 (1984). Again, language
expressly stating a different intention will avoid the application of this maxim.
Practice Resources:
• Corbin § 2 .2 (interpretation against the party who chose the contract words);
§ 2 .2 (interpretation maxims).

End of Document
§ 24.15 A Contract Is Not Invalid for Indefiniteness Simply Because It Fails to

State a Duration
A contract is not invalid for indefiniteness simply because it fails to state a duration. The subject matter or
surrounding circumstances may assist the court in determining the parties’ intention as to duration. Thus, a
commercial contract may be interpreted to permit a party sufficient time under a contract to recoup its investment.
It is often stated that a contract without a stated duration is effective for a reasonable time. UCC § 2- 0 1 inserts a
reasonable time for the shipment or delivery of goods or other action under a contract for the sale of goods.
Contracts for successive performances of indefinite duration under the UCC are effective for a reasonable time, but
may be terminated by either party. UCC § 2- 0 2 .
Beyond the UCC, there are many cases holding that the absence of a duration term allows either party to terminate
the contract at will with notice to the other party. Perhaps the most famous case involving the absence of a time for
performance involved the 1881 contract under which Dr. Lawrence surrendered the “secret formula” for “Listerine”
to the Warner Lambert Company in exchange for the monthly payment to Lawrence, his heirs or assigns of $20
(later reduced to $6) for every gross of Listerine manufactured or sold. By 1905, the formula was no longer “secret”
and by 1931 it had been published in medical journals. In 1956, the manufacturer sought a declaratory judgment
that it was no longer required to pay royalties since a “reasonable time” had expired and the “secret” was out.
Competitors could use the formula without paying royalties. The court held that the royalty payments had to
continue because the contract provided that the royalty must be paid so long as the product was manufactured and
sold and made no reference to whether the formula remained secret. Warner-Lambert Pharmaceutical Co. v. John
J. Reynolds, Inc., 178 F. Supp. 655 (D.N.Y. 1959), aff’d, 280 F.2d 197 (2d Cir. 1960).
Practice Resource:
• Corbin § 2 .2 (contracts that do not state a time limit).

End of Document
§ 24.16 Are Questions of Interpretation Questions of Fact or Questions of

Law?
The notion that questions of fact are for the jury while questions of law are for the judge is a false dichotomy.
Questions of interpretation are questions of fact, which are characterized as questions of “law” only because the
judge decides them. Earlier courts distrusted juries and modern courts will characterize questions of interpretation
as questions of law to preserve judicial review that would be lost if they were questions of fact. When the evidence
is so clear that reasonable minds could not differ over the meaning of the terms, the question of interpretation is for
the court. Metro. Dist. Comm'n v. Conn. Res. Recovery Auth., 130 Conn. App. 132, 2011 Conn. App. LEXIS 386,
22 A.3d 651 (Conn. App. Ct. 2011); Cradic v. McCoy Motors, Inc., 2014 Tenn. App. LEXIS 671 (Tenn. Ct. App. Oct.
20, 2014). There is nothing for the jury to decide. Keith v. Jackson, 2013 Tenn. App. LEXIS 120 (Feb. 22, 2013). If
the interpretation depends on a choice between reasonable inferences to be drawn from the evidence, the question
should be decided by a jury. Wells Real Estate Inv. Trust II, Inc. v. Chardon/Hato Rey P’ship, S.E., 615 F.3d 45 (1st
Cir. 2010).
Where an employment agreement awarded the plaintiff “ownership interests” in the corporation if she met a certain
sales target, the court rejected the defendant’s claim that “ownership” was subject to different interpretations. Since
“ownership” necessarily referred to ownership in the corporation, it referred to stock. Citing Corbin, the court noted
that where the contract language is definitive, the contractual commitments intended by the parties is a question of
law. Datto Inc. v. Braband, 856 F. Supp. 2d 354 (D. Conn. 2012).
When the interpretation process is completed and the only remaining question is the legal effect of the interpreted
words or conduct, the question is one of judicial “construction” and that is exclusively the function of a court.
Practice Resource:
• Corbin § 2 . 0 (is interpretation a question of fact or law?)

End of Document
§ 24.1 “Standards” of Interpretation

Rules, guidelines, maxims, or standards of interpretation cannot be applied mechanically to arrive at a proper
determination of the meaning the parties attributed to their expressions of agreement. The objective evidence of the
meaning that the parties themselves intended is relevant along with certain evidence of meaning that would be
imputed by a reasonable third party. It is important to determine whether one party was or should have been aware
of the meaning intended by the other party. Some evidence will be entitled to greater weight because it is more
credible than other evidence. Trade usage and course of dealing may be of considerable assistance in the
interpretation process, but they should not overcome other compelling evidence of the parties’ intentions.
Whenever language appears so plain and clear on its face that it does not suggest any ambiguity, the interpreter
must remember that it is plain and clear to the interpreter based on his or her background, knowledge, and general
understanding. Interpretation, however, requires the court to discover the meaning of words and conduct as the
parties apparently intended them. To achieve that result, courts must place themselves in the position of the parties
using their vernacular in the context of their trade or industry, their region, and with their backgrounds under all of
the other surrounding circumstances. The greater the context in which interpretation is pursued, the closer a court
will come to the lofty goal of ascertaining the meaning of the parties’ expressions.
Practice Resource:
• Corbin § 2 . 1 (“standards” of interpretation).

End of Document
§ 24.1 Courts Will Review the Fairness of Adhesion Contract Terms

All manner of “contracts of adhesion,” where a party has no reasonable choice but to adhere to the terms “dictated”
by the stronger party, are reviewed for fairness. Courts review adhesion contracts for fairness and sometimes
refuse to enforce those adhesion terms that are demonstrably unfair to the stuck party. The theory is related to the
contractual principle that a choice between two interpretations that are otherwise equal will be resolved by
“construing” the contract against the drafter (contra proferentem) since the drafter controlled and wrote the original
language and should assume the risk of any doubts as to the meaning of such language.
A contract of adhesion may satisfy the procedural element of unconscionability, but a contract or term will not be
unenforceable simply because a contract is deemed to be a contract of adhesion. Nino v. Jewelry Exchange, Inc.,
609 F.3d 191 (3d Cir. 2010). In Bullock v. Foulke Mgmt. Corp., 2015 U.S. Dist. LEXIS 146592 (E.D. Pa. 2015),
Bullock signed a total of six purchase or lease agreements with the defendant car dealership over the course of two
months containing arbitration provisions. She sued for fraud and violations of consumer statutes, and the court
dismissed the action on the basis of the arbitration provisions. The six agreements appeared to constitute contracts
of adhesion (they were proffered on standardized printed forms on a take-it-or-leave-it basis and without
negotiation), but “a contract of adhesion does not constitute a procedurally unconscionable contract per se.” The
court found that “[t]he degree of procedural unconscionability surrounding the six agreements in this case is
underwhelming.” The agreements each were contained in a single page, and the arbitration provisions were in bold
and capital letters. Moreover, the arbitration language appeared directly above the customer’s signature line, and it
was not complex. The court conceded that Bullock’s dealings with the car dealership “may have constituted a
harrowing experience for her” but “[t]his alone … does not amount to procedural unconscionability.” She agreed to a
conspicuous arbitration provision six separate times within two months and “fails to explain how her consent to the
arbitration provision was made unknowingly or involuntarily.”
Cases where adhesion analysis has been employed to review contract terms include disputes involving due-on-sale
clauses; mortgage lender requirements of noninterest bearing escrow accounts; clauses exculpating liability for
negligence; dragnet clauses and allocation of payments provisions in secured transactions governed by Article 9 of
the Uniform Commercial Code or state mortgage law; provisions authorizing a secured creditor to break and enter
into the premises of the debtor to make repossession; insurance contracts; contracts of employment; bills of lading;
and choice of law and choice of forum provisions.
Practice Resource:
• Corbin § 2 .2 - (Courts Will Review the Fairness of Adhesion Contract Terms).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 25 THE “PAROL EVIDENCE RULE”
CHAPTER 25 THE “PAROL EVIDENCE RULE”

the subject matter.

End of Document
§ 25.01 The Parol Evidence Rule Is a Rule of Substantive Contract Law, Not a
Rule of Evidence
[1] The Parol Evidence Rule Applies When a Party Seeks to Introduce Evidence of a Prior Agreement
That Would Vary or Contradict the Terms of a Later Writing
Parties to a contract typically discuss and negotiate the terms of the contract prior to its formation and the
creation of a writing evidencing the contract. After the writing is drafted and signed, one of the parties may claim
that the agreement should be interpreted to contain a prior agreement that does not appear in the writing. The
parol evidence rule is applied to determine whether evidence of such an alleged prior understanding is
admissible.
The “parol evidence rule” may be stated as follows:
When parties have made a contract that is expressed in a writing that they intend to be the final, complete,
and exclusive statement of the contract, evidence of any antecedent agreements, understandings, or
negotiations, parol or otherwise, will not be admitted into evidence for the purpose of varying or
contradicting the writing.
An agreement memorialized the purchase of a pub in exchange for one promissory note for $200,000, which
had been paid in full. The appellants claimed that there was an outstanding balance owed of $85,000. The
agreement also provided that “this agreement and the schedules and exhibits hereto and the ancillary
documents executed hereunder set forth the entire agreement and understanding supersede and cancel any
and all prior discussions, correspondence, agreements, or understandings (whether oral or written) between the
parties hereto with respect to such matters.” The court cited this treatise in stating:
When two parties have made a contract and have expressed it in a writing to which they have both
assented as the complete and accurate integration of that contract, evidence, whether parol or otherwise,
of antecedent understandings and negotiations will not be admitted for the purpose of varying or
contradicting the writing.
Hmeidan v. Zaid Rawahneh, 196 Ohio App. 3d 10, 2011-Ohio-6149, 961 N.E.2d 1224 (5th Dist.).
At the outset, it is important to emphasize that the rule is said to apply only to alleged antecedent (“prior or
contemporaneous”) understandings. Bennett v. Skyline Corp., 2015 U.S. Dist. LEXIS 46959 (N.D. W.Va. 2015)
(parol evidence rule has nothing to do with purported post-formation agreements). The elusive term,
“contemporaneous,” however, should not be viewed as applying to any agreement or understanding after the
writing is executed. Much of the mystery surrounding the parol evidence rule, therefore, is substantially eroded
by Professor Corbin’s insightful statement of a fundamental rule of substantive contract law: “Today may control
the effect of what happened yesterday; but what happened yesterday cannot change the effect of what
happened today.” Thus, the parol evidence rule has no application to agreements made subsequent to the
parties’ execution of a writing evidencing their contract, regardless of how complete and exclusive that writing
may be. Butcher v. Dravo Corp., 2009 U.S. Dist. LEXIS 25128 (W.D. Pa. Mar. 25, 2009) (quoting Murray on
Contracts § .
If the parties’ negotiations arrive at an agreement on certain terms but they form a subsequent contract
containing different or additional terms that they intend to be the final expression of their agreement, that final
expression of agreement must prevail. This is not a statement of the parol evidence rule. It is a basic rule of
substantive contract law that is necessary to carry out the intention of the parties. That basic rule would apply in
any of the following situations:
(1) both expressions of agreement are oral;
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(2) the first expression is written and the second is oral;

(3) both expressions are written;
(4) the first is oral and the second is written.
The parol evidence rule, however, would apply only in situations (3) and (4) because the final expression is
written. It applies only when a party seeks to introduce evidence of a prior agreement that would vary or
contradict the terms of a later writing.
When parties have gone to the trouble of reducing their agreement to a writing that they intend as the final and
complete statement of their agreement, the rule protects the written expression as a superior form of evidence
not subject to faulty recollection by the testimony of witnesses. As illustrated by (3) and (4), however, the rule is
nothing more than a subset of the rule of substantive law that the parties’ later agreement prevails over an
earlier agreement because that is their manifested intention. Thus, the title, “parol evidence rule,” is a
misnomer.
[2] The Rule Is Not a Rule of Evidence

The term “parol evidence rule” is highly inaccurate. The “rule” is not limited to “parol” (oral) statements, and it is
not a rule of evidence. The rule applies to prior written as well as prior oral statements that would vary or
contradict the final written statement. A more accurate caption might be the “parol and written evidence rule,”
but that silly title would still be inaccurate because it is not a rule of “evidence.” Again, it is an application of the
basic rule of substantive law that allows parties to discharge prior agreements by entering into subsequent
agreements. While many cases state that the parol evidence rule is a rule of substantive law, the operative
effects of that distinction are not always clearly understood. See the concurring opinion in R.B.S. v. K.M.S., 58
So. 3d 795 (Ala. Civ. App. 2010). In Domino’s Pizza LLC v. Deak, 2010 U.S. App. LEXIS 11388 (3d Cir. June
4, 2010), the court noted that the “parol evidence rule invokes state substantive law, not federal evidentiary
rules.”
As selections (1) and (2) reveal, the parties can certainly intend that a subsequent (final) oral agreement will
discharge any conflicting oral or written prior agreements or understandings, but the parol evidence rule would
have no application to such a final and complete oral agreement. The basic rule of substantive law would,
however, operate to discharge the earlier agreements, although the final oral agreement itself would have to be
proved by parol evidence. As noted in the next section, whether the statute of frauds applies to a particular oral
agreement is a different issue.
[3] Whether or Not the Rule Applies Is a Question of Fact

Determining whether parties intended a written expression to be the final and/or complete expression of their
agreement that discharges prior understandings is a question of fact. The name, “parol evidence rule,”
however, suggests that it is a question of law because, as a “rule of evidence,” it will be decided exclusively by
courts rather than jurors and it will be preserved for judicial review by appellate courts This serves the
underlying purpose of the rule to remove the fact issue from juries who could not be trusted to afford the parties’
final written statement of agreement the superior evidentiary status it deserves as a permanent record over
faulty human recollection of prior oral agreements. That rationale, however, suffers from the fact that, again, the
rule applies not only to alleged prior oral agreements but to prior written agreements that are as “permanent” as
the final written expression of agreement.
Notwithstanding the fact that there is arguably no need for such a separate “rule”—which is not limited to parol,
is not a rule of evidence, and deals with questions of fact under the guise of questions of law to prevent its
submission to juries—it has spawned and will continued to spawn innumerable cases under its traditional
name, and this will continue to inspire considerable confusion. It is, therefore, critically important to understand
where the rule applies, how courts apply it, and, even more important, the situations to which it does not apply.
Practice Resource:
• Corbin § 2 .2 (the Corbin Thesis).
Page 3 of 3

End of Document
§ 25.02 There Must Be an Otherwise Enforceable Contract in “Writing”
[1] The Parol Evidence Rule Has No Application if There Is No Writing Evidencing the Contract
Simply because a writing appears to be a detailed statement of the agreement of the named parties, such a
document is not self-fulfilling. The parties must still intend the document to evidence their contract. If Ames
drafts a written agreement stating that Barnes has agreed to sell Barnes’s property to Ames for $100,000, if the
document is not delivered to Barnes but Barnes somehow procures it, parol evidence is admissible to prove
that no contract exists. If Ames had delivered the document to Barnes, the document is only an offer until
Barnes assents to it. Barnes’s oral assent may be proven, and a court could be convinced that the parties
intended the writing to be the exclusive evidence of their agreement; this would preclude evidence of any prior
agreement or understanding concerning the purchase and sale of Ames’s property to Barnes.
If there is no writing evidencing the contract, the parol evidence rule has no application. No particular form of
writing is required. The writing may appear in one document or in several documents, including letters, emails,
and the like. A mere receipt that does not state the terms of the contract will not be sufficient, but an invoice
stating all of the essential terms of an agreement may qualify as a statement the parties intend as a final
statement of the terms stated. Before the parol evidence rule is applied, the plaintiff must show that the parties
have executed an integrated document that purports to express their terms. Archer Daniels Midland Co. v.
Soucie, 2009 U.S. Dist. LEXIS 65262 (D. Neb. July 28, 2009).
The statute of frauds generally requires that there is a writing, but it may be satisfied by other evidence. A
writing that will activate the parol evidence rule will have to be intended by the parties to the final or complete
statement of their contract—an “integrated” writing. The statute of frauds may be satisfied by a writing that does
not include certain terms and from which a court could not conclude the parties intended the writing to be final
as to any terms, much less a complete and exclusive statement of the parties’ agreement.
[2] Oral Proof of Misrepresentation, Duress, and Fraud Not Precluded

A contract document signed under duress or induced by fraud will render the contract evidenced by such a
document either void or voidable. See Irwin Indus. Tool Co. v. Worthington Cylinders Wis., LLC, 2009 U.S. Dist.
LEXIS 22367 (W.D.N.C. Mar. 6, 2009) (evidence of fraudulent inducement is admissible regardless of the parol
evidence rule). the rule limiting court review to the four corners of the contractual document does not apply
in a case such as this, where one party alleges that something within those four corners was surreptitiously
added by the other party after the fact, with the deceptive purpose of altering the agreement, and the first party
would have had no way of knowing about the alteration. In such a situation, one party has not assented to the
entire agreement. Contractual duties are discharged for such te tio s. St. Clair Marine Salvage, Inc. v.
Bulgarelli, 2015 FED App. 0158P, 2015 U.S. App. LEXIS 12622 (2015). But the contract actually must have
been induced by the fraud—a misrepresentation made after contract formation is not actionable. Court Plaza
Assocs. v. Wausau Tile, Inc., 2015 N.J. Super. Unpub. LEXIS 2790 (2015).
An illegal bargain will not be enforceable regardless of the parties’ intention that their document is complete.
What appears to be a final expression of agreement may have been obtained by accident. Parol evidence is
admissible in all of these situations to avoid enforcement of the contract. When the most complete writing
evidences a contract under which Ames has agreed to sell and Barnes has agreed to buy Blueacre, clear and
convincing evidence will be admissible to establish that the writing was mistaken. A court will reform the writing
to state the parties’ true intention to buy and sell Blackacre.
Lessor and lessee executed a lease that included an integration clause, but the lessee claimed the lease was
subsequently orally modified to reflect the fact that the payments were being made to purchase, not lease, the
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property. In the litigation that followed, the court cited the Corbin treatise and held that the parol evidence rule
did not bar lessee’s claims for fraud and subsequent oral modification. Martin v. Ort, 2016 Me. Super. LEXIS 15
(Me. Super. Ct. Feb. 3, 2016).
Some courts pay lip service to the principle that an integration clause will not preclude the introduction of
extrinsic evidence to establish fraud in the inducement, but nevertheless hold that the fraud exception to the
parol evidence rule is not applicable where the parties have a well-drafted integration clause that disavows
representations and promises not contained within the four corners of the document. Finley v. Mole, 2015 U.S.
Dist. LEXIS 42669 (D. V.I. 2015). In Finley, the court explained: “… in affixing his signature, Finley disclaimed
reliance on any ‘promise, inducement, representation, or other statement made in connection with’ the Finley-
Mole eeme t. it is ‘unfathomable’ that Finley, ‘[who] intended to rely on extracontractual representations,
would agree’ to such disclaimers.” See also, Lorenz, et al. v. Jeannot, et al., 2015 Mich. App. LEXIS 883 (Mich.
2015) (reliance on an oral promise made prior to entering a fully integrated agreement is per se unreasonable).
[3] Evidence That a Written Contract is Subject to an Oral Condition

The admissibility of oral testimony establishing a condition precedent to an otherwise integrated agreement is
an exception to the parol evidence rule if the oral testimony does not contradict the express terms of such
written agreement. LifeTree Trading PTE., LTD. v. Washakie Renewable Energy, LLC, 2015 U.S. Dist. LEXIS
84125 (S.D.N.Y. 2015).
If Ames and Barnes both sign a writing that contains a complete statement of their agreement to buy and sell
Blackacre, but Barnes later claims that, before signing, they had orally agreed that the sale was conditioned on
a certain stock traded on a public exchange reaching a certain price by a certain date, courts may admit this
evidence on the footing that no contract existed if the condition did not occur. See Pym v. Campbell, 6 El. & Bl.
370 (1856). The rationale is faulty, however, since the parties have agreed on all material terms. No further
manifestation of mutual assent is contemplated. There is a condition precedent to Barnes’s duty over which he
had no control, but that is not different from innumerable formed contracts where one or both duties will not be
activated until a conditioning event occurs. The admission of that evidence varies the terms of the writing.
If Barnes had signed the contract on condition that he would have to later manifest his final assent before the
contract became effective, the admission of the oral condition could be justified as a condition precedent to the
formation of the contract; the admission does not violate the parol evidence rule in varying the terms of the
writing.
Regardless of a court’s rationale, however, evidence of the oral condition should be admitted since even
prudent persons may fail to include such a condition in their writing. It would do more harm than good to
preclude the admission of such evidence, if believed, by insisting on a technical application of the parol
evidence rule, which hardly deserves to be viewed as a sacred rule of contract law.
[4] The “Stranger Exception”—The Inapplicability of the Parol Evidence Rule to Third Parties
Many courts adopt what is often called “the stranger exception” or the “stranger rule,” that a third party may not
invoke the parol evidence rule in connection with a contract to which it was not a signatory. In re Haines, 528
B.R. 912, 2015 Bankr. LEXIS 1278 (Bankr. W.D. Mo. 2015) (court invokes “stranger” exception, citing the
Corbin treatise).
Practice Resources:
• Corbin § 2 .2 (the Corbin Thesis); § 2 .1 (extrinsic evidence of mistake);
§ 2 .20 (fraud, illegality and other disqualifying matters); § 2 .21 (proof that a
contract was not intended to be enforceable); § 2 .2 (extrinsic proof of oral
conditions); § 2 .2 (“Stranger Exception”).

End of Document
§ 25.03 The Concept of “Integration”
[1] Partial and Full Integration

Where parties reduce their agreement to writing and intend that writing to be their final expression of at least
some of the terms of their agreement, the agreement is deemed to be “partially integrated.” See Restatement
(Second) of Contracts §§ 20 and 210. Agreements prior to the writing that are inconsistent with the terms of a
partially integrated writing are not admitted into evidence.
If the parties intend their writing to be not only final as to some terms but a complete and exclusive statement of
all of the terms to which they intend to be bound under this contract, the writing the agreement is then deemed
to be “fully integrated.” Such a writing precludes evidence of not only inconsistent terms that would contradict
the terms of the writing, it precludes non-contradictory consistent additional terms that the parties intend to
discharge when the writing is fully integrated.
Restatement (Second) of Contracts § 21 illus. 4 discusses a contract for the sale of land, the hotel on the
land, and the furniture in the hotel. The drafted contract does not mention personal property. The illustration
concludes that, if the writing is deemed to be partially integrated only as to real property, evidence of the
agreement concerning the furniture is admissible. If, however, the writing is deemed to state the complete
agreement of the parties, it is fully integrated, and the evidence of the furniture agreement is not admissible.
While this illustration and others assist an understanding of the effects of determining whether a writing is
intended to be a partial or full integration of the underlying contract, it does attempt to deal with the essential
question it raises.
[2] “Integration” Under the UCC

Unfortunately, the term “integration” is a conclusion that is analytically useless. The drafters of the Restatement
(Second) of Contracts admit that they continued its use in the analysis of the parol evidence rule only because
they could find no better term. 68 ALI Proceedings, 446 (1971). The Uniform Commercial Code (UCC) avoids
the term “integration” entirely by referring to an intended “final expression” of terms that may not be
contradicted by evidence of a prior agreement, replacing “partial integration.” If, however, the parties intend
their writing to be the “complete and exclusive statement of the terms of their agreement” (“fully integrated”),
evidence of even consistent additional terms is excluded. UCC § 2-202. The UCC version of the parol evidence
rule is further explored later in this chapter.
[3] The Rule Is Not a Rule of Interpretation

Upon determining that a writing is either a partial integration because it contains final terms precluding
inconsistent prior terms, or the writing is fully integrated because it was intended as a complete as well as final
statement of the parties agreement, it will still be necessary to admit extrinsic evidence to interpret those terms.
Restatement (Second) of Contracts § 21 cmt. a, suggests the parol evidence rule is not a rule of
interpretation; rather, “it defines the subject matter of interpretation.” The parol evidence rule “is not a rule of
interpretation, but rather it defines the subject matter of interpretation.” Wachovia Bank, N.A. v. Dresdner (In re
Brookland Park Plaza, LLC), 2009 Bankr. LEXIS 3241, at *18 n.5 (E.D. Va. Oct. 13, 2009).
Practice Resources:
• Corbin § 2 . (partial integration and collateral contracts); § 2 .1 (dispensing
with ambiguity); § 2 .2 (interpretation, integration, and the parol evidence rule).
Page 2 of 2

End of Document
§ 25.04 Determining Whether a Writing Is Fully or Partially Integrated

A parol evidence rule issue arises in an action on a written contract when a party seeks to introduce evidence of
agreements that occurred prior to the writing. The trial judge must decide whether the writing is integrated and
whether it is “partially” or “fully integrated.” How a judge makes this determination, therefore, is a critical inquiry.
A simple response is that the judge determines whether the parties intended their writing to be a final or complete
expression of their agreement. Such a simple response to a question of intention, however, has been buried under
heaps of manufactured complexity. Various tests have been devised to guide courts in the application of the rule.
Before a judge can apply any test, however, the judge must be aware of not only the writing evidencing the
contract, but the proffered extrinsic evidence as well.
A judge cannot decide whether parties intended a writing to be partially or fully integrated without extrinsic
evidence. The question of “integration” is a question of fact-a question of the intention of the parties. Unless the
parties have included an “integration” (“merger”) clause in their written contract expressly manifesting their intent
that the writing contains their entire agreement, whether their writing is final and complete may be demonstrated by
extrinsic evidence to show the circumstances under which the contract was made and the purpose of the parties in
executing the writing. City of Grantsville v. Redevelopment Agency of Tooele City, 2010 UT 38, 233 P.3d 461.
This preliminary determination allows the judge to consider all relevant evidence, including the evidence of alleged
agreements prior to the writing that one party is claiming to be part of the contract. Thus, to determine the
preliminary question of integration, the judge makes a provisional examination of the same evidence that he or she
will later decide to either admit into evidence that the jury will consider or exclude from the jury. If the judge is sitting
without a jury, the judge will make the same preliminary determination of “integration” by comparing the evidence of
prior agreements with the writing. If the judge decides that the writing is integrated with respect to such evidence,
the judge will then exclude it from consideration under the parol evidence rule. It is important to consider the “tests”
judges use in making this determination.
If the question of “integration” is a question of intention, certain terms are often missing in written expressions of
agreement. The parties may have expressed nothing about the time for performance or the place of performance.
In a contract for the sale of goods, a statute such as the UCC may supply such an omitted term, or a court may
supply it without the aid of a statute.
A prevailing view indicates that judicial gap-fillers such as a “reasonable time” should not be viewed as constituting
part of the “integration” since the parties obviously had expressed no intention concerning such terms. Restatement
(Second) of Contracts § 21 suggests a different approach, however. Illustration 3 describes a contract with no set
time for performance, although the parties had orally agreed on an October 1 completion date. The illustration
suggests that the parties may have intended their agreement to be “fully integrated” notwithstanding the missing
term, which is then supplied as a “reasonable time” that would displace the parties’ oral agreement. The illustration
does not explain how an agreement with such a missing term could be complete and exclusive (fully integrated) as
opposed to being only partially integrated. See also, In re Baptist Home of Phila., 525 B.R. 236, 2014 Bankr. LEXIS
5195 (Bankr. E.D. Pa. 2014), where the court, citing the Corbin treatise, wrote: “[i]n determining whether the
contract is fully or only partially integrated, courts consider whether the contract contains a merger or integration
clause, the length and detail of the contract, the formality of the setting, and whether the contract is a form.”
Page 2 of 2
Practice Resource:
• Corbin § 2 .22 (extrinsic proof to overcome presumptions and inferences).

End of Document
§ 25.05 Effect of Merger Clauses

The fundamental issue in parol evidence cases is whether the parties intended the written expression of their
agreement to constitute their final or complete and exclusive statement. The parties themselves may expressly
state their intention in a clause such as the following:
This agreement contains the whole agreement between the Seller and Buyer and there are no other terms,
obligations, covenants, representations, statements or conditions, oral or otherwise, of any kind whatsoever.
Betz Laboratories, Inc. v. Hines, 647 F.2d 402, 403 (3d Cir. 1981). The court characterized this as a “standardized”
clause.
A lease stated, “This Agreement constitutes the entire agreement between the parties and all representations
relating to the License Area and to this Agreement are contained herein.” It also provided that, if the licensee does
not surrender the Licensed Area upon the expiration of the Agreement, the licensee would be deemed a “holdover”
and such holding-over shall be construed as a month-to-month license arrangement. The holdover licensee claimed
an oral agreement prior to the written agreement under which the licensee was guaranteed an extended term of five
years. Citing Corbin, the court held that the purported oral agreement concerning the five-year lease was barred by
the merger clause in the agreement. Green Acres Mall, L.L.C. v. Sevenfold Enters., LLC, 32 Misc. 3d 1231(A), 936
N.Y.S.2d 58 (Dist. Ct. 2011).
Such a “merger” or “integration” or “zipper” clause manifests the parties’ intention that they intend to be bound
exclusively by the terms of their final writing. Any prior negotiations are “merged” or “fully integrated” into such a
writing, which is “zippered” by the clause. In Dominion Midwest Energy v. Mich. Psc, 2009 Mich. App. LEXIS 2271
(Oct. 27, 2009), the court cited Professor Corbin’s suggestion that such a clause should have conclusive effect
unless the writing was never intended to take effect as a contract, the clause was inserted by fraud or mistake, or
there are grounds to set aside the entire contract. Another court wrote that “when the parties include an integration
clause in their written contract, it is conclusive and parol evidence is not admissible to show that the agreement is
not integrated except in cases of fraud that invalidate the integration clause or where an agreement is obviously
incomplete ‘on its face’ and, therefore, parol evidence is necessary for the ‘filling of s. W. Creative, Inc. v. Sci
Funeral & Cemetery Purchasing Coop., Inc., 2014 U.S. Dist. LEXIS 170849 (E.D. Mich. Dec. 10, 2014) (citing the
Corbin treatise). Jacobson v. Hofgard, 2016 U.S. Dist. LEXIS 26802 (D.D.C. 2016) cited the Corbin treatise in
refusing to dismiss a home buyer’s fraud claim relating to the concealment of existing conditions in the house that
was purchased. The integration clause in that case was an inconspicuous, one-sentence provision that appeared in
a lengthy boilerplate form that, apparently, was not the product of any negotiation. A merger clause will not preclude
evidence of fraud relating to the merger clause or fraud invalidating the entire contract including the merger clause.
Mediaform Llc v. Suszko, 2010 Mich. App. LEXIS 1102 (June 15, 2010). In Golden Eye Res., LLC v. Ganske, 2014
ND 179, 853 N.W.2d 544, 2014 N.D. LEXIS 181 (N.D. 2014), the court noted the exception to the parol evidence
rule that oral testimony is admissible to prove fraud or misrepresentation, mistake or illegality “applies even if the
testimony contradicts the terms of a completely integrated writing.” Quoting the Corbin treatise, the court wrote: “[t]o
bar extrinsic evidence would be to make the parol evidence rule a shield to protect misconduct.” Otherwise, as
suggested by the Restatement (Second) of Contracts, a merger clause, “if agreed to” is likely to conclude the issue
of whether the agreement is “completely integrated.” Restatement (Second) of Contracts § 21 cmt. e.
The pregnant phrase, “if agreed to,” however, suggests that courts may be reluctant to provide conclusive effect to
a merger clause in certain circumstances. A pre-printed form used repeatedly as the evidence of the contract may
Page 2 of 2
contain a standardized merger clause. In this form, the clause should not deter a court from considering whether
such an expression of agreement was genuinely intended to discharge any prior agreements or understandings in
the specific transaction before the court. When the merger clause is part of a negotiated contract, there are
suggestions that it creates a presumption that the writing was intended to be complete, a presumption that can be
rebutted only by showing fraud, bad faith, unconscionability, negligence, or a mistake of fact. If, however, there is
other clear evidence of the parties’ intentions, a merger clause should not be permitted “to nullify the clearly
understood and expressed intent of the contracting parties.” Zinn v. Walker, 87 N.C. App. 325, 333, 361 S.E.2d
314, 318 (1987).
The language used in a given merger clause, like any other contract language, is subject to interpretation. One of
the favorite terms used in such clauses is the term “entire.” If a court interprets “entire” to refer only to the subject
matter contained in the writing itself, it may conclude that the writing constitutes only a “partial integration.” See,
e.g., Gem Corrugated Box Corp. v. National Kraft Container Corp., 427 F.2d 499, 503 (2d Cir. 1970). For the same
reason, the term “final” alone suggests a partial integration. Terms such as “complete” and “exclusive,” however,
suggest a fully integrated expression of the parties’ agreement. See UCC § 2-202 . In Wooldridge v. World
Championship Sports Network, Inc., 2009 U.S. Dist. LEXIS 85057 (D. Md. Sept. 17, 2009), the court found the
writing to be “fully integrated” because of the following clause: “This letter supercedes any prior agreements,
promises or statement (whether oral or written) regarding your employment with WCSN.” In Liberty Mut. Fire Ins.
Co. v. KB Home, 2014 U.S. Dist. LEXIS 153327 (E.D.N.C. Oct. 28, 2014), citing the Corbin treatise, the court
explained that se te contracts relating to the same subject matter and executed simultaneously by the same
parties may be construed as one agreement,’ and this is true even where one contract states that there are no other
agreements between the parties.”
Practice Resource:
• Corbin § 2 . (merger clauses).

End of Document
§ 25.06 Determining the Parties’ Intention Regarding Whether a Writing Is the

Final and Exclusive Statement of Their Agreement
[1] The “Corbin” Test

If the parties do not expressly state that they intended their writing to be the final or complete and exclusive
statement of their agreement, courts are left to discern that intention. Professor Corbin recognized the question
as one of fact to which he believed courts should apply (in most cases) a relatively simple and straightforward
test: (a) does “respectable” evidence exist to show that the antecedent agreement was made, and (b) did the
parties assent to the writing with the intention of discharging any such antecedent agreement. Notwithstanding
the pervasive influence of Corbin in the Restatement (Second) of Contracts in general, such a view would not
have been a “restatement” of the existing case law applying the parol evidence rule—it would virtually eliminate
the rule.
Although sympathetic to the Corbin view, the American Law Institute assumed that this view virtually
emasculates the parol evidence rule. As a result, the Restatement (Second) of Contracts attempted to satisfy
everyone by including various tests. These tests have been applied by courts in attempting to answer the
questions that Professor Corbin so clearly described as determinations of intention, which are questions of fact.
[2] The “Appearance” Test

There are cases in which a judge examines a writing and concludes that the parol evidence process has been
completed, even though the judge has not considered evidence proffered to show an agreement made prior to
the writing that one of the parties claims as part of the contract. This “appearance test,” which fails to consider
extrinsic evidence, has been justly criticized:
The conception of a writing as wholly and intrinsically self-determinative of the parties’ intent to make a
sole memorial of one or seven or twenty seven subjects of negotiation is an impossible one.
9 Wigmore, Evidence, § 2 1 at 103 (3d ed. 1940). Restatement (Second) of Contracts § 210 cmt. b, agrees
that a writing cannot prove its own completeness.
Whether the writing was intended to cover such preliminary matters cannot be known until the extrinsic
evidence of the preliminary negotiation is compared with the writing. The judge should admit such evidence
provisionally, out of the earshot of the jury in a jury trial, to determine whether the proffered evidence ultimately
will be admitted or excluded.
Modern courts make such comparisons. This test, or some version of it, may appear where the preliminary
negotiations reveal agreements that are clearly contradicted by the subsequent writing. The application of the
rule is relatively simple in such cases when the parties’ latest expression of intention is in writing and is
inconsistent with the proffered extrinsic evidence. The extent and nature of the writing may also provide
important evidence of the parties’ intention.
An agreement evidenced by a very sparse writing that does not include certain terms does not suggest a fully
integrated writing, but even that type of writing may indicate an intention that the stated terms were intended to
be “final”-a “partially integrated” writing. The party seeking the admission of the extrinsic evidence bears the
burden of showing that a writing that may appear to be final or complete was not intended as a partially or fully
integrated writing. Restatement (Second) of Contracts § 20 . Although the appearance of the writing when
compared with the proffered extrinsic evidence is not irrelevant, it is not the dominant test.
[3] The “Separate Consideration” and “Collateral Agreement” Tests

Page 2 of 4
If the parties have entered into separate contracts supported by separate considerations, the latter contract
would not supersede the former, which does not depend upon the latter contract for its enforcement. Even
when the agreements deal with the same subject matter and are interrelated, separate considerations will
usually evidence an intention that one agreement is not to be integrated into the later written agreement. Where
the plaintiffs claimed that a quitclaim deed was not only a final but completely integrated writing precluding parol
evidence of any other agreement, the defendants claimed that the parties had also entered into a partnership
agreement for separate consideration. Since the alleged partnership agreement was not only consistent with
the deed (i.e., it did not contradict the deed or its terms) and was supported by separate consideration, in
accordance with the Restatement (Second) of Contracts § 21 2 the court reversed the trial court and held
that the evidence was admissible because it did not violate the parol evidence rule. Wirth v. Sierra Cascade,
LLC, 234 Or. App. 740, 230 P.3d 29 (2010). Illustration 3 to § 21 .
If a writing evidences Ames’s agreement to purchase Barnes’s boat for $25,000, an alleged oral agreement by
Barnes to rent dock space to Ames at a monthly rate is a related but separate agreement for a separate
consideration which may be proved by parol evidence. This example also illustrates another so-called test. The
agreement for docking of the boat could be called a “collateral agreement,” which was not intended to be
merged into the writing. Although some courts refer to a “collateral agreement” test, it is not a test; it is a
conclusion that the parties intended to enter into a separate, albeit related, agreement that exists
independently. The fundamental issue remains as to how a court should decide the question of whether the
parties intended to be bound by both the terms of the writing and the prior agreement, or only by the terms of
the writing. Although courts may refer to the “separate consideration” test or even the “collateral agreement”
test, the tests are typically not viewed as dispositive.
[4] The “Natural Omission” Test

The First Restatement of Contracts contained what has become the dominant parol evidence test: an oral
agreement is not superseded by a subsequent writing if the agreement is not inconsistent with the writing and
“is such an agreement as might naturally be made as a separate agreement by parties situated as were the
parties to the written contract.” First Restatement of Contracts § 2 0 . This test may also be called the
“Williston Test” since it was the creation of Professor Williston, the Reporter for the First Restatement of
Contracts.
The same rule is found in Restatement (Second) of Contracts § 21 2 . It is not uncommon to find other tests
or aids stated by courts in determining whether evidence should be excluded, but what has come to be known
under the Restatement (Second) as the “natural omission” test has been widely used. It is important to consider
classic illustrations of this test.
• Gianni leased space in an office building, where he sold soft drinks, fruit, candy, and tobacco. Russell
acquired the building and entered into a lease with Gianni that allowed Gianni to sell fruit, candy, soda
water, and soft drinks, but not tobacco. Shortly thereafter, Russell leased an adjoining room to a
pharmacy that began to sell soda water and soft drinks. Gianni claimed that he agreed not to sell
tobacco in exchange for the exclusive right to sell soft drinks and soda water. Before signing, the lease
had been read to Gianni by two persons, including his daughter. After noting the absence of any
claimed fraud or mistake in the transaction, the court stated the natural omission test: “whether parties,
situated as were the ones to the contract, would naturally and normally include the one in the other if it
were made.”
It is important to understand what is meant by the last phrase, “if it were made.” The natural omission
test does not attempt to deal with the issue of whether the parties actually made such a prior
agreement. Rather, the test is whether reasonable parties, situated as were the parties to this contract,
would have naturally and normally included the extrinsic matter in the kind of writing they executed to
express their agreement. Applying this test, the court held that Gianni and Russell would have included
such an exclusive agreement in the lease. The evidence, therefore, was excluded. Gianni v. R. Russell
& Co., 281 Pa. 320, 126 A. 791 (1924). See also, Finkle Distribs. v. Herzog, 2015 Pa. Dist. & Cnty.
Dec. LEXIS 345 (2015) (citing Gianni v. R. Russell & Co., supra, and holding that to determine whether
the writing is the “entire” contract, “the writing will be looked at, and if it appears to be a contract
Page 3 of 4
complete within itself … it is conclusively presumed that the whole engagement of the parties, and the
extent and manner of their undertaking, were reduced to writing .
• Prior to signing the contract for the sale of a farm, the buyer was concerned about an unsightly ice
house owned by the seller on the land of another. The seller allegedly agreed to remove the ice house
but failed to do so. To determine whether evidence of that alleged prior agreement was admissible, the
court first suggested that the agreement had to be “collateral.” Finding that an agreement to remove an
unsightly object was “collateral” to the agreement to buy and sell the farm, it then stated that the
alleged prior agreement must not contradict any express or implied provisions of the writing. The third
requirement was stated as the natural omission test, which the majority of the court decided that the
plaintiff failed to satisfy. The dissenting opinion recognized the natural omission test but concluded that
a prior agreement to remove the ice house was not the kind of agreement such parties would have
included in the writing. Mitchill v. Lath, 247 N.Y. 377, 160 N.E. 646 (1928).
• A case involved a deed under which the owner granted property to the grantor’s sister and her
husband. The deed reserved an option in the grantor to repurchase the land within thirty months for the
same consideration paid by the buyers plus the depreciated value of any improvements the grantees
made to the property. When the grantor was adjudicated a bankrupt, the trustee in bankruptcy sought
to exercise the repurchase option as part of the bankrupt’s estate. The defendants claimed that the
parties had agreed that the option was to be personal to the grantor and could not be exercised by a
stranger. The trial court determined that the parol evidence rule precluded the admission of such
evidence. Writing for the California Supreme Court, Justice Roger Traynor cited Corbin on Contracts
for the proposition that the crucial question was whether the parties intended the writing to be the
exclusive statement of their agreement.
The court rejected the argument that the question of “integration” was to be determined exclusively
from the face of the writing. Suggesting an analysis with a strong Corbin dimension, the opinion stated
that “[e]vidence of oral collateral agreements should be excluded only when the fact finder is likely to be
misled.” It then applied the natural omission test in concluding that the evidence was admissible. The
court found that the parties to a “family transaction” should not have been conscious of the
ramifications of failing to express the personal limitation of the option to the grantor. The court also
suggested that the form of writing, a deed, did not easily lend itself to the inclusion of such a limitation.
A deed of conveyance does not even purport to be a complete integration of the contract transaction.
At best, it is a partial integration. Masterson v. Sine, 68 Cal. 2d 222, 436 P.2d 561 (1968).
More recently in Hinkel v. Sataria Distrib. & Packaging, Inc., 920 N.E.2d 766 (Ind. Ct. App. 2010), Hinkel signed
a writing evidencing his employment contract that specified his compensation, work location, title, start date,
and date on which his insurance coverage would begin. Hinkel alleged that he was orally promised a year’s
salary and insurance benefits if he were involuntarily terminated. Nothing concerning any severance benefit
appeared in the writing. The court held that such a lucrative severance provision would “naturally and normally”
be included in the kind of writing evidencing Hinkel’s employment and concluded that the writing was a final
manifestation of agreement that superceded any alleged oral promises. In Stevens v. Landmark Partners, Inc.,
574 Fed. Appx. 32, 2014 U.S. App. LEXIS 17525 (2d Cir. Conn. 2014), Stevens sued his former employer,
Landmark, arguing that, at the time he entered into a written employment agreement, he had reached an oral
agreement with Landmark promising him an equity stake in the company. His written employment agreement
stated that, at the time it was signed, the form of his economic participation had yet to be determined. The
district court held that the parol evidence rule precluded Stevens from advancing this argument, and the
Second Circuit affirmed. The Circuit Court noted that even if the agreement was not completely integrated, it
may be integrated with respect to certain provisions. written agreement is integrated and operates to
exclude evidence of the alleged extrinsic negotiation if the subject matter of the latter is mentioned, covered or
dealt with in the iti .
Practice Resources:
• Corbin § 2 . (what is integration, and how do we find it?); § 2 . (partial
Page 4 of 4
integration and collateral contracts); § 2 .10 (collateral agreements in the

absence of a merger clause); § 2 .11 (collateral contracts involving merger
clauses); § 2 .12 (deeds, leases, notes, bank deposit cards).

End of Document
§ 25.0 Parol Evidence of Later Agreements Under the UCC
[1] Evidence of Prior or Contemporaneous Terms That Contradict the Terms of a “Final” Agreement
Are Not Admissible
The UCC version of the parol evidence rule is found in Section 2-202. It is important to consider the statutory
language:
Final Written Expression: Parol or Extrinsic Evidence. Terms with respect to which the confirmatory
memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as
a final expression of their agreement with respect to such terms as are included therein may not be
contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be
explained or supplemented
(a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-
208); and
(b) by evidence of consistent additional terms unless the court finds the writing to have been intended
also as a complete and exclusive statement of the terms of the agreement.
The section reflects a major revision of the parol evidence rule as applied to contracts for the sale of goods.
The caption of the section makes the important distinction between the “agreement” and the “final expression”
of the agreement. It avoids the conclusory term “integration” and its conclusory bifurcations of “partial” or “full”
integration. Rather, if the parties intended their writing to be a “final expression of their agreement,” evidence of
prior or contemporaneous terms that “contradict” the terms of such a “final” agreement are not admissible. The
first paragraph of the section is quick to add that evidence may be admitted to “explain or supplement” such a
“final” agreement.
Evidence to “explain” any writing, final or not final, is simply evidence admitted for the purpose of interpretation,
which has nothing to do with the parol evidence rule. Evidence to “supplement” the terms of a writing does not
“contradict” the writing. As a comment to the section indicates, it should not be assumed that a writing “final” on
some matters “is to be taken as including all the matters agreed upon.” UCC § 2-202 cmt. 1(a).
Evidence of additional terms that are consistent with the writing is admissible where the writing is “final” on
some other terms. If, however, the court finds that the parties “intended” the writing not only as final as to some
matters but as a “complete and exclusive statement of the terms of the agreement,” evidence of consistent
additional terms is not admissible. UCC § 2-202 . “Final” is the rough equivalent of “partially integrated,” while
“complete and exclusive” is the rough equivalent of “fully integrated.”
[2] Evidence of Course of Dealing, Usage of Trade, or Course of Performance Is Admissible Even
When the Writing Is Intended as the Complete Statement of the Agreement
Evidence of course of dealing, usage of trade, or course of performance is admissible to explain or supplement
a writing even when the writing is intended by the parties as the complete and exclusive statement of the
parties’ agreement. UCC § 2-202 . C-Thru Container Corp. v. Midland Mfg. Co., 533 N.W.2d 542 (Iowa 1995).
Comment 2 states that such evidence is admissible “to explain or supplement the terms of any writing stating
the agreement of the parties in order that the true understanding of the parties as to the agreement may be
reached.” (emphasis added) The same comment explains that the writings “are to be read on the assumption
that the course of prior dealings between the parties and the usages of trade were taken for granted when the
document was phrased.” Unless trade usage and course of dealing are “carefully negated,” the parties’ written
expression is to be read as if it contained this evidence.
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Course of performance evidence refers to the conduct of the parties in carrying out the terms of their prior
writing. Since such evidence occurs after the writing, it cannot be precluded by the parol evidence rule. In the
event of inconsistency among the express terms of an agreement and course of performance, course of
dealing, and trade usage, the UCC states the following hierarchy: express terms, course of performance,
course of dealing, and trade usage. UCC § 1- 0 e (formerly § 2-20 2 . Course of performance evidence
contradicting express terms, however, may prevail as a waiver of such terms and a modification of the contract.
UCC § 1- 0 (formerly § 2-20 2 .
To further emphasize the distinction between the parol evidence rule and the concept of interpretation, UCC
§ 2-202 comment (1)(b), insists that words in a writing be interpreted and construed in the commercial context
in which the words were used. UCC § 2-202 comment (1)(c), “definitely rejects” any requirement that a court
must make an original determination that the parties’ language is ambiguous before admitting evidence of trade
usage, course of dealing, or course of performance. Both comments are repudiations of the “plain meaning”
rule of interpretation. The UCC parol evidence concept manifests a strong and pervasive influence of Professor
Corbin; this is unremarkable since it the product of Karl Llewellyn and Professor Corbin was often called the
father “in law” of Professor Llewellyn.
[3] The “Would Certainly” Test

Under the UCC, evidence that is contradictory to a final or complete and exclusive writing is not admissible.
Consistent additional terms other than trade usage, course of dealing, and course of performance are
inadmissible when the writing is intended to be “complete and exclusive.” To determine whether the parties’
“expression” of agreement is complete and exclusive, a comment suggests a modified “natural omission” test. If
the additional consistent terms are such that “they would certainly have been included in the document in the
view of the court, then evidence of their alleged making must be kept from the trier of fact.” UCC § 2-202 cmt.
3.
This “would certainly” test allows the admission of more evidence than the basic natural omission test. To
preclude the admission of evidence under the natural omission test, it is necessary only to show that the parties
would have included the alleged extrinsic matter in the writing. To preclude evidence under the modified UCC
version, however, it is necessary to demonstrate that parties “would certainly” have included the extrinsic
agreement in the writing.
Practice Resource:
• Corbin § 2 . (Restatement (Second) of Contracts and the UCC).

End of Document
§ 25.0 CISG Does Not Include a Parol Evidence Rule

Where the parties to a contract for the sale of goods have their principal places of business in CISG countries,
absent a contrary agreement, the United Nations Convention on Contracts for the International Sale of Goods
(CISG) is the governing law, preempting the domestic law of either country. Article 8 of CISG is concerned with the
interpretation of the parties’ manifestations of agreement. Article 8(3) states:
In determining the intent of a party or the understanding a reasonable person would have had, due
consideration is to be given to all relevant circumstances of the case including negotiations, and practices
which the parties have established between themselves, usages and any subsequent conduct of the parties.
Recognizing “all relevant circumstances,” is clearly in accord with § 2-202 of the UCC. Similarly, “practices which
the parties have established between themselves” would be called “course of dealing” under the UCC. “Usages”
clearly corresponds to “trade usage” and “subsequent conduct of the parties” just as clearly deals with “course of
performance” evidence. The symmetry between the UCC and CISG or between CISG and the common law,
however, departs with a single term in Article 8(3): “negotiations.” If the parties have manifested their agreement in
a writing that they intend as a complete and exclusive statement of their agreement, the parol evidence rule would
clearly apply to any prior understanding. Thus, evidence of their negotiations prior to the execution of their writing
that seeks to vary or supplement its terms would constitute a classic violation of the parol evidence rule of the
common law or the UCC. Such evidence, however, is not precluded under CISG.
Where a United States buyer signed an Italian seller’s standard form contract for the sale of tile, a provision in the
form allowed the seller to cancel the contract if the buyer delayed a payment. When the buyer delayed payment
alleging defects in the tile, the seller cancelled the contract in accordance with the form provision. The buyer sought
to introduce evidence that both parties arrived at a prior oral understanding that the terms of the form which the
buyer signed would not apply to their contract. Since both the United States and Italy are among the 80 nations that
have adopted CISG, the court noted that Article 8(3) of CISG allows such evidence. There is no parol evidence rule
under CISG. MCC-Marble Ceramic Ctr. v. Ceramica Nuova D’Agostino, S.P.A., 144 F.3d 1384 (3d Cir. 1998). See
also Miami Valley Paper, LLC v. Lebbing Eng’g & Consulting GMBH, 2009 U.S. Dist. LEXIS 25201 (S.D. Ohio Mar.
26, 2009).
The absence of a parol evidence rule under CISG is not remarkable in light of the absence of any statute of frauds.
Article 11 states that “[a] contract of sale need not be concluded in or evidenced by writing and is not subject to any
other requirement as to form.” While a “Contracting State” whose domestic law may make a declaration that Article
11 does not apply (Article 96), absent such a reservation, a writing requirement would not apply to any CISG
contract. See Weihai Textile Group Imp. & Exp. Co. v. Level 8 Apparel, LLC, 2014 U.S. Dist. LEXIS 53688
(S.D.N.Y. Mar. 28, 2014). A few countries have taken such a reservation, but the United States is not among them.
Thus, oral contracts for the sale of goods governed by CISG are enforceable and evidence of the parties’
understandings prior to forming contracts, whether oral or written, is admissible.
Practice Resource:
• Corbin § 2 . (other legal systems).

Page 2 of 2
End of Document
Corbin on Contracts Desk Edition > CHAPTER 26 IMPLIED TERMS, DEFAULT RULES, AND THE
CONCEPT OF GOOD FAITH
CHAPTER 26 IMPLIED TERMS, DEFAULT RULES, AND THE CONCEPT OF

GOOD FAITH
the subject matter.

End of Document
§ 26.01 Relation Between Interpretation and Implication
[1] The Purpose of Interpretation Is to Ascertain the Meaning of the Parties’ Words and Conduct
A contract may be evidenced by a writing or electronic record clearly evidencing the promises exchanged by
the parties. Such promises are “express” promises and the contract is an “express” contract. Most contracts,
however, are not attended by such comprehensive statements. A standardized purchase order typically lists
items that the buyer is “ordering.” There is no expression stating that the buyer promises to pay. The price may
be missing. Upon receipt of the order, the seller ships conforming goods precisely in accordance with the list on
the purchase order. Every court would hold that the buyer had promised to pay a reasonable price for the
delivered goods. Such a promise is not “express.” It is “implied.” It is called an “implied-in-fact” from a
combination of the words in the purchase order and the parties’ conduct.
A party enters a taxi and states an address. When the taxi arrives at the address, the driver would be startled to
hear the passenger state “Thank you” while refusing to pay the fare. The passenger’s entry into the taxi and
statement of a destination clearly imply a promise to pay a reasonable fare as a matter of custom and usage.
Innumerable transactions occur each day in which the promise and ensuing contract are implied-in-fact. Millions
of purchases occur in self-service stores without any promissory expression by either the buyer or the seller,
but the buyer’s promise to pay is clear. The “implied-in-fact” characterization, however, is troublesome.
In the previous chapter, we emphasized that the purpose of interpretation is to ascertain the meaning of the
parties’ words and conduct. A promise manifested by conduct instead of words is still an “express” promise
since its meaning is derived from a party’s outward manifestation of intent, albeit in symbols other than words.
A contract evidenced by a writing in code would be viewed as an express contract. A contract evidenced in
traditional shorthand or in the growing use of “text messaging” or some other code would certainly be an
express contract. Often, the parties’ manifestation of agreement by conduct may be easier to “decode” than
written code.
[2] Courts May Imply the Missing Terms of an Agreement

When a writing signed by both parties states that Ames promises to pay $100,000 in exchange for Barnes’s
promise to convey 50 acres of identified property to Ames, courts would call these promises “express promises”
in an “express contract.” They are “directly” promissory and their interpretation seems obvious. As with any
other word or symbol, however, the court must ascertain the meaning of these words. The writing says nothing
about the time or place of performance. Absent other evidence of the parties’ intention concerning the missing
terms, the court may “imply” an agreement that the conveyance and payment for the land will occur within a
reasonable time and place. Such an implication is not based on any manifestation of intention by Ames and
Barnes. They did not consciously advert to these “details” of their agreement. The court supplies that term on
the basis of what reasonable parties would understand in such a transaction.
The troublesome nature of an “implied-in-fact” characterization that fails to recognize a contract by conduct as
an express contract is further exacerbated by promises that are said to be “implied-in-law.” Such a “promise” is
a judicial creation of a “quasi contract” that has nothing to do with the intention of the parties. It is constructed
by a court to remedy the unjust enrichment of one party at the expense of another. It could be called a
“constructed” contract to achieve restitution just as a court in another situation may create a “constructive trust”
to achieve restitution.
[3] Express Contract Excluding Implied Contract

Page 2 of 2
It is common to discover a statement that a contract will not be implied where the parties have an express
contract. The statement is not only misleading, it is filled with ambiguities. If the statement means that parties
did not intend to have a contract manifested by words (express) as well as a contract manifested by conduct
(“implied-in-fact”), the statement is inaccurate.
If a party performs services under an express contract and later seeks recovery of additional compensation
claiming an additional implied contract, the question is not whether such contracts may coexist, but whether the
plaintiff can satisfactorily prove entitlement to greater compensation via the implied contract than is stated in the
express contract. Sizeable construction contracts invariably include “change orders” that may not have been
contemplated much less evidenced by the express terms of the original contract. Evidence of such
modifications may be sufficient to prove an implied contract to pay for the variations in the construction. See
Richards Contracting Co. v. Fullmer Bros., 417 P.2d 755 (Utah 1966).
It is common to discover a statement that there can be no quasi-contractual recovery when the parties have an
express contract. Again, however, the statement is inaccurate and misleading. As suggested in a recent case,
there are circumstances under which a recovery in quasi contract is justified notwithstanding an express
contract. Quoting Corbin on Contracts, a court noted that it is more accurate to say that when parties have
made an express contract, the court should not find a different one by implication concerning the same subject
matter absent evidence that they intended to make such an additional contract. Telecom Italia S.p.A. v. L-3
Communs. Corp., 2007 U.S. Dist. LEXIS 16290 (D. Utah Mar. 7, 2007).
Practice Resources:
• Corbin § 2 .1 (implication, inference, and interpretation); § 2 .2 (using implied
terms to fill parties’ gaps); § 2 . (is there a difference between gap-fillers and
default rules?).

End of Document
§ 26.02 Implication of Conditions and Promises
[1] Implied Promise to Pay for Personal Service

Conditions are implied in virtually every contract. The doctrine of impossibility or impracticability of performance,
to be explored later, provides a clear illustration of the implied condition concept. If a concert hall is leased for a
performance, the classic analysis suggests that there is an “implied condition” that the hall will continue to exist
at the time of the concert, or the converse, that it will not suffer a casualty such as fire or other damage that will
preclude its use. A modern version may avoid the use of “implied condition” and replace it with a statement of
the parties’ “basic assumption” that the hall will exist at the time of the concert. Similarly, there is a basic
assumption in a personal service contract that the employee will not die or become so disabled as to prevent
performance for the duration of the contract. These conditions or assumptions are “implied” because they are
not “interpreted” from the parties’ expression of agreement since parties do not consciously advert to such
matters at the time the contract is formed.
When the provider of personal services alleges that there was a promise to pay for services rendered to the
alleged promisor, but produces no convincing evidence of such a promise in words, a court is left with conduct
evidence under all of the surrounding circumstances to justify an inference of a promise. Among other factors, a
family relationship between the parties would bear against the inference of such a promise, but such evidence
is not conclusive. Courts will consider the extent and difficulty of the service, the value of the benefit conferred,
the level of sacrifice by the claimant, and the financial difficulty of the parties.
Where a niece cared for her aunt, the court recognized the presumption that family members’ services are
gratuitous, but emphasized that the presumption is not conclusive. It can be rebutted not only by an express
agreement to pay for the services, but by proof of circumstances showing that the relative accepting the benefit
of the service knew or should have known the relative performing them expected to be compensated or
reimbursed. The niece did not seek to recover for the personal services she provided; rather she sought only
restitution of the amount of her own funds spent on behalf of the aunt. The court noted that the niece’s services
went beyond what would normally have been expected of family members in similar circumstances. Estate of
Cleveland v. Gorden, 837 S.W.2d 68 (Tenn. Ct. App. 1992).
This is a major factor supporting the inference of a promise to pay. Thus, when a real estate broker finds a
buyer for a landowner, even if the landowner has not requested the services of the broker, the landowner who
takes the benefit of such a service certainly should know that the broker expected to be compensated for the
service.
[2] Commercial Transactions and Requirement and Output Contracts

A contract to sell property may include only the promise of the seller to convey it at a certain price. The buyer’s
signature on such a document, however, easily allows the implication of a promise to buy the property at that
price. Contracts for the sale of goods include “implied” warranties of merchantability and, where the facts allow,
fitness for a particular purpose. Uniform Commercial Code (UCC) §§ 2- 1 and 2-315.
The UCC also recognizes the imposition of the duty of good faith in the performance of every contract. UCC
§ 1- 0 (formerly § 1-20 . An express application of this generic requirement is critically important in contracts
in which a seller agrees to sell its output to a particular buyer or a buyer agrees to purchase its requirements
from a particular seller. The quantity term in such contracts is measured by the actual good faith output or
requirements. UCC § 2- 0 1 .
Page 2 of 2
When a contract requires a party to perform in a certain fashion so that the other party will earn compensation,
a promise to render that cooperation will be implied. Where a sub-investor needed information from the
defendant to exercise its right to participate in profits from a particular venture, the court found that the
defendant had breached the contract in preventing the sub-investor’s exercise of its right. German v. Ford, 300
S.W.3d 692 (Tenn. Ct. App. 2009). Similarly, where a party’s right to compensation is conditioned on his or her
performance, a promise will be implied that the other party will do nothing to hinder or prevent that performance
under the contract.
A promise that parties will exceed ordinary efforts and pursue their “best efforts” is implied in exclusive dealing
contracts for the sale of goods. UCC § 2- 0 2 . The classic expression of this implication appeared in the
famous statement by Judge Cardozo in a case where an exclusive agency contract, signed by both parties, did
not include an express statement of the duty of the agent. Lady Duff-Gordon argued that its absence proved
that the agent had promised nothing at all, making her promise unenforceable for lack of consideration. The
classic response to this argument bears repeating:
It is true he does not promise in so many words that he will use reasonable efforts to place the defendant’s
indorsements and market her designs. We think, however, that such a promise is fairly to be implied. The
law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and
every slip was fatal. It takes a broader view today. A promise may be lacking but the whole writing may be
“instinct with an obligation” imperfectly expressed . If that is so, there is a contract.
Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917).
[3] Insurance and Indemnity Contracts

A liability insurance policy indemnifies the insured against liability to third parties for which the insured may be
responsible, as in automobile or industrial accidents. These policies require the insurer to pay or otherwise
settle the claim of the injured party against the insured. There is a generally recognized duty of good faith and
fair dealing with respect to the discharge of the insurer’s obligations. An insurer would breach that duty if it
denied a claim knowing that there was no principled or rational basis for such a denial. See Erie Ins. Co. v.
Hickman, 622 N.E.2d 515 (Ind.1993) as cited in Backwater, Inc. v. Penn-American Ins. Co., 448 F.3d 962, 964
(7th Cir. 2006).
An insurance company’s denial of coverage, in and of itself, is actionable only as a breach of contract. On the
other hand, where an insurer acts in bad faith in its failure to settle a third-party claim, that action sounds in tort
for bad faith failure-to-settle (BFFS), and it is not an action on the insurance contract. “While the insurance
contract provides the basis for the relationship between the insurer and the insured, ‘bad faith’ liability in
handling third-party claims is premised on tort concepts and not on contract principles.” The contract/tort
distinction is important when it comes to damages: unlike a breach of contract action, “[a]n insurer ‘may be
liable over and above its policy limits if it acts in bad faith … in refusing to settle the claim against its insured
within its policy imits[. Elec. Power Sys. Int’l v. Zurich Am. Ins. Co., 2016 U.S. Dist. LEXIS 3980 (E.D. Mo.
Jan. 13, 2016).
Practice Resources:
• Corbin § 2 . (what will not be covered); § 2 . (good faith and bad faith);
§ 2 .12 (bad faith in insurance); § 2 .1 (basic notion of cooperation); § 2 .1
(output, requirements and exclusive dealing contracts).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 27 CAPACITY OF PARTIES
CHAPTER 27 CAPACITY OF PARTIES

the subject matter.

End of Document
§ 2 .01 Lack of Capacity May Result in an Agreement Being Declared Void,

Voidable, or Invalid
In addition to the usual requirements of a manifested offer, acceptance, and consideration or other validation
device, it is essential that parties to a contract manifest sufficient capacity to form a contract. Persons who make
contracts differ markedly in their intelligence, background, judgment, and maturity. In general, it is impracticable to
consider such differences. When, however, the impairment of ability to engage in the contracting process is clear,
such impairment may result in an agreement being declared void, voidable, or invalid.
While the lack of capacity may be so complete as to declare an agreement “void,” limitations on the capacity to
contract typically result in finding a contract “voidable”—that is, a party with impaired capacity has a power of
avoidance, or disaffirmance. At common law, a married woman had no capacity to bind herself to a contract during
the life her husband. The enactment of Married Women’s Acts, however, eliminated that restriction. Thus, a defense
of lack of capacity on the basis of the defendant’s status as a married woman would fail.
Artificial persons such as corporations and government agencies were traditionally limited to the powers conferred
on them by the government that created them. Any attempt by them to contract beyond their conferred powers
would be an ultra vires act that would be unlawful and the artificial person could raise its lack of capacity to contract
on that basis. Modern statutes and decisions, however, have limited the scope of the ultra vires defense.
The concentration of this chapter is on four other classes of persons with presumed or actual limitations on the
capacity to contract: infants (minors), mentally ill or mentally deficient persons, persons under the influence of drugs
or alcohol, and persons under guardianship.
Practice Resource:
• Corbin § 2 .1 (introduction).

End of Document
§ 2 .02 Capacity of Minors
[1] A Minor May Avoid a Contract

At common law, a contract of an “infant” was deemed to be void. The traditional common law terminology of
“infant” referred to a minor who had not achieved majority age of 21. The phrase “void contract” is an oxymoron
since a declaration that a “contract” is “void” is intended to mean that there never was a contract.
Modern statutes reduced the age of majority to 18 and recognized that a minor’s contract is not void. Rather,
the contract is “voidable” because the minor should have the privilege of either affirming or disaffirming
(avoiding) the contract. The contract is, therefore, enforceable against the adult party whose capacity is not
limited. A power of avoidance is provided for the protection of the minor. Woodman v. Kera LLC, 486 Mich. 228,
785 N.W.2d 1 (2010). The minor lacks the maturity to make a sufficient judgment of a binding nature at the time
the contract was formed.
The power of avoidance applies to executed as well as executory contracts. Whatever age is chosen to as the
age of majority is arbitrary in the sense that a given 16-year-old could display the maturity and judgment of a
30-year-old while a 40-year-old could display the maturity and judgment of a 12-year-old. It is, however,
impracticable to pursue such analyses of every party who makes a contract.
The power of avoidance may be exercised in writing, orally, or by conduct. No particular form is required, but
the entire contract must be avoided. The minor may not avoid the parts the minor deems unfavorable while
retaining other parts. The power may be exercised at any time prior to or within a reasonable time after
reaching majority. Milicic v. Basketball Mktg. Co., 857 A.2d 689, 2004 PA Super. 333. Older cases restricted
avoidance of contracts to convey real property until after the minor reached majority to protect the minor’s
interests. While that case law may still constitute the weight of authority, sound modern authority allows a minor
to avoid such contracts before reaching majority.
[2] A Minor’s Ratification of a Contract Cannot Occur Before the Minor Reaches the Age of Majority
A minor’s effective ratification of a contract cannot occur before the minor reaches the age of majority since any
such purported ratification would, itself, be subject to the power of avoidance. Ratification depends upon a
manifestation of intent and can be expressed by words or conduct. A minor must be aware of the facts upon
which his or her liability will depend, but there is a split in the case law as to whether the minor must be aware
of the legal consequences of ratification. While perhaps a majority of cases would resort to the old maxim that
ignorance of the law is no excuse, there are a fair number of cases holding that ratification is ineffective unless
the minor has knowledge of the legal consequences.
If a contract has been fully performed, an acknowledgment of an intention to adhere to the terms of the contract
will be sufficient. If the contract is still executory, there are cases that require a promise rather than an
acknowledgment, but other cases recognize that a jury may infer an intention to ratify from an acknowledgment
under the circumstances.
Many cases state that a minor’s failure to disaffirm within a reasonable time results in ratification of the contract.
What constitutes a “reasonable time” is a question of fact that will depend upon the circumstances, such as the
extent to which the contract has already been performed by either party, the nature of the transaction, and the
extent to which the other party may be prejudiced by an extensive delay in affirming the contract.
When a minor retains and enjoys the benefits of the contract and fails to disaffirm within a reasonable time after
reaching majority, absent countervailing evidence, courts will find that such conduct manifests an intention to
ratify the contract. If the only performance that has occurred is payment or other performance by the minor,
however, such evidence will not be sufficient to signal ratification. If the minor has received no benefits under
Page 2 of 3
the contract, there is no reason to bar the minor from disaffirming up to the time the statute of limitations has
run. See Madrid v. Rodriguez (In re Estate of Duran), 2003-NMSC-008, 133 N.M. 553, 66 P.3d 326.
[3] Minors Cannot Avoid Certain Contracts

A statute or the public policy of a given jurisdiction may preclude a minor from avoiding a contract in certain
situations. When a minor male contracts to provide support for his out-of-wedlock child, he cannot avoid his
contractual duty. A minor employee cannot avoid a contract not to use an employer’s secret customer lists or
an arbitration clause in a dispute with the employer. See, e.g., Douglass v. Pflueger Haw., Inc., 110 Haw. 520,
135 P.3d 129 (2006). There are also limitations on the use of the power of avoidance in insurance contracts,
military enlistments, and educational loans.
[4] Restitution upon Disaffirmance

If a minor disaffirms a contract, it would be an obvious injustice to allow the minor to retain the consideration
received under the contract. For instance, in an action by the seller of an automobile, if the minor disaffirms the
contract but retains the automobile, the minor must return it. If the minor no longer possesses the automobile,
the minor would have an obligation to return proceeds received from its sale. If the minor has paid cash for the
automobile and, having wrecked it, disaffirms the contract and seeks the return of the purchase price, the
traditional view would treat a minor-plaintiff as it would treat a minor-defendant by holding that the minor is
entitled to a return of the price since the minor has not retained any consideration received under the contract.
Many courts, however, treat a minor differently when he or she assumes the role of a plaintiff. In the case of the
automobile, they would allow an offset for the value of the minor’s use of the auto or the value of its
depreciation, allowing the minor to recover only for the value of the wreck. The distinction is not based simply
on the minor as plaintiff or defendant; rather, it is based on the difference between the risks assumed by the
other party to the contract by the extension of credit to the minor who promised to pay for the auto as
contrasted with selling an auto to a minor who pays cash. Such a cash seller would be astounded to be held to
return the payment without a requirement that the goods be returned.
New Hampshire courts make no distinction between the minor as defendant or plaintiff. In New Hampshire, if a
minor has obtained benefits, the minor is liable in restitution for the value of such benefits whether the minor
sues or is sued. Isolated cases in Arizona and West Virginia suggest a similar approach.
[5] A Minor Is Liable for “Necessaries” Furnished

If a minor has used or consumed goods or services and has nothing to return, but what has been supplied
constitute “necessaries” such as food, clothing, and shelter, the supplier will be entitled to recover their
reasonable value in a quasi contract action. A provider of medical services to a child is entitled to recover the
reasonable value of such services on a restitution theory. Estate of Reed v. Reed, 201 P.3d 1264 (Colo. Ct.
App. 2008). The policy behind such a recovery is often stated as fostering the supply of such basic
requirements of life to minors.
What is a “necessary” will depend upon all of the circumstances, including the minor’s station in life. Basic
educational expenses would always qualify as necessaries, while a college education would probably not
qualify, although changing community standards and the minor’s particular situation could result in finding such
an expense was a “necessary.”
Legal fees may be necessaries in relation to criminal prosecutions or tort actions against the minor. A party may
not successfully sue a minor in tort where the cause of action is essentially a contract action. Though willful
misrepresentation of his or her age may not affect the infant’s power to avoid the contract, an equity court will
require the minor to return the other party to status quo ante.
Practice Resources:
• Corbin § 2 .2 (introduction to contracts of infants); § 2 . (transactions that
infants cannot avoid); § 2 . (avoidance and ratification); § 2 . (effect upon
ratification of ignorance of law or fact); § 2 . (obligations of restitution upon
Page 3 of 3
disaffirmance); § 2 . (torts connected with contracts); § 2 . (liabilities of infants

for necessaries); § 2 . (infants’ liability for benefits in New Hampshire).

End of Document
§ 2 .03 Transactions of the Mentally Infirm
[1] The “Cognitive” Test for Assessing Mental Infirmity

Older cases treated transactions with the mentally infirm as void. With the exception of the adjudication of the
person as incompetent and the appointment of a guardian of the incompetent’s property, modern authority
treats contracts with mentally ill parties as voidable.
Mental infirmity is not limited to parties who are determined to be insane. It may arise from senility, mental
retardation, temporary delirium resulting from physical injury, or intoxication from alcohol or drugs.
Where mediation of a dispute led to an agreement, the defendants claimed that the agreement was
unenforceable because one of the plaintiffs had a mental breakdown during the mediation and allegedly lacked
the capacity to make a contract. The court however, noted that decisions holding contracts void based on
incapacity have done so only where medical evidence demonstrated a permanent, progressive, degenerative,
or long-term illness that has been diagnosed by a medical professional. The evidence disclosed none of these
elements. The court noted that, for 50 years, it had applied the “cognitive” test, which required a showing of
whether the person was “in such a state of insanity” at the time of contracting so as to render himself incapable
of transacting business. The addition of the modern “affective” or “volitional” test recognized that competence to
make a contract can be lost through disorders of motivation or the will where a party understands the
transaction but may still be impelled to act irrationally. Under the modern test, the controlling consideration is
whether the transaction is one which a reasonably competent person might have made. Representation by
competent counsel is relevant in this regard. Though the evolving standard of contractual capacity does not in
all cases require proof that a party’s mental illness or defect was of some significant duration or that it is
permanent, progressive, or degenerative, without medical evidence or expert testimony that the mental
condition interfered with a party’s understanding of the transaction or her ability to act reasonably in relation to
it, the evidence will not be sufficient to support a conclusion of incapacity. Sparrow v. Demonico, 461 Mass.
322, 960 N.E.2d 296 (2012).
If a party has no understanding of the transaction, mutual assent to a bargain arising out of it is impossible.
Even where the competent party is not aware of the mental infirmity of the other party, there remains some
obligation to protect the mentally infirm party against the party’s own improvidence. The compromise solution is
to treat executory contracts and contracts based on grossly inadequate consideration as automatically voidable.
When a contract has been executed, however, and the other party took no advantage of the incompetent and
had no reason to know of the infirmity, the contract is voidable only if the competent party may be placed back
to status quo ante. If the incompetency was obvious to a reasonable person, the incompetent has no obligation
to make restitution.
In Dalon v. Ruleville Nursing & Rehab. Ctr., LLC, 2016 U.S. Dist. LEXIS 15081 (N.D. Miss. Feb. 8, 2016), the
court addressed whether a deceased nursing facility patient’s purported agreement to arbitrate was valid. The
evidence showed that the patient was confused, forgetful, and suffering from either severe or moderate
cognitive impairments at the time she signed the agreement, raising an issue that she lacked capacity to
understand the terms of the agreement. Further, the agreement was drafted by the nursing home and
presented to the patient on a take-it-or-leave it basis—it was a non-negotiable adhesion contract. Moreover, at
the time the patient was admitted, she was suffering from serious medical issues and had a need for care but
there were a limited number of available nursing home facilities. Thus, there was a great imbalance in
bargaining power between the patient and the defendant. The court denied the nursing home’s motion to
compel arbitration pending a hearing.
Page 2 of 2
[2] The Competent Party to a Contract with an Incompetent Has No Power of Avoidance
Just as an adult has no power of avoidance in a contract with a minor who has such a power, neither may a
competent party avoid the contract with an incompetent party, who may disaffirm it. When the incompetent
party regains competency, he or she may ratify the contract. As in contracts with minors, such ratification is
irrevocable and may occur through words or conduct.
Just as suppliers may recover the reasonable value of necessaries against minors, they may bring their quasi
contract actions against parties who can avoid the contract because of mental infirmity. The same kinds of
goods are “necessaries” for incompetents. Fees for legal services to procure a release from custody or
guardianship are recoverable as are expenses of the party petitioning to have a party placed under
guardianship.
[3] Exploitation of Alcoholics and Weak-Minded Persons

When a person does not understand the nature of the transaction, the legal effect is the same even though the
cause is alcohol or drugs. There is, however, less sympathy for such self-induced mental infirmity, particularly
in the older cases. Only when the competent person has reason to know that the intoxicated party cannot
operate in a reasonable manner are such contracts voidable. Restatement (Second) of Contracts § 1 .
If mental infirmity or intoxication is insufficient to allow the exercise of a power of avoidance, there may be other
bases for protection of the mentally infirm. A weak-minded, illiterate person may be exploited by some form of
duress, fraud, or undue influence. Plying a party with liquor and convincing that party to contract for a grossly
inadequate consideration is a species of fraud. Insisting on an unconscionable bargain with a party addicted to
drugs who is desperate for cash to purchase drugs would constitute obvious overreaching and render the
contract voidable. Extracting deeds from the aged or releases from those suffering from great shock or pain
may suggest a combination of mental infirmity and unfair bargaining that will allow a court to treat the contract
as voidable.
Practice Resources:
• Corbin § 2 .10 (introduction to contracts of the mentally infirm); § 2 .11
(requirement of restitution); § 2 .12 (avoidance and ratification); § 2 .1
(liabilities for necessaries); § 2 .1 (intoxicated persons); § 2 .1 (exploitation of
alcoholics and weak-minded persons).

End of Document
§ 2 .04 Capacity to Contract with Oneself

First Restatement of Contracts § 1 cmt. a, stated that it is not possible for a one to make a contract with oneself.
Restatement (Second) of Contracts § requires at least two parties, a promisor and promise. It recognizes,
however, that the same person may operate in different capacities. This could, for instance, allow a contract
between Pamela Jones, the individual owner of a parcel of land, and Pamela Jones, chief executive officer of the
North Corporation, for the sale of individual Jones’s land to the corporation represented by CEO Pamela Jones.
Such a contract may easily suggest a conflict of interest that should be avoided by use of an objective intermediary
who would bargain with Jones the individual at arms-length, but there is otherwise no prohibition to such a contract.
An individual partner may certainly contract with the partnership of which he or she is a member; the partner is both
a promisor and promisee in such a contract.
Practice Resources:
• Corbin § 2 .1 (contracting with oneself); § 2 .1 (contracting with oneself and another).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 28 AVOIDANCE OR REFORMATION FOR

MISCONDUCT OR MISTAKE
CHAPTER 28 AVOIDANCE OR REFORMATION FOR MISCONDUCT OR

MISTAKE
the subject matter.

End of Document

§ 2 .01 Duress, Undue Influence, Misrepresentation, Mistake, or

Unconscionability May Contaminate an Agreement
All of the elements of a contract made by parties of sufficient capacity may appear to be present, but the contract
may later turn out to be void, voidable, or reformable because of duress, undue influence, misrepresentation, or
mistake. What appears to be the volitional assent of a party to a contract may have been induced by a pointed gun
making the alleged contract void ab initio due to such physical duress. More subtle threats or unfair persuasion may
allow a party to avoid a contract because of duress or undue influence. Misrepresentation or a mistake in the
bargain that has a material effect on the agreed exchange may also allow the innocent party to avoid the contract.
Taking advantage of a seller’s market to drive a bargain for what the market will bear, however, will not constitute
duress. Cabot Corp. v. AVX Corp., 448 Mass. 629, 863 N.E.2d 503 (2007). A court may refuse to enforce all or a
part of a contract on the basis of unconscionability, a concept that will be explored in detail in Chapter 29 below. It is
important to understand and distinguish each of these concepts and their effects on a contract.
Practice Resource:
• Corbin § 2 .1 (scope of this chapter and rationale).

End of Document

§ 2 .02 Relief from an Agreement on Grounds of Duress
[1] A Wrongful Act or Threat That Overcomes the Free Will of a Party Constitutes Duress
The early common law required a finding of actual imprisonment or fear of loss or life or limb to constitute
duress. Fear of mere battery was insufficient. Modern courts continue to view a “contract” as void where a
party's agreement was induced by physical compulsion emanating from the other party to the contract or a third
party. Improper threats with no physical compulsion, however, will make the contract voidable.
The modern view is that any wrongful act or threat that overcomes the free will of a party constitutes duress.
Except in cases of economic duress, the test is not whether the will or ordinary firmness of a reasonable party
would have been overcome; the test is subjective, inquiring whether the will of the particular party claiming
duress was overcome. Objective evidence is relevant in making the determination under all of the surrounding
circumstances.
When the alleged coercion takes the form of economic pressure the emphasis is on whether a reasonable
alternative was available to the coerced party. Second Restatement of Contracts § 1 1 suggests that a
contract is voidable by a victim whose manifestation of assent has been induced by an improper threat if the
victim has no reasonable alternative Conagra Trade Group, Inc. v. Fuel Exploration, LLC, 636 F. Supp. 2d 1166
(D. Colo. 2009). This statement and similar definitions of duress, however, raise the underlying issues: what is
a threat, and when is a threat “improper”?
[2] A Threat Is an Expression of Intention to Injure Another

A threat may be defined as an expression of intention to injure another. If Ames angrily claims that Barnes
“threatened” not to sell Barnes's property to Ames except at what Ames deems to be an excessive price, there
is no threat, proper or improper. Barnes may refuse to sell his property at any price or only at a price that Ames
or others deem excessive. Driving a hard bargain is not a threat.
Violence and threats of violence are wrongful and constitute duress. If a threatened act would be a crime or tort,
the threat is improper, but there would be no duress if the threat did not induce the apparent assent of the
victim or if the victim had a reasonable alternative to succumbing to the threat. While violence and threats of
violence constituting duress still exist, they no longer make up the bulk of duress cases.
[3] Threats of Criminal Prosecution

The notion that it is never duress to threaten what one has a legal right to do is a misleading maxim. The act of
turning a party into the IRS for failure to pay taxes is not improper. Nonetheless, when a husband threatened to
report his wife to the IRS to induce her to sign a settlement agreement for his pecuniary advantage, the threat
was not only improper but constituted the crime of extortion under a state criminal statute. Berger v. Berger,
466 So. 2d 1149 (Fla. Dist. Ct. App. 1985).
In another case, a husband embezzled funds and his employer threatened to prosecute the husband unless his
innocent wife signed two judgment notes. The court found an obvious illustration of duress. Germantown Mfg.
Co. v. Rawlinson, 341 Pa. Super. 42, 491 A.2d 138 (1985). While the employer has a right to turn the
embezzler into the authorities, the threat of doing so to induce private gain is an abuse of that right. If the
embezzler himself were the induced party, the same result would obtain. Indeed, an agreement not to
prosecute is itself an illegal bargain. Treating the induced contract as voidable is not a justification of the
criminal act.
Page 2 of 3
[4] Does Duress Require an Unlawful Act?

If a creditor has a right to foreclose on a mortgage or other security interest, a threat to do so unless the debtor
agrees to a disproportionate settlement constitutes duress if the debtor has no reasonable alternative. An older
case required an unlawful act to constitute duress. A creditor was in dire need of immediate cash, a fact known
by the debtor, who offered a lesser amount on a take-it-or-sue-me basis. The creditor agreed to the lesser
amount because his immediate financial need could not be satisfied by awaiting the outcome of the legal
process. The court rejected his claim of duress on the footing that his immediate financial need was not caused
by the debtor, who took advantage of it by an act that was not “unlawful.” Hackley v. Headley, 45 Mich. 569, 8
N.W. 511 (1881). (In subsequent litigation, the court employed the classic pre-existing duty rule to hold that the
promise to accept less that the amount due from the debtor was unenforceable because of the absence of
consideration. This analysis, however, does not justify a holding that the creditor's original promise was not the
product of bad faith coercion.)
The precedent is viewed as requiring an illegal compulsion to state a valid claim of duress. Whirlpool Corp. v.
Grigoleit Co., 2006 U.S. Dist. LEXIS 47588 (W.D. Mich. July 13, 2006). The holding is justly criticized as
inconsistent with other case law. See, e.g., Capps v. Georgia-Pacific Corp., 253 Or. 248, 453 P.2d 935 (1969).
It is also at odds with the dominant view that the harm to the victim of the compulsion must be measured
subjectively. In general, it lags far behind the current view of finding duress where threats to pursue legal rights
are abused to achieve unfair results. See Stefanac v. Cranbrook Educational Community, 435 Mich. 155, 458
N.W.2d 56, 74 n.40 (1990) (Levin, J., dissenting).
[5] Economic Pressure as Grounds for Duress

Cases involving various forms of economic pressure are sometimes called cases of “business compulsion”
rather than duress, which would restrict duress to nineteenth century categories of duress to persons or
property. There is no justification for this distinction or for a new category called “business compulsion.”
The defendant refused to perform existing contracts for asphalt unless the plaintiff agreed to pay a higher price.
The plaintiff could not discover an alternate supplier at a lower price than the defendant's raised price and
signed the defendant's contract which also contained a mutual release of all claims the parties may have had
against each other. The plaintiff argued that it was forced to sign the new contract under duress since the
defendant had threatened to cut off supply unless the plaintiff agreed to the higher price and the plaintiff could
not discover an alternate supplier at a lower price. The court, however, noted that duress not only requires an
effort to take undue advantage of the other party; it must be of such a character as to overcome the will of the
disadvantaged party. The evidence was insufficient to demonstrate that the plaintiff was deprived of the free
exercise of its will. The plaintiff could have purchased its entire asphalt supply elsewhere and held the
defendant liable for damages. The plaintiff had sufficient assets to pursue that course of action without financial
ruin. Instead, the plaintiff chose to purchase the higher-priced asphalt for the security of a fixed-duration
contract. Heckert Constr. Co. v. Sinclair Oil Corp., 2012 U.S. Dist. LEXIS 17019 (D. Kan. Feb. 13, 2012).
[6] Duress Induced by a Third Person

Sandra secured a protective order against her husband, Ray. A divorce decree awarded Sandra half of a 160
acre tract of land while Ray owned the remaining half. Each half was valued at $244,000. Ray was eager to
own the entire tract and paid an unplanned visit Sandra's father to seek his assistance. When Sandra arrived
unexpectedly for a visit with her father, Ray seized the opportunity to invoke the father's aid to have Sandra
agree to sell her half. Discussions and heated arguments ensued for some four hours. The father wanted Ray
to leave because he feared someone might be hurt. Sandra was fearful and crying. She signed an agreement
drafted by Ray to sell her half of the tract for $173,000. She later sought to sell the half to another party,
claiming she had signed the contract with Ray under duress. The father testified that because he wanted to
bring the discussion to an end, fearing that someone may be hurt, he repeatedly urged his daughter to sign.
Ray claimed that he had made no improper threat. Whether Ray's behavior constituted duress under the
traditional definition in Restatement (Second) of Contracts § 1 1 the trial court had found duress pursuant to
§ 1 2 because Sandra's manifestation of assent was induced by a third person. Such an inducement
constitutes duress unless the other party (here, Ray) has given value or relied in good faith without knowledge
of the duress Restatement (Second) § 1 2 . Ray, however, was well aware of the pressure being exerted on
Page 3 of 3
Sandra by her father who was induced to exert that pressure because of Ray's behavior. The court held that
Sandra's manifestation of assent was induced by the duress of her father making her contract to sell her half of
the tract to Ray voidable and unenforceable. Dorale v. Dorale, 2009 Iowa App. LEXIS 352 (May 6, 2009).
[7] Remedies for Duress—Ratification

In rare situations such as signing an instrument at gunpoint without knowledge of its contents, there is an
absence of consent rather than coerced consent that renders the transaction void. Typically, however, the
victim of duress has manifested consent to a coerced bargain where he or she has no reasonable alternative.
Such duress makes a contract voidable. In De Csepel v. Republic of Hung., 714 F.3d 591 (D.C. Cir. 2013),
descendants of the family from whom famous painting were confiscated seven decades earlier sought their
recovery. The plaintiffs argued that the paintings were taken pursuant to a bailment contract which the
defendant breached. The plaintiffs claimed they were within the statute of limitations because a claim under
such a contract accrues only when the return of the property is demanded. The defendant argued that any
claim of a bailment contract was negated by the plaintiff’s insistence that the family’s consent to delivering the
paintings was motivated by duress. The court noted that duress would only make the contract voidable and
voidable contracts become invalid only when a party exercises a power of avoidance. Because the family filed
its breach of contract action within three years of the defendant’s decision not to honor the plaintiffs’ demand for
a return of the collection under the breached bailment contract, the defendant’s statute of limitations defense
was rejected.
Once the coercion is eliminated, the previously coerced party may choose to ratify the contract either expressly
or by conduct, such as the continued receipt of benefits under the contract or simply failing to avoid it with
reasonable promptness. Thus, where an employee accepted the benefits of a settlement agreement and
release, he was precluded from litigating his claims for duress or misrepresentation. Schmidt v. Shah, 696 F.
Supp. 2d 44 (D.D.C. 2010) (citing Restatement (Second) of Contracts § 0 . In a similar case, after the plaintiff
had agreed to a settlement, she claimed duress by her attorney (a third party) that forced her to agree to a
settlement that was too low. The defendant became aware of this claim only weeks after the plaintiff had
agreed to the settlement. The court held that if the plaintiff had suffered duress, she waived her right to avoid
the agreement and ratified it by acquiescing in and acting upon it instead of promptly avoiding it. Nathan v.
Calco Duct & Vent Cleaning, 2009 Conn. Super. LEXIS 2536 (Sept. 29, 2009).
The typical remedy for duress is an action in quasi contract to avoid the unjust enrichment of the coercing party,
thereby protecting the victim's restitution interest by restoring the victim to status quo ante. For example, where
a victim has paid more than owed, he or she is entitled to a return of the excess amount paid with interest. If the
victim has surrendered property, he or she is entitled to the reasonable value of the property with an offset for
amounts the victim has received from the coercing party. The victim may also seek equitable relief in the form
of a constructive trust or equitable lien on the property to secure the restitution interest.
Practice Resources:
• Corbin § 2 .2 (history and elements of duress); § 2 . (wrongful acts or threats—
abuse of rights); § 2 . (threats of imprisonment or criminal prosecution); § 2 .
(duress of property: assertion of liens); § 2 . (coerced settlements or contract
modifications); § 2 . (business compulsion); § 2 . (remedies for duress—
ratification).

End of Document

§ 2 .03 Undue Influence Doctrine Implies Unfair Persuasion Rather than

Coercion
[1] Cases of Undue Influence Often Arise in the Context of a Confidential Relationship
With the expansion of the theory of duress, the concept of undue influence assumed a more specialized role.
Duress involves an improper threat inducing the victim to act according to the dictate of the coercing party;
undue influence involves improper or unfair persuasion. Common cases involve disappointed relatives of a
testator who, they claim, was unduly persuaded to leave property to the persuader instead of the relatives.
Cases of undue influence almost always arise out of a confidential relationship in which a dominant party
persuades the subservient party to act in a manner inconsistent with his or her welfare. The victim is convinced
that he or she can rely on the persuader's advice to pursue action in the victim's best interests. If the
dominating party influences the victim to contract with a third party, the contract cannot be avoided unless the
third party was aware of such influence. Absent such awareness, the third party is in the position of a bona fide
purchaser for value.
Such a confidential relationship shifts the burden of proof to the party seeking to uphold the validity of the
transaction as fair and voluntarily concluded by the other party. Transactions with such a person in a
confidential relationship are presumptively voidable by the subservient party. Undue influence focuses on the
unfairness of the transaction and the advantage to the persuader rather than coercion.
[2] General Test for Undue Influence

The essential test courts use to determine undue influence is whether the dominant party has overcome the will
of the subservient person by improper influence that deprives that party of free and competent exercise of
judgment. Pires v. Pires, 17 LCR 602 (2009). To make that determination, courts will consider the susceptibility
of the influenced party. Age, health, and mental condition are elements to be considered in ascertaining
susceptibility. There must be evidence of the opportunity to exert undue influence, and the existence of a
confidential relationship provides strong evidence of such an opportunity. Comeau v. Nash, 2010 WY 71, 233
P.3d 572. Confidential relationships include relationships between spouses, cohabitants, parent and child,
physician and patient, clergyman and parishioner, trustee and beneficiary, and guardian and ward. Storie v.
Household Int'l, Inc., 2005 U.S. Dist. LEXIS 40292 (D. Mass. Sept. 22, 2005) (quoting Restatement (Second) of
Contracts § 1 cmt. a). A lawyer may contract with a client with respect to matters outside legal services, and
such transactions are not advisable because of the lawyer's fiduciary duty to the client; this places a heavy
burden of proof on the lawyer to show that the transaction is devoid of any undue influence.
There must be evidence of the disposition to exert undue influence. This may be shown by establishing whether
the subservient person had reasonable access to independent advice. The most important evidence, however,
is whether the transaction appears to be natural for the subservient person under all of the surrounding
circumstances. Inadequate consideration would be an obvious but not exclusive factor to consider in this
regard. Evidence of fairness in the exchange is a significant factor in rebutting a prima facie case of undue
influence.
[3] Remedies for Undue Influence

A finding of undue influence makes the contract voidable by the victim. The power of avoidance, therefore, can
be lost by implicit as well as express ratification. A quasi contract action will be available to protect the victim's
Page 2 of 2
restitution interest; equitable restitutionary remedies such as a constructive trust or equitable lien would be
available in an appropriate case.
Practice Resources:
• Corbin § 2 . (background of undue influence); § 2 .10 (elements of undue
influence); § 2 .11 (undue influence: no confidential relationship); § 2 .12
(remedies for undue influence). Corbin on Contracts Desk Edition

End of Document

§ 2 .04 Misrepresentation and Nondisclosure
[1] Misrepresentations Are Assertions Not in Accord with the Facts

A misrepresentation is an assertion not in accord with the facts. Restatement (Second) of Contracts § 1 . A
fraudulent misrepresentation involves scienter, that is, the maker of the misrepresentation must know or believe
the assertion to be false and intend to mislead the other party. An assertion would still constitute fraudulent
misrepresentation even if the maker does not know or believe the assertion to be untrue, if the assertion is
made recklessly, as where the maker lies about the basis for the assertion or implies knowledge for the
assertion that the maker does not possess. A misrepresentation is material if it would likely induce a reasonable
party to manifest assent, or the maker knows that it would likely induce the assent of a particular party because
of that party's idiosyncrasies, even though it would not induce the assent of a reasonable person. Restatement
(Second) of Contracts § 1 2 2 cmt. c.
[2] Effect of Fraudulent vs. Nonfraudulent Misrepresentation

Except for one type or fraud, a fraudulent misrepresentation makes a contract voidable regardless of its
materiality. A nonfraudulent misrepresentation, however, must be material to create a power of avoidance.
Thus, the standard of nonfraudulent misrepresentation is objective, focusing on materiality, while the standard
of fraudulent misrepresentation is subjective, and materiality is irrelevant.
Fraud in the factum (execution), as contracted with fraud in the inducement, prevents the formation of a
contract because it precludes an effective manifestation of assent. It is a misrepresentation of the character or
essential terms of a proposed contract that induces conduct appearing to be a manifestation of assent by a
party who neither knows nor has a reasonable opportunity to know of the character and essential terms of the
document. Restatement (Second) of Contracts § 1 . See BankCherokee v. Insignia Dev., LLC, 779 N.W.2d
896 (Minn. Ct. App. 2010). If Ames's vision is temporarily impeded and her confidant Barnes guides her hand to
sign a document Barnes identifies as a simple receipt but the document is actually a contract to sell her
property, Ames will not be bound. Similarly, if a party is tricked into signing a negotiable instrument with neither
knowledge nor opportunity to learn of its character or essential terms, such fraud will be a defense against a
third party who otherwise qualifies as a holder in due course of the instrument. Uniform Commercial Code
(UCC) § - 02. If, however, a party who knowingly and voluntarily delivers goods in exchange for a check that
is later dishonored, or if the transferor of the goods was deceived as to the identity of the purchaser, the
inducing deceiver takes voidable title to the goods and may pass good title to a good faith purchaser for value.
UCC § 2- 0 .
[3] Causation and Reliance

A deceived party must establish that the misrepresentation caused his or her reliance. If an innocent party did
not believe the deceiver, the party was not deceived. A material misrepresentation creates a rebuttable
presumption of deception and reliance. If the recipient of a misrepresentation should have discovered the falsity
by making a cursory examination, the recipient's reliance is not justified. A nineteenth-century view that the
credulous invite their own misfortunes and should investigate the truth of representations has been substantially
relaxed. Unless the falsity of the representation was obvious, a party is entitled to rely on it. Where a 25-year-
old presented a copy of a driver's license with a 1937 birth date as well as a credit application as a 67-year-old
president of a dental business who had practiced dentistry for 39 years, the court held that an examination of
such documentation could have placed the other party on notice that the defendant was not the person he
Page 2 of 4
claimed to be. Peterson v. Swain, 2010 Conn. Super. LEXIS 841 (Apr. 6, 2010). Deliberate misrepresentations
that lull the recipient into a false sense of security will absolve a failure to investigate. Reliance, however, is a
question of fact and courts may hold that there was no reliance if the party claiming misrepresentation had
pursued a personal investigation of the representations before entering into the agreement. When, however, a
party warrants the accuracy of its representation as, for example, in the sale of a business, it makes no
difference whether the other party is actually deceived, since no-fault liability attaches to the warranty. See
CBS, Inc. v. Ziff-Davis Pub. Co., 75 N.Y.2d 496, 554 N.Y.S.2d 449, 553 N.E.2d 997 (1990).
[4] Requirement of Injury

Earlier statements that a contract can be avoided for misrepresentation only if an injury could be shown were
predicated on the tort action of deceit. Like other torts, it required an injury. The First Restatement of Contracts
§ cmt. c, and Restatement (Second) of Contracts § 1 cmt. c, both reject this view and state that, in
general, no injury need be shown to avoid the contract. Restatement (Second) of Contracts § 1 notes that,
where a misrepresentation induced an agreement but the misrepresentation is later cured, the contract is
avoidable only if it caused an injury. The case law, however, may not go quite that far. In Titan Ins. Co. v.
Hyten, 491 Mich. 547, 817 N.W.2d 562 (2012), the Supreme Court of Michigan reversed the court of appeals in
holding the application of § 1 to have been “improper” since the “cure” doctrine had not been raised at trial
nor had it been adopted in Michigan. The court declined to do so in this case absent full briefing and
arguments.
If a defrauded party receives less than the party had reason to expect or receives something substantially
different from what was expected, the defeat of the party's reasonable expectations is a sufficient “injury.” If the
party obtained what was bargained for, some courts would find that there is no need to redress the trick played
on that party; other courts would still allow the contract to be avoided. A misrepresentation of identity to
purchase land from a party the buyer knows will not sell to him can be avoided notwithstanding an otherwise
fair exchange. A misrepresentation inducing a party to perform a legal duty or to pay a pre-existing debt,
however, will not be avoided.
[5] Nondisclosure
If contracts are bargains, parties who bargain do not reveal all that they know any more than poker players
reveal the cards in their hands. A party with superior knowledge or information lawfully acquired has a
bargaining advantage over a less-informed party. The information may have been acquired only at considerable
cost. Even where the information was readily available at no cost, however, the great Chief Justice John
Marshall could find no duty on the part of one party to disclose information that the Treaty of Ghent had been
signed, ending the War of 1812, and resulting in the removal of the British blockade of New Orleans and a
consequent substantial increase in the price of tobacco. Laidlaw v. Organ, 15 U.S. 178, 4 L. Ed. 214 (1817). If a
buyer has lawfully acquired knowledge of valuable mineral deposits on the seller's land, there is no duty to
disclose that information. There are, however, numerous exceptions to the general rule that there is no duty to
disclose.
Modern courts recognize situations where nondisclosure will have the same effect as a misrepresentation. A
number of cases involve the sale of a residence infested with termites known to the seller who fails to disclose
that fact to the buyer. A partial disclosure (half-truth) is often a lie that operates to defraud the other party. Half-
truths are particularly egregious as answers to specific questions. When the other party asks a question, there
is a duty to speak. One buyer asked about a water conditioner in a basement, and the seller said it was simply
a device to soften the water; in truth, the seller knew that even more expensive equipment would have made
the sulfur-laden well-water barely drinkable. The court allowed rescission of the contract. Cushman v. Kirby,
148 Vt. 571, 536 A.2d 550 (1987). Various statutes such as those regulating the sale of securities and
government contracts require disclosure. Court rules governing discovery require disclosure of information that
may lead to settlement agreements. The Restatement (Second) of Contracts § 1 1 recognizes situations in
which nondisclosure is the equivalent of an assertion that a fact does not exist. See Lerner v. DMB Realty, LLC,
234 Ariz. 397, 322 P.3d 909 (Ct. App. 2014); Los Angeles Unified School Dist. v. Great American Ins. Co., 49
Cal. 4th 739, 234 P.3d 490 (2010).
Page 3 of 4
If a party makes a true statement in good faith that becomes untrue or where the good faith statement is later
discovered to be untrue, the maker has a duty to disclose that fact to prevent the previous assertion from
becoming a misrepresentation. R & R Capital, LLC v. Merritt, 632 F. Supp. 2d 462 (E.D. Pa. 2009). A mere
subsequent opinion by a third party, however, does not constitute such “knowledge.” Powers v. Guar. RV, Inc.,
229 Ariz. 555, 278 P.3d 333 (Ct. App. 2012). Where a party knows or should know that the other party is
operating under a mistaken assumption during negotiations, the first party has a duty to disclose the truth.
Confidential and fiduciary relationships impose disclosure obligations as do suretyship and insurance contracts.
If an attorney changes a document that had been pre-approved, he or she must disclose the changes to both
parties.
Non-disclosure must also be distinguished from concealment. Where an owner concealed severe termite
infestation of his house by having it painted over, a court cited Restatement (Second) of Contracts § 1 0
describing “concealment” as an affirmative act intended or known to be likely to keep another from learning a
fact he would have otherwise have learned. A visible inspection of the house would not have revealed the
damage covered by the paint. Such concealment is equivalent to misrepresentation making the same remedies
available to the aggrieved party. Cameron v. Miller, 2009 U.S. Dist. LEXIS 54944 (D.V.I. June 29, 2009).
Christy purchased a commercial general-liability insurance policy (CGL Policy) from Travelers in the name of
his sole proprietorship, K&D Oilfield Supply. He listed the “Form of Business” as “Individual” and indicated that
K&D was a sole proprietorship. This representation was entirely correct at the time it was made. Subsequently,
Christy registered his business as a corporation under the name K&D Oilfield Supply, Inc. When Christy
renewed his CGL Policy annually, he did not notify Travelers that he had incorporated his business. In cases
like this involving a mere nondisclosure, as opposed to an affirmative misrepresentation, the party failing to
disclose must know or have reason to know that the undisclosed fact will influence the decision-making of the
other party in order for the nondisclosure to be treated as an affirmative misrepresentation. “For Mr. Christy’s
mere silence on the change in his business structure to rise to the level of an affirmative misrepresentation,
Travelers must have made a specific inquiry or Mr. Christy must have known or should have known the
structure of his business was material to Travelers’ decision to renew the CGL Policy.” The resolution of this
issue was a question of fact. Christy v. Travelers Indem. Co. of Am., 2016 U.S. App. LEXIS 891 (10th Cir. N.M.
Jan. 20, 2016).
[6] Erroneous Statements of Opinion Do Not Render a Contract Voidable

An erroneous statement of fact that becomes part of the basis of the bargain in a contract for the sale of goods
is actionable as a breach of an express warranty, but a statement of opinion is not. UCC § 2- 1 . If a seller
erroneously states that a new automobile contains a Bose sound system, there is a breach of the express
warranty since the seller's statement is one of fact. If, however, a seller states that the automobile has a
“magnificent” or “wonderful” or “great” sound system, these statements are mere “puff” or “seller's talk” since
they are statements of opinion that create no warranty.
There are close cases in which different courts dealing with the same phrase could arrive at different results. If
a seller describes the mechanical condition of a used automobile as “A-1,” such a description to an auto
mechanic or a party who is otherwise aware of the mechanics of autos would be “puff.” The same statement
made to an untutored and unwise buyer who relies on the seller's statement can be a statement of fact
constituting an express warranty.
[7] Sense in Which a Statement of Opinion Is a Statement of Fact

In one sense, a statement of opinion is a statement of fact, i.e., it is a fact that a party has a particular state of
mind concerning the matter stated in that party's opinion. See Restatement (Second) of Contracts § 1 cmt. b.
Where a contract for the purchase and sale of commercial property required the seller to disclose any
communication the seller had with existing tenants, the seller claimed it had disclosed all such communications.
Later, the purchaser discovered that a tenant under a five-year lease had discussed its financial difficulties and
possible bankruptcy with the seller, but the seller had not disclosed this information. In response to the
purchaser's claim of fraud, the seller stated its opinion that the tenant's statement was not reliable. The court
concluded that the seller misconstrued the nature of opinion statements as a basis for fraud. Regardless of the
seller's opinion, the tenant's communication to the seller was a fact which the seller had a duty to disclose to
Page 4 of 4
the purchaser. Had the seller disclosed the communication together with its opinion regarding the possibility
that the tenant would not vacate the lease, the seller's opinion would not have been actionable. Complete non-
disclosure, however, was sufficient to establish a case for fraud. Auto. Holdings, L.L.C. v. Phoenix Corners
Portfolio, L.L.C., 2010 U.S. Dist. LEXIS 43500 (D. Ariz. May 4, 2010).
[8] A Promise with an Intent Not to Perform it Constitutes a Misrepresentation of Fact

A promise with an intent not to perform the promise is a misrepresentation of fact since “the state of man's mind
is as much a fact as the state of his digestion.” Edgingiton v. Fitzmaurice, L R., 29 Ch. D. 459, 483 (1885). Mere
proof that a promise was not performed does not establish the promisor’s intention not to perform it and does
not constitute a misrepresentation. Wells Fargo Bank N.A. v. Northern Rockies Neuro-Spine, P.C., 2014 U.S.
Dist. LEXIS 8437 (D. Wyo. Jan. 22, 2014). A promise impliedly represents that the promisor intends to perform
it. Thus, when a promisor has reason to know that he or she is incapable of carrying out the promise, he or she
has made a misrepresentation of fact that generates a power of avoidance in the other party. If the promise
would be unenforceable for lack of consideration or due to the parol evidence rule or statute of frauds, courts
are split on whether such factors are relevant in an action for restitution or deceit.
Practice Resources:
• Corbin § 2 .1 (elements of misrepresentation); § 2 .1 (scienter and
materiality); § 2 .1 (deception and reliance); § 2 .1 (injury); § 2 .1 (fact
versus opinion); § 2 .1 (fact versus law); § 2 .1 (fact versus intention and
promise); § 2 .20 (nondisclosure—implied warranty); § 2 .21 (disclaimers—
merger clauses); § 2 .22 (fraud in the factum distinguished from fraud in the
inducement).

End of Document

§ 2 .05 Disclaimers and Merger Clauses

A merger (“integration” or “zipper”) clause expresses the parties’ intention that the writing evidencing their contract
is intended to be the entire expression of their agreement, thereby leaving no doubt of that they intend their
agreement to be fully integrated. Parol evidence is, therefore, excluded. The most carefully drafted merger clause,
however, does not preclude evidence of fraud or misrepresentation. Fraud vitiates all that it touches.
An “as is” clause is viewed as trade talk that disclaims implied warranties of merchantability and fitness for a
particular purpose. UCC § 2- 1 . Such a clause, however, does not preclude evidence of fraudulent
representation or concealment of information by a seller or to bar actions for deceit and restitution. Prudential Ins.
Co. of Am. v. Jefferson Assocs., 896 S.W.2d 156, 162 (Tex. 1995). In New York State, disclaimers barring specific
representations may be enforceable.
Winter Park participated in an auction as an absentee bidder and executed an “Absentee Bidder Agreement” that
contained a lengthy waiver provision. The waiver included language excluding the implied warranties. It provided
that RKM Auctions’ duty was to provide the car in “as is” condition. This language, the court explained, was
“sufficient to exclude all implied warranties . Winter Park Imps., Inc. v. RK Motors, LLC, 2015 U.S. Dist. LEXIS
150403 (W.D. N.C. 2015).
Practice Resource:
• Corbin § 2 .21 (disclaimers—merger clauses).

End of Document

§ 2 .06 Remedies
Fraudulent misrepresentation allows the victim to choose between restitution and return to the status quo or
affirmation of the contract, retaining any benefits thereunder and seeking damages. Kochert v. Adagen Med. Int'l,
Inc., 491 F.3d 674 (7th Cir. 2007), citing Restatement (Second) of Contracts § 1 . When restitution is sought at
law, the general rule requires the defrauded party to tender what was received under the contract as a precondition
to relief, but a number of states have developed exceptions to this requirement. The offer to restore is conditional
on the return of what the offeror parted with. If the offer is not accepted, the plaintiff retains the benefit it received as
a bailee. An offer to restore is not required to raise fraud as an affirmative defense.
If the defrauded party seeks to affirm the contract, only tort damages are recoverable. For this tort, however, the
damages are measured by using the “benefit-of-the-bargain” rule since fraudulent inducement is a hybrid of tort and
contract. Lightning Litho, Inc. v. Danka Indus., 776 N.E.2d 1238 (Ind. Ct. App. 2002).
If the misrepresentation is negligent rather than fraudulent, many courts embrace an out-of-pocket measure of
damages. Goodrich & Pennington Mortg. Fund, Inc. v. J.R. Woolard, Inc., 120 Nev. 777, 101 P.3d 792 (2004). The
UCC sought to overcome the notion that remedies for fraud should be circumscribed by providing that remedies for
material representation or fraud include all UCC remedies available for non-fraudulent breach. UCC § 2- 21.
Practice Resource:
• Corbin § 2 .2 (remedies: election, express warranty, restitution).

End of Document

§ 2 .0 Adequacy of the Case Law of Fraud

The case law of fraud reveals rules that are quite “elastic.” Seemingly erratic approaches toward the issues of
materiality, reliance, nondisclosure, and the fact-opinion distinction often mask appellate judges' covert imposition
of control over the findings of fact of the court below. The elasticity of these rules makes the business of advising
clients difficult.
Practice Resource:
• Corbin § 2 .2 (adequacy of the case law of fraud).

End of Document

§ 2 .0 The UNIDROIT Principles

UNIDROIT Principles are the product of the International Institute for the Unification of Private Law (UNIDROIT),
which inspired the United Nations Commission on International Trade (UNCITRAL) to create the United Nations
Convention on Contracts for the International Sale of Goods (CISG). The UNIDROIT Principles for International
Contracts include Article 8.3 on fraud. It allows a party to avoid a contract based on fraudulent representation or
fraudulent nondisclosure of circumstances which, according to reasonable commercial standards of fair dealing,
should have been disclosed.
Practice Resource:
• Corbin § 2 .2 (the UNIDROIT principles).

End of Document

§ 2 .0 UCC Terminology—“Rescission,” “Termination” and “Cancellation”

Confusion attends the use of certain terms, including “rescission,” which should be relegated to a contract
manifesting the intention of the parties to discharge a prior executory contract. “Termination” is a power granted to
one or both parties under a contract which may be exercised in accordance with the terms of that contract. It is not
“cancellation,” which puts an end to a contract because of a breach by the other party, permitting the aggrieved
party to sue for damages. If a contract is “voidable,” damages are not owed; only rights to restitution are engaged.
The term “rescission” has been used by lawyers and others to refer to termination, cancellation, and avoidance. The
UCC defines these terms in the interests of clarity. UCC § 2-10 (termination); UCC § 2-10 (cancellation);
UCC § 2-20 cmt. 3 (distinguishing rescission from either termination or cancellation. See Restatement (Second) of
Contracts § 2 particularly comment a, which defines rescission and adopts the UCC distinctions.
Practice Resource:
• Corbin § 2 .2 (terminology: “avoidance,” “rescission,” “cancellation,” “termination”).

End of Document

§ 2 .10 Effect of Mistake in the Process of Bargaining and Promising

A mistake may be defined as a belief not in accord with the facts. The “facts” are reality as generally perceived.
There are mistakes in the law of torts or crimes that are not discussed here. There are other mistakes that do not
arise from a contract, such as a mistake in payment to the wrong party or a double payment to the right party, which
will allow a quasi-contractual recovery to prevent unjust enrichment of the payee.
This chapter focuses on mistakes made in the contractual process of bargaining or promising and their legal effects.
These include mistakes in expression, mistakes in execution, mistakes of identity of persons, mistakes of subject
matter, mistakes of value, mistakes in arithmetic, and mistakes by intermediaries. Mistakes may be made by one
party (unilateral mistake) or by both parties (mutual mistakes). One party may be aware of the other's mistake or
may have caused the other's mistake. A mistake may or may not have a material effect on the agreed exchange.
One of the parties may have assumed the risk of error or a court may have reason to allocate that risk to one of the
parties. It is important to understand remedies for mistake including damages, specific performance, avoidance,
restitution, and reformation.
The different types of mistake and the complexity of factors to be considered preclude a rule that could easily be
applied. The Restatement (Second) of Contracts, however, provides useful guides that assist in the analysis of
mistakes.
Section 152 provides a guide for mutual mistakes:

(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the
contract was made has a material effect on the agreed exchange of performances, the contract is voidable
by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 1 .
(2) In determining whether the mistake has a material effect on the agreed exchange of performances,
account is taken of any relief by way of reformation, restitution, or otherwise.
Section 154 addresses the question of which party bears the risk of a mistake:
A party bears the risk of a mistake when

(a) the risk is allocated to him by agreement of the parties, or
(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to
which the mistake relates but treats his limited knowledge as sufficient, or
(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
Am. Bottling Co. v. Crescent/Mach I Partners, L.P., 2009 Del. Super. LEXIS 359 (Sept. 30, 2009), illustrates the
application of these sections. A settlement of stockholders' suits pursuant to a merger resulted in a court
determining the share price at $32.31, which induced the plaintiff to pay $47,480,676.30 to the acquired company.
Two months later, it was discovered and confirmed that the court's calculations were incorrect, causing an
overpayment of $2.27 per share. The plaintiff sought to recover the overpayment on the basis of a mutual mistake.
The court found all of the elements of Restatement (Second) of Contracts § 1 2 had been met. There was a mutual
mistake since both parties were mistaken as to the price. The mistake was material, and the plaintiff did not assume
the risk of the mistake (Restatement (Second) § 1 since the contract did not assign the risk to the plaintiff, the
Page 2 of 3
plaintiff did not perform with any awareness that its knowledge was limited concerning the underlying facts, nor was
it reasonable for the court to assign the mistake to the plaintiff since the plaintiff entered into the settlement
agreement only after the court had rendered its opinion concerning the “fair value” of the stock.
Where Home Depot mistakenly paid a local assessment that was the landlord’s responsibility, the court held that
Home Depot did not assume the risk, and that a party who has mistakenly performed the obligation of another may
recover from the true obligor “to the extent of the benefit mistakenly conferred[,]” regardless of the nature of the
mistake. Roadepot, LLC v. Home Depot U.S.A., Inc., 2015 R.I. Super. LEXIS 31 (2015).
It is important to distinguish mistakes of fact at the moment of formation from the conscious assumption of uncertain
risks. A purchaser of publicly traded stock assumes the risk that the stock price will decrease or even plummet,
while the seller assumes the risk that the price will increase or even skyrocket. A casualty insurance company
collects premiums from owners whose property suffer no casualty over their lifetimes, while the insurer assumes the
risk of paying huge claims after collecting only the first premium. Such aleatory contracts involve conscious
uncertainty and are formed to reallocate a party's risk to the other party for a price. Indeed, in every contract each
party assumes uncertain risks. There is no mistake at the formation of such contracts; indeed, there is no mistake at
all since the parties knowingly assume some level of risk as to the uncertain future.
Where the parties entered into a mutually agreed-upon Marital Settlement Agreement that stated Wife was to
receive the proceeds of the sale of timber on the marital property, the value of the timber was premised on an
informal appraisal the parties had conducted three years earlier. It later turned out the appraisal was undervalued,
and the court rejected the Husband’s attempt to reform the contract. Husband had ample opportunity to obtain a
complete appraisal but chose to rely on the informal one. Orris v. Orris, 2015 Pa. Super. Unpub. LEXIS 3574 (Pa.
Super. Ct. 2015).
In Commonwealth Group-Winchester Partners, L.P. v. Winchester Warehousing, Inc., 2009 U.S. App. LEXIS 13816
(4th Cir. June 26, 2009), the court emphasized that “mistake” is a belief not in accord with the facts as they exist at
the time the contract is formed. The definition of “mistake” does not include a “prediction” of events to occur.
Capital Center entered into an amendment of its lease of the IMAX system to operate an IMAX three-dimensional
theater. Prior to entering into the amendment, Capital Center expressed its desire to be able to play “Hollywood
movies” on the IMAX system and made a “significant financial investment” to update the IMAX system to
accomplish this desire. After the lease was executed, IMAX announced a new digital projection technology that
Capital Center claimed rendered its IMAX system incapable of playing new Hollywood movies and, therefore,
obsolete. Capital Center defaulted on its lease obligations. The court rejected Capital Center’s mistake defense
since the defense was based on a fact—that upgrades of the IMAX system (expressly contemplated by the
amendment) would be incompatible with showing “Hollywood 3D movies”—that did not exist at the time of the
amendment. IMAX Corp. v. Capital Ctr., 2016 U.S. Dist. LEXIS 2878 (M.D. Pa. 2016). Where the parties’
purported mistake in entering into the contract was based on an erroneous prediction that Indiana would extend its
statutory moratorium on granting new certifications for nursing facilities to be reimbursed under the Medicaid
program, it was not a mistake as to an existing fact at the time the parties made the agreement. The court explained
that “the belief that the moratorium would be extended was … a prediction, and thus cannot support a mutual
mistake of fact defense.” Lutheran Homes, Inc. v. Lock Realty Corp. IX, 2015 U.S. Dist. LEXIS 24588 (N.D. Ind.
Mar. 2, 2015).
It is also important to distinguish mistakes from issues of interpretation. Ambrose moved to avoid a confidential
settlement agreement (CSA) on the ground of mistake. The court quoted the usual definition of “mistake” from § 1 1
of the Restatement (Second) of Contracts—“A mistake is a belief that is not in accord with the facts.” The court
explained that Ambrose did not contend that he executed the CSA under a belief not in accord with the facts.
Rather, he disputed the meaning of a particular provision of the agreement, which is a question of interpretation. It
is not a “mistake” that may be used to avoid a contract. Ambrose v. Krause Publications, Inc., 2009 U.S. App.
LEXIS 25951 (3d Cir. Nov. 30, 2009).
Page 3 of 3
Practice Resources:
• Corbin § 2 .2 (what is meant by mistake and what material factors must be
considered?); § 2 .2 (agreed allocation of risks: conscious uncertainty distinguished
from mistake).

End of Document

§ 2 .11 Kinds of Mistake
[1] Mistake in the Expression of Assent

Earlier in this volume (see Chapter 4 above) we explored mistakes in expression. In the classic case of Raffles
v. Wichlehaus, 2 Hurl & C. 906 (1864), the expressions of the parties contemplated the purchase and sale of
cotton to arrive on a ship named “Peerless.” They later discovered that, unbeknownst to either party, there were
two ships named Peerless. There was no basis for finding a contract between such innocent parties. In another
case, a third party provided altered documents to the contracting parties that led an innocent buyer to believe
that he would receive a building for $23,000, while the innocent builder's document stated the contract price at
$33,500. The court properly held that no contract was formed. Vickery v. Ritchie, 202 Mass. 247, 88 N.E. 835
(1909). The analysis, however, changes where one of the parties knows or should know that the other is
making a mistake.
[2] Mistake as to Existence of Subject Matter

If the parties agree to buy and sell property and neither is aware that the property no longer exists, the contract
will be set aside and restitution of any benefits conferred under it will be made. (A marine insurance policy,
however, may expressly assume the risk of loss that has already occurred. The insurer consciously assumes
such a risk.) Similarly, a contract may be avoided when it mistakenly assumes the existence of a person who
has already died or the existence of incorporeal rights that do not exist. Where, however, a buyer of a dredge
designed for submarine trenching assumed that it was suitable for dredging in shallow water, the court found
the buyer failed to exercise reasonable diligence in determining the capabilities of the dredge and the seller
made no representations. The unilateral mistake of subject matter remained with the buyer. Anderson Bros.
Corp. v. O'Meara, 306 F.2d 672 (5th Cir. 1962). Leases of mineral lands may be set aside if the evidence
clearly indicates that it would not have been made absent such a mutual mistake. If the contract indicates that
the lessee assumes the risk of lease payments whether or not minerals are discovered, however, there is no
mistake on which to base any relief.
[3] Mistake as to Identity

When Ames makes an offer to Barnes and Carr attempts to accept the offer, it is clear that Carr had no power
of acceptance and no contract is formed. There can be no mutual assent in such a transaction. This basic
rationale, however, is not necessarily correct in all cases of mistake of identity. If the parties have performed the
agreement while the mistaken party remained mistaken, the notion that there was no “meeting of the minds”
may not provide an appropriate solution.
Plaintiffs sought bids for a service that had to be performed by a Florida corporation. The defendant
misrepresented its state of incorporation by using the address of a Florida corporation in accepting the bid. In
the plaintiffs' action for damages, the trial court held that there was no “meeting of the minds” since the plaintiffs
mistakenly believed they were dealing with a Florida corporation. On appeal, the court relied on the analysis in
Corbin on Contracts in noting that older cases deal with mistakes of identity of a contracting party in terms of
contract formation, but the issue is more effectively treated under the law of mistake. When one party is
laboring under a mistake about who the other party really is, an otherwise valid contract is, at most, voidable by
the mistaken party. It is certainly not voidable by the party who induced the mistake by its misrepresentation.
Governing Bd. of the St. Johns v. Cont'l Aerial Surveys, Inc., 827 So. 2d 304 (Fla. Dist. Ct. App. 2002).
Page 2 of 4
If Ames intends to make an offer to the Barnes Company of California but mistakenly sends the offer to the
Barnes Corporation of Boston, which regularly deals in the products in Ames's offer and otherwise has no
reason to suspect the offeror has made a mistake, Ames will be bound by the appearance of its offer to a
reasonable party such as Boston Barnes. Restatement (Second) of Contracts § 2 cmt. b. On the other hand, if
Boston Barnes knew or should have known of Ames's mistake, there is no contract. Its shipment of goods to
Ames would operate as a counter-offer.
Innumerable contracts are made in which one party neither knows nor cares who the other party is. If the
identity of a party to the bargain is, in fact, immaterial to the other party, the case law indicates that courts will
enforce the contract. When an agent makes a contract for an undisclosed principal, there is no mistake since
the agent is bound as if the agent were a principal. The other party gets not only what he or she expected but
more since, upon disclosure, the principal may also be liable.
The UCC deals with mistakes of identity in determining the rights of good faith purchasers for value. If a party
procures goods from the owner through a misrepresentation of identity, the deceiver is nonetheless a
“purchaser” who takes voidable title to the goods and can pass good title to a good faith purchaser for value.
UCC § 2- 0 . The same section includes other deceptions such as providing a check that later is dishonored or
procuring the goods through fraud punishable by the criminal law. Similarly, entrusting goods to a merchant
who deals in goods of that kind (e.g., leaving a watch to be repaired at a jewelry), allows the merchant to pass
good title to the goods to a good faith purchaser for value.
[4] Mistakes in the Sale of Land

Mistakes in contracts for the sale of land are made as to the location, size or value of the real property. If the
parties orally agree upon a certain tract of a certain size but the subsequent contract document contains a
mistaken description, the remedy of reformation will lie if the evidence of the mistake is clear and convincing.
Such evidence and the remedy of reformation will be readily available if the parties have described the land in
their written contract and the mistaken description appears in the subsequent deed of conveyance.
Any tract of land can be viewed as unique in terms of its location. As such, it is not difficult to establish that a
mistake as to the location has a material effect upon the agreed exchange, allowing the contract to be avoided
and restitution of any down payment granted. There are cases nonetheless where courts deny such relief
because the mistake was due exclusively to the buyer's carelessness.
Many of the land cases involve a mistake in the acreage of the land. A material variance in the actual acreage
will typically allow avoidance by the aggrieved party. Innocent but materially mistaken representations by
vendors of land concerning the amount of timber on the land or water rights will allow the contract to be
avoided.
[5] Mistake as to Releases

After agreeing to release a party from any and all claims in exchange for a certain payment, the claimant may
later assert that the release is voidable because of mistake. The most prevalent situation involves personal
injury claims. If a claimant later discovers that the nature and extent of the injury is greater than originally
assumed, most courts will not permit the claimant to avoid the release on the basis of mistake. If the injury
discovered after the release was unknown at the execution of the release, courts will permit avoidance of the
release under what may be called the “unknown injury” rule since the unknown injury could not have been part
of the basic assumption on which the release contract was made.
To avoid this risk, the claimant may have been asked to sign a release explicitly discharging the other party
from liability for either known or unknown injuries. Such a release may not preclude avoidance and consequent
liability, however. Courts will look to discover unfairness or unconscionability with respect to such terms. The
release in standardized, boilerplate language particularly invites such scrutiny. The basic assumptions of the
parties at the time of the release, the consideration received by the claimant, and the relationship between the
known and unknown injuries are among the relevant factors courts will consider. Restatement (Second) of
Contracts § 1 2 cmt. f.
[6] Mistake or Ignorance of Value

Page 3 of 4
While the value of the promised exchanges in a contract is almost always a principal inducement for making the
contract, value is uncertain and subjective. Each party assumes the risk of value.
Representatives of an estate hired an appraiser to determine the value of the personal property in preparation
for an estate sale. The appraiser stated that she did not appraise fine art but the representatives chose not to
hire a fine art expert. Among the personalty at the sale were two paintings that sold for $65; they turned out to
be originals by a well-known artist and the buyer subsequently arranged to have them sold at auction for more
than a million dollars. The buyer was not aware that the paintings were originals when he purchased them for
$65. The estate's claim of mutual mistake was rejected on the basis of the analysis in Restatement (Second) of
Contracts § 1 . A party bears the risk of mistake when the party is aware that he or she has only limited
knowledge with respect to the fact to which the mistake relates, but treats that limited knowledge as sufficient.
Essentially, there is no “mistake” since the parties acted out of conscious ignorance and assumed the risk of
such a mistake. Restatement (Second) of Contracts § 1 and cmt. c. The court also noted § 1 c under
which courts may allocate the risk of a mistake because it is reasonable to do so under the circumstances. See
§1 cmt. d. The estate had ample opportunity to appraise what it was selling before selling the property and
chose not to do so. It was, therefore, just for the court to allocate the risk of the mistake to the estate. Estate of
Nelson v. Rice, 198 Ariz. 563, 12 P.3d 238 (2000).
The most famous case dealing with a mistake of value is Sherwood v. Walker, 66 Mich. 568, 33 N.W. 919
(1887). In that case, a cow named Rose 2d of Aberlone was assumed to be sterile but was, in fact, fertile and
worth 10 times the contract price at which she had been sold. The court found the contract to be voidable on
the footing that a barren cow is substantially a different creature than a breeding cow. The court's rationale is
uncertain. Presumably it concluded that the parties made a basic assumption that was mistaken and the
mistake had a material effect on the agreed exchange. The critical issue, however, is, whether the buyer or
seller assumed the risk of such a mistake.
In the sale of the paintings for $65, it could certainly be argued that the parties mutually assumed that the
paintings were not original, but the risk of the mistaken value was on the seller. In another famous case, the
seller of a stone was unsure of its value and brought it to a jeweler who was not an expert in uncut stones.
Subsequently, the jeweler bought the stone for a nominal sum and it later turned out to be a diamond worth a
multiple of the price paid rather than a topaz. The evidence clearly indicated that the seller assumed the risk
that the stone could turn out to be a diamond and the buyer assumed the lesser risk that the stone was
worthless. Wood v. Boynton, 64 Wis. 265, 25 N.W. 42 (1885).
A jewelry shop owner offered to sell a customer 20 carat diamond for $235,000, and the customer conferred
with persons knowledgeable about gems who advised him the “price was too good to be true,” but the customer
bought it anyway. The actual price should have been $4,850,400. The jeweler filed an action seeking recovery,
but the court held there was a fact issue as to whether the jeweler was unduly negligent in entering into the
contract. DePrince v. Starboard Cruise Servs., 163 So. 3d 586 (Fla. App. 2015).
The case law indicates that risks of value will not be reallocated when a much greater or lesser value is later
discovered absent some manifestation of understanding at the time the contract is made that such risks were
not assumed.
[7] Mistake in Pricing

In Aluminum Co. of America v. Essex Group, Inc., 499 F. Supp. 53 (W.D. Pa. 1980), ALCOA agreed to convert
alumina into aluminum for Essex in a contract that could last for more than 20 years. To assure some profit for
ALCOA in such a long-term contract, the parties agreed on a price formula that was approved by the eminent
economist, Alan Greenspan. The price would change in accordance with the wholesale price index. After a few
years, it became clear that energy costs were rising much more rapidly than the index. ALCOA's projected
losses were huge and it sought to avoid the contract on the grounds of mutual mistake and commercial
impracticability as well as frustration of purpose.
The court found that there was a mutual mistake since both parties had agreed to the formula that was
designed to assure a particular result. The parties were mistaken since the index upon which the formula was
based could not encompass actions such as the Arab oil embargo, which created havoc with energy costs.
There is much to be said for the court's view of mutual mistake since the parties' basic assumption was that
ALCOA should not suffer a loss under a price formula that was designed to assure that it would receive at least
some profit. The court's modern view of mutual mistake that was expressly influenced by the Corbin analysis
Page 4 of 4
has not engendered a uniformly favorable reaction. See, e.g., Printing Industries Asso. v. International Printing
& Graphic Communications Union, Local No. 56, 584 F. Supp. 990 (N.D. Ohio 1984). In terms of its analysis of
the doctrines of commercial impracticability and frustration of purpose (discussed in Chapter 74 below), the
case is viewed as an unreliable precedent.
Practice Resources:
• Corbin § 2 .2 (mistake or misunderstanding in the expression of assent);
§ 2 . 0 (mistake as to existence of subject matter necessary to performance);
§ 2 . 1 (mistake as to identity of a party to a bargain); § 2 . 2 (cases in which
identity is immaterial); § 2 . (mistake in sales of land, as to title, area, quality,
or price); § 2 . (releases—mistake as to personal injuries and employment
rights); § 2 . (mistake or ignorance of value or as to factors that affect value);
§ 2 . (the ALCOA case).

End of Document

§ 2 .12 Mutual vs. Unilateral Mistake
[1] Avoidance May Be Available for Unilateral Mistake

The notion that relief for mistake will be granted only where the mistake is mutual is erroneous. It is universally
accepted that avoidance of a unilateral mistake will be granted where the other party knew or should have
known of the other party's mistake.
Anco's first employment with ACCO began in 1981 and ended with a paid severance package in 2006. Anco
was rehired in 2007, and this employment ended in 2009 with another severance package. Anco received an
estimate of the severance he would receive, six weeks of salary ($10,190.19) plus other benefits. When the
severance agreement arrived, however, it stated that Anco's severance amounted to 26 weeks of salary
($44,157.49) plus other benefits which Anco did not question. After Anco began to receive payments, ACCO
discovered its mistake of computing Anco's severance payments on the basis of his original starting
employment date of 1981 instead of his subsequent starting date of 2007. Anco claimed that the only mistake
was ACCO's error; there was no mutual mistake that would give rise to reformation. While recognizing the
importance of the distinction between mutual and unilateral mistakes because of the reluctance of courts to
allow a party to avoid a contract on the basis of a unilateral mistake (Restatement (Second) of Contracts § 1
cmt. a), the court also recognized that relief from a unilateral mistake was appropriate where the other party
knew or had reason to know of the mistake (Restatement (Second) of Contracts § 1 . ACCO made a
unilateral mistake in choosing the wrong date to calculate severance benefits. The mistake had a material effect
on the agreed exchange that was adverse to ACCO, and ACCO did not bear the risk of the mistake if Anco
knew or had reason to know of it. When he received the estimate of severance benefits, Anco did not question
their accuracy. Yet, when the letter agreement arrived stating benefits greater than four times the estimate, he
simply signed the agreement. The court held that Anco was not entitled to such a windfall. Anco v. ACCO
Brands United States LLC, 2012 U.S. Dist. LEXIS 30168 (N.D. Ill. Mar. 7, 2012).
Beyond this generally recognized “exception” to the view that relief is limited to mutual mistakes, it is now
generally recognized that avoidance for unilateral mistake is available where:
(1) enforcement of the contract against the unilaterally mistaken party would be oppressive or result in an
unconscionable exchange of values; and
(2) avoidance would impose no substantial hardship on the non-mistaken party.
If, however, a party is aware, at the time of contracting, that it has only limited knowledge of facts to which the
mistake relates but treats the knowledge as sufficient and the knowledge turns out to be mistaken, that party
bears the risk of the mistake. Ass'n of Apt. Owners of Nihilani v. Nihilani Group, LLC, 130 Haw. 351, 310 P.3d
1052 (2013). Where a health insurer failed to confirm a patient's medical history before agreeing to settle a
claim with a hospital in the amount of over $265,000, the court denied the insurer's claim for rescission of the
settlement agreement on the basis of unilateral mistake since the insurer “did not exercise anything
approaching ordinary care” before agreeing to the settlement amount. HealthEast Bethesda Hosp. v. United
Commer. Travelers of Am., 596 F.3d 986 (8th Cir. 2010).
Where a corporation’s president personally guaranteed a debt of the corporation, he was held personally liable
for his contractual obligation even though, subjectively, he misunderstood the legal effect of what he agreed to.
Charter Adjustments Corp. v. Tung, 2015 Cal. App. Unpub. LEXIS 4356 (2015).
Where a unilaterally mistaken party alone bore the risk of a mistake, and the other party affirmatively relies on
the mistake, the mistaken party is not entitled to relief. Where a subcontractor based a bid on information it
gleaned by looking at the wrong drawing, it underestimated the amount of asphalt required for the job. The
Page 2 of 3
prime contractor relied on that mistake in accepting the bid. The court held that the subcontractor alone bore
the risk of the unilateral mistake and was not entitled to relief. United States ex rel. Asphalt Contrs. & Site Work,
Inc. v. KAR Contracting, LLC, 2015 U.S. Dist. LEXIS 163027 (S.D. W. Va. Dec. 4, 2015).
It is sometimes urged as a general rule that reformation will not be granted in the case of a unilateral mistake,
but that statement overlooks the necessary condition to any reformation remedy, the true intention of the
parties, to which the court may reform a mistaken writing. If no such “true (mutual) intention” exists, reformation
is impossible regardless of whether the mistake is unilateral or mutual.
[2] Failure to Discover Facts That Would Have Avoided the Mistake
In the nineteenth century, courts often stated that one had to bear the consequences of one's own mistake. The
current view is stated nicely in Restatement (Second) of Contracts § 1 a mistaken party's fault in failing to
discover facts that would have avoided the mistake does not bar the party from reformation or avoidance unless
the fault amounts to a failure to act in good faith and according to reasonable standards of fair dealing.
Nonetheless, if the other party was innocent and has materially changed his or her position in reliance on the
contract, relief for a unilateral mistake must be conditioned on the ability to restore that party to status quo.
Otherwise, relief for the mistaken party will be denied.
When an offeree appears to assent to a written offer by signing it or otherwise manifesting assent, but has not
read the offer, the offeree should be bound by the terms of the unread offer absent any awareness by the
offeror of the offeree's misconception or other grounds for avoidance. Where a document contained a forum
selection clause the court explained that a person signing a contract is presumed to know its terms. Preston
Frankford Shopping Ctr. Dallas, TX. Ltd. P'ship v. Butler Dining Servs., LLC, 757 F. Supp. 2d 248 (W.D.N.Y.
2010). A court held that conspicuous waiver language in a gym membership agreement barred claims for
personal injury, and plaintiff’s failure to read the waiver is “supine negligence.” Hinkal v. Pardoe, 2016 PA Super
11, 2016 Pa. Super. LEXIS 32 (2016). The offeror is reasonable in assuming a contract has been formed. That
logical view, however, is modified where the offeree is laboring under a mistake. A “reasonable care” standard
may suggest that no party should assent to a writing without reading it and anyone who does so is guilty of
some form of “negligence.” A lack of such diligence does not preclude the remedy of avoidance or reformation
assuming good faith and fair dealing by the mistaken party. Again, where the other party is innocent and
changes his or her position, the party must be restored to status quo.
If an offeror has misrepresented the terms of the writing and the offeree relies on the misrepresentation without
reading it, courts must choose between fraud and negligence. Older cases held the negligent offeree to the
bargain, but modern courts find negligence much less objectionable than fraud.
[3] Computation Errors

Errors in arithmetic are common. A simple computational mistake presents an offer or a bid on a construction
project that the offeror or bidder would not have made had it been aware of the mistake. Failing to insert an
item in a column of figures resulting in a total $50,000 lower than the total without the mistake is not an
uncommon error. It is sometimes suggested that if such an offer or bid is accepted the contract can be avoided
because there was no mutual assent—no “meeting of the minds.” Regardless of the phraseology, the concept
is wrong.
When the offer was made at the totaled figure, that number was the number intended by the offeror; there was
no mistake in the offer. The mistake was antecedent to the offer in the failure to include a missing term that led
to the final figure. Many courts have agreed that a contract is formed when such an offer is accepted by an
offeree who is neither aware nor should be aware of the antecedent error.
If the error is discovered before the offeree accepts, a contract will not be recognized where an offeree attempts
to “snap up” an offer the offeree knows is mistaken. If the offeree accepts such an offer without actual or
imputed awareness of the mistake, a number of cases have held that prompt notice of a substantial error prior
to the offeree's irreversible change of position will allow the bargain to be avoided.
[4] Elements Required for Relief

Relief is conditioned on: (1) the materiality of the mistake; (2) the “negligence” in making the mistake was slight,
e.g., an inadvertent clerical error; (3) the non-mistaken party will not be prejudiced by granting relief; and (4)
Page 3 of 3
enforcement of the mistaken bid would be unconscionable, i.e., oppressive to the mistaken party. Boise Junior
College Dist. v. Mattefs Constr. Co., 92 Idaho 757, 450 P.2d 604 (1969). See also Restatement (Second) of
Contracts § 1 .
The “unconscionable” element will not be met simply because a contractor's mistaken bid will result in less
profit than a non-mistaken bid would have produced. A $250,000 loss because of a mistaken bid is substantial
in absolute terms, but if it simply lowers a contractor's profit to $2 million instead of $2.25 million, the effect is
hardly oppressive.
[5] A Contract May Be Voidable by One Party and Not by the Other
When a unilateral mistake makes the bargain voidable, it is voidable by the mistaken party but not unless it
operates in some way to the mistaken party's substantial disadvantage. If a vendor mistakenly conveys less
that it supposed, the vendor has no power of avoidance if the purchaser is content with the bargain as
performed.
Essentially, the same concept applies to mutual mistakes. Though a mistake is mutual, it typically operates to
the disadvantage of one of the parties. Thus, if the basic assumption of the parties in a conveyance of land was
the purchaser's desire to use the land for a purpose that turns out to be a violation of a zoning law, the contract
is voidable by the purchaser. If, however, the purchaser chooses not to exercise the power of avoidance and
pay the purchase priced notwithstanding the mistake, the contract is enforceable against the seller.
Practice Resources:
• Corbin § 2 . (negligence and delay of mistaken party, change of position by
others, and ratification); § 2 . (mistake caused by failure to read a document
before signing); § 2 . (must mistake be mutual? unilateral mistake compared);
§ 2 . 0 (unilateral errors of computation in preparing bids and offers); § 2 . 1
(mistake by one party, the other having knowledge or reason to know of it);
§ 2 . 2 (contract may be voidable by one party and not by the other); § 2 .
(unilateral mistake as ground for refusing specific enforcement).

End of Document

§ 2 .13 Specific Performance in the Case of Unilateral Mistake

When judges sat on one side of Westminster Hall and chancellors sat on the other side, the separation between law
and equity was emphatically clear and to any observer it appeared to be permanent. The evolution of the two
systems, however, clearly displays a great deal of mutual borrowing. Equitable defenses and causes of action
became legal defenses and causes of action. At one time, fraud and mistake may have been seen as solely within
the jurisdiction of the chancellor, but they clearly became part of common law courts, assisted materially by the
elimination of separate courts.
When a contract is voidable because of mistake, a decree of rescission of the contract is not necessary for a simple
action for restitution of money. Indeed, where the modern remedy sought is solely damages of any kind, whether to
protect the reliance, restitution, or expectation interests, the action is at law. A remedy of specific performance,
however, continues to manifest the historical discretion inherited from chancellors of old.
If a unilateral mistake is material and the contract would not have been made absent the mistake, even if the
mistaken party was somewhat negligent, a court of equity will refuse to grant specific performance. Specific
performance in spite of a material mistake would often cause serious hardship, and justice only requires that the
other party be placed in status quo ante. If the mistake is immaterial, specific performance will be granted
Practice Resources:
• Corbin § 2 . (unilateral mistake as ground for refusing specific enforcement); § 2 .
(remedies for mistake—effect of amalgamation of law and equity).

End of Document

§ 2 .14 Elements and Application of the Remedy of Reformation

Reformation is the quintessential equitable remedy. It is available where the parties have an agreement (not
necessarily a contract) that they have agreed to reduce to writing and the writing is at variance with the terms of the
parties' original agreement. Historically, the notion involved a writing by a “scrivener”—a lawyer or someone with
alleged expertise in creating such writings—who failed to state the true intentions of the parties in the writing. The
Chancellor could correct the “scrivener's error” by ordering reformation of the writing, not reformation of the
agreement, since the objective is to state the true agreement of the parties. Reformation does not lie where the
contract is mistaken. Contracts are not reformed; writings are reformed. Sutton v. Licenziato, 2015 Conn. Super.
LEXIS 2433 (Conn. Super. Ct. Sept. 18, 2015) (citing the Corbin treatise); Wells Fargo Bank v. Pampoukidis, 2014
Conn. Super. LEXIS 2953 (Conn. Super. Ct. Nov. 25, 2014) (citing the Corbin treatise); Apple Tree Ridge
Neighborhood Ass'n v. Grandfather Mt. Heights Prop. Owners Corp., 206 N.C. App. 278, 697 S.E.2d 468 (2010).
The writing may be a contract, a deed, or other instrument.
Neither the statute of frauds nor parol evidence rule precludes reformation of a writing. The mistake in the writing
may be a mathematical error, an error in stating the boundaries of property, or the failure to change the beneficiary
of an insurance policy, since reformation may be granted to third-party beneficiaries.
Reformation requires clear and convincing evidence of the true intention of the parties to which the court may
reform the writing. (Some cases suggest that the evidence must be “strong and convincing” or “entirely
satisfactory.” The standard, “beyond a reasonable doubt” may also be found in a rare reformation case, but that
standard is applicable in criminal cases. In confidential relationships, the standard of proof is relaxed.) Absent clear
and convincing evidence that the parties' original mutual intentions, reformation will not lie. W. Coast Pizza Co. v.
United Nat'l Ins. Co., 166 Wash. App. 33, 271 P.3d 894 (2011). Lincoln Nat’l Life Ins. Co. v. Onsager, 2015 U.S.
Dist. LEXIS 83267 (D. Iowa 2015) (evidence of alleged mistake in naming beneficiary of annuity policy did not rise
to the level of “clear and convincing,” the evidence “supports only the contention that no one is sure what happened
with respect to the beneficiary designation . Any court with equity powers may decree reformation. A decree of
reformation may be accompanied by a decree of specific performance, an injunction, or damages. Though the
concept of reforming the writing is clear, it is not necessary that the writing be redrafted since the decree itself fixes
the parties' rights and duties. Reformation may be had not only by the original parties to the contract, but by a real
party in interest claiming privity to the instrument such as an assignee. Cascades Dev. of Minn., LLC v. Nat'l
Specialty Ins., 675 F.3d 1095 (8th Cir. 2012) (citing Restatement (Second) of Contracts § 1 cmt. e). While it is
not uncommon to discover assertions that the remedy of reformation is available only where the mistake in the
writing is mutual, the remedy is also proper where one of the parties is unaware of the mistake in the writing and the
other party is aware of it but does not disclose the mistake. Where a unilateral mistake is coupled with such
inequitable conduct, reformation may be granted. Otherwise, mutual mistake is viewed as necessary to effect
reformation. Essex Ins. Co. v. Tina Marie Enter., LLC, 2014 U.S. Dist. LEXIS 46830 (M.D. Fla. Apr. 4, 2014).
As seen earlier in this chapter, duress is normally raised to set a transaction aside. Where, however, a party has no
reasonable alternative but to yield to threats in signing a writing evidencing contract terms different from those to
which the party previously agreed, reformation of the writing to conform to the original agreement would be
appropriate.
Practice Resources:
Page 2 of 2
• Corbin § 2 . (reformation of mistaken instruments); § 2 . (reformation for duress);

§ 2 . (procedure and burden of proof in getting reformation).

End of Document

§ 2 .15 Mistake in Payment or Performance

Relief for mistakes in performance is more readily given than relief for mistakes in contract formation. Except for
mistakes of law, which are considered in the next section, where one party mistakenly pays money to the other
party in the performance of the contract, the fundamental rule against unjust enrichment allows the payor to recover
the payment. Similarly, the payor may recover an excess amount mistakenly paid under the contract. If something
other than money has been transferred, the transferor may recover the value of what has been transferred and, in
an appropriate case, specific restitution will be granted. When a party performs without awareness that the statute
of limitations could have shielded it against such performance, the party will not be entitled to restitution because of
the underlying moral obligation to make the payment.
As in other mistake situations, “conscious ignorance” must be considered. When an insurer and insured share a
mistaken basic assumption that a casualty has occurred, the insurer's payment is recoverable. If the payment was
made under circumstances of serious doubt as to whether the casualty occurred, the settlement stands.
Practice Resource:
• Corbin § 2 . (mistake in payment or other performance).

End of Document

§ 2 .16 Mistake of Law

In the 1802 case of Bilbie v. Lumley, 2 East 469, 102 E.R. 448 (K.B. 1802), Lord Ellenborough ruled that money
paid under a mistake of law need not be repaid since ignorance of the law is no excuse. The injustice of that rule
spawned numerous exceptions under which restitution would be granted for so-called mistakes of law. As
suggested in an opinion by Judge Posner, the notion that ignorance of the law is no excuse is the converse of the
presumption that everyone knows the law in all of its complexity; such a notion is rather “wooden.” Lawyers Title
Ins. Corp. v. Dearborn Title Corp., 118 F.3d 1157, 1163 (7th Cir. 1997).
Another rationale recognizes the fact that the law favors settlements and when a party pays a claim to which it
might have a good defense, it is settling a dispute and the settlement ought to stand. If the dispute is so one-sided
that an inference of settlement is implausible, there is no reason for refusing to recognize a mistake of law as a
ground for restitution.
Beyond restitution, courts have allowed avoidance and reformation based on such mistakes. The old rule denying
relief for mistakes of law has been eroded by so many qualifications and exceptions that it retains little vitality.
Restatement (Second) of Contracts § 1 1 cmt. b, rejects any distinction between mistakes of law and mistakes of
fact. Like a mistake of fact, a mistake of law is a belief not in accord with the facts, i.e., the statutes, judicial
decisions, and regulations existing at the time the contract is made. Id.
Practice Resources:
• Corbin § 2 . (mistake of law—its effect upon a contract); § 2 . 0 (restitution of money
paid under mistake of law).

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§ 2 .1 Misrepresentation of Law
The notion that a misrepresentation of law does not make a contract voidable because everyone is “presumed to
know the law” is absurd because everyone does not “know the law.” Similarly, the view that any statement about
the law can only be a statement of opinion upon which no party should rely is equally absurd. Certainly, when a
lawyer states a “rule of law” in a jurisdiction in which he or she is licensed to practice, it is not unreasonable for the
recipient of that statement to rely upon such an assertion as one in accordance with the facts. If a vendor of land
states that he has good title to the land even though, unknown to the vendor, he does not have good title, the buyer
is entitled to rely on this statement of fact even though it is stating a legal conclusion. Restatement (Second) of
Contracts § 1 0 illus. 2.
Practice Resource:
• Corbin § 2 . 1 (mistake of law caused by misrepresentation).

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§ 2 .1 Mistake as to the Legal Effect of Words

If the words of a written agreement are the words the parties intended, and the parties mistakenly believe those
words create a particular legal effect, it makes no difference whether the mistake is called a mistake of law or a
mistake of fact. Whether the writing was drafted by a third party such as a lawyer (scrivener) or the parties
themselves, they will not be denied reformation of the writing to state their true intention because their words had a
different legal effect from the effect they intended.
Where a party claimed that the writing evidencing the contract inadvertently used the term “mortgagee” where
“mortgagor” was the intended term, the court recognized that such a writing could be reformed. The other party,
however, sought to offer evidence that “mortgagee” was the intended term but the trial court refused to consider
that evidence. The court of appeals noted that the parol evidence rule does preclude such evidence in a suit for
reformation and reversed the trial court's grant of summary judgment. Wolf Mt. Resorts, LC v. ASC Utah, Inc., 2011
UT App 425, 268 P.3d 872.
If the parties use common words in a sense peculiar to themselves—in effect, a private code—the common
meaning of the words does not manifest the parties' genuine intention. Thus, the writing is mistaken because
unintended legal effects are attributed to the parties' words. In such a case, the parties should be able to introduce
clear and convincing evidence of their true intention in using such words to support reformation of the writing to
state their intended legal effects.
Practice Resource:
• Corbin § 2 . 2 (mistake as to the legal effect of words used in a contract or deed).

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§ 2 .1 Mistake as to Legal Rights

When Ames asserts a right against Barnes that Barnes denies, and both parties are operating in good faith, they
may decide to enter into a compromise and settlement of this dispute. The law favors such settlements, which will
not be set aside because of a mistake made by either party, whether the mistake is one of law or fact. If
adjudicated, Ames's claim may have proven to be legally enforceable. Even if the claim is doubtful, a settlement
agreement is in the best interests of the parties and society, and the outcome of litigation that the settlement
avoided cannot be determined with certainty. If it is later determined that Ames asserted her claim in good faith, but
she had no enforceable right against Barnes, who in good faith denied the claim, only Ames made a mistake and
Ames certainly has no ground for complaint. Barnes's agreement to settle the claim may have been motivated
exclusively by his desire to avoid litigation. Whether that decision was wise or unwise, he was not mistaken. If
Barnes was mistaken and actually owed the money, he has no basis for avoiding the settlement.
Practice Resource:
• Corbin § 2 . (mistake as to rights and other legal relations).

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§ 2 .20 Mistake of Foreign Law

A mistake of foreign law, including the law of sister states, is treated as a mistake of fact. There is no moral,
economic, political, or other reason for permitting another party to profit from such a mistake.
Practice Resource:
• Corbin § 2 . (mistake of foreign law).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 29 UNCONSCIONABILITY AND THE DUTY TO
READ
CHAPTER 29 UNCONSCIONABILITY AND THE DUTY TO READ

the subject matter.

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§ 2 .01 History and Development of Unconscionability

In 1750, a court stated that an unconscionable contract is a contract that “no man in his senses and not under
delusion would make on the one hand, and … no honest and fair man would accept on the other.” Earl of
Chesterfield v. Janssen, 28 Eng. Rep. 82, 100 (1750). Since the Chancellor was the keeper of the King’s
conscience, unconscionability was the quintessential evil underlying equitable jurisdiction. Equitable relief certainly
had to be denied to any plaintiff who evidenced unconscionable conduct. It would be a clear contradiction for a
court of equity to grant specific performance to a plaintiff whose conduct was unconscionable.
Notwithstanding its pervasive character, judicial attempts to provide an effective definition of unconscionability have
failed. As one court suggests, unconscionability is “not a concept, but a determination to be made in light of a
variety of factors not unifiable into a formula . [It] is a flexible doctrine designed to allow courts to directly consider
numerous factors which may adulterate the contractual process.” NEC Techs. v. Nelson, 267 Ga. 390, 391–392,
478 S.E.2d 769, 771–772 (1996). Two hundred and twenty years after the 1750 “definition,” a court concluded that
a transaction is unconscionable “only when the transaction affronts the sense of decency without which business is
mere predation and the administration of justice an exercise in bookkeeping.” Gimbel Bros., Inc. v. Swift, 62 Misc.
2d 156, 158, 307 N.Y.S.2d 952, 954 (Civ. Ct. 1970). co scio e is a word that defies lawyer-like definition. It
is a term borrowed from moral philosophy and ethics. As close to a definition as we are likely to get is ‘that which
‘affronts the sense of decency.’ A much-quoted judicial definition is ‘an absence of meaningful choice on the part of
one of the parties together with contract terms which are unreasonably favorable to the other ty. Smith v.
Express Check Advance of Miss., LLC, 153 So. 3d 601, 2014 Miss. LEXIS 490, 39 I.E.R. Cas. (BNA) 1091 (Miss.
2014) (citing the Corbin treatise).
The most popular modern definition appeared early in the developing case law:
Unconscionability has generally been recognized to include an absence of meaningful choice on the part of
one of the parties together with contract terms which are unreasonably favorable to the other party.
Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449 (D.C. Cir. 1965).
Notwithstanding its popularity, this definition is a tautology requiring an elaboration of “meaningful choice” and
“unreasonably favorable.” As is often true in the attempt to define legal concepts, there are too many dimensions of
unconscionability to fit within even a paragraph-long definition.
Prior to the Uniform Commercial Code (UCC), courts of law rarely granted relief on the explicit ground that a
contract or provision of a contract was unconscionable. Instead, they would resort to strained constructions,
interpretations, and applications of traditional doctrine including questionable analyses of mutual assent,
consideration, and other doctrines to achieve conscionable results. The use of such “covert tools” was unreliable
and unpredictable. These practices provided the principal rationale for the creation and enactment of the UCC
unconscionability provision.
Practice Resource:
• Corbin § 2 .2 (historical background).
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§ 2 .02 Unconscionability Under the UCC
[1] UCC Does Not Define Unconscionability

UCC § 2- 02 governing unconscionable contracts or clauses, attracted massive scholarly attention. It reads as
follows:
(1) If the court as a matter of law finds the contract or any clause of the contract to have been
unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce
the remainder of the contract without the unconscionable clause, or it may so limit the application of
any unconscionable clause as to avoid any unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause thereof may be
unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its
commercial setting, purpose and effect to aid the court in making the determination.
The purpose of the section is to “make it possible for the courts to police explicitly against the contracts, or
clauses which they find to be unconscionable” rather than through “manipulation” of traditional rules. UCC § 2-
302, cmt. 1. As many courts have stated, the section does not attempt to define “unconscionability.” UCC § 2-
302, cmt. 1, suggests a “basic test”:
[W]hether, in the light of the general commercial background and the commercial needs of the particular
trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances
existing at the time of the making of the contract. … The principle is one of the prevention of oppression
and unfair surprise … and not of disturbance of allocation of risks because of superior bargaining power.
UCC § 2- 02 is the product of the Code’s chief architect, who was also the principal draftsman of Article 2. Karl
Llewellyn’s general view that an approach by statute may be dubious and awkward is clearly manifested in the
unconscionability section. He created his “favorite” section as a principle to be elaborated and adumbrated in
the only way he believed it could be done: on a case-by-case basis in the common law tradition. Subsection (2)
was designed to allow the presentation of “all kinds of business background to instruct the court.” Statement of
Karl Lewellyn in 1 State of New York 1954 Law Revision Commission Report Hearings on the Uniform
Commercial Code at 113. The presentation of the principle in subsection (1), however, provided a major
challenge to courts.
The harshest criticism of the UCC section on unconscionability called it “an emotionally satisfying incantation”
proving that “it is easy to say nothing with words.” Arthur A. Leff, Unconscionability and the Code—the
Emperor’s New Clause, 115 U. Pa. L. Rev. 485, 558–559 (1967). Nonetheless, the same author suggested an
analysis of unconscionability that continues more than four decades later: the dichotomy between procedural
and substantive unconscionability.
[2] Procedural and Substantive Unconscionability
[a] Case Law Does Not Make Clear Whether There Must Be Evidence of Both Procedural and
Substantive Unconscionability
Procedural unconscionability refers to a defective bargaining process, particularly in the use of
standardized, printed forms containing the superior bargaining party’s boilerplate clauses phrased in
technical language and inconspicuously inserted in a maze of fine print that would be impervious to
negotiation even if the weaker party understood their meaning. The phrase “contract of adhesion” became
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a popular way to characterize terms dictated by the stronger party to which the weaker party had to adhere
in a “take-it-or-leave it” deal. A contract of adhesion satisfies the procedural element of unconscionability,
but a contract or term will not be unenforceable simply because a contract is deemed to be a contract of
adhesion. Nino v. Jewelry Exchange, Inc., 609 F.3d 191 (3d Cir. 2010).
Substantive unconscionability focuses on the effect of the contract or clause to determine whether it is
unreasonably favorable to one of the parties. A contract or clause is substantively unconscionable if it is
overly harsh, particularly one-sided or “lopsided,” or manifests an outrageous degree of unfairness.
Courts almost invariably invoke the procedural/substantive unconscionability analysis, but they are
sometimes unclear in their descriptions. Thus, a court may include not only unfair surprise but oppression
under the “procedural” heading, while another court may include them under the “substantive” label. “Unfair
surprise,” however, may suggest only procedural defects in the bargaining process while “oppression” has
substantive overtones.
The case law also demonstrates a lack of clarity as to whether only one or both types must be evidenced to
refuse enforcement of a clause or contract. Most courts continue to suggest that some manifestation of
both is required, though not in equal portions. “California law utilizes a sliding scale to determine the
ultimate question of unconscionability—greater substantive unconscionability may compensate for lesser
procedural unconscionability.” Elite Logistics Corp. v. Hanjin Shipping Co., 589 Fed. Appx. 817, 2014 U.S.
App. LEXIS 17972 (9th Cir. Cal. 2014). The court in Elite Logistics reiterated the widely accepted test that
“the core concern of unconscionability doctrine is the ‘absence of meaningful choice on the part of one of
the parties together with contract terms which are unreasonably favorable to the other ty.
[b] Procedural Unconscionability Alone Is Generally Not Sufficient

Courts typically insist on a finding of both procedural and substantive unconscionability. Some courts speak
of a “sliding scale” to suggest that more of one type will allow less of the other. Several courts have held
that substantive unconscionability alone will suffice. The New Mexico Supreme Court concluded, “While
there is a greater likelihood of a contract’s being invalidated for unconscionability if there is a combination of
both procedural and substantive unconscionability, there is no absolute requirement in our law that both
must be present to the same degree or that they both be present at all.” Cordova v. World Fin. Corp.,
2009-NMSC-021, 146 N.M. 256, 208 P.3d 901, 908. The Arizona Supreme Court held that the notion of the
dual requirement of both procedural and substantive unconscionability is more coincidental than doctrinal. It
suggests that the more plausible reading of UCC § 2- 02 requires only substantive unconscionability.
Maxwell v. Fidelity Fin. Servs., 184 Ariz. 82, 90, 907 P.2d 51, 59 (1995). It would, however, be extremely
rare for a court to conclude that procedural unconscionability alone will suffice.
A pre-printed clause in a consumer contract to purchase an automobile contained a clause excluding
consequential damages. The clause appeared only in the owner’s manual placed in the glove
compartment. Thus, the owner received the manual upon delivery of the car. Beyond the usual concern that
such a pre-printed clause allows no bargaining by the weaker party, the court was particularly concerned
that the buyer had no opportunity to see the clause when she signed the contract. The court stated that
most cases involve both procedural and substantive unconscionability “although contracts may be voidable
without substantive unconscionability if the procedural unconscionability is sufficiently severe.” Since
clauses excluding consequential damages are not regarded as substantively unconscionable per se, the
holding was based on what the court deemed to be pure procedural unconscionability. Razor v. Hyundai
Motor Am., 222 Ill. 2d 75, 100, 854 N.E.2d 607, 622, 305 Ill. Dec. 15 (2006).
In another case, the court held that substantive unconscionability alone would be sufficient, but declined to
decide whether procedural unconscionability alone would be sufficient. Adler v. Fred Lind Manor, 153
Wn.2d 331, 347, 103 P.3d 773, 782 (2004). If a clause is fair or, at least not lopsided or otherwise harsh,
and if there is nothing inherently wrong with a “contract of adhesion,” it is difficult to discern under existing
case law why the clause would not be enforced. The opinion is further evidence of the fact that the case law
analysis of unconscionability is, at best, a work in progress.
[c] “Contracts of Adhesion” Are No Longer Viewed as Unfair

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Currently, contracts of adhesion, albeit often viewed as procedurally unconscionable per se, are no longer
viewed as unfair. Indeed, the fact that there are fine print clauses with nonnegotiable terms is deemed
“normal” in a society that depends upon standardized form contracts to assure efficiency in contracting. A
number of courts have embraced this view, and it is epitomized by the statement of one judge who wrote,
“But what’s wrong with a contract of adhesion, anyway? Many contracts have standard terms that are not
open to negotiation yet are routinely enforced.” United States v. Hare, 269 F.3d 859, 862 (7th Cir. 2001)
(Easterbrook, J.).
There must be some element of substantive unconscionability to result in a refusal to enforce the contract
or one of its terms. One court’s statement rings true: “Without proof that the terms are unfair, the court
normally will be unable to ascertain what detriment the weaker party suffered as a result of the bargaining
process.” Urban Invest., Inc. v. Branham, 464 A.2d 93, 100 (D.C. 1983).
While courts take solace in using the procedural/substantive dichotomy in discussing whether to refuse to
enforce a contract or term on the basis of unconscionability, such an “analysis” may suffer from its author’s
own criticism of the language in UCC § 2- 02 it may simply be another “emotionally satisfying incantation
proving that it is easy to say nothing with words.” In terms of a workable test to determine unconscionability,
we may not have come much further than the test suggested by the creator of § 2- 02 Professor Llewellyn:
“[W]hen it gets too stiff to make sense, then the court may knock it over.”
Practice Resource:
• Corbin § 2 .1 (UCC on unconscionability).

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§ 2 .03 Emerging Law of Unconscionability
[1] Unconscionability Applies to All Types of Contracts: Arbitration—Federal Arbitration Act—

Severance
[Note: Arbitration is generally governed by the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1–
16. A full discussion of the Federal Arbitration Act and recent developments thereunder
appears in § 89.02, infra.]
Unconscionability has been applied to myriad situations well beyond contracts for the sale of goods under UCC
Article 2. The Article 2 provision is replicated in § 20 of the Restatement (Second) of Contracts. The concept
has been applied to contracts to construct plants, home improvement contracts, brokerage contracts,
equipment leases, and many other contracts that are not governed by Article 2.
After a relatively quiet period, the unconscionability defense was revived in the last two decades in a plethora of
cases involving arbitration clauses. Issues included the weaker party surrendering the right to adjudicate any
claim in a court of law, waiving a jury trial by allegedly agreeing to arbitrate all claims of any kind or nature,
while the stronger party could continue to litigate some claims in a court of law. McGregor v. Christian Care Ctr.
of Springfield, L.L.C., 2010 Tenn. App. LEXIS 309 (Apr. 29, 2010), found that such a provision made the
arbitration agreement unconscionable. Other courts, however, allow an exception for the stronger party if a
“business reality” such as mortgage foreclosure on a real estate loan requires an action in court. Salley v.
Option One Mortg. Corp., 592 Pa. 323, 925 A.2d 115 (2007). Other unconscionability claims in arbitration cases
are based on requirements of fee payments, including “loser pays” clauses that would deter a party from
asserting a claim (Alexander v. Anthony Int’l, L.P., 341 F.3d 256 (3d Cir. 2003)), or cost splitting provisions with
similar effects, (Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003)), limiting the time for filing claims
(Adler v. Fred Lind Manor, 153 Wn.2d 331, 103 P.3d 773 (2004)), or precluding class actions. See Skirchak v.
Dynamics Research Corp., 508 F.3d 49 (1st Cir. 2007).
An arbitration clause in a nursing home contract was deemed unconscionable by a divided court of appeals.
The court found procedural unconscionability in the contract the 95-year-old Florence Hayes was required to
sign. The court found substantive unconscionability in depriving her and not the home of punitive damages and
her right to recover attorney fees as well as a right to a trial by jury. The Supreme Court of Ohio, reversed. It
held that age alone is not a sufficient basis for finding procedural unconscionability. Neither was it persuaded
that substantive unconscionability resulted from waiving a trial by jury which is a necessary consequence of an
agreement to arbitrate. Payment of one’s attorney’s fees is the norm in a civil proceeding and, while the waiver
of punitive damages applied only to Hayes, this one-sided feature of the agreement was not sufficient to make it
substantively unconscionable. Hayes v. Oakridge Home, 122 Ohio St. 3d 63, 2009-Ohio-2054, 908 N.E.2d 408.
Two former Uber drivers challenged the arbitration provisions in the contracts that allowed them to drive for
Uber. The agreements provided that disputes would be resolved by arbitration and that disputes as to
arbitrability would be resolved by the arbitrator. The district court, in Mohamed v. Uber Techs., Inc., 109 F.
Supp. 3d 1185, 2015 U.S. Dist. LEXIS 75288 (N.D. Cal. 2015), denied Uber’s motion to compel arbitration,
holding that the arbitration agreements were unenforceable due to unconscionability. In Mohamed v. Uber
Techs., Inc., 2016 U.S. App. LEXIS 16413 (9th Cir. Cal. Sept. 7, 2016), the Ninth Circuit reversed in part, and
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disagreed with the conclusion that the agreements were unconscionable. With certain exceptions, the
agreements delegated the authority to decide issues relating to the “enforceability, revocability or validity of the
Arbitration Provision or any portion of the Arbitration Provision” to the arbitrator. Therefore, challenges to the
enforceability of the arbitration agreements should have been adjudicated in the first instance by an arbitrator
and not in court. The court explained: “Clear and unmistakable evidence of an agreement to arbitrate
arbitrability ‘might include … a course of conduct demonstrating assent … or … an express agreement to do
so. The instant delegation language, the court held, was clear and unmistakable. The court also rejected the
contention that the delegation provision was unconscionable.
Both substantive and procedural unconscionability must be present in order for a court to find a contract
unconscionable, but “they need not be present in the same e ee. . Recently, the California Supreme
Court has emphasized that “unconscionability requires a substantial degree of unfairness beyond ‘a simple
old-fashioned bad i . . Rather, unconscionable contracts are those that are “so one-sided as to
‘shock the co scie ce. . When considering an unconscionability challenge to a delegation provision,
the court must consider only arguments “specific to the delegation provision.”
The court held that the agreements provided the drivers a meaningful right to opt out of arbitration altogether,
thus making them procedurally conscionable as a matter of law. Citing the Corbin treatise, the Ninth Circuit
rejected the argument that because the opt out provision in one of the agreements required that it be done by
an overnight delivery service, it was illusory. While overnight mail is more burdensome than email, the
agreement required Uber to comply with opt outs made by via overnight mail, so it was not illusory. Because
the court concluded that the agreements were not procedurally unconscionable, the unconscionability argument
failed.
The Federal Arbitration Act recognizes that an arbitration clause must be valid to be enforceable and a claim
that the arbitration agreement as contrasted with the contract as a whole is a matter of state law to be
determined by a court instead of an arbitrator. The parties may, however, by clear and unmistakable language,
agree that even such a “gateway” question of the arbitrability of a part of the agreement such as an arbitration
provision may be delegated to an arbitrator. A 5-4 decision by the United States Supreme Court held that such
a provision was enforceable where a party did not challenge the delegation provision, but claimed that the
arbitration provision was unconscionable. Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772,
177 L. Ed. 2d 403 (2010). For a fuller discussion of this case, see § .02 infra.
While arbitration typically involves individual parties, the parties can certainly agree to class arbitration. Where
an arbitration provision was silent concerning class arbitration, the Supreme Court held that arbitration was a
matter of contract and an arbitration panel’s decision to permit class arbitration violated the terms of the
arbitration agreement. Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 130 S. Ct. 1758, 176 L. Ed.
2d 605 (2010). While Stolt-Nielsen held that a party cannot be forced to engage in class arbitration unless he
has agreed to do so, the Court did not hold that a clause barring class arbitration is enforceable per se. Nat’l
Supermarkets Assoc. v. Am. Express Travel Related Servs. Co. (In re Am. Express Merchants’ Litig.), 634 F.3d
187, 193 (2d Cir. 2011). A case approaching that issue, however, was already in process. (See § .02 infra.)
In AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011), the United
States Supreme Court found that an otherwise unconscionable arbitration agreement was not made
unconscionable because it contained a waiver of classwide arbitration. In Discover Bank v. Superior Court, 36
Cal. 4th 148, 30 Cal. Rptr. 3d 76, 113 P.3d 1100 (2005), the California Supreme Court found most collective-
arbitration waivers in consumer contracts to be unconscionable. Though it limited its holding to consumer
adhesion contracts, the United States Supreme Court was not persuaded since “the times in which consumer
contracts were anything other than adhesive are long past.” The court deemed another limitation to small
damages as “toothless and malleable” (citing Oestreicher v. Alienware Corp., 2009 U.S. App. LEXIS 7259 (9th
Cir. Apr. 2, 2009) (unpublished), where the court found $4,000 sufficiently small). As to a third “requirement”
that the consumer must allege that the defendant had a scheme to cheat consumers, the court found no limiting
effect at all since a mere allegation would suffice. (See the further discussion at § .02.
The Supreme Court affirmed its fidelity to Concepcion in DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 193 L. Ed.
2d 365, 2015 U.S. LEXIS 7999, 84 U.S.L.W. 4018, 25 Fla. L. Weekly Fed. S 567, 166 Lab. Cas. (CCH)
P61,659 (U.S. 2015): “The Federal Arbitration Act is a law of the United States, and Concepcion is an
authoritative interpretation of that Act. Consequently, the judges of every State must follow it.”
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An arbitration clause that contains a classwide waiver, however, may still be unconscionable if it also contains
one or more of the kinds of provisions discussed above that courts deem unconscionable. See Barras v.
Branch Banking & Trust Co. (In re Checking Account Overdraft Litig. MDL No. 2036), 685 F.3d 1269 (11th Cir.
2012). A court may choose to sever an unconscionable term from the agreement. If the unconscionable
element does not constitute an essential part of the agreed exchange and the clause does not manifest a
systematic effort to impose arbitration as an inferior forum to work to the advantage of the party with superior
bargaining power, the clause may be severed. Nino v. Jewelry Exchange, Inc., 609 F.3d 191 (3d Cir. 2010)
(citing Restatement (Second) of Contracts § 1 .
[2] Unconscionability Is Generally Not Applicable in Contracts Between Merchants

Courts have resisted the use of unconscionability between merchants who are theoretically capable of fending
for themselves in making deals. Where a defendant corporation sought to avoid the enforcement of an
indemnity provision in a contract signed with another merchant, the court noted that the defendant was an
experienced and profitable business entity whose president made an informed decision to enter a contract
which he admitted he signed to avoid losing the business to a competitor. The court held that the defendant
was not unfairly surprised or oppressed by the indemnity provision. Allied Waste N. Am., Inc. v. Its Enters.,
2009 U.S. Dist. LEXIS 25367 (D. Ariz. Mar. 24, 2009).
Courts have, however, recognized an unconscionability defense in a contract between parties who are
technically “merchants” when bargaining power is grossly disproportionate. An indemnity clause in a contract
between a major oil company and a filling station operator who could barely read led a court to deny
enforcement of the clause on the basis of unconscionability.
[3] The Issue of Unconscionability Is Equitable in Nature

The UCC clearly requires that only courts decide unconscionability questions and the courts just as clearly
adhere to this requirement. The issue of unconscionability is equitable in nature; no right to a jury trial exists. A
court may also raise the issue on its own motion in keeping with the underlying purpose of the statute to allow
courts to “police” against unconscionable contracts and contract terms. In Wells Fargo Bank, N.A. v. Smith, 398
S.C. 487, 730 S.E.2d 328 (Ct. App. 2012), the defendant answered by pleading unconscionability and sought a
jury trial. A jury trial was guaranteed in any action at law by the state constitution. Thus, the relevant question
was whether an action is legal or equitable since there is no guarantee of jury trials in equity. While the
defendant’s claim did not specify whether it was based on common law unconscionability or statutory
unconscionability under the UCC § 2- 02 the court held that, in either situation, unconscionability is equitable in
nature. It may not be used as a basis for recovery. It is shield rather than a sword (Restatement (Second) of
Contracts § 20 . Since the only remedies based on unconscionability are equitable remedies and statutory
unconscionability is expressly determined as a matter of law, there was no right to a trial by jury.
Courts have also adhered to the statutory mandate of flexibility of remedy, which allows courts to refuse to
enforce the entire contract, a particular clause, or to limit the application of a clause. Courts have also remade
contracts by reducing grossly excessive price terms, reducing interest terms, and increasing duration terms
when a clause required filing a claim within an absurdly short period. A finding of unconscionability may also be
sufficient to meet the requirements of a consumer fraud statute in a given jurisdiction. Unconscionability alone,
however, does not provide a basis for a cause of action except in a declaratory judgment action or a suit for
reformation of a writing.
[4] Recent Trends Have Eroded the Force of Unconscionability Claims

It is important to recognize that unconscionability focuses on the tension between the stability of contracts, in
which parties must be held to their contracts and terms to which they apparently assented, and the refusal to
enforce such contracts and terms when there is sufficient evidence of a lack of assent or bargaining and the
terms are unduly harsh. Unconscionability claims, therefore, often fail because courts cling to the relative
certainty of the terms to which the parties have allegedly consented.
In Eastham v. Chesapeake Appalachia, LLC, 2013 U.S. Dist LEXIS 133476 (S.D. Ohio Sept. 18, 2013), a five-
year oil and gas lease signed in 2007 allowed the defendant to extend it for another five-year term. The illiterate
lessor stated that he was unaware of the extension provision which he claimed was unconscionable. Citing
Page 4 of 4
§ 20 of the Restatement (Second) of Contracts, the court noted that, just because the lease was in
standardized terms did not mean that the terms could not be negotiated. The lessor did not require the lease to
be read to him before he signed it. The court rejected any claim of unequal bargaining power since the lessor
owned land which the lessee desired to use. Finding no procedural unconscionability, the court also found no
substantive unconscionability. Though the lessee would be bound for five more years at 2007 rates while
market prices had ascended five years later, the court found that the plaintiff had assumed that risk when he
first signed the unread contract in 2007. Moreover, the court did not deem the old rates as so commercially
unreasonable to trigger the unconscionability doctrine.
While the facts of this case may not have resulted in a finding for the plaintiff by an even more generous
application of the unconscionability concept, the current approach neutralizing or even favoring the formerly evil
“contract of adhesion” and the tendency to insist on a more formalistic enforcement of contract terms have
further eroded the force of unconscionability claims. When courts admit their inability to define a concept, they
are naturally reluctant to apply it.
In Bullock v. Foulke Mgmt. Corp., 2015 U.S. Dist. LEXIS 146592 (E.D. Pa. 2015), Bullock signed a total of six
purchase or lease agreements with the defendant car dealership over the course of two months containing
arbitration provisions. She sued for fraud and violations of consumer statutes, and the court dismissed the
action on the basis of the arbitration provisions. The six agreements signed by Bullock appeared to constitute
contracts of adhesion (they were proffered on standardized printed forms on a take-it-or-leave-it basis and
without negotiation), but “a contract of adhesion does not constitute a procedurally unconscionable contract per
se.” The court found that “[t]he degree of procedural unconscionability surrounding the six agreements in this
case is underwhelming.” The arbitration provisions of the agreements were in bold and capital letters.
Moreover, the arbitration language appeared directly above the customer’s signature line, and it was not
complex. The court conceded that Bullock’s dealings with the dealership “may have constituted a harrowing
experience for her” but “[t]his alone, however, does not amount to procedural unconscionability.” She agreed to
a conspicuous arbitration provision six separate times within two months and “fails to explain how her consent
to the arbitration provision was made unknowingly or involuntarily.”
Practice Resources:
• Corbin § 2 . (emerging law of unconscionability), §2 . (what is
unconscionable?).

End of Document
READ
§ 2 .04 Consequential Damages and “Failure of Essential Purpose”
[1] Consequential Damages May Be Limited or Excluded Unless the Limitation or Exclusion Is
Unconscionable
Unconscionability is referenced in two other sections of the UCC: Sections 2-719 and 2-309. Section 2-719(1)
expressly allows parties to provide for remedies in substitution of Code remedies. A seller’s promise to repair or
replace non-conforming goods or parts for a certain period is expressly permitted. Such exclusive substituted
remedies are common in standard forms of suppliers of goods, which also contain clauses that exclude any
seller’s liability for consequential damages. If such remedy limitations are part of the contract and the goods
prove to be nonconforming, the buyer would only be entitled to the substituted remedy. If, however, a seller’s
promise to repair is not performed, the substituted remedy has failed of its essential purpose. Under § 2- 1 2
such a “failure of essential purpose” removes the barrier to the buyer’s UCC remedies. UCC buyer’s remedies
expressly allow the recovery of consequential damages along with direct damages. For example, the remedy of
“cover” in § 2- 12 allows the buyer to recover the difference between a higher price required for a substitute
product and the contract price “together with any incidental or consequential damages.”
If a seller’s limitation of consequential damage provision is viewed as dependent upon the validity of the
substituted repair remedy, the failure of the substituted remedy would also remove the clause excluding
consequential damages. See, e.g., Lincoln Composites, Inc. v. Firetrace USA, LLC, 2015 U.S. Dist. LEXIS 85,
85 U.C.C. Rep. Serv. 2d (Callaghan) 496 (D. Neb. 2015).
Section 2-719(3), however, states, “[c]onsequential damages may be limited or excluded unless the limitation or
exclusion is unconscionable.” This may be interpreted to mean that exclusions of consequential damages are
independent clauses that are enforceable unless they are unconscionable. When the seller’s exclusion of
consequential damages clause is viewed as independent of the seller’s failed substituted remedy clause, the
buyer would be entitled to direct damages under the UCC provisions for buyer’s remedies, but not
consequential damages. The majority of courts have adopted the independent view. Thus, such a clause would
be enforceable unless it was deemed to be unconscionable under the circumstances, regardless of the failure
of a substituted remedy clause.
[2] Dispensation of Notification of Termination Will Be Invalid If Its Operation Is Unconscionable

UCC § 2- 0 provides a default rule of performance within a reasonable time when the parties have not
expressed the time for performance. Section 2-309(3) states that a clause granting a power of termination to a
party normally requires reasonable notification of such termination. If the agreement dispenses with notification
of such termination, the dispensation will be invalid if its operation would be unconscionable under the
circumstances. If there is no express provision granting a power of termination, the unconscionability provision
of § 2- 0 is not engaged.
[3] UNIDROIT Principles

Article 3.10 of the UNIDROIT Principles of International Commercial Contracts suggests analogues to common
law concepts of duress and undue influence as well as unconscionability. A party may avoid a contract if the
other party has taken excessive advantage of the first party’s dependence, economic distress, urgent needs,
improvidence, ignorance, inexperience, or lack of bargaining skill. A court may also “adapt” a contract or a term
to make it accord with reasonable commercial standards of fair dealing.
Page 2 of 2
Practice Resources:
• Corbin § 2 . (unconscionability under UCC § 2- 1 § 2 . (unconscionability
under UCC § 2- 0 § 2 . (unconscionability under UNIDROIT Principles).

End of Document
READ
§ 2 .05 The Traditional Duty to Read Rule
[1] A Party Who Signs an Instrument Manifests Assent and May Not Later Claim Not to Have Read It
If Ames sends a letter to Barnes offering to purchase Barnes’s property and Barnes manifests assent to that
offer, Barnes will be bound to the terms of Ames’s offer even if Barnes did not read the offer. The outward
manifestation of assent provided Ames with a reasonable understanding that a contract for the purchase and
sale of Barnes’s property had been concluded. Ames must be able to rely on Barnes’s manifested assent
without fear that Barnes will subsequently attempt to avoid the contract on the footing that he failed to read or
understand it. In Molina v. Scandinavian Designs, Inc., 2014 U.S. Dist. LEXIS 55863 (N.D. Cal. Apr. 21, 2014),
the court considered whether Molina was bound by an arbitration agreement which he had signed though he
claimed the absence of mutual assent since he “speak[s] and read[s] very little English.” While recognizing the
general principle that there is no contract absent the mutual assent of the parties, the court relied on precedent
holding that a party who accepts or signs and instrument which on its face is a contract, is bound by its terms
regardless of whether he reads it. If he cannot read, he should have someone read it to him before he signs it.
A party who is illiterate may be bound to a contract by negligently failing to learn its contents. In the absence of
fraud, that fact that a party cannot read, write, speak or understand the English language does not affect the
enforceability of the agreement. Citing the Restatement (Second) of Contracts § 1 comment b, the court
noted that a party is generally bound by the terms of a writing to which he manifests assent which is deemed to
cover unknown as well as known terms.
Where an employer had posted on its website a dispute resolution process that included arbitration and
communicated the process by e-mail to all employees for some 13 years before the defendant-employee was
terminated, the plaintiff claimed that he was not bound by the arbitration agreement because he did not read
the e-mail and, therefore, could not assent to the arbitration process. The court held that one’s failure to read
could not be the basis for an unconscionability claim. The receipt of the e-mail was an offer which the defendant
accepted by his continuing employment. Fields v. NCR Corp., 683 F. Supp. 2d 980 (D. Iowa 2010). Similarly,
where the defendants claimed that they had not seen a clause waiving a trial by jury because they had not read
the contract, the court held that a failure to read was not a sufficient basis for invalidating the clause. AEL Fin.
LLC v. Tri-City Auto Salvage, Inc., 2009 U.S. Dist. LEXIS 77573 (N.D. Ill. Aug. 31, 2009). A court held that
conspicuous waiver language in a gym membership agreement barred claims for personal injury, and plaintiff’s
failure to read the waiver is “supine negligence.” Hinkal v. Pardoe, 2016 PA Super 11, 2016 Pa. Super. LEXIS
32 (2016).
[2] Qualifications to the Duty to Read Rule

There are numerous qualifications to the “duty-to-read” rule. If the fine print is illegible, to suggest that a party is
not bound by whatever the drafter of the fine print intended is hardly a qualification. There is no duty to read the
unreadable.
Even when the print is legible, if the terms are not sufficiently called to the attention of a reasonable party in a
fashion that the party would have an opportunity to read the terms under all of the surrounding circumstances, a
party should not be bound by the terms. Printed terms on letterheads, catalogues, tags, and packaging may be
inoperative under this qualification. Burdensome and unexpected terms on the reverse side of documents
should not be enforceable unless they are called to the attention of the party against whom they are designed
to operate. Signs on garage walls or reception desks containing contract terms will not be operative unless they
Page 2 of 5
are displayed so prominently that a customer must have known of the existence of such terms and can be
presumed to have assented to them.
When a party relies on misrepresentation or fraud as to the contents of a document which he or she signs
without reading, some courts have held the deceived party bound based on a lack of diligence. Other courts
have allowed such a party to avoid the contract. Restatement (Second) of Contracts § 20 takes the position that
fraudulent representation of the contents of a writing overcomes the duty to read. When a person signs a
contract in a language he or she does not understand or signs without reading because of eyesight problems,
that person will be bound by the terms of the contract unless he or she was deceived as to its terms.
[3] Fiduciary Exception to the Duty to Read

A major exception to the duty-to-read rule applies when a fiduciary relationship exists between the party who
signs a document without reading it and the fiduciary. The signing party may avoid the legal effect of a
document if the fiduciary failed to make the signing party aware of the legal significance of the document,
provided that the rights of innocent third parties have not intervened.
[4] Reasonable Expectations of Parties to an Insurance Contract

The modern concept of the “contract of adhesion” was originally found in a series of cases involving insurance
contracts. These contracts had a maze of fine print (“boilerplate”) that contained non-negotiable terms that the
insured would not read or would not understand even if they were read. If the printed terms are at variance with
the reasonable expectations of the insured or beneficiaries of the policies, Professor Robert E. Keeton argued
that such reasonable expectations should be honored. Insurance Law Rights at Variance with Policy
Provisions, 83 Harv. L. Rev. 961 and 83 Harv. L. Rev. 1281 (1970). A majority of courts that have considered
the doctrine in insurance cases have adopted this view. As the Supreme Court of Oklahoma stated, “Of the
thirty-six jurisdictions which have addressed the reasonable expectations doctrine, our research reveals only
four courts which have rejected the rule.” Max True Plastering Co. v. United States Fidelity & Guar. Co., 912
P.2d 861, 866 (Okla. 1996).
In St. Paul Fire & Marine Ins. Co. v. Ohio Cas. Ins. Co., 2014 U.S. Dist. LEXIS 42133 (D. Ariz. Mar. 28, 2014),
the court noted that the absence of misrepresentation is not determinative of the application of the reasonable
expectations doctrine. The doctrine is particularly concerned about the reasonable expectations of the insured
and beneficiaries under a contract, but courts emphasize that the reasonable expectations of both the insured
and the insurer must be honored. Courts must be careful to avoid a notion of an insured’s “reasonable
expectations” that every loss is necessarily covered—this would have courts engaging in a wholesale rewriting
of insurance contracts. Courts adopting the doctrine require a showing of ambiguity in the policy language
(under which a term can reasonably have more than one meaning), or a showing that exclusions in the policy
are obscure or technical or hidden in complex language. In such cases, the doctrine of reasonable expectations
is applied to resolve the language in a fashion conforming to the parties’ reasonable expectations. The doctrine
would also apply where an insurer’s agent makes a representation inconsistent with the language of the policy
because such a representation creates an ambiguity though the written policy language is unambiguous. Nunn
v. Mass. Cas. Ins. Co., 2014 U.S. App. LEXIS 9070 (2d Cir. May 15, 2014).
[5] Restatement (Second) of Contracts § 211
[a] “Reason to Believe” Test

Along with contracts for insurance, most of the contracts made in a modern society are evidenced by
standard forms containing standardized (boilerplate) terms. Such terms are typically non-negotiable,
unread, and not understood if they are read. If the terms are non-negotiable, there is no point in
understanding or even reading them. If contract law is predicated on mutual assent, how can there be
“assent” to such terms? The issue was ignored by the First Restatement of Contracts. The Restatement
(Second) of Contracts, however, addresses this issue in Section 211, captioned “Standardized
Agreements.”
Page 3 of 5
(1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests
assent to a writing and has reason to believe that like writings are regularly used to embody terms
of agreements of the same type, he adopts the writing as an integrated agreement with respect to
the terms included in the writing.
(2) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated,
without regard to their knowledge or understanding of the standard terms of the writing.
(3) Where the other party has reason to believe that the party manifesting such assent would not do
so if he knew that the writing contained a particular term, the term is not part of the agreement.
The purpose of this provision is not to undermine the basic rule that one is bound by terms to which one
manifests assent, regardless of whether one reads or understands such terms. Indeed, subsection (1) was
designed to state the obvious proposition “that when you agree to a standard agreement, you agree to it,
and that means everything that is in it, subject, of course, to qualifying terms.” Statement of the then
Reporter to the Second Restatement of Contracts, Robert Braucher, in 47 ALI Proceedings 524 (1970).
Only subsection (3) presents a novel concept.
Instead of relying on the “reasonable expectations” of the party who will be said to have manifested assent
to a standard term, the test is stated in terms of whether the other party responsible for inserting the term
“had reason to believe that the party manifesting assent” would not have manifested assent if he or she
knew that the particular term was part of the agreement. Such “reason to believe” could be inferred from the
fact that the term is “bizarre or oppressive, from the fact that it eviscerates the non-standard terms explicitly
agreed to, or from the fact that it eliminates the dominant purpose of the transaction.” Restatement
(Second) of Contracts § 211 cmt. f.
If the term is illegible or otherwise hidden or the adhering party had no opportunity to read the term, the
inference that the other party had reason to believe the adhering party would not have assented is
reinforced. Just because a document is in small print, however, will not be sufficient to show that one’s
reasonable expectations were not met. Castle v. Barrett-Jackson Auction Co., LLC, 229 Ariz. 471, 276 P.3d
540 (2012). The section recognizes a strong relationship to the concept of unconscionability found in
Restatement (Second) of Contracts § 20 but distinguishes the sections by insisting that when it is alleged
that a perfectly legible term is oppressive, it would have to be tested under the unconscionability rubric
rather than the standardized agreement analysis.
[b] Problems with the “Reason to Believe” Test

The “reason to believe” test is undermined in two ways. First, a comment states that, although customers
are typically bound to terms in standardized agreements without even appearing to know about them, “they
are not bound to unknown terms which are beyond the range of reasonable expectation.” Such a test is
indistinguishable from the “reasonable expectations” test in the insurance cases discussed above. See J. E.
Murray, Jr., The Standardized Agreement Phenomena in the Restatement (Second) of Contracts, 67
Cornell L. Rev. 735 (1982).
Second, § 211 2 treats all parties alike without regard to their knowledge or understanding of standard
terms. The other party, however, may well have “reason to believe” that a customer who is knowledgeable
and sophisticated with respect to such standard terms was aware of the terms in the standardized contract
he or she is signing and, therefore, intended to sign it regardless of such terms. A party may not have such
“reason to believe” the same about a party who is less knowledgeable. Yet, a comment emphasizes that all
parties are to be treated alike, even though this may give the advantage of a restricted reading to
sophisticated customers. Restatement (Second) of Contracts § 211 cmt e. In one case, a court relied on
§ 211 2 in holding that the standardized terms in an employee handbook distributed to all employees were
abiding on the employer even though the employees had not read the terms, since standardized
agreements must be interpreted as treating alike all those similarly situated without regard to their
knowledge or understanding of the standard terms of the writing. Anderson v. Douglas & Lomason Co., 540
N.W.2d 277, 284 (Iowa 1995).
The Supreme Court of Arizona has embraced § 211. The Arizona interpretation applies a signer’s
“reasonable expectation” test rather than a test of the other party’s “reason to believe.” Darner Motor Sales
v. Universal Underwriters Ins. Co., 140 Ariz. 383, 682 P.2d 388 (1984). To the extent that § 211 is viewed
Page 4 of 5
as a “reasonable expectations” test, there is considerable concern that a general acceptance of such a test
would cause the proverbial flood of litigation and attendant costs while undermining the efficiency of
standard form contracts. Section 211 has seen favorable treatment in only a handful of jurisdictions.
In a recent case applying Arizona law, Gregorio v. GEICO Gen. Ins. Co., 815 F. Supp. 2d 1097 (D. Ariz.
2011), the court adopted the standardized agreement provision in § 211 of the Restatement (Second) of
Contracts, suggesting that § 211 is the codification of the “reasonable expectations” test: “Where the
other party has reason to believe that the party manifesting such assent would not do so if he knew that the
writing contained a particular term, the term is not part of the agreement.” Commentators have noted a
distinction between the Keeton doctrine and § 211 since the latter assesses reasonable expectations
from the insurer’s perspective while the Keeton doctrine would assess reasonable expectations from the
insured’s perspective. Even where the language of the insurance contract is unambiguous to a court, the
doctrine will apply where the terms cannot be understood by a reasonably intelligent consumer, or where
the insured did not receive full and adequate notice of a term that is unusual, unexpected, or emasculates
apparent coverage, or where some activity by the insurer would create an objective manifestation of
coverage, or, finally, where activity by the insurer induced an insured reasonably to believe he or she had
coverage though the contract unambiguously denied such coverage. The court noted that, even in Arizona
where the doctrine is expansive, it “must be limited by more than the fervent hope usually engendered by
loss.” While a court can subtract terms from a policy, it may not invoke the doctrine to add language to
grant coverage that was not included in the policy. To do so would go beyond the function of policing the
insurer’s boilerplate provisions to take away coverage and allow courts to create coverage outside the four
corners of the contract. While the policy in this case contained an exclusion of uninsured motorist (UIM)
coverage, absent the exclusion, the policy did not provide for UIM coverage. Thus, if the court deleted the
superfluous exclusion language, it would still be faced with the insuperable obstacle of adding coverage not
contained in the policy. The court granted Geico’s motion for summary judgment.
[6] Modern Emphasis Is on Whether a Contract or Term Is So Substantively Unfair That It Will Not Be
Enforced
As suggested earlier, modern courts find nothing inherently wrong with contracts of adhesion, which necessarily
feature the absence of any real choice by the party with inferior bargaining power. The obvious need for
efficiency and the pervasiveness of these contracts has enhanced the judicial attitude toward contracts of
adhesion. The leading cases of the past, however, emphasized the vices of such contracts.
In Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69 (1960), the court found a disclaimer of the
implied warranty of merchantability to be unenforceable because of the grossly disproportionate bargaining
power of the automobile manufacturer and the absence of any real freedom of choice by the consumer buyer in
agreeing to such a clause. In Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965), the
court also emphasized that the consumer had “little bargaining power, and hence little real choice” in signing a
commercially unreasonable contract. In Weaver v. American Oil Co., 276 N.E.2d 144 (Ind. 1971), a lessee of a
filling station was relieved of a clause indemnifying the oil company against its own negligence because of the
company’s “prodigious amount of bargaining power” and the failure to explain the provisions of this contract to
the lessee.
The current view that accepts contracts of adhesion necessarily accepts gross disparity in bargaining power
and the consequent absence of any real choice. The duty to read appears to be more firmly in place and the
fact that parties do not read the boilerplate to which they are bound is a fully accepted fact of commercial life.
The current emphasis, therefore, is on whether the contract or term is so substantively unfair that it will not be
enforced.
The UCC unconscionability provision required elaboration and definition in the case law of the last half century.
That development did not occur, as evidenced by the admission of current courts that the term cannot be
defined. The use of “procedural” or “substantive” unconscionability notions cloak the reality that there is no
genuine analysis in their use. When a concept is so amorphous that courts have great difficulty in its
application, it tends to be abandoned. Successes in the use of unconscionability became rare. Though the
concept has been employed in a large number of recent cases claiming that arbitration clauses are
unenforceable, the defense fails more often than it succeeds. Moreover, this case law will induce arbitration
clauses to be redrafted to avoid future claims that they are unconscionable.
Page 5 of 5
If contracts of adhesion are no longer to be viewed with disdain, the standardized clauses that populate
contracts of adhesion must also be respected under current views. It is fair to suggest that the traditional duty-
to-read rule appears stronger than it was 40 years ago. Its qualifications and exceptions may also be more
limited than they were at that time. Like everyone in life, judges prefer certainty. The certainty of printed terms,
even those not read or bargained for, are more appealing to courts than concepts that never were well-defined
and whose precedent typically enhances rather than cures confusion.
Practice Resources:
• Corbin § 2 . (traditional duty-to-read rule); § 2 . (qualifications to the
traditional duty-to-read rule); § 2 .10 (modern approach to contracts of adhesion
and exculpation and indemnity clauses); § 2 .11 (duty to read and the
Restatement (Second) of Contracts); § 2 .12 (duty to read—concluding
remarks).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 30 DEFINITIONS AND TERMINOLOGY—

CONDITIONS CLASSIFIED
CHAPTER 30 DEFINITIONS AND TERMINOLOGY—CONDITIONS CLASSIFIED

the subject matter.

End of Document

§ 30.01 The Legal Operation of Contract

In previous chapters, we focused on the determination of whether a contract has been formed. Courts must sort
through myriad facts including oral or written statements of the parties as well as their conduct and all of the
surrounding circumstances searching for “operative” facts—facts that have legal significance because they create
legal relations between the parties. Thus, courts search for operative facts that will constitute an offer that creates a
power of acceptance and operative facts that evidence the exercise of that power to form a contract. If an offer has
been accepted as part of a bargained-for-exchange between parties who have the capacity to make a contract, a
contract is formed. For the first time, the legal relationship between the parties to the contract consists of rights and
correlative duties that will be recognized by the legal system.
Once the contract has been formed, the agreement stage has been completed. The focus then moves to the
performance stage of the contract. The parties now have a contractual relationship that requires good faith and
cooperation. The formation of a bilateral contract creates future rights and duties before any performance is due. In
a contract for the sale of land or goods, the seller's duty to convey or deliver the property will not be performed until
some period of time has elapsed. The buyer's duty to pay is not due until the date of the conveyance of land or until
the seller tenders delivery of the goods. Yet, the parties have a legal relationship before any such performance is to
occur.
Either party may repudiate the contract before the time for performance. Either party may breach the contract by
failing to perform his or her duty when performance is due. Any number of contingencies including unforeseen
events can occur during the performance stage of the contract. It is critically important to understand how the law
will react to the operative facts and events that occur during the performance stage.
Practice Resources:
• Corbin § 0.1 (legal operation of a contract); § 0.2 (life history of a contract); § 0.
(description of a legal relation); § 0. (right to future performance compared with right to
immediate performance).

End of Document

§ 30.02 Conditional Rights and Duties
[1] Definition of Condition

The term “condition” may be employed to explain the agreement process. If Ames offers to buy Barnes's
property for $100,000, such an offer could be translated into Ames offering $100,000 to Barnes “on condition”
that Barnes convey the property to Ames. See, e.g., Romero v. Bank of Am., N.A., 2015 U.S. Dist. LEXIS 6600
(D. Kan. Jan. 21, 2015), where the court defined “condition precedent” as “something that it is agreed must
happen or be performed before a right can accrue to enforce the main contract.” If a condition precedent does
not occur or is not performed, the contract does not take effect and is unenforceable. The non-occurrence of a
condition precedent discharges the other party’s duty of performance” under a contract. This use of the term
“condition,” however, is not found in contract law because the concept of “condition” is relegated to events
affecting the rights and duties of the parties and no rights and duties exist until a contract is formed. Even after
the contract between Ames and Barnes is formed, if Ames has not agreed to pay the $100,000 until 30 days
after the contract is formed, it may be said that Barnes's right to Ames's $100,000 is “conditional” on the
passage of 30 days. The passage of time is so certain, however, that it is not viewed as conditional.
One court has defined “condition” as used in the law of contracts as follows:
In contract law, “condition” is an event, other than the mere lapse of time, that is not certain to occur but
must occur to activate an existing contractual duty, unless the condition is excused. The fact or event
properly called a condition occurs during the performance stage of the contract, i.e., after the contract is
formed and prior to its discharge.
Morrison v. Bare, 2007-Ohio-6788, 2007 Ohio App. LEXIS 5955 (9th Dist.), quoting John E. Murray Jr., Murray
on Contracts, § (4th ed. 2001).
A condition is an “operative” fact or event because its occurrence “activates” a legal duty that already existed
and its non-occurrence prevents the duty from becoming activated. Mikulaninec v. Monumental Life Ins. Co.,
2015 Ky. App. Unpub. LEXIS 268 (2015). Failure of the condition does not prevent the formation of the
contract. Rather, the duty to which the condition is attached does not become operative. Baumgardner v. Bimbo
Food Bakeries Distrib., 697 F. Supp. 2d 801 (N.D. Ohio 2010). If Ames agrees to purchase Barnes' property for
$100,000 “on condition that Ames is able to secure financing of $60,000 of the purchase price,” Ames has a
duty when the contract is formed and Barnes has a correlative right. Ames's duty, however, is expressly
conditioned on securing a $60,000 mortgage loan on the property. A bank or other commercial lender will
consider the value of the property in which it would hold a real estate mortgage security interest to assure the
repayment of the $60,000. If the loan is made available, the condition to Ames's duty has occurred and the duty
“awakens.” Similarly, Barnes's existing right against Ames becomes enforceable because the conditioning
event has occurred.
Where a city’s contractual obligation to provide an access road was “subject to” funding, and the city took
reasonable steps to obtain the occurrence of the condition, the fact that funding was not obtained meant the
condition did not occur, and the city had no contractual obligation to provide the road. Laybourn v. City of
Wasilla, 362 P.3d 447, 2015 Alas. LEXIS 150 (Alaska 2015). A contract provided, in pertinent part: “… as
deferred compensation, the Corporation shall pay to Employee in the event of termination of employment on
account of death, disability, retirement or termination by the Corporation without cause … 95% of Employee’s
accounts receivable at the close of business on the date of termination that may be collected during the
succeeding twelve months.” The language “in the event of” was conditional, but since the Employee voluntarily
terminated, and since voluntary termination was not one of the conditions listed, the Corporation did not breach
Page 2 of 4
the contract by refusing to pay deferred compensation to the Employee. Lariviere v. Surgical Servs., P.C., 2015
Iowa App. LEXIS 647 (2015).
[2] Condition Distinguished From Promise—Simultaneous Promise and Condition

A promise supported by consideration or an alternate validation device creates a legal duty. Ames's promise to
purchase Barnes's property in exchange for Barnes's promise to sell the property to Ames for $100,000 creates
legal duties in both parties as well as correlative rights. The parties, however, also agreed that Ames's duty was
conditioned on a loan of $60,000 from a commercial lender to assist Ames in financing the purchase. This
condition created no duty; it was attached to Ames's contractual duty to pay $100,000 for the property. If the
condition occurred, i.e., if the loan was obtainable, Ames's duty became unconditional. If no such loan secured
by the property was obtainable, however, the conditioning event that would activate the duty did not and would
not occur. The duty, therefore, is discharged. Ames has no duty and Barnes has no correlative right to Ames's
payment of $100,000. There has been no breach of contract because there is no breach of a duty. See Corey
v. Big Run Indus. Park, LLC, 2009-Ohio-5129, 2009 Ohio App. LEXIS 4352 (10th Dist.); 360networks Tenn.,
LLC v. Ill. Cent. R.R. Co., 2010 U.S. Dist. LEXIS 52841 (N.D. Ill. May 28, 2010); and Henson v. Old Carco
Liquidation Trust (In re Old Carco LLC), 2013 U.S. Dist. LEXIS 128358 (S.D.N.Y. Sept. 9, 2013), (explaining the
difference between a promise and a condition), vacated on other grounds, Henson v. Old Carco Liquidation
Trust (In re Old Carco LLC), 576 Fed. Appx. 37, 2014 U.S. App. LEXIS 15981, 59 Employee Benefits Cas.
(BNA) 1698 (2d Cir. N.Y. 2014).
If Ames or Barnes notified the other that he or she was simply cancelling the deal before the time for the
occurrence of the condition lapsed, such an announcement from either party would constitute a repudiation that
materially breached the contract. If Ames attempted to avoid liability by simply not attempting to secure a
$60,000 loan, she would breach her contract because the condition of obtaining the loan would also include an
implied promise by Ames to make a reasonable effort to secure the loan.
A case emphasizing the critical difference in effect between a promise and condition involved a supplier of
components that promised to waive royalties on its patent rights “so long as” the promisee gave serious
consideration to the promisor as a supplier of components. The court held that the phrase, “so long as,” was a
condition to the promisor's duty to waive royalty payments. Since the condition did not occur, the duty to which
it was attached was never activated. The promisee, however, had never promised to give serious consideration
to the promisor. Thus, the promisee had no duty to provide such serious consideration and could not be liable
for any breach of duty. Grigoleit Co. v. Whirlpool Corp., 2010 U.S. Dist. LEXIS 45524 (C.D. Ill. May 10, 2010).
In this analysis, the court relied heavily on the Restatement (Second) of Contracts § 22 illus. 6.
In CBS Outdoor Inc. v. NextMedia Group Inc. (In re NextMedia Group Inc.), 2011 U.S. Dist. LEXIS 115541 (D.
Del. Oct. 6, 2011), NextMedia agreed to sell certain site leases to CBS for $72 million conditioned on CBS
providing a schedule of the site leases to allow for cash flow payments. CBS failed to timely deliver such a
schedule. Its claim as an unsecured creditor in the bankruptcy of NextMedia was denied on the footing that
timely delivery of the schedule was a condition precedent to NextMedia's duty to pay. CBS argued that the
delivery of the schedule was not a condition precedent, but even if it was a condition, the bankruptcy court
erred in enforcing the forfeiture since breach of the condition was not a material breach of the contract. The
court quite properly concluded that the plain language of the agreement indicated that CBS's right to payment
never arose. An express condition cannot be “breached,” materially or immaterially. Express conditions do not
create duties. They are events that must occur to activate duties. When a condition precedent does not occur,
the duty is not activated. It is discharged. Any discussion of material breach is irrelevant.
The same fact or event may constitute both a promise and a condition. Such an event is a “promissory
condition,” and is demonstrated in a classic example. A contract for the sale of a large quantity of rice had to be
delivered no later than December 31. The buyer promised to give the seller two weeks' notice as to whether the
rice was to be shipped and time was of the essence. When the buyer failed to provide timely notice, the buyer
had breached its promissory duty, which provided the seller with a secondary right to claim damages. The
same event—the failure to give timely notice—was the failure of a condition that prevented the activation of the
seller's duty to ship. Since it was impossible for the timely notice to occur in the future, the seller's duty was
discharged. Internatio-Rotterdam, Inc. v. River Brand Rice Mills, Inc., 259 F.2d 137 (2d Cir. 1958).
If the buyer had merely promised to give shipping instructions by December 17 and was a day late, and the
court determined that the breach was immaterial, the seller could recover whatever damages it could prove
Page 3 of 4
from the losses. The seller, however, would still be required to perform the contract, since an immaterial breach
does not discharge the other party's duty to perform. If timely notice of shipment is not only a promissory duty,
but a condition, as the court found, the failure of the condition to occur discharges the seller's duty.
Citing the Corbin treatise, the court in HPEV, Inc. v. Spirit Bear Ltd., 2014 U.S. Dist. LEXIS 165958 (D. Nev.
Nov. 26, 2014) explained the distinction between contractual promises and conditions: “a condition is a fact or
an event and is not an expression of intention or an assurance. A promise in a contract creates a legal duty in
the promisor and a right in the promisee; the fact or event constituting a condition creates no right or duty and is
merely a limiting or modifying factor.”
While there is a critical distinction between promises and conditions, “it is often difficult to determine whether
language is intended to create a condition or a promise,” but “terms such as ‘if,’ ‘provided th t he ‘after, ‘as
soon s s ect to o condition that,’ or some similar phrase are evidence that performance of a contractual
provision is a condition.” Commercial Contrs. Equip., Inc. v. Lower Platte North Natural Resources District,
2015 Neb. App. LEXIS 90 (2015). The parties in Commercial Contrs. Equip., Inc. left no doubt as to their
intentions—they agreed that “a decision by the Engineer ‘shall be required as a condition precedent to any
exercise by [either party] of any rights or remedies either may otherwise have under the o t ct. The use of
the language “condition precedent” conclusively settled the question that the language was conditional.
[3] A Condition Cannot Be “Broken”

The promise to give timely notice or to perform any other duty can be broken, but a condition cannot be
“broken.” A condition either occurs or it does not occur. One court recognized that non-fulfillment of a promise is
a breach of contract that creates a secondary right to damages in the aggrieved party. Non-occurrence of a
condition, however, simply precludes the activation of a duty. Its non-occurrence does not create any remedial
rights since remedial rights can only be created by the breach of a promise. Weiss v. Northwest Broad., Inc.,
140 F. Supp. 2d 336 (D. Del. 2001), If a party's failure to cooperate or action prevents the occurrence of a
condition, the condition is eliminated and the duty is activated. See § 0.1 below.
[4] Express, Implied, and Constructive Conditions

Just as contracts are sometimes referred to as “express” or “implied-in-fact,” conditions may be called “express”
or “implied.” The same confusion attends this classification of conditions as it did the classification of contracts.
As we saw earlier, the only difference between a so-called “express” versus “implied-in-fact” contract was the
mode of expression. A contract evidenced by the words of the parties is an express contract; a contract
manifested by their conduct is called “implied” but more accurately would also be called “express” since it is
created by the parties' intention. Just as sign language or other conduct must be interpreted, so must the words
of the parties. “Express” conditions are found in the words expressed by the parties. See Kinesoft Dev. Corp. v.
Softbank Holdings, Inc., 139 F. Supp. 2d 869 (N.D. Ill. 2001). But whether expressed by words or conduct, the
contract or condition manifests the parties' intentions.
Another type of “implied” contract discussed earlier is the so-called “implied-in-law” contract. This is not a
contract and is not created by any manifested agreement of the parties. It is also called a “quasi” contract to
further assure that it will not be viewed as a genuine contract. It might also be called a “constructive” contract
since it is wholly constructed by courts to avoid unjust enrichment.
Just as there are “implied-in-law” contracts, there are “implied-in-law” conditions. These conditions are typically
called “constructive” conditions that are “implied” by courts to facilitate the performance of agreements when
the parties have expressed no intention concerning a term. If a contract between Ames and Barnes that Ames
will paint Barnes's house for a price of $10,000 does not specify when Ames is to be paid, may Ames insist on
being paid when he arrives to paint but before his performance begins? In such a case, a court will construct a
condition that the performance that takes time (painting) is a constructive condition precedent to Barnes's duty
to pay. “Payment” can be performed in an instant. As will be seen later in this volume, constructive conditions
are useful in myriad situations.
[5] Conditions Precedent and Subsequent

The division of conditions into conditions precedent and conditions subsequent has produced nothing but
confusion. In form, any condition can be stated as a condition precedent or subsequent.
Page 4 of 4
If Ames is the beneficiary of his recently deceased uncle's will in the amount of $100,000 or more, Ames
promises to purchase Barnes's property for $100,000 and Barnes agrees to sell it for that amount.
Here, the condition is stated in the form of a condition precedent. Being declared a beneficiary of the uncle's
estate at $100,000 is an event that must occur before Ames's duty to purchase Barnes's property for $100,000
is activated.
The same condition in the same agreement may be expressed as a condition subsequent.
Ames agrees to buy and Barnes agrees to sell Barnes property to Ames for a price of $100,000. If,
however, Ames is not named as a beneficiary in his recently deceased uncle's will for an amount of
$100,000 or more, Ames's promise to purchase the property is null and void.
Substantively, the condition is identical in either form. Since it must occur to activate Ames's duty, it is
accurately described as a condition precedent.
If either party can prove with little or no difficulty that the event constituting the condition either occurred or did
not occur, the distinction is meaningless. If, however, there is difficulty in proving that the condition did or did
not occur, the burden of proof may be allocated on whether the condition is characterized as precedent or
subsequent in form. Further discussion of this point will be found in Chapter 39 below.
[6] Concurrent Conditions

Concurrent conditions are constructive conditions. Unlike genuine conditions, they refer to the promised
performances themselves. Earlier, we noted that a principal purpose of constructive conditions was to
determine order of performance—a performance that takes time must occur as a constructive condition to the
other party's performance as where the painter must complete the service of painting as a constructive
condition to the owner's duty to pay for that service. Many contracts, however, contemplate exchanges where
neither performance takes more time to perform than the other. In such a case, the performances are due
simultaneously and the respective performances are viewed as constructive conditions of exchange. In order
for one party to place the other in default, that party must tender performance; that is, the party must offer to
perform with the demonstrated ability to do so. Ames agrees to sell a painting by a famous artist to Barnes
$250,000. Neither performance requires more time than the other. If neither party tenders performance to the
other, neither is in default because neither is required to perform before the other.
[7] Discharge of Duty

If a condition has not occurred, the duty is not activated, but as long as the condition may still occur, the duty is
not discharged. If it is no longer possible for the condition to occur, the duty is necessarily discharged because
it can never be activated.
Practice Resources:
• Corbin § 0. (conditional rights and duties); § 0. (condition defined); § 0.
(conditions: precedent and subsequent); § 0. (concurrent promissory
conditions); § 0. (contractual duty not discharged merely because it is not yet
enforceable); § 0.10 (express and implied conditions); § 0.11 (constructive
conditions); § 0.12 (promise and condition distinguished); § 0.1 (can a
condition be “broken”?).

End of Document

§ 30.03 There Is a Presumption That Words Are Promissory Rather than

Conditional
As suggested earlier in this chapter, when a promise is not performed, it will not have the drastic effect of
discharging the other party's duty if the breach is deemed to be immaterial. The aggrieved party has a claim to
damages for any breach, material or immaterial, but must continue to perform its duties under the contract if the
breach is immaterial. If the event constituting a condition does not and cannot later occur, the duty to which it is
attached is discharged. Thus, construing contract language to constitute a condition can have a drastic effect
amounting to a forfeiture, even though the same language, construed as a promise, may only signal an immaterial
breach that would avoid the forfeiture because the other party's duty would not be discharged.
There is a strong policy against forfeitures. In one case, heavy rain severely damaged farmers' tobacco crops that
were insured by a federal agency. Before the crops could be inspected by the insurer, the farmers plowed the crops
under to preserve the soil. The insurer denied the claim on the basis of a provision in the policy stating that the
tobacco stalks with respect to which a loss is claimed shall not be destroyed until the insurer makes an inspection.
The insurer claimed that this provision was a condition to its duty to pay for the loss and it owed nothing to the
farmers. The court, however, employed the presumption that, where doubtful words may be interpreted as either a
promise or a condition, they should be interpreted as a promise. As a promise, the insurer could claim a breach for
which damages would be payable but the insurer would have to prove the damages it sustained by not having the
unplowed crops available for inspection, even though the adverse weather and eyewitness testimony may have
been more than sufficient to prove the actual damage to the crops. Howard v. Federal Crop Ins. Corp., 540 F.2d
695 (4th Cir. 1976).
The presumption of a promise rather than a condition will not be dispositive, however. It does not relieve the court
of its responsibility to interpret the contract language. In Howard, the language of the provision was not stated in
conditional terms, while another subsection in the same provision opened with the phrase, “It shall be a condition
precedent.” If the provision at issue had been stated that clearly, it would have been difficult for the court to
characterize the language as “doubtful.”
Practice Resource:
• Corbin § 0.1 (presumption that words are promissory rather than that they create a
condition). Corbin on Contracts Desk Edition.

End of Document

§ 30.04 Promises to Pay Out of Funds Yet to Be Acquired

A promise to pay an engineer for his services “as soon as the plant is in successful operation” was followed by the
explanation that disbursements had to be delayed until the plant began earning income. Though the engineer
substantially completed his services, the plant was never in successful operation and the owner claimed that the
quoted phrase was a condition to its duty to make any payment. The court considered the engineer's original offer
to perform the services at a fee that was not conditional. Since the revised agreement contained the same fee, the
court concluded that the parties did not intend the quoted clause to allocate the risk of no payment to the engineer.
Rather, it was intended to focus on “when” rather than “if” the payment would be made. North American Graphite
Corp. v. Allan, 184 F.2d 387 (D.C. Cir. 1950).
The same issue appears in numerous cases where a contract between a general contractor and subcontractor
states that the subcontractor will be paid after the general contractor is paid. Courts will lean hard toward
interpreting these clauses as “pay when paid” rather than “pay if paid” clauses in order to avoid shifting the risk of
nonpayment to the subcontractor, which would constitute a forfeiture. The “pay when paid” clause merely delays
payment; it does not deny payment. The critical question is whether the parties intended to reallocate the risk of no
payment to a subcontractor. Sloan & Co. v. Liberty Mut. Ins. Co., 653 F.3d 175, 2011 U.S. App. LEXIS 15798 (3d
Cir. Pa. 2011).
If the language of the contract clearly conditions payment to the subcontractor on the owner's payment to the
general contractor, such provision may be prohibited by statute. See, e.g., N.C. Gen. Stat. § 22 -2 (2008).
Alternatively, it may be viewed as against public policy. Such holdings typically find that these provisions are
contrary to provisions of mechanics' lien laws that prevent the waiver of such liens. See, e.g., West-Fair Elec.
Contrs. v. Aetna Cas. & Sur. Co., 87 N.Y.2d 148, 638 N.Y.S.2d 394, 661 N.E.2d 967, 971 (1995). This argument
was rejected in Fixture Specialists, Inc. v. Global Constr., LLC, 2009 U.S. Dist. LEXIS 27015 (D.N.J. Mar. 30,
2009).
Absent these limitations, however, such clauses may be upheld. For example, a subcontractor claimed that it had
not been paid some $1.9 million under an agreement that stated “all payments to Subcontractor by Contractor are
expressly contingent upon and subject to receipt of payment for the work by Contractor from Owner.” The court
found the language to constitute a “pay-if-paid” clause, which, under the laws of both Texas and New Mexico,
required the general contractor to be paid as a condition precedent to the payment of the subcontractor.
MidAmerica Constr. Mgmt. v. Mastec N. Am., Inc., 436 F.3d 1257 (10th Cir. 2006). In Cam Invs., LLC v. Totty, 128
So. 3d 749 (Ala. Civ. App. 2013), the defendant homeowner cancelled his prepaid roof-repair contract with the
plaintiff’s former employer and sought a refund on the plaintiff’s assurance that the plaintiff’s new company would
repair the roof. The roof was repaired by the former employer went bankrupt, precluding a refund to the defendant
who claimed that the refund was a condition precedent to his duty to pay for the roof repair. The court noted the
similarity between “pay-if-paid” clauses in subcontractor situations which might lead to a construction that the
payment intention was a mere timing mechanism rather than a condition. The direct evidence in this case, however,
reminded the court that parties are permitted to allocate risks in a fashion that might be otherwise viewed as a
forfeiture. As such, the court must enforce the contracts as written.
Practice Resource:
Page 2 of 2
• Corbin § 0.1 (promise to pay out of funds yet to be acquired).

End of Document

§ 30.05 “Dependent” vs. “Independent” Promises

For several centuries, a distinction has been made between “dependent” and “independent” promises. If the duty to
render a promised performance is not due until the other party has performed all or part of its promise, the first
promise is said to be “dependent” on the earlier performance. The terminology, however, renders no analytical
service and is not used in the Restatement (Second) of Contracts because it is “misleading.” Restatement (Second)
of Contracts § 2 1 Reporter's Note.
Practice Resources:
• Corbin § 0.1 (“dependent” and “independent” promises); § 0.1 (other classifications
of conditions).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 31 EXPRESS CONDITIONS—AND PROMISES
CHAPTER 31 EXPRESS CONDITIONS—AND PROMISES

the subject matter.

End of Document
§ 31.01 Forms of Expression to Make a Duty Conditional

Any fact or event can be made a condition of a contractual duty. There is no required form of words to create a
condition, but there are some commonly used terms and expressions. Ames’s promise to purchase Barnes’s
property “if” or “on condition” or “subject to” or “provided that” Ames can secure a loan for 80 percent of the
purchase price would typically signal a duty that is expressly conditional on the occurrence of that condition. Ames’s
promise to purchase Barnes’s property “provided that there shall be no liability unless my father wills me at least a
half million dollars,” conditions Ames’s duty. A promise to pay a broker’s commission may be expressly conditional
on the passing of title from the seller to the buyer. An insurance company’s promise to pay 60 days after proof of
loss is expressly conditioned on proof of loss. Absent such proof, the insurer’s duty to pay is simply not activated.
Whether a condition to a duty exists depends upon the manifested intention of the parties as reasonably interpreted
from their words or conduct. Duncan Aviation agreed to pay Royal Crown 8 percent of “total revenue” as a
commission on sales of aircraft—“Payments will be made within 30 days of receiving payment from customers.”
While noting that the agreement contained no conditional-sounding language such as “provided that” or the like, the
court found that the term “total revenue” referred to money actually received by Duncan. Moreover, the time for
payment to be made also manifested the parties’ intention to pay only after Duncan actually received payment.
Thus, Duncan’s receipt of a customer’s payment was a condition precedent to Duncan’s duty to pay Royal. Royal
Crown Ltd. v. Duncan Aviation, Inc., 2010 U.S. Dist. LEXIS 7555 (D. Neb. Jan. 28, 2010). On the other hand,
Kansas City Southern agreed to acquire a 49 percent interest in the Texas-Mexican Rail Lines (TMM), whose board
had approved the transaction. The Chairman of the Board, who controlled 99 percent of the TMM shares, claimed
that one of the “warranties and representations” required under the agreement made TMM shareholder approval a
condition, and that had not occurred. The court rejected this argument since the agreement contained a list of
conditions that did not include shareholder approval. The shareholder approval appeared under “warranties and
representations” and contained no conditional language such as “if,” “provided,” or “on condition.” Kan. City S. v.
Grupo TMM. S.A. de C.V., 2003 Del. Ch. LEXIS 116 (Nov. 4, 2003).
There is a strong preference to construe doubtful language as promissory rather than conditional since a conditional
duty is discharged if the condition has not occur and cannot occur. An immaterial breach of promise, however, will
not discharge the duty created by the promise and may, therefore, avoid a forfeiture.
A court may find a condition in a promise to perform a duty “after” certain actions are taken. When the language of a
bond stated “the Surety’s obligation [to indemnify] under this bond shall arise after” certain actions were taken,
however, the court noted the interpretive preference in favor of finding a promise rather than an express condition to
avoid forfeitures. International Fid. Ins. Co. v. County of Rockland, 98 F. Supp. 2d 400 (S.D.N.Y. 2000). The court’s
interpretation was based on the “logic and logistics” of indemnification and the absence of “unmistakable language”
of condition.
Similarly, when a party “agreed, subject to the other terms and conditions of this [agreement]” to indemnify the other
party and “to give prompt notice” of any indemnification claim, an appellate court recognized that, if the trial court’s
interpretation that this language made the giving of prompt notice a condition, the duty of indemnification would
never arise. On the usual basis of preferring an interpretation of a promise rather than a condition, the court held
the language was insufficiently precise or clear to make the giving of prompt notice a condition precedent. Smurfit
Newsprint Corp. v. Southeast Paper Mfg. Co., 368 F.3d 944 (7th Cir. 2004). Where an action for breach of contract
was based on a claim much older than the relevant six-year statute of limitations, the plaintiff claimed that contract
language stating “all disputes which may arise out of this contract will be solved amicably” made such amicable
Page 2 of 2
attempts to solve the dispute a condition precedent to bringing a claim. Since the final effort at an amicable solution
had failed less than two years before this action was filed, the plaintiff asserted that its action was within the statute
of limitations. On the basis of preferring an interpretation that language is not conditional, the court held that the
action was time-barred. Bulgartabac Holding AD v. Republic of Iraq, 2009 U.S. Dist. LEXIS 91417 (S.D.N.Y. Sept.
30, 2009).
Though interpretation of language as conditional is not favored, language in a shopping center lease stating,
“[p]rovided that all other Lessees occupying space within the shopping center are similarly obligated” was held to
unambiguously create a condition precedent to the tenant’s duty. The court viewed such clear language as
obviating any necessity to indulge in an interpretation to preclude forfeiture. Dinnerware Plus Holdings, Inc. v.
Silverthorne Factory Stores, LLC, 128 P.3d 245 (Colo. Ct. App. 2004).
Practice Resource:
• Corbin § 1.1 (forms of expression that will make a duty conditional).

End of Document
§ 31.02 Conditions Necessary to Performance
[1] If Performance of a Duty Is Impossible Without the Occurrence of an Event, the Event Is
Necessarily a Condition to the Duty
When the performance of a duty is impossible without the occurrence of an event, the event is necessarily a
condition to the duty. A promise to deliver goods to a destination to be named by the buyer makes shipment of
the goods impossible absent the buyer’s identification of the destination. Similarly, a promise to construct a
building based on plans to be supplied by an architect makes it conditional on the receipt of the plans. Such
events are conditions, but they are also promises to cooperate by the other party, whose breach of duty makes
it liable for damages.
As discussed in Chapter 30 above, cases involving promises by general contractors to pay subcontractors
distinguished “pay-when-paid” clauses from “pay-if-paid” clauses, with a strong interpretive preference for the
former that would avoid forfeitures. It is, however, certainly possible for party to promise to pay only if “able” to
pay. Assuming the promise is not interpreted as absolute because it merely suggests a convenient time for
payment rather than a condition, the condition of “ability” to pay requires an interpretation of the reasonable
meaning of that party’s “ability” in light of its resources.
[2] Events Beyond the Promisor’s Control

Clauses conditioning performance on the absence of strikes, fires, or other causes beyond the promisor’s
control that either delay performance or make performance impossible are designed to limit the promisor’s risk
of performance in an uncertain future. As will be seen later in this volume, the doctrines of impossibility of
performance and commercial impracticability may excuse a party from performing, absent any clause. To
further ascertain that supervening events beyond the control of the promisor excuse performance, these force
majeure clauses are common in commercial contracts. They are predicated on unexpected events that will
have more than a material effect on a party’s ability to perform. If performance is merely delayed by such
events, the duty is excused only during the period of the delay.
If a contractor promises to render performance “on demand,” it is usually interpreted to require a demand for
performance as a condition to activate the contractor’s duty. Typically, a demand must occur within a
reasonable time, a time ordinarily measured by the statute of limitations. If demand is made within a reasonable
time, it is generally held that the statutory period for barring action begins to run from the date of the demand;
interest on damages is awarded only from that date.
Section 3-118(b) of the Uniform Commercial Code (UCC) deals with the statute of limitations on demand notes.
If a demand is made to the maker of such a note, an action must be commenced within six years after the
demand. If no demand is made to the maker, an action on the note is barred after 10 years.
Practice Resources:
• Corbin § 1.2 (plaintiff’s performance is a condition when the defendant’s
performance is impossible without it); § 1. (promise to perform when able);
§ 1. (provisions as to causes beyond promisor’s control); § 1. (promise to
render performance “on demand”).

Page 2 of 2
End of Document
§ 31.03 Conditions and Promises of Satisfaction
[1] Personal Satisfaction Generally Is Held to a Test of Good Faith

When a party promises a performance that will satisfy the promisee, one of the critical questions is whether the
promised performance must only meet a level of satisfaction that a reasonable person would approve or
whether the performance must meet the subjective satisfaction of the promisee.
A promise by a father to pay an artist $100,000 for a portrait of his daughter unless he changes his mind is not
a promise. It is an “illusory promise” since the father is not committed to any course of action. A promise to pay
the artist $100,000 for the portrait if the father is personally satisfied with the portrait, however, is not illusory. In
one case, an artist promised to create a picture of a man’s deceased daughter that the father would like. The
court held that the contract was conditioned on the personal (subjective) satisfaction of the father. Gibson v.
Cranage, 39 Mich. 49 (1878). The father’s statement of dissatisfaction must be made in good faith. The father’s
refusal to view the portrait or evidence of the father’s statement before seeing the portrait that he would not
accept it would clearly manifest bad faith. Unreasonableness is circumstantial evidence of bad faith, but it is not
conclusive. If the father is honestly dissatisfied, he has no duty to pay for the portrait.
A requirement of “satisfactory” performance will be determined by objective criteria when a performance is
objectively measurable, such as one to supply equipment meeting certain specifications or construction
according to an architect’s drawings. Similarly, “satisfactory proofs” of insurability or loss covered by insurance
will be objectively determined. Conditions of personal satisfaction in personal service contracts, however, are
measured by a subjective standard.
An employee was terminated after nine months under a two-year employment contract that reserved the right of
the employer to terminate the employee’s services for failure to perform to the company’s satisfaction. The
employee claimed that the standard should be one of reasonable satisfaction, while the employer asserted that
the standard should be the employer’s personal satisfaction in good faith. The court cited the Corbin on
Contracts in explaining that there is a distinction between conditions of satisfaction in matters of taste,
sensibility, or judgment, as to which a subjective standard applies, and matters of mechanical utility or fitness,
to which an objective standard applies. The court held that, in matter of employment, when there is a condition
of personal satisfaction, a subjective standard applies. Silvestri v. Optus Software, Inc., 175 N.J. 113, 814 A.2d
602 (2003).
Shek signed a guaranty on a bank loan to Hidden River (a real estate developer). The guaranty stated it was
intended to induce the bank, “at its option, at any time or from time to time to make loans … to or for the
account of Hidden River.” The bank extended further financing, but later refused to extend more and sued
Hidden River and Shek. Shek claimed that the bank failed to perform its contractual obligations under the
guaranty agreement. The court concluded that the bank’s obligation under that agreement was to consider
Hidden River’s request for further financing. The bank performed that obligation. Where a party’s obligation
under a contract is subject to its own discretion, the discretion must be exercised in good faith. The evidence
indicated that the bank met the good faith standard. Macatawa Bank v. Hidden River Estates, 2009 Mich. App.
LEXIS 1305 (June 16, 2009).
JCI outsourced the molding of truck panels to defendant, and the parties’ contract allowed JCI the right to
resource the production of the parts if JCI did not have continuing satisfaction with defendant’s’ quality, delivery,
meeting of program milestones, service and price-competitiveness. After JCI terminated the agreement, the
court held that JCI’s right to terminate was dependent on JCI’s personal taste, feeling or individual judgment.
The reasonableness or justice of JCI’s dissatisfaction could not be questioned. The only standard that limited
JCI’s ability to terminate the defendant was that its dissatisfaction could not be given in bad faith, dishonestly,
Page 2 of 3
insincerely, or fraudulently. Johnson Controls v. Atl. Auto. Components, 2015 Mich. App. LEXIS 1856 (Mich. Ct.
App. Oct. 13, 2015).
According to the terms of an annuity contract with TIAA, there was a right to change the beneficiary by “written
notice satisfactory to TIAA.” A standard beneficiary designation form was completed, signed, and sent to TIAA.
TIAA refused to accept the beneficiary designation and distributed the proceeds according to the original
designation, arguing the phrase “satisfactory to TIAA” in the change of beneficiary provision reserved a
contractual right for it to use discretion in approving changes to beneficiaries. The court disagreed and found
the language ambiguous because the phrasing raised the questions of what must be satisfactory and what
discretion is conferred on TIAA. The court cited the Corbin treatise to explain that “satisfactory” carries with it an
objective component, and “even honest dissatisfaction with the written notice will not avoid defendant’s
obligation, if a reasonable insurer in its position would be satisfied.” The canon of construction and
interpretation contra proferentem and the principle that an insurance contract should be read to accord with the
reasonable expectations of the purchaser assisted the court to conclude the provision gave no discretion to
TIAA. Pedrick v. Roten, 70 F. Supp. 3d 638, 2014 U.S. Dist. LEXIS 137058 (D. Del. 2014).
[2] Courts Sometimes Impose a Reasonable Standard on Conditions of Satisfaction

A court will never admit limiting the parties’ freedom of contract. But when a good faith but highly unreasonable
exercise of the condition of personal satisfaction will require a harsh result, a court may resort to a pseudo-
interpretation of the condition to impose a reasonable standard on a condition of satisfaction. Without changing
the standard, where some performance has been rendered before a condition is exercised in good faith but
unreasonably, the performing party may recover the reasonable value of the performance in restitution to avoid
the unjust enrichment even though the condition has not been fulfilled.
[3] UCC “Sale on Approval”

When a buyer of goods or services has an “option to cancel” a contract or a “privilege of return,” the buyer,
absent other qualifications, has a power to terminate the contract at will. The “option to cancel” or “privilege of
return” may, however, be exercisable only upon the buyer’s dissatisfaction with the product or service.
If a seller agrees to deliver goods to a buyer who has the privilege of returning the goods, the contract is a “sale
on approval” under UCC § 2- 2 1 . UCC § 2- 1 1 defines a “sale or return” where the buyer intends to
resell the goods to customers, rather than use the goods as in the case of a “sale on approval.” A “sale or
return” contract allows the buyer to return any unsold goods. The arrangement is often called a “sale on
consignment.”
Since the “sale on approval” provision allows a buyer to return the goods even though the goods conform to the
contract, it may appear to be an unconditional power of termination. A comment, however, suggests that sales
on approval are sometimes called contracts for sales “on trial” or “on satisfaction.” UCC § 2- 2 cmt. 1. Since
the goods may be returned even though they meet all objective specifications in the contract description, the
Code may appear to suggest a subjective standard. The comment, however, states:
On the point of “satisfaction” as meaning “reasonable satisfaction” where an industrial machine is involved,
this Article takes no position.
UCC § 2- 2 cmt. 1.
Where the UCC does not displace pre-existing law, pre-Code principles of law apply. UCC § 1-10 (formerly
§ 1-10 . If, therefore, the subject matter is one of measurable mechanical utility, the common law objective test
would apply. That solution, however, may be too facile. A sophisticated device sold “on approval” for use in a
science laboratory may not be approved by a scientist who, after testing it in good faith, decides that the device
is not appropriate for certain experiments even though it meets all objective criteria. There is no escape from an
examination of what the parties intended by “satisfaction” or “approval” under all of the circumstances. The
parties may avoid a dispute as to whether the standard is objective or subjective by a clear statement of the
standard in the contract.
Practice Resources:
• Corbin § 1. (promises conditional on personal satisfaction); § 1. (promise of
Page 3 of 3
satisfaction compared with condition of satisfaction); § 1. (performances

involving artistic taste); § 1. (personal dissatisfaction as a condition of a power
to terminate); § 1.10 (judicial disregard of express words of condition).

End of Document
§ 31.04 Conditions of Approval by Third Parties
[1] A Duty Under a Contract May Be Conditioned on the Approval or Satisfaction of a Third Party
A duty under a contract may be conditioned on the approval or satisfaction of a third party. Typically, such
cases involve binding contracts where a third-party expert must be satisfied with the performance. The common
illustration is the construction contract that names an architect or engineer who must approve all or a portion of
the work as a condition to the owner’s duty to pay the builder. Major construction projects involve “progress
payments” that the contract requires to be made at stated intervals of the performance. The issuance of an
architect’s certificate of approval is a condition precedent to each progress payment. This assures the owner
that the work is being performed in accordance with the design and materials required under the architect’s
supervision.
[2] Judgment of Third Parties Must Be in Good Faith

Like any other condition of satisfaction, an architect or engineer must make the judgment in good faith. Fraud,
bad faith, or a gross mistake that has the effect of bad faith will excuse the condition. While some courts have
excused the condition because they found that the approval was unreasonably withheld since the contractor
had substantially performed the work, most courts reject the reasonableness standard since it contradicts the
manifested intention of the parties to rely on the honest and good faith subjective judgment of the named
architect or engineer.
A condition will be excused if a third-party expert, operating in good faith, makes a decision to approve or not
approve the work for reasons beyond its expertise. Thus, a condition was excused when an engineer decided
to approve defective work on a school building because he was motivated to allow the school to open on time
for the benefit of the children. James I. Barnes Constr. Co. v. Washington Township, 184 N.E.2d 763 (Ind. Ct.
App. 1962). In another case, an architect refused to issue a certificate of approval to avoid the appearance that
he was issuing it as prelude to litigation; the condition was excused. Rizzolo v. Poysher, 89 N.J.L. 618, 99 A.
390 (1916). In these cases, the courts unfortunately resorted to traditional categories such as dishonest
judgment, or gross mistake, or even “constructive fraud,” in order to excuse the condition. The better rationale
would recognize that the engineer was not hired to make decisions as a member of the school board and the
architect was not hired as a dispute resolution expert.
Even when a named third party’s approval is a condition to payment under a construction contract, absent clear
contract language to the contrary, the parties intend to be bound to the contract if the named third party
becomes unavailable. A replacement expert will be appointed in such cases. In contracts for the sale of goods,
UCC § 2- 0 1 c recognizes that parties may intend to have a binding contract though they leave the price to
be determined by a third party. If the third party is an expert in cotton and is chosen to grade the cotton, that
party’s unavailability would not be fatal to the existence of the contract. If, however, a contract for the sale of a
valuable painting for which there is no market price requires a price to be determined by a trusted named
expert, the parties may not intend to be bound to their agreement if that expert is not available to value the
painting. UCC § 2- 0 cmt. 3.
[3] Final and Conclusive Determinations by Third Parties

The certificate of an architect or engineer is a condition to the owner’s duty to pay, but it is not a final and
conclusive determination of that issue unless the contract expressly states that the third party’s decision is final
and conclusive. The parties are permitted to make such decisions final and conclusive by the named third party
even though such an architect or engineer is in the pay of one of the parties and not the other. Courts must
Page 2 of 2
ascertain that any judgments made by such an expert are in good faith, free of collusion, and made only after a
careful investigation of the facts. While the careful and good faith conclusions of an architect or engineer under
such a contract are entitled to final effect, to the extent that the architect or engineer makes decisions with legal
conclusions, courts should be willing to carefully review those aspects of the decision that are not concerned
with the quality of the work. The case of Ingrassia Constr. Co. v. Vernon Twp. Bd. of Educ., 345 N.J. Super.
130, 784 A.2d 73 (2001), illustrates this qualification.
A construction company sued a board of education for wrongful termination of its contract. The contract was
evidenced by the American Institute of Architect’s (AIA) standard form, which required the architect to make
“final and binding” decisions on any dispute between the owner and contractor. The standard AIA form made
such decisions “subject to arbitration,” but that phrase had been deleted from the contract in question. The
architect decided that the board had the right to terminate the contract, but the certificate was defective
because the architect who issued the decision was unlicensed in the United States. The court explained that
the phrase, “subject to arbitration” had been added to the standard AIA form as a reflection of some concern
that an architect’s decision should not be accorded conclusive effect. The court declined to decide that question
in this case because the certificate was defective. While recognizing that a proper architect’s certificate would
be a condition precedent to the board’s right to terminate the contract, the court noted the express language of
the AIA form that preserves the owner’s common law right to remedies for material breach of the contract.
Practice Resources:
• Corbin § 1.11 (approval by a third person as an express condition of duty);
§ 1.12 (certificate of architect or engineer as a condition); § 1.1 (fraudulent or
unreasonable refusal of certificate); § 1.1 (provisions making determination of
architect or engineer conclusive).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 32 CONSTRUCTIVE CONDITIONS
CHAPTER 32 CONSTRUCTIVE CONDITIONS

the subject matter.

End of Document
§ 32.01 History and Operation of Implied and Constructive Conditions

It is difficult to imagine a society without the institution of contract as we now know it. Yet, the early common law did
not recognize the typical modern contract consisting of an exchange of informal promises. The single promise
created no obligation until the “quid pro quo” had been received or the “consideration” had been performed. The
course of the contractual obligation was performance rather than the promise. Until performance occurred, no
contract had been formed. It was not until the fifteenth century that the promise rather than the performance
became the quid pro quo and the modern executory contract was recognized. The difficulties attending this
development, however, would last for a few more centuries.
When Ames promised to sell goods to Barnes in exchange for Barnes’s promise to purchase the goods at the
agreed price, the promises formed a contract, but they were viewed as independent promises. If Ames sued Barnes
for failure to pay, the fact that Ames failed to tender delivery of the goods was irrelevant. Barnes had relied upon
Ames’s promise and now must sue Ames for breaching that promise. That silly situation continued until courts
recognized that parties do not bargain only for promises or performances; they bargain for both the promise and the
performance.
The parties’ agreement typically did not express conditions to each other’s performance. Ames’s promise to sell
goods and Barnes’s promise to pay did not state that Ames must tender the goods as a condition to Barnes’s duty
to pay for them. In a service contract under which Ames agrees to paint Barnes’s house for a price, the contract
often said nothing about the order of the parties’ performance. Desirous of finding such promises to be dependent
instead of independent, courts searched for any express terms in the agreement to find that one performance was
conditional on the other. It remained for the great Chief Justice of King’s Bench, Lord Mansfield, to recognize as a
matter of common sense that promises were typically dependent rather than independent. Kingston v. Preston, 2
Doug. 689 (1773).
If Barnes’s performance is dependent upon Ames’s tender of the goods or painting the house, one of the
performances is a condition to the other party’s performance. The condition, however, is not expressed. It is
implied-in-law. In other words, it is constructed by a court to facilitate the performance of the contract in a fair and
just fashion.
Practice Resource:
• Corbin § 2.2 (history of implied and constructive conditions).

End of Document
§ 32.02 Implied and Constructive Conditions Distinguished

Numerous statements pervading contract law emphasize that it is the objectively manifested intention of the parties
that constitutes the sole operative factor in determining the legal relations of the parties. The assertion is stated in
different ways, including the common statement that courts do not make contracts for the parties. Throughout this
volume, we have noted that general statements about contract law are always subject to exceptions. While a court
may not depart from the manifested intention of the parties, if the parties have failed to manifest an intention that
would allow the contract to be enforced in a fair and just fashion, courts are quite willing to “construct” an omitted
term.
If the parties manifest an intention that a duty is conditional but the manifestation is not expressed in definite words,
the condition is called “implied.” Like a genuine contract that is implied from conduct rather than words, however,
the condition may be expressed in a form other than language. Such an implied-in-fact condition is just as genuinely
intended as a condition expressed in words. It is not created by courts; it is discovered from the parties’ expressions
of intention. A constructive condition, however, is not derived from the manifested intentions of the parties. It is a
condition constructed by a court in the interest of fairness and justice.
The origins and meaning of such conditions is well stated by Judge Cotillo, who wrote:
As I understand it, the doctrine of implied conditions in contract law is a creation of the courts, by way of judicial
fiction, in order to give the defendant an advantage which logically and equitably should be given to him by way
of defense. The doctrine of conditions implied in law dates back to the decision of Lord Mansfield in 1773,
sitting on the King’s Bench, in the case of Kingston v. Preston . It is a creation of the courts in order to
overcome the hardships of the strict enforcement of the letter of contract law. An express condition is, of
course, a real condition actually created by the parties and intended by them, whereas the condition implied in
law is an invention of the courts created by the law in an endeavor to do justice by the parties. In other words,
where an unforeseeable and unforeseen contingency arises which the parties, naturally enough, failed to
provide for or to contemplate, the law in such an event will think for them along equitable lines and will imply
such conditions as would have been in the minds of the parties, had they thought of them.
Lion Brewery v. Loughran, 131 Misc. 331, 226 N.Y.S. 656 (Sup. Ct.), rev’d, 223 A.D. 623, 229 N.Y.S. 216 (1928).
Practice Resources:
• Corbin § 2.1 (implied and constructive conditions distinguished); § 2. (commercial
paper—express and constructive conditions of promisor’s duty).

End of Document
§ 32.03 Order of Performance

When the contract expressly states that the entire performance or part performance of one party is to occur prior to
the performance of the other party, the parties have manifested their intention as to the order of performances,
which must be honored. If the parties have not expressly addressed the order of performance and the performance
of one party will necessarily require some period of time while the other party’s performance can occur
instantaneously, the performance that takes time is a constructive condition precedent to the duty of the other party.
The party who must perform first is assuming a credit risk that he or she will receive the performance promised by
the other party. The employee who must perform before being paid is assuming the risk that the employer will be
able to pay for the week’s work. Since typical employers were viewed as better credit risks than typical employees,
there was less risk in having the employee await payment. Absent express contract terms to the contrary, since a
builder’s performance will take time, the builder must complete the building before being paid. If, however, the
contract requires the owner to secure its promise to pay through a bond, the owner’s procurement of such a bond is
a constructive condition precedent to the builder’s duty to commence construction.
Practice Resource:
• Corbin § 2. (conditional promises when one party performs before the other).

End of Document
§ 32.04 Concurrent Constructive Conditions

When the exchanged promises for agreed equivalents can be performed simultaneously, which party must perform
first? The curious answer is, neither. Absent contrary language, in the sale of land or goods, neither performance
requires any appreciable time.
A contract for the sale of Barnes’s land to Ames for $100,000 will be performed by the exchange of deed and the
payment in some form such as a certified check or cash. If the parties have not expressly stated a time for “closing”
or “settlement,” and neither pursues their respective performance, neither party can be in default. Where
performances on either side can be performed simultaneously, absent a contrary agreement they are concurrent
constructive conditions that must be performed simultaneously (Restatement (Second) Contracts § 2 . If the
contract stated a maximum time for performance or, if no time was stated but a reasonable time has expired,
neither party can place the other party in default. Winning v. Winning, 2012-Ohio-1448, 2012 Ohio App. LEXIS 1287
(11th Dist.). To place a party in default, the other party had to “tender” performance within a reasonable time—that
is, one party must have the complete ability to perform and offer to do so in order to activate the duty of the other
party. Thus, if Ames offers to hand Barnes a certified check for $100,000 that Barnes refused to accept, the
constructive (concurrent) condition to Barnes’s duty has occurred, his duty was activated, and his refusal to perform
breaches that duty. Ames may pursue her remedies, including the remedy of specific performance of the contract
for Barnes’s land.
If the contract to purchase Barnes’s land for $100,000 stated that Ames would pay three installments of $25,000
each on three separate dates prior to the closing date when the final $25,000 payment was due, the first three
payments may be viewed as a constructive conditions precedent, but the final payment would be a constructive
concurrent condition. If Barnes insisted on receiving payment of the final $25,000 before surrendering the deed,
Ames could claim a breach of contract since a condition necessary to activate Ames’s duty would be Barnes’s
tender of the deed.
Instead of analyzing such a defense as a failure of a condition (express or constructive) to occur, some would prefer
to characterize such a response as an “equitable defense.” Such a phrase, however, is confusing since it originally
referred to a defense available in equity but not in actions at law. Moreover, use of the term “defense” suggests that
the burden of alleging and proving the facts constituting the defense rests on the defendant. The question of which
party should aver and prove the existence of a given fact or facts, however, is a different question. Moreover, it is
generally true that the burden of alleging and proving that an event occurred before a duty is activated is typically
on the plaintiff.
Practice Resources:
• Corbin § 2. (nonperformance of a condition as an “equitable defense”); § 2.
(promise-for-promise contracts for simultaneous performances).

End of Document
§ 32.05 Failure to Perform a Condition

If the performances are simultaneous, absent a prior tender or offer to perform by the other party, there has been
no “failure of consideration” and there has been no breach of any contractual duty. Both parties were under a duty
to perform, but neither duty had been activated by a tender or offer to perform. Thus, the correlative rights and
duties were not immediately enforceable. When, however, a performance constitutes a constructive condition
precedent and is only partially performed, a literal application of the constructive condition (dependent covenant)
concept would lead to manifest injustice.
Just four years after distinguishing dependent and independent covenants, Lord Mansfield was required to mitigate
the potential harshness of that doctrine. In Boone v. Eyre, (1777) 1 H. Bl. 273, he stated that if there was only a
partial failure of the constructive condition precedent that could be paid for in damages, the other party had a
remedy in damages but could not refuse to perform on the footing that the constructive condition had not occurred.
If a defendant could insist that his promise (covenant) was dependent (conditional) upon the absolute, full,
performance of the plaintiff’s promise, even a slight failure of that performance would allow the defendant to reap
the benefit of the plaintiff’s performance and be discharged from any further performance. The doctrine of
dependent covenants (constructive conditions), which was designed to foster fair and just results, would be turned
on its head by such an application. As will be seen, the Mansfield mitigation of the harshness that could otherwise
attend the original doctrine developed into a modern doctrine that treats the constructive condition precedent as
activating the other party’s duty when the performance constituting that constructive condition is “substantial.”
Practice Resources:
• Corbin § 2. (failure to perform a condition was deemed a “failure of consideration”);
§ 2. (partial failure of performance in relation to a condition); § 2. (analysis of Ellen
v. Topp).

End of Document
§ 32.06 The Implied Covenant of Good Faith

The cases are legion which imply what courts often call a “covenant” of good faith in every contract. See, e.g.,
AT&T Communs. of Cal., Inc. v. Pacific Bell, 2000 U.S. App. LEXIS 23215, at *5 (9th Cir. Sept. 8, 2000). The
Restatement (Second) of Contracts § 20 imposes a duty of good faith and fair dealing in the performance and
enforcement of all contracts. The duty of good faith is not operative during the formation stage of the contract.
Robinson v. Wingate Inns Int’l, Inc., 2014 U.S. Dist. LEXIS 139758 (D.N.J. Sept. 24, 2014) (the duty of good faith
and fair dealing does not apply to a lack of good faith in contract formation, it arises only in connection with contract
performance and enforcement). Once the contract is formed, however, the parties owe each other an obligation of
good faith and fair dealing. The Uniform Commercial Code mandates a general “obligation of good faith” in the
performance and enforcement of every contract. UCC § 1- 0 and the comment thereto. Mansoor Int’l Dev. Servs.
v. United States, 121 Fed. Cl. 1 (2015) (duty applies to both performance and enforcement of contract). “Good faith
means honesty in fact and the observance of reasonable commercial standards of fair dealing.” UCC § 1-
201(b)(20). Good faith is a standard connoting decency, fairness or reasonableness that is applied in a variety of
contractual contexts which emphasize “faithfulness to an agreed common purpose and consistency with the
justified expectations of the other party.” Black Horse Lane Assoc., L.P. v. Dow Chem. Corp., 228 F.3d 275, 288 (3d
Cir. 2000) (quoting Restatement (Second) § 20 cmt. a). Acting unreasonably and negligently are not enough. “The
implied covenant of good faith and fair dealing requires a party vested with contractual discretion to ‘exercise that
discretion reasonably and with proper motive, and [not] arbitrarily, capriciously, or in a manner inconsistent with the
reasonable expectations of the ties. And: “Improper motive is a ‘predominant theme’ in implied covenant cases
under Illinois . . The party exercising discretion cannot act in bad faith, with ‘dishonest purpose,’ ‘ulterior
motives,’ or an ‘intent to harm’ the other party.” Thus, poor, or even negligent business judgment is not enough.
Deom v. Walgreen Co., 591 Fed. Appx. 313, 2014 U.S. App. LEXIS 21592, 2014 FED App. 0842N (6th Cir.) (6th
Cir. Ky. 2014).
A party does not breach the covenant of good faith by doing something that is explicitly authorized by the
agreement. Braeger Chevrolet, Inc. v. Ally Fin., 2015 U.S. Dist. LEXIS 43595 (E.D. Wis. 2015). “… the 'general rule'
[regarding the covenant of good faith] is plainly subject to the exception that the parties may, by express provisions
of the contract, grant the right to engage in the very acts and conduct which would otherwise have been forbidden
by an implied covenant of good faith and fair dealing.” Travelers Cas. & Sur. Co. of Am. v. R.J. Lanthier Co., 2014
U.S. Dist. LEXIS 123355 (S.D. Cal. Sept. 2, 2014) (citing the Corbin treatise). Tilstra v. Boumatic LLC, 2015 U.S.
App. LEXIS 11183 (7th Cir. 2015).
The duty of good faith frequently arises in connection with contract language that affords a party discretion in the
manner of performance. For example, the duty was activated where a contract gave a party the right to amend
commissions “solely in its discretion.” McDermott v. Avaya, Inc., 2015 U.S. Dist. LEXIS 49066 (W.D. Wash. 2015).
See also, 3E Mobile, LLC v. Global Cellular, Inc., 2015 U.S. Dist. LEXIS 104870 (D.D.C. 2015) where, on its face,
an agreement required the supplier to produce product but also gave it discretion not to. When the supplier failed to
produce product ordered by the buyer, the buyer sued, and the court held that the buyer stated a claim for breach of
the duty of good faith despite the discretion afforded the supplier.
Where a manufacturer had the right to terminate a dealership only for good cause, this did not allow the
manufacturer to evade the spirt of the bargain or to terminate a dealer merely because it could make more money
from another dealer. Tilstra v. Boumatic LLC, 2015 U.S. App. LEXIS 11183 (7th Cir. 2015).
Page 2 of 3
There is much litigation over banks’ good faith obligations to lenders. Where a bank foreclosed on a $21.2 million
dollar loan, the defendants counterclaimed that the bank allegedly delayed foreclosure proceedings for 20 months
to mislead bank regulators as to the condition of the loan and thereby gain executive bonuses resulting in a severe
increase in the depreciation of the property and consequent increase in the deficiency owed by the defendants. The
plaintiff claimed that it was not unfaithful to the purpose or the intention and spirit of the contract since it simply
required the defendants to repay the loan. The court, however, found that the plaintiff equated the literal and
express terms of the contract with its intention and spirit. Fulfilling the express terms of the contract may still
demonstrate a violation of the implied covenant of good faith and fair dealing. In exercising its right to repayment of
the loan, the bank was still required to operate fairly and in good faith. Armed Forces Bank, N.A. v. FSG-4, LLC,
2011 U.S. Dist. LEXIS 130636 (D. Nev. Nov. 10, 2011). Bank’s withdrawal of funding to the developer of a
subdivision of homes violated the implied covenant of good faith and fair dealing, which the court held could be
breached even where the express terms are not violated. Great Western Bank v. LJC Dev., LLC, 362 P.3d 1037,
2015 Ariz. App. LEXIS 277, 726 Ariz. Adv. Rep. 21 (Ariz. Ct. App. 2015). In another case, Webber defaulted on a
bank loan secured by two lots, and the Bank commenced a non-judicial foreclosure of the lots. The Bank ultimately
postponed the trustee’s sales seventeen times—for approximately two years—before cancelling the sales. In the
meantime, the market value of the lots plunged. The Bank sued Webber, and Webber filed a counterclaim alleging
that the Bank breached the implied covenant of good faith by, in effect, preventing Webber from selling the property
and applying the sales proceeds to pay down the indebtedness owing to the Bank. The court held that a party may
breach the implied covenant even in the absence of a breach of an express provision of the contract by denying the
other party the reasonably expected benefits of the agreement. “By entering into deed of trust contracts, parties opt
for an efficient and speedy method of selling the collateral.” The court held there existed material factual disputes as
to whether the decrease in the value of the lots was a result of the continued postponement of the sales. New York
Cmty. Bank v. Webber, 2016 Ariz. App. Unpub. LEXIS 163 (2016).
While the implied obligation of good faith requires that neither party do anything to injure or destroy the rights of the
other party to receive the benefits of the agreement, it has no existence separate from the underlying contract to
which it is attached. It does not create independent substantive rights, it generally cannot override express
contractual terms and it does not prevent parties from protecting their respective economic interests. See, e.g.,
Mendez v. Bank of Am. Home Loans Servicing, LP, 840 F. Supp. 2d 639 (E.D.N.Y. 2012) (New York law will not
recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when it arises
from the same allegations as a breach of contract claim.). The good faith requirement, however, precludes action or
inaction that would contravene the reasonable expectations of the other party. Thus, in a well-known case, where a
lessee may have had reason to believe that the other party’s actions had failed to consider certain effects of a
clause in a 20-year-old lease that would result in allowing the lessee to purchase the property at price substantially
below the market price, the court recognized the lessee’s failure to alert the lessor to these effects could be viewed
as the lessee taking opportunistic advantage of the lessor, violating the implied duty of good faith and fair dealing.
Market Street Assocs. Ltd. Partnership v. Frey, 941 F.2d 588 (7th Cir. 1991). Similarly, a court deemed a
defendant’s deliberate failure to respond to a question a tactical decision anticipating that its silence would result in
the plaintiff not meeting strict requirements to exercise an option to repurchase 1.5 acres of land for a nominal sum.
Failing to point out the necessity of meeting the requirements with a view to mislead the plaintiff constituted bad
faith. The Supreme Court of New Hampshire found that the trial court’s decree of specific performance was proper,
notwithstanding the plaintiff’s failure to meet the express requirements of the manner and timing of exercising the
option. Livingston v. 18 Mile Point Drive, Ltd., 158 N.H. 619, 972 A.2d 1001 (2009). A right of first refusal in a lease
was assignable only with the defendant’s consent. The defendant argued that the “majority view” allows landlords to
withhold consent unreasonably. The court disagreed, noting that the so-called majority view was eroding as
manifested in even more jurisdictions applying a standard of good faith and fair dealing to such consent. Dick
Broad. Co. v. Oak Ridge FM, Inc., 395 S.W.3d 653 (Tenn. 2013).
Practice Resource:
• Corbin § 2.2 (every contractual relationship imposes an obligation of good faith on the
party undertaking it).
Page 3 of 3

End of Document
Corbin on Contracts Desk Edition > CHAPTER 33 CONSTRUCTIVE CONDITIONS IN CONTRACTS

FOR THE SALE OF GOODS
CHAPTER 33 CONSTRUCTIVE CONDITIONS IN CONTRACTS FOR THE SALE

OF GOODS
the subject matter.

End of Document

§ 33.01 Constructive Conditions in Contracts for the Sale of Goods

In the United States, contracts for the sale of goods are governed by the Uniform Commercial Code (UCC). The
doctrine of constructive conditions is part of that codification. Absent contrary agreement, a contract for the sale of
goods requires simultaneous performances, which require neither party to perform before the other. To place the
buyer in default, the seller must tender delivery of the goods. UCC § 2- 0 . To place the seller in default, the buyer
must tender payment for the goods. UCC § 2- 11. It is tempting to assert that the UCC has rejected a major part of
the doctrine of constructive conditions, which was designed to mitigate the harsh effects of the early common law
notion that all covenants were independent. In later chapters, we explore the doctrine of “substantial performance”
that allows a party to recover for breach of contract though his or her performance was not perfect. While the
statement that the doctrine of substantial performance does not apply to contracts for the sale of goods is
technically correct, there are limitations to the “perfect tender” rule in contracts for the sale of goods.
Practice Resource:
• Corbin § .1 (constructive conditions in contracts for the sale of goods).

End of Document

§ 33.02 The Perfect Tender Rule

Critical language in UCC § 2- 01 appears quite draconian: “[I]f the goods or the tender of delivery fail in any respect
to conform to the contract, the buyer may “reject the whole . As courts are fond of saying, “any” means “any.”
Substantial performance in either the goods themselves or their tender will not be sufficient. If the buyer has an
absolute right to reject for any defect in the goods or their tender, the standard would appear to be “perfection.”
While substantial performance is not recognized in contracts for the sale of goods, the UCC does recognize several
critical factors that mitigate the harsh results that would ensue if an unyielding standard of “perfect tender” were
applied.
Section 2-601 begins with the qualification that it is subject to the installment contracts provisions of Article 2, which
do not allow rejection of a given installment for “any” defect. Rather, the standard to be applied seems familiar: “The
buyer may reject any installment [of goods] which is non-conforming if the non-conformity substantially impairs the
value of that installment . UCC § 2- 12 2 (emphasis supplied).
Section 2-601 also expressly recognizes that the parties may “otherwise agree” that the applicable standard is not
“perfect.” Since the section requires the tender and the delivered goods to conform “to the contract,” it is important
to recognize that “contract” is defined in UCC § 1-201 12 as the “total legal obligation that results from the
parties’ agreement.”
The broad definition of “agreement” found in UCC § 1-201 recognizes the bargain created not only by the
parties’ contractual language but also “inferred from other circumstances, including course of performance, course
of dealing, or usage of trade as provided in Section 1-303.” Therefore, if the trade usage or course of dealing the
parties have practiced in the past includes some deviations from the letter of the contract language, the
performance would continue to be “perfect.” Their course of performance under the immediate contract could
operate as a waiver or modification of the contract. Beyond these significant qualifications of the “perfect tender”
rule, two others are more important.
Practice Resources:
• Corbin § .2 (the perfect tender rule and qualifying concepts); § . (contracts for the
sale of goods and constructive conditions).

End of Document

§ 33.03 A Seller Has the Right to “Cure” Defects

UCC § 2- 0 is designed “to counterbalance the perfect tender rule.” Cooper v. Bluff City Mobile Home Sales, Inc.,
78 S.W.3d 157, 163 (Mo. Ct. App. 2002). When a buyer exercises the right to reject for “any” defect in UCC § 2-
601, the seller is afforded the right to “cure” the defect if the time for performance has not yet expired. UCC § 2-
508(1). UCC § 2- 0 2 allows a cure even beyond the time for performance if the seller has reasonable grounds to
believe that a nonconforming tender would be acceptable. T. W. Oil, Inc. v. Consolidated Edison Co., 57 N.Y.2d
574, 457 N.Y.S.2d 458, 443 N.E.2d 932 (1982).
Whether cure allows a seller to insist that the buyer accept “repaired” goods or whether the buyer is entitled to a
replacement with new goods has raised issues concerning the buyer’s faith in the product. A court upheld a buyer’s
right to refuse to accept a replaced transmission on a new automobile since the buyer’s faith in the original car was
“shaken.” Zabriskie Chevrolet, Inc. v. Smith, 99 N.J. Super. 441, 240 A.2d 195 (1968). When, however, a buyer
refused to accept an adjustment on a new television set to correct a faulty picture, the court held that such an
adjustment was an acceptable cure. Wilson v. Scampoli, 228 A.2d 848 (D.C. 1967).
Practice Resource:
• Corbin § . (cure in UCC § 2- 0 . Corbin on Contracts Desk Edition

End of Document

§ 33.04 Good Faith Is a Restraint on Perfect Tender

Another mitigation of the perfect tender rule emanates from the requirement under UCC § 1- 0 that every contract
or duty within the UCC imposes an obligation of good faith. Thus, a buyer’s absolute right to reject for any defect
must meet the standard of “honesty in fact and the observance of reasonable commercial standards of fair dealing.”
UCC § 1-201 20 .
The paradigm case is Neumiller Farms, Inc. v. Cornett, 368 So. 2d 272 (Ala. 1979). In that case, the sellers agreed
to deliver “chipping” potatoes to the buyer at $4.25 per hundredweight. When the market price plummeted to $2.00
per hundredweight, the buyer rejected the tendered potatoes, claiming that they would not “chip” satisfactorily. The
sellers had their crop tested by experts who reported that the potatoes were suitable in every respect. They also
purchased potatoes from another party who was supplying potatoes to the buyer at $2.00 per hundredweight
without the buyer’s objection. When these potatoes from the same fields were delivered by the sellers, however, the
buyer again said they were unfit for chipping. The jury found for the sellers and the court of appeals affirmed the
verdict on the footing that the jury was entitled to believe that the buyer’s rejection based on a claim of
dissatisfaction was not made in good faith and constituted breach of the contract.
Practice Resource:
• Corbin § . (good faith as a general restraint on perfect tender).

End of Document

§ 33.05 Rejection and Acceptance of Goods

A buyer may reject goods or a tender of goods for any defect, subject to the mitigating factors just discussed, but
rejection must be within a reasonable time after the goods have been delivered and it is not effective absent
seasonable notification to the seller. UCC § 2- 02. The buyer must then hold the rejected goods for the seller with
reasonable care at the seller’s disposition. UCC § 2- 0 .
If the time for rejection has passed, the goods have been accepted and rejection is no longer possible. Under UCC
§ 2-2 0 acceptance occurs when the buyer:
(a) after a reasonable opportunity to inspect the goods, signifies to the seller that the goods are conforming;
(b) fails to make an effective rejection; or
(c) does any act inconsistent with the seller’s ownership of the goods such as using them or selling them to
another party.
In Isource NYC LLC v ROC Apparel Group, LLC, 2015 NY Slip Op 30654(U) (NY Sup. Ct. 2015), the buyer’s mere
complaint about the quality of goods, without more, did not constitute a clear and unequivocal act of rejection.
Accepted goods may not be rejected, but UCC § 2- 0 allows for revocation of acceptance under certain
circumstances. Acceptance may be revoked if the non-conformity in the goods substantially impairs their value and
the buyer either accepted the goods without discovering the defect because of the difficulty of such discovery, or
accepted them on the reasonable assumption that the non-conformity would be cured and has not been cured.
The seller does not have the right to cure a nonconformity in accepted goods. See Vanalt Elec. Constr., Inc. v.
Selco Mfg. Corp., 2007 U.S. App. LEXIS 10881 (3d Cir. May 8, 2007). Timely and sufficient notice of any breach
concerning accepted goods must be sent within a reasonable time after the buyer discovered or should have
discovered any breach. The failure to provide such notice will bar the buyer from “any remedy.” UCC § 2- 0
supports the prevention of stale claims, allowing sellers to marshal evidence for a defense or to correct defects or
otherwise mitigate damages. See In re Ford Motor Co. E-350 Van Prods. Liab. Litig., 2008 U.S. Dist. LEXIS 73690
(D.N.J. 2008). When the claim is made by a consumer who had no direct dealings with the manufacturer of the
product, the majority of courts hold that the consumer need only notify the immediate seller. See ACE Am. Ins. Co.
v. Fountain Powerboats, Inc., 2007 U.S. Dist. LEXIS 62818 (D.N.H. Aug. 24, 2007). In Hillerich & Bradsby, Co. v.
Charles Prods., 2015 U.S. Dist. LEXIS 153553 (W.D. Ky. 2015), Hillerich & Bradsby’s claims against a supplier for
failing to comply with certain statutory obligations was barred because it waited too long to notify the supplier:
Hillerich & Bradsby should have discovered the [alleged violation] a short period of time after receipt, if not
immediately. Instead, Hillerich & Bradsby sold hundreds of these products for approximately a year and a half.
Accepting deliveries for approximately nine months without mentioning readily identifiable defects and waiting
approximately one and a half years to revoke bars Hillerich & Bradsby from now properly revoking its contract.
Whatever the reasonable amount of time to raise such issues and subsequently timely revoke a contract, no
reasonable trier of fact could find that obvious and immediately ascertainable defects were timely revoked after
this unreasonable, substantial delay.
The factors used to resolve issues of whether a non-conformity in the goods substantially impairs their value to the
buyer under UCC § 2- 0 are very similar to the criteria used to determine whether a breach of contract is material
under Restatement (Second) of Contracts § 2 1. The central question is whether a party would receive the
Page 2 of 2
substantial benefit of the bargain. Restatement (Second) of Contracts § 2 cmt. b, to promote good faith in the
performance of bargains, borrows the UCC concept of “cure” to allow a material breach to be cured. See Bollech v.
Charles County, 2003 U.S. App. LEXIS 13843 (4th Cir. July 10, 2003). The meaning of “cure” as used in the
Restatement (Second) has been viewed as providing the breaching party with a second chance to perform
substantially. Volvo Trucks N. Am. v. State DOT, 2010 WI 15, 323 Wis. 2d 294, 779 N.W.2d 423 (quoting the
Corbin treatise). Thus, if the cure provided the aggrieved party with substantial performance, the material breach
would be erased. Since the UCC does not recognize the doctrine of substantial performance in contracts for the
sale of goods, however, a UCC cured performance would theoretically require a virtual duplication of the original
“perfectly tendered” performance to be effective.
Practice Resources:
• Corbin § . (rejection and acceptance of goods under UCC §§ 2- 02 and 2-606);
§ . (revocation of acceptance under UCC § 2- 0 § . (cure and material breach
under the Restatement).

End of Document

§ 33.06 International Provisions for Contracts Between Merchants
[1] CISG May Preempt Local Commercial Laws

Unless otherwise agreed, when merchant parties to a contract for the sale of goods each have their principal
place of business in one of the more than 70 nations that have adopted the United Nations Convention on
Contracts for the International Sale of Goods (CISG), the CISG preempts the commercial laws of both nations
to promote a uniform analysis. CISG Article 2 states that the convention does not apply to contracts for the sale
of consumer goods. The parties may agree to opt out of CISG, but they do not opt out merely by stating, for
example, that the applicable law shall be the law of California or the law of British Columbia since both the
United States and Canada are CISG signatories; this makes it the law of both California and British Columbia.
See Asante Techs. v. Pmc-Sierra, Inc., 164 F. Supp. 2d 1142 (N.D. Cal. 2001).
[2] Avoidance Under CISG Generally Requires a Fundamental Breach

The CISG approach to contract performance, conditions, and breach focuses on a choice between the
aggrieved party’s decision to either avoid or not avoid the contract. Generally, “avoidance” requires a
fundamental breach—a breach resulting “in such detriment to the other party as substantially to deprive him of
what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable
person of the same kind in the circumstances would not have foreseen such a result.” CISG Article 25. Here we
see a convergence of the material breach standard of Restatement (Second) of Contracts § 2 1 the
“substantial impairment of value” standard of UCC § 2- 0 and CISG Article 25.
CISG also allows an aggrieved buyer or seller to avoid the contract through the use of what is sometimes called
the “Nachfrist Procedure.” The name is taken from German law and refers to a situation in which a party has
delayed performance but which may not constitute a fundamental breach. The aggrieved party is entitled to fix
an additional reasonable period of time for the performance. If the performance does not occur with the
additional time, the aggrieved party may avoid the contract. CISG Articles 47 and 53.
Absent a fundamental breach or a successful use of the Nachfrist Procedure, the aggrieved party may not
avoid the contract and has the remedies available for breach, including damages, specific performance, repair
and replacement, or substitution of goods. Even when avoidance is available to the aggrieved party, it is not
mandatory.
[3] CISG Provides a Strong Right to Cure

CISG provides a strong right to cure by allowing a seller to remedy any failure of its obligations, even after the
date for delivery. CISG Article 48(1). One of the underlying general provisions of CISG requires the
“observance of good faith in international trade.” CISG Article 7(1).
The two major trading nations that had not adopted CISG had been England and Japan. Upon Japan’s
acceptance of CISG in 2008, England’s reticence to join the other major trading nations in supporting a uniform
law for international contracts for the sale of goods becomes more conspicuous.
Instead of absolute draconian positions that view contracts as broken, the thrusts of both the UCC and CISG
clearly move in the direction of finding reasonable ways to uphold contracts pursuant to the standards of good
faith and fair dealing. They each attempt to balance the interests of both parties and preserve contracts where
possible in the overall promotion of commercial activity.
Page 2 of 2
Practice Resources:
• Corbin § . (recent English approaches to the perfect tender problem); § .10
(the emerging consensus); § .11 (international provisions for contracts
between merchants).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 34 CONSTRUCTIVE CONDITIONS IN SERVICE

CONTRACTS, CHARTER PARTIES, AND LEASES
CHAPTER 34 CONSTRUCTIVE CONDITIONS IN SERVICE CONTRACTS,

CHARTER PARTIES, AND LEASES
the subject matter.

End of Document

§ 34.01 Performance of Service Comes Before Payment of Wages

An executory contract requiring both parties to perform often fails to state the order in which each party's obligation
must be performed. Absent express contract terms to the contrary, the presumption is that where one performance
takes time and the other performance can be performed instantly, the performance that takes time is a constructive
condition precedent to the instant performance. In a contract to paint a house, unless the parties otherwise agree,
the act of painting the house is a constructive condition to the owner's duty to pay the painter. Similarly, an
employer's duty to pay wages is constructively conditioned on an employee performing work in accordance with the
contract terms. Employees may contract to be paid in advance of their performance, but, absent a contrary
agreement, it is the universal custom for an employee to perform the work prior to being paid. The performance of
work takes time; payment occurs instantaneously. For many current workers, wages are automatically deposited in
a bank account for the employee's use. When the parties' performances under a contract are not simultaneous, the
party who must perform first is extending credit to the recipient of that performance. As between the employee and
employer, it is generally assumed that the employer is the better credit risk.
Suppose the employee's performance is not perfect. Does the “perfect tender rule” that applies in contracts for the
sale of goods apply to personal service contracts? The answer is no. While the doctrine of “substantial
performance” is typically associated with building contracts, it is also applied to personal service contracts.
Imperfections in the employee's performance may include absences, failures to perform when present,
insubordination, and other failures. Some deviation from “perfection” is allowed under the substantial performance
banner. The challenge is to determine when that line is crossed.
Practice Resources:
• Corbin § .1 (law of employment now subject to rapid changes); § .2 (constructive
conditions in service contracts—substantial performance); § . (performance of
service comes before payment of wages).

End of Document

§ 34.02 Effect of Absence from Service

To suggest that absence preventing the employee from rendering substantial performance will preclude the
occurrence of the constructive condition necessary to activate the employer's duty to pay wages is a truism that
provides no guidance. The issue is one of fact, which immediately suggests the necessity of considering all of the
surrounding circumstances. What is helpful, however, are some common sense guidelines that may be useful in
distinguishing absences that will or will not preclude substantial performance.
It is not remarkable that courts generally consider longer absences as more likely to prevent substantial
performance that shorter ones. An absence for a day or two, however, may be more harmful than an absence for a
week if the shorter absence occurs at a time and under circumstances where it will have a major effect on the
employer's business. The particular function the absent employee would perform and the expected quality and
importance of that performance will also be factors in determining the extent of harm.
Absences at the beginning of employment are more likely to be harmful than absences after the employee has
already worked for some period and has already provided what may be a substantial benefit to the employer. A
willful absence in defiance of an employer's express command can be harmful to company morale even if it
displays no immediate harm to gross profits.
If the absence is caused by accident, illness, or misfortune, it is customary for the employer to condone such
absences. An employee may reasonably believe that a given day's absence would not be important. Regardless of
the reasonableness or good intentions of the employee, however, sufficient harm to the employer's business will
justify dismissal for such absence. It is even possible that an employer would be justified in hiring a replacement
even where the original employee has not breached the contract. In one instance, an opera singer became ill and
could not attend rehearsals. The court held that the hiring of a substitute was justified even though the singer had
not breached her contract. Substantial performance required her participation in rehearsals and the duty of the
theater manager to pay her was conditioned on such performance. Poussard v. Spiers & Pond, (1876) 1 Q.B.D.
410.
Practice Resources:
• Corbin § . (effect of absences from service); § . (absence may justify discharge
even though it is not a breach of legal duty).

End of Document

§ 34.03 Willful Disobedience and Disloyalty

An employee's willful disobedience of an employer's direction within the limits of the employment contract is a
ground for discharge even if the failure to perform did not injure the employer's business. The challenge is to
determine the limits of the contract, which may not be sufficiently clear. The employer's direction must be
reasonable. Employees need not, however, subject themselves to serious injury unless the nature of the
employment contemplates such a risk. An employee must serve the interests of the employer. If an employee is
serving the interest of third parties or his or her personal interest by conducting a competing business, such
disloyalty is a ground for dismissal.
Practice Resource:
• Corbin § . (willful disobedience and disloyalty).

End of Document

§ 34.04 Fraud in Relation to Employer

Fraud or dishonesty in relation to the employer constitutes grounds for discharge. Examples include embezzling
funds, padding expense accounts, or lying to induce employment. If the dishonest conduct affects the employer as
well as third persons, there are grounds for dismissal.
When conduct such as drunkenness or sexual immorality affects only third persons, the lines are more blurred
because they change as mores change. What constitutes immoral conduct that shocks the conscience of the
community and affects the value of the employee's performance to his employer? There is no universal set of
ethical standards that provides clear guidance in the twenty-first century. The question is typically a jury question.
This uncertainty induces “morals clauses” in many contracts of employees in leadership or other public positions.
Practice Resources:
• Corbin § . (fraud or dishonesty in relation to employer); § . (fraudulent or immoral
conduct not directly connected to service to employer).

End of Document

§ 34.05 Interpretation of Employment Agreements
[1] Promises May Be Implied as Well as Express

Employment agreements are further complicated by alleged representations and promises made by employers
and even by employees. Beyond express promises, courts must consider what promises may reasonably be
implied. Clearly, the employer impliedly promises to pay for services rendered, either a wage that is mentioned
or a reasonable wage when none is mentioned. An employee impliedly promises to render a reasonable quality
of service for the duration of the employment, be it a day or a longer period.
[2] An Employer May Promise to Assign Particular Work

An employer may promise not only to pay wages, but to assign certain work to an employee. The promised
work may allow the employee to display certain skills or artistry or to rise to higher positions. An employer may
also promise a place of dignity or leadership, and a demotion from that position would be a breach of contract.
An employee had a senior management position providing for severance with pay and benefits for a year if the
employer exercised its power of termination during the year. The employer ordered the employee to accept a
change to at-will employment status. The employee refused and sought severance pay. The court found that
the demotion was a constructive discharge and affirmed the lower court's award of the severance pay. Walker
v. City of Cookeville, 2003 Tenn. App. LEXIS 566 (Aug. 12, 2003).
[3] Length of the Term of Service

There is much litigation in personal service contracts over the term of service intended by the parties.
Employment contracts tend to be informal and expressions of agreement are often incomplete. If the parties
have no definite period in mind, the employment will be at-will. Both parties may have the same definite period
in mind or only one party may have such a period in mind.
The “English rule” deemed an indefinite duration employment contract as a contract for a year. The at-will rule,
however, supplanted that view during the second half of the nineteenth century. Great hardship to one party
can influence a court in finding a duration of some period rather than a terminable-at-will contract. If an
employee has to surrender a substantial position to take a new job, such reliance can also support a finding of
definite duration.
A musical director tried to rebut an at-will presumption on the footing that he had to surrender his previous job
since the musical director position required him to go on the road. The court quoted Corbin on Contracts in
rejecting this argument since, as the plaintiff knew, the new position required anyone who took it to go on the
road and leave prior employment behind. Rapagnani v. Judas Co., 736 A.2d 666, 1999 PA Super. 203.
Certain phrases concerning duration of employment have taken on more definite meanings. Thus, “permanent
employment” does not mean lifetime employment. Employment as long as services are “satisfactory” may
suggest duration beyond an at-will term. If a contract for a term is renewed with no expression concerning the
new term, courts will typically find a new term consistent with the original term unless the original term was less
than one year. Talisman Software, Sys. & Servs. v. Atkins, 2015 NCBC 104, 2015 NCBC LEXIS 108 (N.C.
Super. Ct. 2015) held that when an employment contract for a definite term expires and the employee
continues to provide services beyond the expiration, he or she is presumed to serve under a new contract—a
contract implied in fact—that has not just the same duration as the expiring written contract but the same terms
and conditions in general as the original one.
Page 2 of 2
Practice Resources:
• Corbin § . (promises of employer and employee may be implied as well as
express); § .10 (employer may promise work as well as wages); § .11
(interpretation of service contracts—term of service).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 35 CONDITIONS IN INSTALLMENT CONTRACTS
CHAPTER 35 CONDITIONS IN INSTALLMENT CONTRACTS

the subject matter.

End of Document
§ 35.01 Nonpayment of Installment Contracts
[1] Definition of Installment Contract

An installment contract is one in which the performance of one or both parties will be in parts or pieces. For
example, when a seller agrees to deliver goods for which the buyer agrees to pay in installments such as a third
of the price at delivery and two later payments of one-third each, the seller's whole performance occurs at a
single time, but the buyer's performance is divided into installments. Both parties' performances may be divided
into installments, as where a builder agrees to construct a building for a price of $20 million and the owner
agrees to make five progress payments of $4 million each.
In the first example, by delivering the goods and agreeing not to receive two-thirds of the payment until later,
the seller has extended credit to the buyer. In the second example, the builder has extended credit to the owner
by first constructing a portion of the building before receiving payment. An installment contract, however, may
involve no extension of credit as when a seller agrees to deliver 12,000 units of goods over the course of one
year at 1,000 units per month for which it will receive payment upon each monthly delivery.
The central question of this chapter is the effect of a breach of an installment contract. While the failure to
render an installment is certainly a breach of the contract, when does such a breach go to the essence of the
contract constituting a “total” breach that discharges the aggrieved party from any further duty of performance
under the contract? It is important to consider this and related questions in various contexts.
[2] Nonpayment of an Installment of the Price of Land

When a buyer of land is to make installment payments prior to the conveyance, except for the last payment,
such payments are constructive conditions precedent of the seller's duty to convey the land. The seller can
maintain an action for each of the installments prior to the date of conveyance without tendering a deed. The
final payment and tender of the deed are concurrent conditions requiring a tender by either party to place the
other party in default. If the seller has not sued for the first installment until the second installment is overdue,
the seller may no longer bring separate actions. The seller must sue for both installments in the same action.
If the contract required the seller to convey the land prior to the buyer's payment of all installments, the buyer's
duty to pay such installments is constructively conditional on the seller's prior conveyance of the land. Absent a
clause manifesting the parties' intention to make time of the essence, failure of the seller to convey on the exact
contractual date will not totally discharge the purchaser from further duty.
If the buyer's failure to pay installments goes to the essence of the contract, justifying the seller in cancelling the
contract, the seller can maintain an action for “total breach” without tendering a conveyance. In such a case, the
seller will retain the land and the general measure of damages would be the contract price minus the value of
the land. A seller of land will not be able to recover all installments—the entire contract price—without
conveying the land. Such a remedy amounts to specific performance of the land contract. If, therefore, a seller
should sue for the full contract price in a court of law without tendering a conveyance, the court should give
judgment for the contract price while making issuance of the execution of that judgment conditional on the
delivery of a proper deed of conveyance in court.
[3] Nonpayment of an Installment of the Price of Goods

The Uniform Commercial Code (UCC) defines an “installment contract” as one that requires or authorizes the
delivery of goods in separate lots to be separately accepted. UCC § 2- 12 1 . In Chapter 33 above, it was noted
that the requirement of the perfect tender rule as set out in UCC § 2- 01 was subject to several exceptions,
including the stated exception of installment contracts. Thus, a buyer may reject an installment only if the
Page 2 of 3
nonconformity substantially impairs the value of that installment and cannot be cured. UCC § 2- 12 2 . A defect
in the required documents (e.g., bill of lading or drafts) also allows the rejection of an installment.
Even then, if the seller gives adequate assurance that the defect will be cured, the buyer must accept that
installment. UCC § 2- 12 2 . A breach of the whole contract requires a nonconformity or default with respect to
one or more installments that substantially impairs the value of the whole contract. UCC § 2- 12 . The UCC
clearly suggests a policy of keeping installment contracts intact by establishing the substantial impairment
standard.
An installment contract called for weekly deliveries of the seller's product with payments to be made by the
purchaser within 10 days of each delivery. The buyer fell behind in its payments, which accumulated to a
substantial amount. The seller repeatedly notified the buyer of these arrearages but continued to ship the
goods. When the market price of the product rose significantly above the contract price, the buyer sought
assurances that the seller would continue to perform. The seller gave these assurances on condition that the
buyer would make the payments. The buyer sent the seller a check for past shipments, but several days later
stopped payment on the check because he was told by a truck driver, not employed by the seller, that this
shipment would be his last. Again, the buyer demanded adequate assurances, but the seller made no further
deliveries. The trial court held that the party in breach was the buyer, not the seller, and the seller was entitled
to recover the balance due on delivered goods.
On appeal, the buyer claimed that its failure to pay did not “substantially impair the value of the whole contract.”
Whether there is a substantial impairment of the value of an installment or of the whole contract is a question so
fact. Certainly, the failure to make one or even more than one installment payment on time, absent other
factors, would not rise to the substantial impairment standard. The cumulative effect of failures to pay and
substantial arrearages, however, would constitute substantial impairment of the value of the whole contract.
The buyer further claimed that a seller in an installment contract may never terminate a contract without first
demanding adequate assurances from a buyer. The court very simply stated that “this is not the law.” Where
there is doubt over whether a party's default with respect to an installment is a substantial impairment of the
whole contract, the aggrieved party may wisely seek to remove any doubt by demanding adequate assurances
of performance. Where, however, conduct is sufficiently egregious as to remove doubt, there is no need to
demand assurances. Cherwell-Ralli, Inc. v. Rytman Grain Co., 180 Conn. 714, 433 A.2d 984 (1980).
In a contract for the supply of 135,000 tons of caustic soda to be delivered in monthly installments over one
year, the arithmetical average delivery of 11,250 tons was not taken by the buyer which, over the first four
months, took a total of 16,931 fewer tons than the target monthly minimums. The seller claimed that this failure
constituted a substantial impairment of the value of the contract to the seller since the seller's surplus inventory
of the product caused by the buyer's breach was interfering with its production and created other problems in
the resale market of the product. The court did not find the claims to be compelling. The seller failed to show
that the buyer's default constituted a substantial impairment of the value of the whole contract to the seller.
Bayer Corp. v. DX Terminals, Ltd., 214 S.W.3d 586 (Tex. App. 2006).
[4] Nonpayment of an Installment on a Construction Contract

Failure of an owner to make an installment payment under a construction contract is more likely to cause
substantial difficulty to a builder than the failure to make a payment to a seller of goods. Though the failure to
make one installment payment may be a relatively small percentage of the total contract, the builder typically
relies on such payments to enable the purchase or materials and to pay subcontractors and other workers on
the project. Such a failure could allow a builder to suspend performance or even cancel performance of the
remainder of the contract.
A delay in the payment of an installment in such a contract, by itself, would not justify a builder in stopping
performance in the absence of other factors such as an owner of doubtful solvency with a poor record of
payment. Even where the builder would be justified in stopping work, it need not do so. Absent a repudiation by
the owner, the builder may carry on and treat the failure to make the installment payment as a partial breach for
which it may seek recovery.
A builder's failure to perform a part of the contract may justify the owner in refusing to make a progress
payment. Often, the determination of the builder's performance will be made by the architect or engineer named
in the contract. Frequently, a builder's default will justify withholding payment, but not cancelling the entire
contract.
Page 3 of 3
Although builders' remedies are considered more fully in a later chapter on remedies for breach, they are
summarized at this point. If the nonpayment is a partial breach, the builder may only recover the amount of the
installment due with interest. If the nonpayment continues, the builder may suspend performance. A vital
breach going to the essence of the contract will allow the builder not only to suspend performance but to
renounce the contract.
In this situation, the builder:
• may choose to stop performance and seek no remedy, continue performing and sue for damages as if
the breach were partial;
• cancel the contract and, assuming it has not been substantially performed, seek a restitution remedy in
quasi contract for the value of the benefit conferred;
• bring an action for breach of contract to recover the contract price minus the cost of completion; or,
• sue for specific performance of the contract, under rare circumstances.
The available remedies are clear; the more difficult issue is whether the breach is total or merely partial.
Practice Resources:
• Corbin § .1 (installment contracts—effect of a nonpayment); § .2 (when is
an installment contract divisible?); § . (nonpayment of an installment of the
price of land); § . (nonpayment of an installment of the price of goods); § .
(nondelivery or defective delivery of an installment of goods); § .
(nonpayment of an installment on a construction or service contract); § .
(remedies available to building contractor in case of nonpayment of an
installment).

End of Document
§ 35.02 Distinction Between “Entire” and “Divisible” Contracts
[1] Whether a Contract Is Entire or Divisible Depends on the Parties' Intentions in Light of All the
Surrounding Circumstances
A contract containing more than one promise by each party is a single “entire” contract. If the failure to perform
one of these promises constitutes a material breach, the aggrieved party is discharged of any further duty under
the contract. The parties, however, may have divided their respective performances into pairs intending the
performance on one side to be the agreed equivalents of the performances on the other side. Such a single
contract may then be loosely described as “divisible” or “severable.” Restatement (Second) of Contracts § 2 0
cmt. b. The terms “divisible,” “severable,” and “entire” are mere conclusions at which courts arrive after an
analysis of the manifested intention of the parties. There are numerous questions that are often connected with
judicial discussion of “divisibility,” such as whether it is possible for a party to commit more than one breach or
maintain more than one action for alleged breaches, or reject one performance but have a right to other
performance under the contract.
In a well-known case, Dwight John sought the return of his payment for seven outdoor advertising signs for
which he had paid a total of $680. The contract stated that the rental of one sign measuring 10' x 30' would be
$35 per month and the rental on each of the remaining six signs measuring 4' x 8' would be $10 per month. The
trial court found that although the defendant had substantially complied with the contract as to five of the signs,
one sign was never erected and another was installed in the wrong location. If the contract was deemed
divisible (severable), John would recover only $120, the price of the two signs the defendant failed to properly
install. If, however, the contract was deemed to be “entire,” John would recover the entire $680. The trial court
held that the contract was divisible. On appeal, the court recognized that there is no foolproof method for
determining whether a contract is divisible or entire since it is a question of the intention of the parties in light of
all of the surrounding circumstances. The court noted that the price for the seven signs was not a lump sum but
was apportioned per individual sign. Each of the signs was complete unto itself and the monthly billings were on
a “so much per sign” basis. The court concluded that it had no basis for overturning the trial court's
determination that the contract was divisible. John v. United Advertising, Inc., 439 P.2d 53 (Colo. 1968).
It is important to emphasize that the divisible performances of agreed equivalents (one large sign for $35 per
month and each smaller sign at $10 per month) were not separate contracts. The defendant breached this
single contract by failing to provide all seven signs. Because the performances for each of the five signs and
the payments therefore were divisible, however, the defendant could claim payment for those parts that were
performed in accordance with the contract. Nonetheless, the defendant breached the contract and was liable
for any provable damages for such breach.
[2] A Contract Is Not Divisible if the Parties Do Not Intend Their Performances as Agreed Equivalents
If the parties do not intend their respective performances on either side of the contract as agreed equivalents,
the contract is not divisible. The typical large construction contract under which the builder receives progress
payments at various stages of the work is not a divisible contract. Rather, progress payments are made to
assure that the builder will be able to pay for the necessary labor and materials as the construction progresses.
They also serve as incentives for the builder to complete each stage of the work in accordance with the
architect's approval, which is a condition that must be satisfied to activate the owner's duty to make the
progress payment. Each payment, however, is not intended as the price for that portion of the work completed.
The United States entered into an industrial preparedness contract under which the contractor would be ready
to manufacture certain component parts in the event of war. Step 1 required the contractor to secure necessary
Page 2 of 2
information to plan for volume production. Step 2 required the completion of all production processes short of
procuring the necessary tooling and materials. Step 3 required the acquisition of additional tooling and
manufacturing aids to meet the production schedule. All of these steps were in preparation for Step 4, which
would be taken only in the event of national emergency. The government paid the contractor for each of these
steps totaling $92,000. The contractor, however, then declared bankruptcy and would never be able to perform
Step 4. The court held that the contract was not divisible since Steps 1 through 3 were merely incidental to Step
4. The government would not have “bought” each of the three steps alone. The inability to perform Step 4
thwarted the purpose of the contract. The government was entitled to restitution of amounts already paid.
Pennsylvania Exchange Bank v. United States, 170 F. Supp. 629 (Ct. Cl. 1959).
[3] Maintaining Separate Actions for Divisible Contracts

Though a divisible contract is a single contract and there are procedural rules against splitting a cause of
action, a party who agrees to pay in installments for goods sold or land conveyed can be sued for failure to pay
each installment. Under a lease, the landlord can get judgment for a month's rent upon the lessee's default.
Such a leasehold contract may be said to be “divisible.” If, however, the seller of goods or land or the lessor of
a property waits to sue until the last installment is due, it can bring only one action notwithstanding the prior
individual breaches of contract.
When a customer has a running account with a supplier of goods, the customer receives goods as needed
throughout a given period. There is an exact price for each purchase. While each of the transactions could be
viewed as “divisible,” this characterization is not helpful. Rather, the parties' course of dealing through such an
“open account” suggests that the duty to pay the total amount for all goods delivered within the last month or
other customary period arises only at the end of that period. Only one action would then be maintainable,
notwithstanding numerous individual transactions during the preceding month.
Where the parties’ contract provided that Gee would receive commissions for generating business for an
insurance company at various times in the future, the contract was a divisible, continuing contract, and “the
failure to pay each commission was a separate breach subject to its own four-year statute of limitations.”
Access Ins. Planners, Inc. v. Gee, 175 So. 3d 921, 2015 Fla. App. LEXIS 14513, 40 Fla. L. Weekly D 2224 (Fla.
Dist. Ct. App. 4th Dist. 2015).
Practice Resources:
• Corbin § . (“entire” and “divisible” as terms of confusion); § . (questions
indicating various forms of divisibility); § .10 (one contract compared with two
separate contracts); § .11 (apportionment of installment performances into
pairs of equivalents); § .12 (divisibility as a basis for maintaining several
actions); § .1 (defective installments of goods).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 36 CHARACTER AND EFFECT OF SUBSTANTIAL
PERFORMANCE
CHAPTER 36 CHARACTER AND EFFECT OF SUBSTANTIAL PERFORMANCE

the subject matter.

End of Document
PERFORMANCE
§ 36.01 Meaning and Application of Substantial Performance

When a contract requires Ames to perform her promise first as a constructive condition to a later performance by
Barnes, Ames’s failure to perform at all is a total breach that discharges Barnes’s duty, unless the breach can be
cured. When Ames has partially performed her promise, the critical determination is the effect of that partial
performance on Barnes’s duty in light of the fact that Barnes is entitled to full performance.
As noted earlier in Chapter 32, the doctrine of substantial performance was necessary to mitigate otherwise harsh
results from the application of the early common law notion that exchanged promises (covenants) were
independent. Once it was recognized that the exchanged promises in a bilateral contract were typically dependent
so that the performance or tender of performance of one promised performance was dependent upon the other
party’s tender or performance, it became necessary to confront the situation in which the earlier performance was
only partial. If every performance, no matter how substantial, was required to be perfect, the fairness and justice
underlying the doctrine of dependent covenants would be undermined.
Any failure to render complete performance constitutes a breach since the promisee is not receiving the total
performance for which he or she bargained. If, however, Ames’s failure to perform is insubstantial, the “doctrine” of
substantial performance will prevent Barnes from being discharged from his duty, although he will have a
counterclaim for any damages he can prove resulting from Ames’s partial failure to perform. An immaterial or minor
breach does not discharge the non-breaching party’s obligations under an agreement, but even an immaterial
breach subjects the breaching party to damages. See, e.g., Leaman v. Wolfe, 2015 U.S. App. LEXIS 17505 (3d Cir.
2015).
The paradigm application of substantial performance is in building contracts. If a builder completes construction but
an inspection reveals certain deviations from the plans, if the owner received substantially what he or she bargained
for, notwithstanding the deviations, the builder will be entitled to recover the contract price minus the losses the
owner sustained because of the deviations. Again, any deviation is a breach of the contract, but an insubstantial
breach will not be fatal to a builder.
The doctrine of substantial performance also may apply to other types of contracts such as to personal service
contract. Indep. Fin. Servs. v. CCI Group, Inc., 459 F. Supp. 2d 138 (D.R.I. 2006). The doctrine does not apply to
contracts for the sale of goods that are governed by the Uniform Commercial Code (UCC). As noted in Chapter 33
above, the UCC includes its own mitigating factors to avoid a draconian requirement of “perfect” performance.
It is important to understand that the doctrine of substantial performance does not refer to just any performance that
may have substantial value. In the construction of a major building, the digging of a hole and other preparation for
the construction of the building may have substantial value in itself. A value of $200,000 for such an effort is
“substantial.” But compared to the total performance of constructing a building at a contract price of $10 million,
digging the hole is hardly “substantial performance.” It is important to consider how the deviation from full
performance is measured.
Practice Resources:
• Corbin § .1 (the problem of “substantial performance”); § .2 (the problem is not
restricted to building contracts); § . (substantial performance is not a complete
Page 2 of 2
discharge of duty); § . (substantial performance does not mean any performance

having substantial value).

End of Document
PERFORMANCE
§ 36.02 Not Every Deviation Will Result in a Failure of Substantial

Performance
[1] Whether a Party Has Substantially Performed Is a Question of Fact

Where a plaintiff partially failed to perform a contract but claimed that the doctrine of substantial performance
should be applied, the court quoted Corbin on Contracts:
A promisor, it is true, is obligated to perform as he promised. This does not mean, however, that every
deviation from the performance promised so goes to the essence of the contract as to privilege the other to
refuse to render a reciprocally promised performance . There is [no] fixed formula. The question is one
of degree, its determination involving the resolution of many factors .
Harahan v. FairMarket Life Settlements Corp., 2006 U.S. Dist. LEXIS 82248 (E.D. Mich. Oct. 31, 2006).
The case involved an option to rescind an earlier sale of a life insurance policy. The plaintiff wired the original
purchase price of $250,000 he had received on the deadline date, but he failed to tender a $64,000 regular
premium payment that the buyer’s assignee was required to pay. The court held that the doctrine of substantial
performance did not apply since the very size of the premium payment that the plaintiff failed to pay removed
the case from the realm of other cases where courts held that substantial performance applied.
The case illustrates the influential factor of measuring the extent of nonperformance in terms of value in money.
In a building contract, the higher the cost of curing defects in the builder’s performance, the less likely it is that
the rendered performance will be viewed as “substantial.” Deviations in size in terms of square feet may not be
as important as deviations in the quality of workmanship or materials used.
Judge Cardozo’s opinion in Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239, 129 N.E. 889 (1921), is the classic
elaboration of the substantial performance doctrine. In Jacob & Youngs, the plaintiff built a residence at a price
of $77,000. A plumbing specification required wrought-iron pipe of “Reading manufacture.” When the defendant
learned that some of the pipe was the product of another manufacturer, the plaintiff was directed to do the work
anew even though the pipe was otherwise identical to “Reading” pipe. The pipe was mostly encased within the
walls. Obedience to the direction would require major demolition and replacement at great expense involving
economic waste. The failure to use Reading pipe was not willful. Even the architect failed to note the
discrepancy though he inspected the pipe upon arrival. There was no difference in quality or cost of the pipe
that was used.
Recognizing that nothing less than full performance completes the duty of a promisor, Judge Cardozo
nonetheless noted that a performance omission that is “both trivial and innocent, will sometimes be atoned for
by allowance of the resulting damage.” The “distinction is akin to that between dependent and independent
promises, or between promises and conditions.” Where the deviations are “insignificant,” dependent covenants
will be viewed as independent covenants. He then addressed the factors to be considered in determining
whether performance is substantial:
We must weigh the purpose to be served, the desire to be gratified, the excuse for deviation from the letter,
[and] the cruelty of enforced adherence.
Jacob & Youngs, Inc., 230 N.Y. at 243, 129 N.E. at 891.
There is symmetry between these factors and the guidelines to determine materiality of breach.
[2] Material Failure of Performance Under the Restatement (Second) of Contracts

Restatement (Second) of Contracts § 2 analyzes a duty of performance as a constructive condition. Villare v.
Beebe Med. Ctr., Inc., 2015 Del. LEXIS 40, 108 A.3d 1226 (Del. 2015) (citing Restatement (Second) of
Page 2 of 3
Contracts § 2 (1981) in support of this position: “[I]t is a condition of each party’s remaining duties to render
performances to be exchanged under an exchange of promises that there be no uncured material failure by the
other party to render any such performance due at an earlier time.”) A material failure of performance operates
as a failure of a constructive condition. Section 241 of the Restatement (Second) sets forth the circumstances
that are significant in determining whether a failure is material.
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of
which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account
of all the circumstances including any reasonable assurances; and
(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with
standards of good faith and fair dealing.
The comments to § 2 1 make it clear that these criteria are necessarily flexible. In Brown v. Grass, 2013 U.S.
App. LEXIS 22185 (3d Cir. Oct. 31, 2013), in determining whether a breach was material, the district court
considered only three of the five factors in § 2 1. On appeal, the plaintiff claimed the trial court had abused its
discretion. The appellate court noted that the plaintiff failed to object to these instructions on the record at any
time. Thus, it would reverse the trial court only for plain error that was so highly prejudicial that the instructions
failed to provide the jury with adequate guidance and would result in a miscarriage of justice. Given the
flexibility of the § 2 1 standards, the court held that the trial court had not erred in providing instructions only on
three of the five criteria.
The symmetry between the criteria for determining whether a breach is material and the doctrine of substantial
performance is expressly noted in the Restatement (Second). When a party such as a builder sues for the
unpaid balance under a construction contract, the Restatement (Second) notes that:
It is common to state the issue, not in terms of whether there has been an uncured material failure by the
contractor, but in terms of whether there has been substantial performance by him. This manner of stating
the issue does not change its substance, however, and the rule stated in this Section [dealing with material
breach] also applies to such cases.
Restatement (Second) of Contracts § 2 cmt. d (emphasis supplied). See Richard v. Deutsche Bank Nat’l
Trust Co., 2012 U.S. Dist. LEXIS 45003 (D. Or. Mar. 30, 2012).
Absent the “doctrines” of material breach or substantial performance, as suggested by Judge Cardozo in Jacob
& Youngs, Inc., a court could deem a promise as “independent” rather than “dependent” to accomplish the
desired result, although such labels are no longer used since they would be mere conclusions attached to the
court’s analysis.
If a failure to perform is deemed immaterial under the criteria of the Restatement (Second) of Contracts, the
defective performance is necessarily “substantial.” Conversely, if a court finds that a failure to perform is
substantial, it is necessarily finding that the failure to perform is “material.” It has become common for courts to
use the criteria for determining material breach and substantial performance interchangeably. Fire Sprinklers,
Inc. v. Icon Contr., Inc., 279 S.W.3d 230 (Mo. Ct. App. 2009); Psychiatric Solutions of Va., Inc. v. Finnerty, 54
Va. App. 173, 676 S.E.2d 358 (2009). Both “doctrines” are designed to avoid forfeitures and reflect the
concomitant view that even a breaching party is to be treated fairly. See John E. Murray, Murray on Contracts,
§ 10 .
Practice Resources:
• Corbin § . (how great may be the deviation without preventing substantial
performance?); § . (relative extent, degree, and value of the
nonperformance); § . (degree of non-fulfillment of purpose and Restatement
(Second) 241(c) and (d)).
Page 3 of 3

End of Document
PERFORMANCE
§ 36.03 The Cause of the Failure Generally Is Not a Factor in Determining

Whether the Failure Is “Substantial”
There are cases, including Jacob & Youngs, Inc., suggesting that a willful failure to perform will deprive a party of
the doctrine of substantial performance. Such statements, however, tend to be mere dictum.
The modern view was announced in Vincenzi v. Cerro, 186 Conn. 612, 442 A.2d 1352 (1982). The court in
Vincenzi, citing Corbin on Contracts, stated the following:
The contemporary view, however, is that even a conscious and intentional departure from the contract
specifications will not necessarily defeat recovery, but may be considered as one of the several factors
involved in deciding whether there has been full performance. The pertinent inquiry is not simply whether the
breach was “willful” but whether the behavior of the party in default “comports with standards of good faith and
fair dealing.”
Vincenzi, 442 A.2d at 1354 (citations omitted). See also DuBaldo Elec. v. Montagno Constr., 2008 Conn. Super.
LEXIS 373 (Feb. 11, 2008).
The Vincenzi court quoted the standard in Restatement (Second) of Contracts § 2 1 e providing another instance
of support for the interchangeability of standards to determine material breach and whether performance was
substantial.
While the “good faith and fair dealing” standard may provide some guidance beyond the earlier “willful” standard, it
remains a very flexible standard allowing courts and juries to achieve just results.
Practice Resource:
• Corbin § . (is substantial performance affected by the cause of the defects?).

End of Document
PERFORMANCE
§ 36.04 Benefit to the Defendant

If a builder constructs a house with structural defects, the house cannot be used. A commercial building containing
defects that preclude the use of the building for its intended purpose would also preclude the application of
substantial performance to allow a recovery for the plaintiff builder.
If a party has received the benefit of a plaintiff’s performance and the benefit is substantially what the defendant
bargained for, a finding of substantial performance is more than likely. The essential test is in the use of the
defective performance. The owner’s acceptance and use of a building is evidence that the performance was
“substantial.” Though a contractor completed 90 percent of the work on a sewer construction project before walking
off the job, the trial court found that the contractor had not substantially performed the contract since the defendant
still had no operational sewer system. The court of appeals agreed quoting Corbin’s explanation: “A high degree of
difference in form and usefulness may be decisive on the question of substantial performance.” Roberts Contr. Co.
v. Valentine-Wooten Rd. Pub. Facility Bd., 2009 Ark. App. 437, 320 S.W.3d 1 (2009). Though the court found no
substantial performance, it allowed a recovery in quasi contract for restitution of the value of the benefit conferred
by the contractor that exceeded the damages sustained by the owner (Restatement (Second) of Contracts § .
If the builder is claiming substantial performance of a building contract, it is not necessary to prove acceptance or
use of the building, although such evidence may be helpful in establishing substantial performance. If, however, the
builder is suing for restitution in quasi contract for benefits conferred, evidence of some benefit would be necessary.
A building may enhance the value of the owner’s land even if the owner refuses to use the building.
Practice Resource:
• Corbin § . (benefit to the defendant).

End of Document
PERFORMANCE
§ 36.05 Pleading Substantial Performance

A builder’s allegation of full performance (performance of all conditions to the right of payment) is sufficiently
supported by substantial performance of the contract. The defendant’s claim of recoupment or a minor counterclaim
for damages is not a defense against the plaintiff’s cause of action.
Practice Resource:
• Corbin § .10 (method of pleading substantial performance and measure of recovery
by one who has rendered “substantial performance”).

End of Document
PERFORMANCE
§ 36.06 Nonpayment Without Cancellation

If an owner’s refusal to pay an installment under a building contract is justified, the contractor is not justified in
abandoning the work because it was not paid. When a subcontractor promised to perform work for a real estate
developer in a “workmanlike manner” and failed to perform a portion of the work in that manner, the developer
refused to make the progress payment for the work. The builder demanded that the subcontractor continue with the
work but the subcontractor refused because of the nonpayment. The court held that the subcontractor had failed to
perform the constructive condition to the progress payment and its subsequent refusal to continue with the work
constituted a total breach of contract. K & G Constr. Co. v. Harris, 223 Md. 305, 164 A.2d 451 (1960).
Practice Resource:
• Corbin § .11 (performance less than “substantial” may justify nonpayment without
justifying cancellation).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 37 CONDITION OF PERFORMANCE ON TIME—

CONDITION OF NOTICE
CHAPTER 37 CONDITION OF PERFORMANCE ON TIME—CONDITION OF

NOTICE
the subject matter.

End of Document

CONDITION OF NOTICE
§ 3 .01 Time of Performance

Notwithstanding protestations to the contrary, common law judges did not invariably view a party’s contractual
performance on time as an absolute duty. The actual practice of judges belied any view that time was of the
essence in all contracts. The question was always one of degree under all of the surrounding circumstances.
If Ames contracts to render a performance to Barnes by June 15, the failure to complete the performance by that
date appears to be a breach of contract. Nonetheless, trade usage, course of dealing, or other custom may allow
Ames some period of grace beyond June 15 to complete the performance. Even a slight delay beyond a grace
period would not be deemed a material breach where the promisee suffers little of no prejudice. See Jenkins v.
U.S.A. Foods, 912 F. Supp. 969, 974 (E.D. Mich. 1996); Edward Waters College v. Johnson, 707 So. 2d 801, 802
(Fla. Dist. Ct. App. 1998).
Absent contrary evidence, a delivery date in a contract is likely to be regarded as a “target” date rather than an
absolute requirement of performance by that date. time is not of the essence, even in an agreement setting
forth a specific date for performance, absent a showing that reasonable delay would have constituted a material
breach or that the party entitled to performance suffered a significant injury due to the delay in performance .
Blue Lagoon Dev., LLC v. Maury, 2015 Fla. App. LEXIS 9532 (Fla. App. 2015). Customary grace periods will be
affected by the particular circumstances, such as whether the goods are perishable or otherwise may speedily
decline in value. Equity recognized some excuses for later performances that were not recognized at common law.
Practice Resources:
• Corbin § .1 (time is of the essence—common law and equity compared); § .2
(eliminating an express condition of performance on time).

End of Document

CONDITION OF NOTICE
§ 3 .02 “Time Is of the Essence” Provisions

Parties certainly may contract for performance that is exactly on time. This is what is meant by the phrase, “time is
of the essence.” If the parties have inserted a negotiated “time is of the essence” clause, such a clause suggests
that one party’s promised performance in full within the exact time is a condition of the other party’s promised
performance even in the absence of an express provision that the counter performance is conditional. A failure to
perform on time under such a “time is of the essence” clause generally is regarded as an essential breach of the
contract that discharges the promisee and provides the promisee with a right to damages for total breach of the
contract.
In Breof BNK Tex., L.P. v. D.H. Hill Advisors, Inc., 370 S.W.3d 58 (Tex. App. 2012), a lessee stated that a condition
to its renewal of a commercial lease was the installation of an ADA accessible restroom by November 1. When the
restroom was not completed by that date, the lessee claimed a material breach that ended the lessee’s duties. On
appeal, the court explained that, to constitute a material breach, the agreement must expressly state that time is of
the essence or the nature or purpose of the contract and surrounding circumstances make it apparent that time is of
the essence. While this agreement did not expressly state that time was of the essence, the lessee had made it
very clear that, absent this requirement, since November 1 was the start of the busiest period of the year for the
lessee, it would not renew the lease unless the restroom was completed by that date. The court agreed with the trial
court’s holding that the breach was material.
Not all clauses making “time of the essence” will have that effect, however. A contract may contain several
promises of different performances varying in amount and importance. There is a major difference between
negotiated “time is of the essence” clauses and the use of such clauses inserted for no apparent purpose. Such a
clause may have been inserted in a contract with no realization of its significance. A “time is of the essence clause”
appearing in the boilerplate standard terms of a printed form used to evidence innumerable contracts of myriad
importance suggests that a party does not necessarily intend all performances to be exactly on time. Yet, not all
courts are persuaded that a printed “time is of the essence” in boilerplate should have any less effect than a
negotiated clause. See, e.g., Bd. of Washtenaw County Rd. Comm’Rs v. Lincoln Consol. Sch. Dist., 2013 Mich.
App. LEXIS 1519 (Sept. 19, 2013).
When a contract contains several promises for sundry performance that vary in amount and importance, a “time is
of the essence” clause typically is not intended to apply to each of these promises. If, however, the parties
manifested an intention that performance on time was of the essence in their contract, the clause will be enforced.
See Arvilla Motel, Inc. v. Shriver, 889 So. 2d 887 (Fla. Dist. Ct. App. 2004).
A court of law or equity should normally enforce a time limitation when a promise is expressly conditional on the
rendition of the other party’s performance or on the occurrence of any other event by a specified time. If the
promisee has already performed or changed position in such a fashion that enforcement of the time limitation would
constitute an unjust forfeiture, the condition may be excused. See Associated Builders, Inc. v. Coggins, 1999 ME
12, 722 A.2d 1278 (excusing a three-day delay in payment on the footing that it did not constitute a material breach
where enforcement could have caused a forfeiture).
But some courts hold that a “time is of the essence” clause is not conclusive. Even with such a clause, it is up to the
factfinder to consider whether the breach was material to excuse the other party’s performance, based upon the
totality of the circumstances. Kodak Graphic Communs. Can. Co. v. E.I. du Pont de Nemours and Company, 2015
Page 2 of 2
U.S. Dist. LEXIS 834 (W.D. N.Y. 2015), aff’d, Kodak Graphic Communs. Can. Co. v. E. I. du Pont de Nemours &
Co., 2016 U.S. App. LEXIS 1764 (2d Cir. N.Y. Feb. 3, 2016).
Practice Resource:
• Corbin § . (express provisions declaring that “time is of the essence”).

End of Document

CONDITION OF NOTICE
§ 3 .03 When Time Is of the Essence in Land Sale Contracts

In the absence of a “time is of the essence clause,” a contract for the sale of land that contains a time fixed for
payment or conveyance generally does not require performance by the time specified in the contract. See Tulisano
v. Schonberger, 74 Conn. App. 101, 810 A.2d 806 (2002). Performance must be within a reasonable time, however.
Moreover, tender of payment or tender of conveyance may still be a constructive condition. When time is not of the
essence, if either performance is due before the other, it is a constructive condition precedent to the other party’s
duty. If the performances are concurrent, a tender of performance by either party will be necessary to place the
other party in default.
Even if the delay in performance constitutes a breach of contract, absent other circumstances, slight delays are not
material breaches since they are common in such contracts. If values are rapidly fluctuating and the purchasing
party has gained as a result of the delay, however, a court may find that such a delay may go to the essence of the
contract and justify the seller’s refusal to convey. Other circumstances may have similar effects, as where the buyer
knows that the seller requires performance precisely on time to prevent an expiration of an option. See Mitchell v.
Walker, 179 So. 633 (Ala. 1938).
A contract under which a broker does not promise to procure a purchase for the owner’s land within a specified time
requires the broker to perform within a reasonable time. If the owner names a definite period, however, time is of
the essence. If the time is limited to 60 days, the buyer found by the broker must accept the offer and be ready and
able to pay the price within that time limit. The broker may be seen as having an irrevocable power of acceptance
during the 60 days, but the period ends promptly at the end of the stated time. If the broker’s time has expired, a
later consummation of a sale by the owner to a purchaser who the broker assisted in identifying will not entitle the
broker to a commission absent a showing of the owner’s bad faith in, for example, deliberately delaying the
consummation of the sale to avoid paying the commission.
Practice Resources:
• Corbin § . (when time is of the essence in land sale contracts); § . (time limit for
broker’s consummation of a sale of land).

End of Document

CONDITION OF NOTICE
§ 3 .04 Delay in the Sale of Goods

The ordinary contract for the sale of land does not imply that time is of the essence. Common law courts suggested,
however, that time is of the essence in contracts for the sale of goods. Delay is more likely to be of more
importance in a contract for the sale of goods, but there is no escape from the need for a careful consideration of
the surrounding circumstances of a given situation, such as the purpose of the contract, the type of goods involved,
the length of the delay, and the degree of injury, if any.
Contracts for the sale of goods are governed by the Uniform Commercial Code (UCC), and are said to be subject to
the so-called “perfect tender” rule. The rule, expressed in UCC § 2- 01 generally allows a buyer to reject goods for
any failure of performance including, the tender of performance on time. As discussed in Chapter 33 above, there
are several exceptions and qualifications to this right of rejection for “any” defect.
For example, installment contracts are expressly excepted from the UCC perfect tender rule. Thus, a delay in a
buyer’s payment of an installment would not discharge the seller from performing. If a seller has partly performed, a
subsequent delay is much less likely to be fatal. Absent contrary manifestations of intention or surrounding
circumstances, modern courts may view a delivery date in a sale of goods contract as an approximate or target
date for delivery so as to recognize a delivery within a very short time of that date as sufficiently “perfect.”
Contracts for the transportation of goods are more likely to be held to a “time is of the essence” standard because
the parties’ focus on delivery dates is much more apt to be viewed as essential. A contract for the sale of goods
where the seller is also the manufacturer, however, is less likely to be held to that standard since delays in the
manufacturing process tend to be more common and the possibility of the buyer refusing to take the product on the
basis of a delay would cause the manufacturer to suffer a forfeiture. This would be particularly egregious in the case
of specially manufactured goods for which there is no readily available substitute market.
Practice Resource:
• Corbin § . (mercantile contracts for the sale of goods).

End of Document

CONDITION OF NOTICE
§ 3 .05 Time Is Not Commonly of the Essence in Building Contracts

A “time is of the essence clause” in a building contract would be rare. Construction contracts are subject to delays
for many reasons where fault is often difficult to assess. Owners are not excused for short delays or even long ones
absent exceptional harm. Completed construction contracts that are delayed or otherwise imperfect are the
paradigmatic illustrations of the “substantial performance” doctrine, which requires the owner to pay the contract
price minus the provable damages from the builder’s immaterial breach. Where a list of unfinished items on a
building contract for the City of Hartford had a completion date of August 1, all but one were completed by that date.
The remaining item was completed after August 1. The City, however, claimed it was not required to release the
builder’s retainage of $300,000 because the completion of all items by August 1 was a constructive condition to the
payment of the retainage. The agreement was silent concerning the consequences of a delay. There was no “time
of the essence” clause and the builder argued that the parties did not treat the August 1 date as a material
condition. The court recognized that merely stating a completion date in a building contract does not import a “time
of the essence” concept. Whether the delay was material, however, is a question of fact to be determined according
the usual criteria for material breach as listed in § 2 1 of the Restatement (Second) of Contracts. Earth Tech., Inc.
v. Fluor NE, Inc., 2009 Conn. Super. LEXIS 1129 (Apr. 30, 2009).
It is possible to have a “time is of the essence clause” or a similar clause conditioning the owner’s performance on
the completion of performance precisely on time, but it may very well be excused in order to avoid a forfeiture if the
builder completed the building shortly beyond the maximum date. A building contract may include a liquidated
damages clause for each day of the contractor’s delay. Such a clause, if reasonable, will be enforced. It is not
uncommon for construction contracts to include bonus provisions for completion of the work ahead of specified
schedule. Certainly, time is of the essence with respect to such bonus payments.
Practice Resource:
• Corbin § . (building contracts—time commonly not of the essence).

End of Document

CONDITION OF NOTICE
§ 3 .06 Failure of Timely Performance

It is possible for a party to make “time of the essence” of a performance a condition to a promise even though the
other party has not promised to perform on time or at all. For example, a party may promise to make a payment to a
charity conditioned on the charity raising a specified total by a certain date. Thus, time is of the essence, although
nobody has promised to procure the other subscriptions to the charity.
A contract may provide that the failure of Ames to complete performance by a specified time creates a power in
Barnes to cancel the contract upon written notice within a specified time. The failure to perform on time would not
discharge Barnes’s duty under the contract. It would, however, allow Barnes to cancel the contract by providing
written notice with the specified time for such notice.
Practice Resource:
• Corbin § . (failure of performance on time may create a power to terminate).

End of Document

CONDITION OF NOTICE
§ 3 .0 Waiver of Time Limit

When a “time is of the essence” clause is a condition of Barnes’s duty to accept Ames’s performance, Barnes can
waive this condition by merely expressing a willingness to do so. No consideration is necessary to support such a
waiver. Having waived the condition of timely performance, Barnes may re-establish a new time line provided that
Ames is given a reasonable opportunity to comply with it. Barnes can also waive the condition by accepting a
delayed performance from Ames or because Barnes knows that Ames is continuing to perform in reliance on the
contract to which Barnes does not object. Barnes would be estopped from asserting the time condition. Barnes’s
original waiver could include a time of the essence clause that would be enforced.
Practice Resource:
• Corbin § . (waiver of time limit).

End of Document

CONDITION OF NOTICE
§ 3 .0 Power of a Party to Make Time of the Essence by Notice

If a contract specifies a date for performance but does not make time of the essence, once that date has passed,
either party may make performance on a subsequent date of the essence by giving notice to that effect, provided
that the notice leaves a reasonable time for the other party to perform. King v. Stevenson, 445 F.2d 565, 570 (7th
Cir. 1971). The reasonableness of a time limit, whether fixed by agreement or by a party’s notice, will depend upon
all of the surrounding circumstances, including whether the contract is partly performed or executory on both sides.
Practice Resource:
• Corbin § .10 (power of one party to make time of the essence by notice).

End of Document

CONDITION OF NOTICE
§ 3 .0 Condition of Notice
[1] Notice as an Implied or Constructive Condition

In the event that a promise is not expressly subject to a condition to give notice, under what circumstances will
notice to the promisor be an implied or constructive condition to the promisor’s duty to perform? A number of
cases suggest that notice need not be given to the promisor when the parties have substantially equivalent
sources of information with respect to the facts or events necessary to performance.
In one instance, a contract provided that no action could be maintained against a prime contractor unless
commenced within ten months after the contractor had filed a certificate of completion with the government. An
action filed by the subcontractor more than ten months after the certificate was filed was held to be untimely.
The contract did not require express notification of such a filing and the court refused to imply or construct such
a notice requirement since the subcontractor could discover the date on which the certification was filed.
Hartford Accident & Indemnity Co. v. Heftler Constr. Co., 325 F.2d 107 (7th Cir. 1963).
Conversely, if one party has superior sources of information, a condition of notice will be “implied.” In
constructing a sewer for a town, the defendant promised to indemnify the town against claims arising out of the
construction. The court held that the failure of the town to notify the defendant for three years that such an
action had been brought against the town precluded an indemnity action since the failure to notify violated a
condition of notice that had been constructed by the court. Town of Fairfield v. D’Addario, 149 Conn. 358, 179
A.2d 826 (1962). Such a condition is typically called a constructive condition of cooperation.
[2] Notice of Defects as a Condition of Duty to Make Repairs

A lease may require a landlord to make repairs. In the case of such a lease, is notice a condition to the
landlord’s duty? If the landlord is in possession of the property in need of repair and has ready access to
inspect the property, the tenant’s notice of the need for repair generally is not a condition to the landlord’s duty
since the landlord has a source of information substantially equivalent to that of the tenant.
[3] Notice as a Condition in Suretyship Contracts

The issue of whether there is a condition of notice to the duty of a surety that an advance has been made or
credit provided to a principal debtor has seen considerable litigation. An effective analysis was provided in the
classic case of Bishop v. Eaton, 161 Mass. 496, 37 N.E. 665 (1894). In that case, the defendant, in Nova
Scotia, wrote to the plaintiff, in Illinois, “If Harry [the defendant’s brother] needs more money, let him have it and
I will see that it is paid.” This was an offer of suretyship that the plaintiff accepted by becoming a surety for
Harry. The court stated that, ordinarily it is not necessary for an offeree to notify an offeror of the acceptance of
such an offer since the principal debtor and surety are in such relations that the surety will know that an
advance has been made. When the act constituting the acceptance will not readily come to the attention of the
offeror, however, there is a condition of notice that the act constituting acceptance has occurred. The same
analysis is applicable concerning a default by the principal debtor in not repaying a loan. Even where notice is
required, absent substantial harm to the surety, failure to notify may give rise to an action for immaterial breach
but not the discharge of the surety.
[4] Notice as a Condition to a Right of Action—UCC

Express conditions typically are events that must occur before the duty to which the condition is attached
becomes activated. Parties, however, may include a condition of notice of any claim to a right of action.
Page 2 of 2
Numerous cases involve conditions of notice in insurance policies requiring the insured to notify the insurer of
an accident or the fact that the insured has been sued. A “notice of claim” provision in a directors and officers
liability insurance policy had to be provided “as soon as practicable” and no later than ninety days as a
“condition precedent” to the insurer’s duty. Though the notice was provided within ninety days, the trial court
granted summary judgment for the insurer because notice had not been provided “as soon as practicable.” On
appeal, the court held that whether notice had been provided “as soon as practicable” remained subject to the
insurer’s proof that the delay prejudiced the insurer according to the criteria for material breach as found in
Restatement (Second) of Contracts § 2 1. By the insurer’s own admission, it was not prejudiced by the delay.
There was no material effect on the agreed exchange. If, however, notice had not been provided within ninety
days, it would not have been necessary for the insurer to demonstrate prejudice to deny coverage. Prodigy
Communications Corp. v. Agricultural Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. 2009).
Where a buyer has accepted goods but claims a breach of warranty, notification of the breach must occur
within a reasonable time after the buyer discovered or should have discovered the breach. Failure to provide
such notice will bar the buyer from “any remedy” under the Uniform Commercial Code. UCC § 2- 0 .A
comment states that the purpose of the notice provision is to inform the seller of the breach and to open the
way for normal settlement through negotiation (comment 4). Different interpretations of the comment language,
however, have led to disparate holdings concerning the the necessary of the notice or whether a seller who is
already aware of the nonconformity of the goods must, nonetheless, receive a § 2- 0 notification. See
Connick v. Suzuki Motor Co., 675 N.E.2d 584, 589 (Ill. 1996) (buyer must still give notice) and Cox House
Moving, Inc. v Ford Motor Co., 2006 U.S. Dist. LEXIS 55490 (D.S.C. 2006) (seller’s knowledge obviated need
for further notice).
Practice Resources:
• Corbin § .11 (notice as an implied or constructive condition); § .12 (notice of
defects as condition of duty to make repairs); § .1 (notice as a condition in
suretyship contracts); § .1 (notice as a condition to a right of action).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 38 ALEATORY CONTRACTS
CHAPTER 38 ALEATORY CONTRACTS

the subject matter.

End of Document
§ 3 .01 Aleatory Contracts Are Not Agreements to Exchange Equivalent

Performances
In preceding chapters we explored the reasons for the modern concept of dependent covenants, which we call
constructive conditions. In such contracts, the parties contemplate a mutually agreed upon exchange of promised
performances. When Ames agrees to work for Barnes at a certain salary or when Barnes agrees to sell her house
to Ames for a certain price, their mutual promises are dependent. Ames’s performance of his promise to work is a
constructive condition of Barnes’s promise to pay the salary. If Ames fails to work, Barnes’s duty to pay the salary is
not activated. Barnes’s tender of a deed to her house is a constructive condition of Ames’s promise to pay the price.
If Barnes fails to tender the deed, the constructive condition to Ames’s duty to pay the price has not occurred and
his duty will be discharged if it is too late for the constructive condition to occur in the future.
There are situations, however, where the parties contemplate that one of them may have to perform even though
the other does not have to perform; that is, a party agrees to perform even if the condition that will activate the other
party’s duty to perform never occurs. The classic example is the casualty insurance contract under which the
insured promises to pay a definite premium in exchange for the insurer’s promise to pay a stipulated amount only in
the event of casualty to the insured’s property. The occurrence of a casualty is an event that may never occur.
Indeed, the insured hopes that it never will occur and is assuming the risk that it will pay premiums for a lifetime and
receive no payment from the insurer. The insurer also hopes that the condition will never occur because it is
assuming the risk of paying the full value of the property and contents as soon as it receives the first premium
payment. There is, however, no question that the promise of the insurer to assume the risk is consideration for the
premiums received from the insured.
Such a contract may be likened to a wager or “betting” contract, but it not an illegal bargain because the insured
has an interest in the property. It is called an aleatory contract. The word “aleatory” is derived from the Latin alea,
referring to dice. See Davidson & Jones, Inc. v. North Carolina Dep’t of Admin., 69 N.C. App. 563, 317 S.E.2d 718
(1984), rev’d in part, 315 N.C. 144, 337 S.E.2d 463 (1985).
A person placing money in a slot machine in a gambling casino enters into an aleatory contract in which the
casino’s performance is conditioned on the fortuitous event of the bettor winning according to the prescribed rules.
If winning occurs, the condition to the casino’s duty to pay the promised amount is activated; in the more likely
event of losing, the casino’s duty is not activated. This is the risk assumed by the party making the bet, who has
paid a small sum in exchange for a chance to win a much greater sum. Romanski v. Detroit Entm’t, L.L.C., 265 F.
Supp. 2d 835 (E.D. Mich. 2003), aff’d, 428 F.3d 629 (6th Cir. 2006). Thus, unlike traditional bilateral contracts, the
promise of each party to an aleatory contract is not given in exchange for the other party’s performance. Jackson
Nat’l Life Ins. Co. v. Receconi, 113 N.M. 403, 410, 827 P.2d 118, 125 (1992).
The First Restatement of Contracts § 2 1 described an aleatory contract as one that is conditioned on the
happening of a fortuitous event, or an event supposed by the parties to be fortuitous. The Restatement (Second) of
Contracts describes the same situation, but uses the term “aleatory” only in a comment. § 2 2 cmt. b).
An aleatory contract may also require each of the performances to depend upon different fortuitous events. Thus, if
Ames promises Barnes that Ames will guarantee the debt of Carr in exchange for Barnes’s promise to Ames to
guarantee the debt of Davis, each of the performances is conditioned on the occurrence of different fortuitous
events. If neither of the principal debtors, Carr or Davis, defaults, the duties of Ames and Barnes will not be
activated. If both Carr and Davis default, both guarantors (Ames and Barnes) will be required to pay the debts that
Page 2 of 2
the principal debtors failed to pay. If, however, only one of the principal debtors (Carr or Davis) defaults, only the
guarantor of that debt will be required to perform; the other guarantor will have no activated duty. Thus, the
promised performances were not contemplated by Ames and Barnes as equivalent exchanges for each other.
An option contract is not an aleatory contract. An option simply provides the option holder with an irrevocable power
of acceptance which the holder may or may not choose to exercise. The option holder has provided consideration
for this irrevocable power. If an exchange occurs there is no assumption that one party risks receiving nothing. For
example, in an option contract for the sale of land, if the option holder chooses to exercise the option, the holder
must still pay the agreed price for the property.
The concept of aleatory contracts can be applied to any type of contract where one party assumes the risk that it
will be under a duty to perform in spite of the failure of the other party to perform. Restatement (Second) of
Contracts § 2 2 illus. 2, refers to a “pay-if-paid” contract where a subcontractor agrees to be paid only if (not
merely when) the general contractor is paid by the owner. In such a contract, the subcontractor assumes the risk
that it will perform and not be paid if the general contractor is not paid. Since the general contractor’s non-payment
is justifiable, if the subcontractor refuses to continue the work because it has not been paid, it has breached the
contract.
Practice Resources:
• Corbin § .1 (aleatory contracts are not agreements to exchange equivalent
performances); § .2 (conditional promises are not aleatory unless they impose
unequal risks); § . (legality and validity of aleatory contracts); § . (aleatory
promises distinguished from other conditional promises); § . (effect of a party’s
repudiation or other breach of an aleatory contract).

End of Document
§ 3 .02 Insurance as an Aleatory Contract

Usually, insurance contracts are expressly conditioned on the insured’s payment of stated premiums and the
insured makes no promise to pay the premiums. If the premium is not paid, the express condition to the insurer’s
duty has not occurred and the duty is not activated. It is, however, possible for an insured to promise to pay the
premium. In such a case, the insured’s promise is absolute while the insurer’s promise is aleatory because it is
conditional on the occurrence of a fortuitous event that may never occur.
When one promise is aleatory and the other promise is not, it is assumed that the aleatory promise that must only
be performed if a condition occurs is more valuable than the promise received in exchange. If the insurer repudiates
its aleatory promise, the insured loses the substantial benefit of the insurer’s protection against loss. Thus, the
insured’s duty to perform the promise given in exchange for the aleatory promise will be discharged.
Practice Resource:
• Corbin § . (insurance as an aleatory contract).

End of Document
§ 3 .03 Suretyship as an Aleatory Contract

A promise to answer for the debt of another is aleatory because it is conditioned on the nonpayment of the debt by
the principal debtor. Although a suretyship promise may not give rise to a constructive condition on the part of the
promisee, the surety’s duty may nonetheless be constructively conditioned on the performance of the creditor’s
return promise to grant credit to the principal debtor.
When a surety issues a bond in a construction project, the surety’s obligation is conditioned on the default of the
principal obligor, the contractor. If the owner promised to advance funds to finance the construction, the surety’s
obligation is constructively conditioned on the performance of that obligation.
Practice Resource:
• Corbin § . (suretyship as an aleatory contract).

End of Document
§ 3 .04 Aleatory Contract to Pay Agents and Subcontractors

Courts may show some reluctance in treating a contract as aleatory because one party may get something for
nothing. When a clause in a contract between a general contractor and subcontractor states that the subcontractor
will be paid when the general contractor is paid, the preferred interpretation is that the parties merely intended to set
a convenient time for payment to the subcontractor—a “pay-when-paid” contract—rather than a conditional “pay-if-
paid” aleatory contract under which the subcontractor would never get paid if the general contractor is not paid.
Even if the contract language is aleatory, in a few jurisdictions, the promise could be deemed unenforceable as
against public policy. If, however, such contract language is emphatically clear that the subcontractor has agreed to
assume the risk of not being paid at all if the general contractor is not paid, such an aleatory contract is enforceable.
See MidAmerica Constr. Mgmt. v. Mastec N. Am., Inc., 436 F.3d 1257 (10th Cir. 2006) (discussing the distinction
between “pay-when-paid” and “pay-if-paid” clauses in other jurisdictions).
A landowner’s promise to pay a commission to a broker, conditioned on procuring a purchaser, is an aleatory

promise whether the agent promises to pursue a diligent effort or simply renders the service without making a
promise. In either case, the broker risks being compensated on the success or failure of its efforts. The broker gets
nothing unless it succeeds. If the broker manages to secure a purchaser immediately after making the contract, the
broker receives the same commission it would have received if it had toiled for months to find a purchaser.
A lawyer’s promising to render services to be paid only upon the contingency of a successful settlement or litigation
has made an aleatory contract. The lawyer’s services are rendered regardless of victory or defeat. The client’s
promise is aleatory, whether the amount payable for a successful result is a fixed fee or an amount determined by
the size of a settlement or judgment.
Practice Resource:
• Corbin § . (aleatory contracts for compensation of agents and subcontractors).

End of Document
§ 3 .05 Futures Contracts as Aleatory

Farmers agree to sell their crops even before they are planted. Farmer Ames may agree to sell his entire unplanted
crop of tomatoes to the Barnes Catsup Company for $300,000, Barnes to assume all risks. Absent the risk clause,
the crop may have had a market value of $400,000. If a blight struck all tomato crops without the fault of Ames, a
court may find that the contract was aleatory and that Barnes owes Ames $300,000 even though Ames cannot
deliver one tomato. See Losecco v. Gregory, 32 So. 985 (La. 1902).
Parties are eager to contract against such aleatory contingencies. Commodity trading in “futures” typically involves
offsetting contracts to hedge against losses and preserve a margin of profit. In a famous old case, a buyer of whale
oil agreed to pay 85 cents per gallon on condition that a greater quantity did not arrive in a certain location by a
certain date. If the greater quantity arrived, he agreed to pay only 60 cents per gallon. Gray v. Gardner, 17 Mass.
188 (1821).
Practice Resource:
• Corbin § . (other illustrations of aleatory contracts, including futures contracts).

End of Document
§ 3 .06 Promises to Transfer an “Expectancy”

Suppose that, in consideration of a promise from Barnes to pay $25,000, Ames promises to turn over money or
property of undetermined amount that Ames expects to receive from another as a gift, devise, or inheritance. Ames
has no present right to such money or property. Ames’s promise is aleatory because it involves an uncertain event
that may never occur; it is dependent upon the act and will of a third person. Such a contract is nonetheless
enforceable with both parties assuming a sizeable risk. When two parties each expect an inheritance, an agreement
that they will share their inheritances equally illustrates exchanged aleatory promises that are enforceable.
Practice Resource:
• Corbin § .10 (promises to transfer an “expectancy”).

End of Document
§ 3 .0 Time Is Not of the Essence in an Aleatory Contract Unless Expressly

Made So
Since aleatory promises are not constructively conditional, time is not of the essence unless it is expressly made so.
A common provision in a fire insurance policy will fix a time for making proof of loss or notifying the insurer of loss.
Such provisions are express conditions so that time is of the essence in performing such acts. Absent such
conditional language, a mere promise to provide proof or notice does not make time of the essence.
Practice Resource:
• Corbin § .11 (time of performance is not of the essence in an aleatory contract unless
expressly made so).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 39 CONDITION SUBSEQUENT—ANALYSIS—

PLEADING AND BURDEN OF PROOF
CHAPTER 39 CONDITION SUBSEQUENT—ANALYSIS—PLEADING AND

BURDEN OF PROOF
the subject matter.

End of Document

§ 3 .01 Distinguishing Conditions “Precedent” and “Subsequent”
[1] An Event Is a Condition Subsequent if Its Occurrence Will Discharge a Duty That Is Already Due
Characterization of a condition as “precedent” or “subsequent” requires an answer to the preliminary question,
precedent or subsequent to what? An event is a condition precedent if it must occur before the duty to which it
is attached becomes due. An event is a condition subsequent if its occurrence will discharge a duty that is
already due. Potter v. Patterson UTI Drilling Co., 2010-NMCA-042, 148 N.M. 270, 234 P.3d 104.
When a casualty insurance policy states that a loss shall be payable 60 days after proof of such loss has been
filed with the insurer, the filing of such proof is a condition precedent because its occurrence is necessary to
activate the duty of the insurer to pay. Absent such proof, the insurer’s contractual duty to pay is not due. Such
a policy may also contain a statement that no suit or action of any kind may be commenced against the insurer
for failure to pay if the litigation is commenced more than 12 months after any loss occurs. If the insured has
filed adequate proof of loss as required by the policy, the condition precedent to the insured’s duty is fulfilled,
activating the insurer’s duty to pay the loss. If payment is not made, the failure of the insured to sue the insurer
within 12 months of the loss will terminate the insured’s duty. This failure to sue within the prescribed period is
often characterized as a “condition subsequent.” More simply it may be called an event that terminates a duty.
An insurance policy was issued on the life of Frank Tesson, payable to his wife, Alice, “if living; if not, then to
the assured’s executors, administrators or assigns.” Both Frank and Alice were lost at sea when the luxury
ocean liner Lusitania was torpedoed by a German submarine in 1915. There was no evidence of whether Frank
or Alice survived the other, nor was there any legal presumption or applicable simultaneous death statute. The
administrators of the two estates claimed the insurance proceeds.
The court held that Alice did not have a vested interest in the policy since Frank retained the right to change the
beneficiary. Thus, she had a mere expectancy. To recover, her administrator would have to prove that a
condition precedent had occurred; that is, that Alice survived Frank, if only for a moment—an impossible
burden of proof. The court, however, suggests that an action by Frank’s administrator would be subject only to
a condition “subsequent,” which would cast the burden on Alice’s administrator to prove Frank had not survived
her. Yet, the right of action for Frank’s administrator would require proof of the condition precedent that Alice
did not survive Frank. This analysis is clear from the language of the policy: “if not, then to the assured’s
executors, administrators or assigns.” McGowin v. Menken, 223 N.Y. 509, 119 N.E. 877 (1918).
[2] Restatement (Second) Eliminates the “Precedent”—“Subsequent” Distinction

Restatement (Second) of Contracts § 22 defines a condition as “an event, not certain to occur, which must
occur, unless its occurrence is excused, before performance under a contract becomes due.” Under this
definition, all conditions are “precedent” because the duty to which the condition is attached will not become
“due” (activated) until the conditioning event occurs. This restriction is deliberate since the Restatement
(Second) rejects the use of the familiar phrase, “condition subsequent.”
When a contract states that the occurrence of an event, not certain to occur, will terminate an activated duty,
courts often refer to such an event as a “condition subsequent.” The Restatement (Second) does not call it a
condition, however. Instead, § 2 0 is entitled, “Event That Terminates a Duty.” Despite the Restatement
(Second), case law continues to use the “condition subsequent” terminology to refer to such a terminating
event. See Cambria Sav. & Loan Asso. v. Estate of Gross, 294 Pa. Super. 351, 439 A.2d 1236 (1982), for a
judicial analysis of this change. Although the effort of the Restatement (Second) to limit the use of “condition” to
Page 2 of 2
conditions precedent has yet to succeed, the effort was a worthy reaction to the unfortunate use of the term
“condition” in a variety of senses.
[3] The Form of the Contract Is Not Determinative

If a conditioning event must occur before a duty is activated, the condition is necessarily a condition precedent.
The overwhelming majority of conditions are conditions precedent. As seen above, however, when the
conditioning event terminates rather than activates a duty, it can be called a condition subsequent.
Unfortunately, conditions are often viewed as either “precedent” or “subsequent” not in terms of their substance,
but in terms of the form in which they appear. Consider the following.
A contract document states, “If Ames inherits $200,000 from his grandfather’s estate within the next 30 days,
Ames will purchase Barnes’s property for that amount.” The conditioning event is the inheritance of $200,000,
which must occur within the next 30 days. Ames’s duty to purchase Barnes’s property cannot be made due
(activated) prior to such inheritance. The condition is precedent in both substance and form.
The contract document may be stated differently: “Ames hereby promises to purchase Barnes’s property for
$200,000. If, however, Ames does not inherit $200,000 from his grandfather’s estate within the next 30 days,
this promise is null and void.” The substance of the promise is identical to the first iteration, but the form is
different. The second statement appears to suggest a duty that is immediate, created by the promise to buy
Barnes’s property for $200,000. The second sentence of that statement, however, suggests that the immediate
duty will be discharged if a certain event (inheritance) does not occur. In form, it has the appearance of a
condition subsequent. In substance, however, it is still a condition precedent because, again, it remains
impossible for Ames’s duty to be activated until he can be shown to be entitled to the inheritance. Thus, the
event should be recognized as a condition precedent.
Practice Resources:
• Corbin § .1 (condition “subsequent” distinguished from condition “precedent”);
§ .2 (time limit for suit as a condition “subsequent”); § . (illustration from
insurance—condition of survivorship—vested interest).

End of Document

§ 3 .02 Burdens of Proof
[1] The Burden of Proof Is Affected by the Form of Stating a Condition

The paradigm example of the effect of the form of stating the condition on the burden of proof is found in the
case of Gray v. Gardner, 17 Mass. 188 (1821). In Gray, a buyer of whale oil gave his unconditional note to pay
60 cents per gallon. He also signed a note that he would pay 85 cents per gallon on the condition that the
obligation would be void if a greater quantity of oil arrived at Nantucket and New Bedford between April 1 and
October 1 than the quantity that had arrived in those locations within the same time period the previous year.
The court held that the condition was a condition subsequent and the seller was entitled to judgment on the
note at 85 cents per gallon unless the defendant affirmatively proved that a larger amount of oil had arrived
before midnight October 1. The facts were such, however, that whichever party had the burden of proving the
amount of oil that came in would fail.
Because it construed the condition as a condition subsequent, the court allocated the burden of proving that the
condition did not occur. The condition was stated in the form of a condition subsequent, since the duty was
stated and then followed by a provision making the duty “void” if a certain event did not occur. The defendant’s
duty to pay the note at 85 cents per gallon, however, could not possibly exist until a moment after midnight on
October 1. The note was not due and payable until then. To activate the duty under that note, it had to be
shown that a lesser quantity of oil had arrived by midnight. Absent that proof, the note never became due and
payable. Any condition may be stated in the form of a condition precedent or condition subsequent, but, again,
the critical question is, precedent or subsequent to what? The substance of the condition would have been
clear if the note had stated the conditioning event before the promise: “If a greater quantity of oil does not arrive
at Nantucket and New Bedford between April 1 and midnight of October 1, the buyer promises to pay 85 cents
per gallon.”
[2] Proving a Condition Precedent or Subsequent

When the occurrence or non-occurrence of the conditioning event will not be difficult to prove, either party will
be capable of sustaining that burden. Since it was apparently impossible to prove the occurrence or non-
occurrence of the condition in Gray by a preponderance of the evidence, the allocation of that burden was
dispositive. While the burden of proving a true condition subsequent may logically fall upon a defendant, the
court’s characterization of the condition as “subsequent” was clearly erroneous. Even when the characterization
of a condition as precedent or subsequent is correct in substance, however, that characterization should not
always determine which party has the burden of proving that a condition has or has not occurred.
If a conditioning event must occur to activate the defendant’s duty, such a condition precedent is a necessary
part of the plaintiff’s cause of action, but the plaintiff may only have to make a general and blanket allegation
that all conditions have occurred. Federal Rules of Civil Procedure Section 9(c) provides that it is sufficient to
aver generally the occurrence of all conditions precedent, whereas denial of such occurrence shall be made
specifically and with particularity. Not all applicable rules or statutes are as broad, however.
A condition to the defendant’s duty may be peculiarly within the defendant’s knowledge. In such a case, it may
be appropriate to put upon the defendant the burden of going forward with the evidence or even the burden of
proof. In such a case a court may allow the plaintiff to assume that the condition has occurred unless the
defendant affirmatively proves that it has not occurred.
In one case, an insurance policy stated that the entire policy would be “void” if the insured was guilty of fraud.
The court quite correctly held that the burden of proving such fraud was on the insurer. The insured was not
Page 2 of 2
required to allege or prove the absence of fraud. The court, however, stated that the burden of proof was on the
insurer because it was a condition “subsequent.” Benanti v. Delaware Ins. Co., 86 Conn. 15, 84 A. 109 (1912).
The absence of fraud on the part of the insured, however, can be properly characterized as a condition
precedent. The determination of whether a condition is precedent or subsequent is a conclusion that bears no
necessary relation to the proper allocation of the burden of proving the occurrence of non-occurrence of the
conditioning event.
The pleading rules of a particular jurisdiction may require that a plaintiff plead the fulfillment of a condition
precedent. Under Illinois law, a “party cannot sue for breach of contract without alleging … that he has himself
substantially complied with all the material terms of the agreement,” including plausibly alleging that he
performed the conditions that activated the contractual duties at issue. Reserve Hotels Pty Ltd. v. Mavrakis, 790
F.3d 738, 2015 U.S. App. LEXIS 10550 (7th Cir. Ill. 2015).
[3] Proving Exceptions and Limitations

Courts generally hold that the burden of proving an express exception or limitation to a duty falls on the
defendant. In one instance, Westlake purchased property from Goodrich pursuant to a contract by which the
parties sought to allocate the risks of environmental remediation. Westlake agreed to indemnify Goodrich
against any liability resulting from remediation of the site after the closing of the transaction. In holding that
Westlake had the burden of proving the occurrence of the contractual limitation of its liability, the court quoted
Corbin on Contracts and held that where performance such as a promise to indemnify is promised in general
terms followed by specific exceptions and limitations, the indemnitor has the burden of proving that the case
falls within the exception. Westlake Vinyls, Inc. v. Goodrich Corp., 518 F. Supp. 2d 947 (W.D. Ky. 2007). In
Meador v. Cincinnati Ins. Co., 915 So. 2d 60 (Ala. Civ. App. 2005), an insurance policy contained a provision
stating that, if fraud was committed, the policy would be void. The trial court gave an instruction that the plaintiff
(insured) had the duty to prove the absence of fraud as a condition precedent to recovery under the policy. On
appeal, the court stated that, even if the nonexistence of fraud was a condition precedent, fraud is an
affirmative defense that the defendant insurer had the burden of proving.
Practice Resources:
• Corbin § . (note conditioned to be void on a specified event); § .11 (burden
of proof as affected by the form of stating a condition); § .12 (when burdens of
allegation and proof are on defendant); § .1 (burdens of proof—exceptions
and limitations).

End of Document

§ 3 .03 Sale with a Privilege of Return

A contract for the sale of a chattel that allows the buyer to return it after a trial period may take different forms. The
parties may agree that ownership of the chattel remains with the seller until the buyer has announced approval; this
fulfills a condition precedent to the buyer’s duty of payment. The parties may agree on a present sale and transfer
of title to the buyer, subject to the buyer’s right to return the chattel after a trial and receive a refund of the price if it
has been paid. The return of the chattel would then operate as a condition subsequent, extinguishing the title in the
buyer and causing it to revert to the seller.
Absent a contrary agreement, under the Uniform Commercial Code (UCC), a “sale on approval” is a sale under
which the goods are delivered to the buyer, but remain the property of the seller until the buyer accepts them.
Goods held on approval are not subject to the claims of the buyer’s creditors until acceptance. UCC § 2- 2 1 .
The UCC distinguishes a “sale on approval” from a “sale or return,” under which goods are delivered to a buyer
primarily for resale. UCC § 2- 2 1 . A “sale or return” is a present sale that may be undone at the buyer’s
option, a condition “subsequent.” Unlike a “sale on approval,” goods held on “sale or return” are subject to the
claims of the buyer’s creditors while they are in the buyer’s possession. UCC § 2- 2 2 .
Practice Resource:
• Corbin § . (sale with privilege of return—“condition” subsequent to “title”).

End of Document

§ 3 .04 Exercise of a Reserved Power of Withdrawal or Termination

In a very old case, a court was confronted with determining the proper analysis of an express power of termination
or withdrawal. The state of North Carolina had agreed to take two-fifths of the shares of stock in a railroad
corporation if the other three-fifths were subscribed by private citizens by a certain date. The defendant was one of
the private citizens who subscribed. His contract to purchase 30 shares, payable in installments, provided that he
“may” withdraw his subscription if sufficient subscriptions to activate the state’s commitment were not obtained
within 12 months. When the sufficient subscriptions were not obtained, the defendant’s obligation to pay
installments was discharged. Wilmington & R. R. Co. v. Robeson, 27 N.C. 391 (1845).
The company’s failure to obtain the necessary subscriptions was a necessary condition to activate the defendant’s
power to withdraw or terminate his obligation. Under the contract, the defendant had to give notice of his decision to
withdraw, which was a condition precedent to the company’s duty to return the installments the defendant had
already paid. If a subscriber had failed to pay previous installments when due, giving notice of withdrawal would
constitute a condition “subsequent” that would discharge the duty to pay those installments.
Practice Resource:
• Corbin § . (exercise of a reserved power of withdrawal or termination).

End of Document

§ 3 .05 Time Limits on Warranty

In a contract for the sale of goods, the parties may agree on an express warranty that is limited in duration. To
activate warranty protection, the buyer must notify the seller. Under a 90-day express warranty, notification of a
breach of warranty on the ninety-first day will discharge the duty of the seller even though there had been a breach
of warranty for the first 90 days after the goods were delivered to the buyer. The time limit operates as a condition
subsequent, discharging the express warranty obligation of the seller at the end of 90 days.
Practice Resource:
• Corbin § . (time limit of warrant of quality—form of pleading).

End of Document

§ 3 .06 Conditional Delivery and the Parol Evidence Rule

When a deed, bond, or written contract is delivered with a written or oral provision that it is to become effective only
upon the occurrence of a condition, the intention of the parties will be upheld. In a classic case, the parties’ written
agreement evidenced the sale of a patent but they had orally agreed that it would take effect only upon the approval
of a third party, Abernathie. The court held that the seller’s action for the price failed absent proof of Abernathie’s
approval. Pym v. Campbell, 6 Ellis & Blackburn 370 (Q.B. 1856). Subsequent cases have agreed, often stating that
there is no parol evidence problem where there is a condition precedent to the existence of a contract.
The Restatement (Second) of Contracts recognizes this rationale and agrees with the result but insists that there is
a contract where the buyer’s duty was conditional on Abernathie’s approval. To allow evidence of prior oral
condition, it suggests that the writing is not integrated or not fully integrated even if it contains a merger clause. See
Restatement (Second) of Contracts § 21 and Brown Dev. Corp. v. Hemond, 2008 ME 146, 956 A.2d 104, 108–109
(evidence of oral conditions may be admitted unless they contradict the terms of the contract). The Restatement
rationale appears to be based on a desire to maintain the narrow purity of the definition of “condition” as limited to
an event attached to a duty in an existing contract. Using the term “condition” as part of the phrase, “condition
precedent to formation,” however, avoids confusion in its use.
Practice Resource:
• Corbin § . (conditional delivery of an instrument and the parol evidence rule).

End of Document

§ 3 .0 Duty of Immediate Performance

If an event constituting a condition to a promisor’s duty of immediate performance has occurred, the duty is
activated, but if the duty is not performed, there may be a condition to the promisee’s right to compensation. A
contract may require an arbitration and award as a condition to a promisee’s remedial right to bring an action. The
contract may also require notice to exercise a remedial right within a certain time. If a promise to refund a purchase
price for defects is conditioned on the buyer providing notice of the exercise of such a warranty within a certain
time, the failure to provide such timely notice will discharge the obligation.
Practice Resource:
• Corbin § . (duty of immediate performance distinguished from remedial duty to make
compensation).

End of Document

§ 3 .0 Contract Provisions May Be Construed as Promises Rather than

Conditions to Avoid Occurrence of Forfeiture
The general policy against forfeitures may be seen in the excuse of conditions. Earlier we noted that contract
provisions stating that a subcontractor on a construction project will be paid when the general contractor is paid will
be construed as simply providing a convenient time for payment rather than as a condition that would result in a
forfeiture. In cases of doubt, contract provisions are construed as promises rather than conditions because
conditions can more easily result in forfeitures.
Even when a condition is stated in language that does not allow for such interpretation, a condition may be excused
to avoid a disproportionate forfeiture unless it constitutes a material part of the agreed exchange. Restatement
(Second) of Contracts § 22 . When Burger King agreed that Family Dining would be its exclusive licensee in two
Pennsylvania counties for 90 years, conditioned on Family Dining’s construction of 10 restaurants in those counties
at specified periods, the court excused strict compliance with that condition since Family Dining would have
suffered an extreme forfeiture. Burger King Corp. v. Family Dining, Inc., 426 F. Supp. 485 (E.D. Pa. 1977).
It is important to note that the delays in building the restaurants were not deemed material by the franchisor, Burger
King. When the fourth and fifth of the 10 restaurants were delayed, Burger King did not terminate the agreement;
rather, the parties entered into a modification of the agreement that extended the time for the completion of future
restaurants. When Family Dining later missed deadlines in the ninth and tenth years, the court held that Burger King
could not enforce the schedule since it had not communicated a new position concerning deadlines. Thus, the court
held that the development rate was “not critical.” When, however, it is clear that the condition constitutes a material
part of the agreed exchange, the condition will not be excused. See LifeWise Master Funding, LLC v. Telebank,
2003 U.S. Dist. LEXIS 26340 (D. Utah Mar. 5, 2003), distinguishing Burger King.
Where a reinsurance agreement stated a condition of prompt notice of any claim involving death, serious injury or a
lawsuit, the plaintiff did not notify the reinsurer of lawsuits until several years after they were filed. Absent such
“prompt notice,” the reinsurer refused to pay the claim. Under New York law, the failure of such an unambiguous
provision will allow such a forfeiture. Under Pennsylvania law, however, the district court predicted that the insurer
would have to show prejudice from the delay. Finding Pennsylvania law controlling, the court decreed a recovery of
more than a half million dollars to the insured. While agreeing with the district court’s analysis of Pennsylvania law,
the court of appeals found that New York law applied, thereby relieving the defendant of any necessity to show
prejudice to enforce the condition. Pac. Emplrs. Ins. Co. v. Global Reinsurance Corp. of Am., 693 F.3d 417 (3d Cir.
2012).
Practice Resource:
• Corbin § .10 (forfeitures are regarded with disfavor).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 40 ELIMINATION OF CONDITIONS BY WAIVER

OR PREVENTION
CHAPTER 40 ELIMINATION OF CONDITIONS BY WAIVER OR PREVENTION

the subject matter.

End of Document

OR PREVENTION
§ 40.01 Distinguishing Waiver and Estoppel

The concepts of waiver and estoppel were introduced in Chapter 13 in the discussion of failures to meet the
requirements of writings for modifications in contracts for the sale of goods under Section 2-209 of the Uniform
Commercial Code (UCC). This chapter focuses on general use and application of “waiver” and the differences
among “waiver,” “estoppel,” and “modification” of contracts.
Case law provides no single definition of “waiver.” The most popular definition, “the voluntary relinquishment of a
known right,” is not comprehensive and can be misleading. It is also not uncommon to see a phrase suggesting that
waiver requires an estoppel. “Estoppel,” however, is a conclusion. If what is meant is that waivers cannot exist
without reliance, that statement is inaccurate, as we will see. One can even discover suggestions that a waiver
requires consideration, but a waiver supported by consideration would be a contract modifying the previous
contract. Waivers are not modifications of contracts and they require neither consideration nor reliance. It is more
accurate to suggest that waivers refer to the surrender of express or constructive conditions.
To emphasize these distinctions, consider the following situations. Ames lends $25,000 to Barnes who provides his
promissory note for that amount plus interest to Ames. May Ames “waive” her right to the $25,000 plus interest?
The answer is no. Ames’s right may be discharged in various ways including making a gift to Barnes, but in no
sense should Ames be said to have “waived” her right to that payment. Duties are not discharged by waiver. Again,
waiver refers to the surrender of conditions.
If Ames agrees to purchase Barnes’s land for $100,000 through four installment payments of $25,000 at specified
times, Barnes may waive the condition of timely payment for any one or all four of the installment payments, but he
is not waiving the payments themselves. If he has given Ames reason to believe that the payments required on
certain dates will be waived, we will see that he may be able to reinstate those previously waived dates. The parties
may agree to a modification of the dates, or Ames may justifiably rely on Barnes’s waiver so as to preclude any
reinstatement of the waived dates. Modifications, however, occur only through the agreement of both parties and
reliance requires the action of both Barnes who waives and Ames who relies. “Waiver,” however, is a voluntary act
of only one party.
Practice Resource:
• Corbin § 0.1 (waiver and estoppel compared).

End of Document

OR PREVENTION
§ 40.02 Waiver of a Condition May Be Effective Without Consideration

As we saw in a previous chapter, insurance contracts typically contain conditions requiring notice of proof of loss. If
an insurer states in advance of any loss suffered by the insured that the insurer will not insist on proof of loss within
a certain number of days as required by the policy, it is receiving nothing for its promise. Such conditions, however,
are not viewed as material parts of the agreed exchange and can, therefore, be waived without any consideration. If
the insured relies on such a promise or representation by the insurer that it will not insist on compliance with the
time provision for a successful notification of proof of loss, the waiver is not only enforceable but irrevocable
because of reliance. Again, however, unless the insurer withdraws the waiver within a reasonable time to allow the
obligor to meet the requirements of the condition, the waiver would be effective absent any reliance. See Zetter v.
Griffith Aviation, Inc., 2006 U.S. Dist. LEXIS 23192 (E.D. Ky. Apr. 25, 2006) (citing Corbin for the proposition that a
mere voluntary expression of willingness to waive a promisor’s duty that is not a material part of the agreed
exchange is sufficient).
In many cases, the waiver takes place only after the failure to perform the condition on time and there is no
manifestation of reliance. If an insured fails to pay a premium after the last day on which it was due, the insurer may
“waive” the forfeiture and reinstate the policy. No new consideration or reliance is necessary.
Practice Resource:
• Corbin § 0.2 (waiver of a condition may be effective without consideration).

End of Document

OR PREVENTION
§ 40.03 Waiver of Timely Performance

There are many illustrations of waiver of timely performance in contracts for the sale of property and leases as well
as insurance contracts. When a landlord sought to evict a tenant when she failed to pay rent by the twentieth of the
month as required by the lease, the trial court dismissed the landlord’s complaint because the tenant paid the rent
for over a year at the end of the month without objection by the landlord. The court cited Corbin on Contracts in
holding that the landlord had waived timely payment. Peterson v. Buie, 259 Wis. 2d 482, 655 N.W.2d 547, 2003 WI
App 1.
An agreement required a tenant to make monthly rent payments on the first of each month but he frequently was
late. Nevertheless, the landlord accepted the payments and did not furnish the tenant written notice of any intent to
terminate the lease due to the late payments. The court cited the Corbin treatise and held that the landlord waived
strict compliance with the agreement’s terms, including the requirement that a waiver was to be in writing. Savre v.
Santoyo, 2015 ND 170 (2015). A landlord or other creditor who accepts only one or two late payments will not be
said to have waived subsequent defaults. A series of delayed payments, however, provides a reasonable basis for
an obligor to believe that future late payments will also be acceptable. Repeated occasions for performance with
knowledge that the performance is inconsistent with the terms of the contract constitutes a course of performance
relevant to demonstrate waiver of the inconsistent term. See UCC § 1- 0 (formerly § 2-20 .
Practice Resource:
• Corbin § 0. (waiver of condition of payment or other performance on time).

End of Document

OR PREVENTION
§ 40.04 Waiver by Continuation of Performance

Just as a seller who continues to supply a non-paying buyer is waiving timely payments, a buyer who continues to
receive late deliveries of goods waives timely performance. Hovnanian Land Inv. Group, LLC v. Annapolis Towne
Ctr. at Parole, LLC, 421 Md. 94, 25 A.3d 967 (2011). An owner who takes possession of a newly-constructed
building may be waiving defects in construction, but the circumstances of such cases vary widely. The use of a
defective building on the owner’s land may be the lesser of two evils and manifest a reasonable use without waiving
any conditions to the owner’s liability. It is important to consider the waiver of other conditions in building contracts.
Practice Resource:
• Corbin § 0. (waiver by continuing to perform or receive performance).

End of Document

OR PREVENTION
§ 40.05 Waiver of Conditions in Building Contracts

Since delays in building contracts are commonplace, time is not of the essence in such contracts absent an express
condition to that effect. Even an express condition in such a contract can be waived by a simple expression of
assent or payment in disregard of the condition. If the builder must procure a surety bond before commencing
performance, permitting work to proceed without such a bond is a waiver of that condition. Procuring an architect’s
certificate as a condition to a progress payment can be waived by the expression of that intention by the owner or
an architect who is an authorized agent of the owner. Making payments to the builder absent such a certificate is
another manifestation of waiver.
Building contracts often require extra work. A contractual requirement of written change orders signed by an
architect as a condition to payment for such work may be obviated in various ways. The owner may be said to have
agreed to pay for extra work in a new contract with the builder for the work that is not governed by the original
contract. A condition requiring any change order to be evidenced in a written order may be said to have been
waived. See Universal Builders, Inc. v. Moon Motor Lodge, Inc., 430 Pa. 550, 558, 244 A.2d 10, 15 (1968).
Building contracts may also contain a condition requiring the builder to give notice of the owner’s representative
interfering with or preventing the builder’s performance so as to cause a delay. The condition of such notice to
justify delay is often waived orally and without consideration. It is nonetheless effective, as is conduct leading a
builder to understand that notice that such delay will occur is unnecessary.
Practice Resource:
• Corbin § 0. (waiver of conditions in building contracts).

End of Document

OR PREVENTION
§ 40.06 Waiver by Subsequent Events

An insurance contract contained a condition subsequent requiring commencement of an action for its breach to
occur within 12 months. The court held that performance of the condition was made very difficult by the outbreak of
the Civil War and should be deemed waived. Semmes v. Hartford Ins. Co., 80 U.S. 158, 20 L. Ed. 490 (1871). If the
defendant prevents an action within a time limit specified in the contract or otherwise leads the plaintiff reasonably
to believe that bringing the action within the time limit will not be insisted upon, the time limitation condition will be
waived.
Another case distinguished waiver and estoppel. An insurance policy required proof of loss to be made within 60
days and suit to be commenced within 12 months after a fire. The plaintiff did not meet either condition. He claimed
that in active negotiations after the fire, he had been lulled into a false sense of security that the claim would be paid
until the negotiations extended beyond one year. At that time, the insurer refused to pay on the footing that the
conditions in the contract had not been met.
The court held that, assuming the defendant was estopped from pleading the time limitation, it did not operate as a
waiver to eliminate it. Once the plaintiff was aware that the defendant repudiated its obligation under the contract,
he could no longer rely on estoppel. He was then required to bring his action within a reasonable time of learning of
the repudiation. He waited for two years and eight months to sue and provided no explanation for the delay. The
court held that the lower court should have directed a verdict for the defendant. Gilbert v. Globe & Rutgers Fire Ins.
Co., 91 Or. 59, 174 P. 1161 (1918).
On rehearing, the same court noted a “strong line of authorities” holding that the conduct of the insured was not a
“waiver” in the strict sense, but was a simple case of estoppel, which suspends the time limitation until it is removed
by notice to the plaintiff that the defendant repudiates the contract. At that moment, the time limitation is reactivated,
which, in this case, required the action to be brought within one year of the repudiation. Gilbert v. Globe & Rutgers
Fire Ins. Co., 91 Ore. 59, 178 P. 358 (1919).
A half-century later, an action was brought two days prior to the end of one year after the estoppel was removed.
The defendant argued that the original case allowed an action to be brought only within a reasonable time after the
estoppel was removed instead of a full year. The court chided the defendant for failing to note the clarification by
this court in its rehearing opinion of the Globe case and proceeded to confirm the holding that, after the estoppel is
removed, the plaintiff had a year in which to bring the action. Cody v. Insurance Co. of Oregon, 253 Or. 587, 454
P.2d 859 (1969).
Practice Resource:
• Corbin § 0. (condition “subsequent” made inoperative by waiver, estoppel, or
subsequent events).

End of Document

OR PREVENTION
§ 40.0 Waiver of “Legal Tender” as a Condition

When a contract requires the promisor to pay money, it must be paid in legal tender as defined under federal
statutes. A personal check is not legal tender. Enriquillo Export & Import, Inc. v. M.B.R. Indus., Inc., 733 So. 2d
1124 (Fla. 1999). Nonetheless, an estoppel will quickly arise through the failure to object to payment by such a
check drawn on a solvent bank with sufficient funds in the drawer’s account.
In a contract for the sale of goods, absent contrary agreement, payment by check is viewed as an acceptable
method of payment in the ordinary course of business. If the seller of goods refuses the check and demands
payment in legal tender, the seller must allow a reasonable extension of time for such payment. UCC § 2- 11 2 .
Cf. Restatement (Second) of Contracts § 2 .
Where an option to renew a lease required payment by certified check, the lessee sent its personal check to which
the lessor did not object and claimed the lease was ended until the time to exercise the option had expired. The
court recognized that a failure to object to a tender of payment that does not conform to the specific requirement of
a contract may constitute a waiver and a state statute also suggested a waiver analysis. Frandson v. Oasis
Petroleum N. Am., LLC, 870 F. Supp. 2d 726 (D.N.D. 2012).
Practice Resource:
• Corbin § 0. (waiver of “legal tender” as a condition).

End of Document

OR PREVENTION
§ 40.0 Waiver of Condition of Notice

An insurance policy typically contains an express condition of notice. Notice of disrepair may be a constructive
condition of a landlord’s duty to repair the premises. The notice requirement is for the benefit of the promisor and is
usually not a material part of the agreed exchange. As such, it may be waived before or after the time of notice is
due. The waiver may be express or implied from conduct. If an insurance condition of notice is not met and the
insurer continues to deal with the insured concerning the loss, a court may conclude that the condition has been
waived. See United States Fidelity & Guaranty Co. v. Bimco Iron & Metal Corp., 464 S.W.2d 353, 357 (Tex. 1971).
Practice Resource:
• Corbin § 0. (waiver of condition of notice).

End of Document

OR PREVENTION
§ 40.0 Waiver of Defects in Title to Land

Absent a contrary agreement, a purchaser of land has a right to marketable title; this is a material part of the agreed
exchange. The condition of marketable title is not merely technical or procedural. Thus, where the parties have
contracted for clear and marketable title, the condition cannot be waived without consideration or reliance. See
Rose v. Mitsubishi International Corp., 423 F. Supp. 1162 (E.D. Pa. 1976); Restatement (Second) of Contracts
§ 22 .
If the vendor has not promised marketable title, the purchaser may still condition its promise on the absence of any
defects in the title. The vendor could not be sued for failure to deliver marketable title, but the purchaser’s duty to
buy would not be activated in the face of such defects. Where the seller promises clear and marketable title, it
operates not only as a condition to the purchaser’s duty but also as a promise by the vendor for which the
purchaser can recover damages in the event of breach.
Practice Resource:
• Corbin § 0. (waiver of defects in title to land).

End of Document

OR PREVENTION
§ 40.10 Provisions That a Contract Will Be Void on the Occurrence of

Specified Conditions
A contract may provide that unless payments are made exactly on time, the tender of performance is perfect or
other specified conditions occur, the other party’s duty is “void” or “null and void.” This type of provision, however,
seldom means what it literally states. Generally, it means that the duty of one of the parties is conditioned on the
other party’s payment on time or perfect tender or other specified performance exactly as agreed. The promisor
should be able to waive such a condition.
Richard and Diane Perkins agreed to purchase property from Donald and Carolyn Beach. The Perkins’ duty to
purchase was conditioned on an inspection contingency. After the inspection, they claimed defects valued at
$5,000. They accepted Donald’s promise to pay them $2,000 and informed Carolyn that they were taking the
property “as is.” Carolyn argued she, as a vendor, had the right to terminate the contract on the failure of the
inspection condition. The court relied on the Corbin on Contracts statement of the general rule that a party for
whose benefit a condition is inserted in a contract may waive it. The court concluded that the inspection condition
was intended to benefit the purchaser and that the Perkins did, in fact, waive that condition. Perkins v. Beach, 2003
Conn. Super. LEXIS 3174 (Nov. 13, 2003). Where a contract required the plaintiff to provide all plans, designs and
specifications before any work commenced to repair the plaintiff’s vessel, that condition was waived when the
plaintiff manifested acceptance of work that was performed for 18 months though the plaintiff had failed to provide
such material. Offshore-Inland Servs. of Ala., Inc. v. R/V Deepocean Quest (ex Nadir), 2007 U.S. Dist. LEXIS
73534 (W.D. Wash. Oct. 2, 2007).
Practice Resource:
• Corbin § 0.10 (waiver of provision that contract shall be void on specified conditions).

End of Document

OR PREVENTION
§ 40.11 Failure to State Existing Defenses

Previously, it was clearly established that, if a condition to a promisor’s duty has not occurred, the duty is not
activated and will be discharged if the condition cannot occur in the future. Is this truism affected by the fact that the
promisor is unaware that the condition has not occurred and has refused to perform for invalid reasons? The
answer is no.
A party may defend a failure to perform a contract by demonstrating a legal excuse, even if the party was ignorant
of the excuse at the time it refused to perform. See Western Auto Supply Co. v. Sullivan, 210 F.2d 36, 40 (8th Cir.
1954). See also Cars Unlimited II, Inc. v. Nat’l Motor Co., 2007 U.S. Dist. LEXIS 59745 (E.D. Va. Aug. 15, 2007).
Similarly, a party who states an insufficient reason for performing a promise is not precluded from later showing a
sufficient reason existed. Restatement (Second) of Contracts § 2 . Where an insurer denied coverage and later
amended its complaint to add allegations concerning alleged misrepresentations by the insured making the policy
void ab initio, the court cited the Corbin treatise in holding that an insurer does not necessarily waive defenses it
does not raise in a letter denying coverage where there is no voluntary and intentional relinquishment of a known
right. Great Lakes Reinsurance (UK) PLC v. Kranig, 2013 U.S. Dist. LEXIS 2091 (D.V.I. Jan. 7, 2013). Nor is an
employer precluded from discharging an employee for stated invalid reasons or no reason if an effective cause for
such a discharge exists. Fairfield County Bariatrics v. Ehrlich, 2010 Conn. Super. LEXIS 568, at *51 n.10 (Mar. 8,
2010). An employer, however, would have to show that it did indeed terminate the plaintiff for the alleged material
breach, not that it merely could have done so. Sarbacher v. AmeriCold Realty Trust, 2011 U.S. Dist. LEXIS 131290
(D. Idaho Nov. 14, 2011). The refusal of an employee to perform for stated reasons that have no justification is not
a breach if justifiable reasons exist. Restatement (Second) of Contracts § 2 cmt. c, illus. 8. If, however, the failure
of a promisor to state justifiable reasons for refusing to perform induces reliance by the promisee, the promisor may
be estopped to introduce such reasons later. Restatement (Second) of Contracts § 2 . Cf. § 2- 0 of the Uniform
Commercial Code. There is an important exception to this use of estoppel when the transaction involves a letter of
credit.
Practice Resource:
• Corbin § 0.11 (waiver and estoppel by omission to state an existing ground of defense).

End of Document

OR PREVENTION
§ 40.12 The Requirement of an Estoppel to Prevent the Assertion of New

Reasons as a Ground for Action Under a Contract Does Not Apply to Letters
of Credit
Letters of credit are governed by UCC Article 5 and the Uniform Customs and Practice for Commercial
Documentary Credits (UCP). The traditional letter of credit operates to assure a seller of goods that it will receive
payment. A contract may require a buyer to arrange for its bank to issue a letter of credit to the seller, which allows
the seller to issue a draft on the “credit.” The letter is transmitted to the seller. A bill of lading is presented to the
bank and if it precisely matches the terms of the letter of credit, the bank will pay the seller’s draft. The purpose of
the letter of credit is to assure a reliable payment mechanism. The bank will not become involved in the underlying
transaction. If the bank dealt with issues of alleged defects in the goods that would justify the buyer not paying the
seller, the entire rationale for letters of credit would be emasculated. If the terms of the bill of lading match the terms
of the letter of credit, the bank must pay the seller because the letter of credit is an independent obligation of the
issuing bank. Any justification for refusing to pay emanating from non-conformities in the goods is necessarily
waived.
Practice Resource:
• Corbin § 0.12 (waiver and letters of credit).

End of Document

OR PREVENTION
§ 40.13 Express Provisions Against Waiver or Variation

A contract stating that a condition or promise cannot be waived is wholly ineffective. Gillani Consulting Inc. v.
Daewoo Heavy Indus. Am. Corp., 2006 U.S. Dist. LEXIS 88704 (W.D. Wash. Dec. 7, 2006). A party to a written
contract can waive, expressly or by performance, any provision of the contract, including a non-waiver clause.
Parties to a contract cannot deprive themselves of the power to alter, vary, or discharge a contract, even in the face
of an express provision in their contract denying such power. Freedom of contract prevails over any such clause. 42
East, LLC v. D.R. Horton, Inc., 218 N.C. App. 503, 722 S.E.2d 1 (2012).
An agreement required a tenant to make monthly rent payments on the first of each month but he frequently was
late. Nevertheless, the landlord accepted the payments and did not furnish the tenant written notice of any intent to
terminate the lease due to late payments. The court cited the Corbin treatise and held despite the presence of non-
waiver provision, “[p]arties to a contract cannot, even by an express provision in that contract, deprive themselves
of the power to alter or vary or discharge it by subsequent eeme t. . a provision that an express condition of a
promise or promises in the contract cannot be eliminated by waiver, or by conduct constituting an estoppel, is
wholly ineffective.” Savre v. Santoyo, 2015 ND 170 (2015).
Contracts often contain clauses requiring modifications or rescissions to be evidenced by a writing. The common
law view was that even this restriction will not invalidate a subsequent oral agreement to the contrary. Gillani
Consulting Inc. v. Daewoo Heavy Indus. Am. Corp., 2006 U.S. Dist. LEXIS 88704 (W.D. Wash. Dec. 7, 2006). UCC
§ 2-20 2 provides that if the parties agree that their modifications or rescissions must be in writing, that agreement
will be enforced. As noted in our earlier exploration in Chapter 13 above of the confusion surrounding that section of
the UCC, that provision may be waived.
Practice Resource:
• Corbin § 0.1 (effect of express provisions against waiver or variation).

End of Document

OR PREVENTION
§ 40.14 Power to Reestablish a Waived Condition

Although a vendor may waive the right to receive performance on time, the right may be reinstated by notice to the
obligor. Defaults occurring prior to the notice are not revived. The notice merely prevents past conduct from
constituting a waiver of new defaults. If a condition was waived under a valid contract, there is no power to restore
such a condition by notice.
Contracts often include anti-waiver (“nonwaiver”) provisions such as the following clause:
The waiver or indulgence of any default by the Buyer of any provision of this Agreement … shall not operate as
a waiver of any subsequent default by the Buyer of such provision or as a waiver of any of the other rights of
[the other party] herein.
Absent such a clause, if a creditor falls into a pattern of accepting delinquent installments, it may not then suddenly
declare default when another late payment is made without first apprising the debtor on its insistence of strict
compliance with the terms of the contract.
Joe Shelton wanted to purchase a mobile home from Westinghouse and signed a contract containing the above-
quoted clause. Shelton promised to pay 144 installment payments. He made 40 payments over a three and a half
year period, but his payments were habitually late by one, two, or even three months. On four occasions, his checks
were returned for insufficient funds. Nonetheless, Westinghouse allowed him make good on those checks. When
Shelton fell further in arrears on three monthly payments, Westinghouse claimed that the entire debt was
accelerated under another clause in the contract and sought a writ of replevin to repossess the mobile home. The
court found that the pattern of accepting late payments was so pervasive as to allow the debtor an opportunity to
prove that the creditor not only waived its right to strictly enforce the terms of the contract, but even waived the anti-
waiver clause. Westinghouse Credit Corp. v. Shelton, 645 F.2d 869 (10th Cir. 1981).
Practice Resource:
• Corbin § 0.1 (power to re-establish a condition that has been eliminated by waiver).

End of Document

OR PREVENTION
§ 40.15 Proof of Waiver Must Be Pleaded

If a complaint alleges performance of all conditions in the contract, the plaintiff’s case is not sustained by proving a
waiver of one of more of the conditions. There is a material variance between the pleading and proof. Excusable
non-performance is not performance. At the same time, a plaintiff who has who has alleged full performance of
conditions should be readily permitted to amend the complaint by setting forth proof of waiver or other excuse if the
excuse will be as effective as performance in entitling the plaintiff to the remedy sought.
Practice Resource:
• Corbin § 0.1 (proof of waiver not admissible unless pleaded).

End of Document

OR PREVENTION
§ 40.16 Waiver of a Condition Does Not Discharge the Other Party’s Duty to
Compensate for Breach
The waiver of a condition removes the condition so that the promisor can no longer defend its failure of
performance by claiming a condition to its duty has not occurred. Such a waiver does not discharge the other
party’s existing duty to compensate for breach. If a buyer of goods waives the condition requiring prompt
performance by the seller, the buyer must proceed to perform notwithstanding the seller’s delay. The seller’s delay
is still a breach for which the waiving party retains the right to sue for damages.
Where a buyer accepted a large shipment of young hens though the hens did not conform to the contract
description, the common law would require the buyer to pay for the hens notwithstanding the failure of a material
condition since the buyer’s acceptance would have waived the condition. The Uniform Commercial Code, however,
now applies to such a contract for the sale of goods. Under the Code, a buyer who accepts nonconforming goods
has a cause of action for breach of warranty allowing damages based on the difference in the value of the goods
accepted and the value they would have had if they had been as warranted, unless special circumstances suggest
proximate damages of a different amount. UCC § 2- 1 . See Midwest Hatchery & Poultry Farms, Inc. v. Doorenbos
Poultry, Inc., 783 N.W.2d 56 (Iowa Ct. App. 2010).
Practice Resource:
• Corbin § 0.1 (waiver of a condition of one’s own duty is not a discharge of one’s right
to damages for the other’s breach).

End of Document

OR PREVENTION
§ 40.1 A Party Who Unjustly Prohibits the Occurrence of a Condition

Eliminates the Condition
A party who unjustly prohibits the occurrence of a condition of a promissory duty thereby eliminates it as a condition
to that duty. There is no clearer illustration of this principle than the prevention that occurred in Foreman State Trust
& Sav. Bank v. Tauber, 348 Ill. 280, 180 N.E. 827 (1932). In consideration of marriage, the husband promised that
his executor would pay the promisor’s wife $20,000 if she survived him. The husband prevented the condition from
occurring by deliberately and intentionally killing his wife. The court pointed to the principle that one cannot take
advantage of one’s own wrongful conduct to assert the failure of a condition to defeat liability under the contract.
In a less extreme case, a plaintiff contracted to perform engineering services in exchange for compensation to be
calculated on actual construction costs. The defendant abandoned the project and claimed that it owed nothing to
the engineer because there were no actual construction costs. Citing Corbin on Contracts, the court held that a
party may not escape liability by preventing the happening of the condition. Perkins v. Cedar Mt. Sewer
Improvement Dist. No. 43, 360 Ark. 50, 199 S.W.3d 667 (2004). Where an agreement to settle and dismiss a class
action was conditioned on the defendants’ payment of $425,000, the defendants did not make the payment and
claimed that the failure of the condition left them with no obligation. The court rejected this “incomprehensible
argument” by explaining that the payment was a condition to the duty of the plaintiffs to dismiss the class action.
The defendants’ promise to pay the $425,000 created a duty in the defendants which they could not eliminate by
their prevention of the condition. One who prevents the occurrence of a condition by his or her own nonperformance
will not be permitted to take advantage of that nonoccurrence. Huttenstine v. Mast, 2009 U.S. App. LEXIS 13288
(4th Cir. June 22, 2009).
A bankruptcy court held that the prevention doctrine required a showing that “but for” the defendant’s prevention of
the condition, the duty to which it was attached would have been performed. On appeal, the court rejected the “but
for” test and held that the prevention doctrine only requires a party to prove that the defendant’s conduct “materially
contributed” to the failure of the condition. President Casinos, Inc. v. Columbia Sussex Corp. (In re President
Casinos, Inc.), 419 B.R. 381 (E.D. Mo. 2009).
Practice Resource:
• Corbin § 0.1 (elimination of a condition by unjustified prevention of its fulfillment).

End of Document

OR PREVENTION
§ 40.1 Broker’s Right to a Commission When the Owner Refuses to Convey

the Property or the Buyer Fails to Perform
When an owner of property lists property with a broker to whom the owner promises a commission for producing a
buyer able and willing to purchase on the owner’s terms, the owner’s duty is limited by these express conditions. If
the broker produces such a buyer but the owner refuses to convey, the owner has prevented the fulfillment of the
conditions. The broker is entitled to full commission mitigated only by whatever broker savings can be shown due to
the fact that the transaction was not completed. If the owner retained the privilege of making a sale through its own
efforts, the broker would not be entitled to any commission.
In Ferguson Advisors, LLC v. Malherbe, 2012 OK CIV APP 33, 274 P.3d 839, the broker agreed to delay a payment
of a portion of a commission until the buyer paid the balance of the purchase price. The buyer, however, never paid
the balance. The court found guidance in illustration 4 to § 22 of the Restatement (Second) of Contracts in
concluding that a broker normally assumes the risk that a buyer’s obligation would be fulfilled as a condition to the
owner’s duty to pay the commission. The court held that the plaintiff-broker had assumed that risk in this case.
Practice Resource:
• Corbin § 0.1 (broker’s right to a commission prevented by the principal’s refusal to
fulfill a condition to convey).

End of Document

OR PREVENTION
§ 40.1 When a Promisor Makes Fulfillment of a Condition More Difficult or

Expensive
Where the resolution of liens was a condition precedent to the vesting of the plaintiff’s rights under a settlement
agreement, the defendants made no effort to resolve them for 10 years. The court held that the defendants
deliberate inactivity was a breach of the implied duty of good faith that precluded the occurrence of the condition. In
re Estate of Drake, 4 A.3d 450 (D.C. 2010). A contract to buy and sell property conditioned on the assent of a third
person implies a condition of good faith and cooperation in procuring that assent. Similarly, when a buyer’s duty to
purchase property is expressly conditioned on the buyer’s success in obtaining a mortgage loan at a certain
percentage of the purchase price, the buyer has impliedly promised to make reasonable efforts to procure the
mortgage loan.
Whether a promisor has prevented a condition from occurring is, however, a question of fact. In Godburn v.
Meserve, 130 Conn. 723, 37 A.2d 235 (1944), an elderly person promised to will her real property in exchange for
the plaintiff’s promise of board, lodging, and personal care. She complained about the food and had habits that
aggravated the plaintiffs. The court recognized that the plaintiffs may have assumed the risk of a considerable
degree of aggravation in such a contract. The mere fact that the promisee was unpleasant was not a basis for
discharge of the obligation. It should be contemplated that elderly people can be eccentric and demanding. The
essential question is whether the elderly person violated her obligations under the contract. The court held that her
conduct was within the reasonable contemplation of the parties at the time the contract was formed and did not
prevent the occurrence of any condition.
Practice Resource:
• Corbin § 0.1 (when a party’s non-performance contributes to making the fulfillment of
a condition more difficult or expensive).

End of Document

OR PREVENTION
§ 40.20 Implied Promise to Procure a License or Permit

When a performance is conditioned on obtaining a permit, it is necessary to determine the party responsible for
procuring it. It will also be necessary to determine whether the parties intended that one party assumed a
contractual risk by promising to procure the permit so that its failure would give rise to an action for damages, or
whether the parties did not intend that party to assume the risk In the latter case, the failure to obtain the permit
would be the failure of a condition excusing performance, but would not constitute a breach since neither party
undertook such a duty.
As in other determinations of the intention of the parties, the parties’ language and all surrounding circumstances
may be called upon to aid the court’s interpretation. The owner of a lot who contracts for the erection of a building is
typically seen as assuming the risk of procuring a building permit. The owner of a bar impliedly promises bartenders
and other workers that it has procured a license for the sale of liquor. A party seeking employment as a bus driver
impliedly promises that he or she has obtained the necessary license to drive a bus.
Practice Resource:
• Corbin § 0.20 (implied promise to procure a license or permit).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 41 PRELIMINARY ANALYSIS—ISSUES AND

TERMINOLOGY
CHAPTER 41 PRELIMINARY ANALYSIS—ISSUES AND TERMINOLOGY

the subject matter.

End of Document

TERMINOLOGY
§ 41.01 Obstacles to Recognizing Third-Party Rights

A simple question spawned centuries of debate: In exchange for Ames’s promise to release Barnes from a debt of
$10,000 owed to Ames, Barnes promises to transfer ownership in a landscape painting to Carr. May Carr enforce
Barnes’s promise?
There were two fundamental obstacles to the recognition of a cause of action in Carr. First, Carr is neither a
promisor nor a promisee under such a contract. He is a stranger to this contract; thus, he is not in “privity.” Second,
there is no consideration moving from Carr to support Barnes’s promise. The consideration for Barnes’s promise is
moving from Ames.
The history of third-party beneficiary law may be roughly divided into three periods in dealing with these obstacles.
There was an early recognition of third-party rights often aided by fictions. In the middle period, courts found such
fictions unreliable and unconvincing. Third-party beneficiary claims were generally rejected. The last stage was
based on a fundamental principle that the intention of contracting parties to confer an enforceable contract right on
an identifiable third party should be enforced.
The influence of Professor Arthur Linton Corbin on the twentieth century development of contract law in general
cannot be gainsaid. It is, however, important to recognize Corbin’s almost obsessive efforts to convince courts to
recognize enforceable rights in third parties. These efforts proved successful as manifested by the pervasive
recognition of third-party beneficiary rights in both Restatements of Contracts that were pervasively adopted. The
obstacles were so embedded in British law, however, that only legislative action would overcome the historical
resistance. That final victory occurred 32 years after Professor Corbin’s death, when an Act of Parliament officially
recognized the rights of third-party beneficiaries. Contract (Rights of Third Parties) Act of 1999, Chapter c. 31.
Practice Resource:
• Corbin § 1.1 (the essential issues).

End of Document

TERMINOLOGY
§ 41.02 The Need for “Privity”

Since one of the fundamental obstacles to recognition of third-party beneficiary rights is the absence of “privity,” it is
important to consider the meaning of that term. Courts are hard-pressed to provide a definition, since privity simply
refers to the relationship between contracting parties. If the law recognizes a person as a “party” to a contract, that
person is automatically in privity. Thus, privity is nothing more than a conclusion with no analytical benefit. If Ames
and Barnes enter into a contract intending to benefit Carr through Barnes’s performance in delivering the painting,
why should that intention not be honored by treating Carr as a “party” so that it can be said that Carr is in privity?
Authentic Apparel Grp., LLC v. United States, 123 Fed. Cl. 92, 2015 U.S. Claims LEXIS 1082 (Fed. Cl. 2015)(where
plaintiff is not a party or a third party beneficiary to a contract, there is no privity and he or she cannot sue); Societe
d’Equipments Internationaux Nig., Ltd. v. Dolarian Capital, Inc., 2016 U.S. Dist. LEXIS 3783 (E.D. Cal. Jan. 12,
2016)(Dolarian, who was not a party to the contract, could not sue simply because he was the sole shareholder of
DCI, which was a party to the contract, nor was he a third party beneficiary). The underlying reason for the
conclusion that such a third party is not in privity is found elsewhere.
Practice Resource:
• Corbin § 1.2 (what is “privity”?).

End of Document

TERMINOLOGY
§ 41.03 Consideration Not Moving From Promisee

The more significant impediment to recognizing an enforceable right in an intended third-party beneficiary was
based on the absence of any consideration moving from the third party to the promisor. The third party was viewed
as a “stranger” since the third party did not supply consideration.
Yet, there are enforceable contracts in which a third party furnishes the consideration and the promisee benefits
from the performance. See Frumkin v. Mayer, 139 Pa. Super. 139, 11 A.2d 767 (1940). If a promise made to and
for the benefit of a promisee is enforceable even though the consideration is moving from a third party, there is no
justification for refusing to recognize an enforceable right in a third party when the promisee intends to benefit that
party. Nonetheless, this issue constituted the major historical impediment to the recognition of a contract right in a
third-party beneficiary.
Practice Resource:
• Corbin § 1. (consideration not moving from promise).

End of Document

TERMINOLOGY
§ 41.04 The Rights of a Third Party Are “Legal” and “Equitable”

The history of third-party beneficiaries contains statements concerning the equitable nature of a beneficiary’s rights,
but the distinction between “legal” and “equitable” in this context is an illusion. The third-party beneficiary has a
contract right—a jural right. This right is the same kind of legal and equitable right that the third party would have
possessed as a promisee.
Practice Resource:
• Corbin § 1. (the third party’s right is a “legal” and “equitable” right).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 42 THIRD-PARTY BENEFICIARY HISTORY
CHAPTER 42 THIRD-PARTY BENEFICIARY HISTORY

the subject matter.

End of Document
§ 42.01 History of Third-Party Beneficiaries in England

In an early English case, a promise was made to pay the debt of the promisee to his creditor; the court would not
recognize a cause of action in this third party. The writ of assumpsit contemplated the appropriate party to bring an
action as the party to whom the promise was made rather than some “stranger.” The most important obstacle,
however, was the absence of any consideration moving from the third party to the promisor. Bourne v. Mason, 1
Vent. 6 (1669 K.B.).
A distinction was made, however, in the famous case of Dutton v. Poole, 83 Eng. Rep. 523 (K.B. 1677). In that
case, Sir Edward Poole planned to sell timber to raise funds for his daughter Grazil’s dowery. Sir Edward’s son and
heir, Nevil, promised his father to pay Grazil 1,000 pounds if his father would refrain from selling the timber and the
father agreed. When Nevil refused to pay, Grazil sued and the court had to decide whether such an action by a
party from whom the consideration did not run would be recognized. The court was aware of cases that refused to
recognize such a right in a “stranger” to the contract, but it distinguished those cases from the instant case because
it involved a relationship between a father and his children, a “natural consideration” concept. The court noted that
the outcome would have been different had the third party been a stranger.
A century later, the great Lord Mansfield expressed surprise that there could be any doubt about third-party
recovery. Martyn v. Hind, 2 Cowp. 437, 443 (1776). Nonetheless, absent “natural consideration,” the traditional
obstacles to recognition of a contract right in the third party continued. Third parties could resort to Chancery, which
recognized property rights in a third party when real property was conveyed to a trustee to be held in trust for the
beneficiary. Such relief, however, was based on property law rather than contract law and could be had only in a
court of equity.
In the nineteenth century, Tweedle v. Atkinson, 1 Best & S. 393 (1861 Q.B.), repudiated the “natural consideration”
concept since consideration based on natural love and affection was no longer recognized. While the case is often
viewed as setting forth the requirement of “privity,” there is no mention of that requirement in the opinion.
Nonetheless, Tweedle was the forerunner of the opinion in Dunlop Pneumatic Tyre Co. v. Selfridge & Co., A. C.
847, 853 (1915). That case removed any doubt that third-party beneficiary rights would not be recognized. Dunlop
stated:
My Lords, in the law of England certain principles are fundamental. One is that only a person who is a party to
the contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a
right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a
stranger to a contract as a right to enforce the contract in personam. A second principle is that if a person with
whom a contract not under seal has been made is to be able to enforce it consideration must have been given
by him to the promisor or to some other person at the promisor’s request. These two principles are not
recognized in the same fashion by the jurisprudence of certain Continental countries or of Scotland, but here
they are well established. A third proposition is that a principal not named in the contract may sue upon it if the
promisee really contracted as his agent. But again, in order to entitle him to sue, he must have given
consideration either personally or through the promisee, acting as his agent in giving it.
Dunlop Pneumatic Tyre Co. v. Selfridge & Co., A.C. 847, 853 (1915).
While there were subsequent judicial criticisms of this analysis, the reform would not occur without legislation. After
centuries of dispute and confusion, a bill recognizing third-party rights was introduced in the House of Lords on
Page 2 of 2
December 3, 1998 and passed the House of Commons on November 1, 1999. In its modified form, it was approved
by the House of Lords on November 10 and received Royal Assent on November 11 as the “Contract (Rights of
Third Parties) Act of 1999.”
Practice Resource:
• Corbin § 2.1 (third-party beneficiaries in England).

End of Document
§ 42.02 The New York Experience

It is unremarkable that the American experience was influenced by the vacillation and confusion attending the
English experience. Prior to 1861, New York recognized third-party beneficiary rights. As early as 1806, a New York
court cited the English case of Dutton v. Poole as support for holding that a beneficiary could enforce such a right.
Schemerhorn v. Vanderheyden, 1 Johns 139, 140 (1806).
Though it recognized a conflict in the case law, an 1847 case resolved the conflict in favor of recognizing third-party
beneficiaries. Delaware & Hudson Canal Co. v. Westchester County Bank, 4 Denio 97 (1847) (relying on Dutton v.
Poole and Martyn v. Hind as well as cases in Massachusetts and Connecticut). These cases served as a prelude to
what became the famous case of Lawrence v. Fox, 20 N.Y. 268 (1859). In light of the precedent, however,
Lawrence was not viewed as remarkable when it was handed down.
Holly, who owed Lawrence $300, lent $300 to Fox. Fox promised that he would pay Holly’s debt to Lawrence.
Lawrence was Holly’s creditor. The court had to decide whether a third-party creditor of the promise, who was not a
promisee and from whom consideration did not move, may recover from the promisor, with whom promisor Fox had
not dealt. The plurality opinion written by Judge Gray would later take on a “landmark” character by rejecting fictions
such as an agency fiction favored by two of the concurring judges and unearthing the “broader and more
satisfactory basis, that the law operating on the act of the parties creates the duty, establishes a privity, and implies
the promise and obligation on which the action is founded.” Lawrence, 20 N.Y. at 272 (quoting Brewer v. Dyer, 61
Mass. 337, 340 (1851)).
The denouement followed:
The principle … “that a promise made to one for the benefit of another, he for whose benefit it is made may
bring an action for its breach,” has been applied to trust cases, not because it was exclusively applicable to
those cases, but because it was a principle of law, and as such applicable to those cases.
Lawrence, 20 N.Y. at 274.
The “principle” of Lawrence, however, was undermined 18 years later in Vrooman v. Turner, 69 N.Y. 280 (1877).
Vrooman limited the Lawrence precedent to its holding, i.e., to actions by creditor beneficiaries where some
obligation or duty was owed by the promisee to the third party. Subsequent New York courts struggled to discover
some relationship between the promisee and beneficiary, and returned to the natural affection or natural
consideration concepts from the seventeenth century.
In a 1918 case, a wife who was near death promised to leave her property to her husband in exchange for his
promise to provide the value of the property to her niece. The court held that the niece had a cause of action
against the husband since the relationship between the childless aunt and the niece was only “imperceptibly
different” from the natural affection and natural consideration relationship recognized as sufficient in Dutton to allow
a third-party recovery.
The court, however, was not content to simply list categories allowing third-party recoveries. It noted that, “The
doctrine of Lawrence v. Fox is progressive, not retrograde. The course of the late decisions is to enlarge, not to
limit, the effects of that case.” Lawrence was declared the “leading case.” Seaver v. Ransom, 224 N.Y.233, 120
N.E. 639 (1918).
Page 2 of 2
The New York Court of Appeals confirmed that stature in a famous statement by Judge Cardozo:
The assault upon the citadel of privity is proceeding in these days ce. In the field of the law of contract,
there has been a gradual widening of the doctrine of Lawrence v. Fox … until today the beneficiary of a
promise, clearly designated as such, is seldom left without a remedy.
Ultramares Corp. v. Touche, Niven & Co., 255 N.Y. 170, 180, 174 N.E. 441, 445 (1931).
The full recognition of third-party beneficiary rights without any requirement of privity or consideration moving from
the third party is clearly evidenced in modern New York case law. The particular application of third-party
beneficiary rights in familial transactions continues to be recognized in modern New York cases. See Cianciotto v.
Hospice Care Network, 32 Misc. 3d 916, 927 N.Y.S.2d 779 (Dist. Ct. 2011).
Practice Resources:
• Corbin § 2.2 (the American experience); § 2. (the New York experience).

End of Document
§ 42.03 The Massachusetts Experience

As in New York, in Massachusetts there was an early recognition of the right of a third party to sue, but
Massachusetts totally rejected the early principle and required a much longer gestation period to allow a rebirth. As
early as 1813, there were cases clearly recognizing the principle that an intended third-party beneficiary should be
allowed to bring an action for its breach. See Felton v. Dickinson, 10 Mass. 287 (1813).
The reversal began in 1854 when a court created categories of “exceptions” to the requirement or privity. Mellen v.
Whipple, 67 Mass. 317, 1 Gray 317 (1854). One of the exceptions, based in the natural affection concept of the
English case of Dutton v. Poole, was eroded when that case was overruled in England.
Similar evasions to preclude recovery by third parties continued until 1979. In Choate, Hall & Stewart v. SCA
Services, Inc., 378 Mass. 535, 392 N.E.2d 1045 (1979), the Supreme Judicial Court of Massachusetts reviewed the
history of third-party beneficiary law in Massachusetts, relying extensively on the scholarship of Professor Corbin.
The court concluded that the earlier “exceptions” were nothing more than rationalizations rife with analytical
weaknesses. The court characterized the privity concept as serving no useful purpose. No longer would it be
necessary to “squeeze” a third-party beneficiary into one of the “exceptions” to bring an action. With Choate Hall,
Massachusetts joined the other jurisdictions which, inspired by the New York case of Lawrence v. Fox, adopted a
general principle to allow third-party beneficiary actions.
The Choate Hall case dealt with a third-party creditor beneficiary, and the court was next confronted with a claim
that Choate Hall should be limited to its facts. This presented the possibility of an outcome similar to the New York
case of Vrooman v. Turner, a decision that retarded the application of the principle unearthed in Lawrence v. Fox.
The Massachusetts Supreme Court, however, was not about to make that mistake. It held that the principle applied
to any intended beneficiary, creditor or otherwise. Rae v. Air-Speed, Inc., 386 Mass. 187, 435 N.E.2d 628 (1982).
Recent manifestations of the modern view in Massachusetts include Miller v. Mooney, 431 Mass. 57, 725 N.E.2d
545 (2000).
Practice Resource:
• Corbin § 2. (the Massachusetts experience).

End of Document
§ 42.04 The Pennsylvania Experience

As in New York and Massachusetts, the early Pennsylvania cases recognized a principle allowing recovery by a
third-party beneficiary.
In the 1837 decision of Blymire v. Boistle, 6 Watts 182 (1837), however, the court noted that numerous cases
allowing recovery by third-party beneficiaries were “not all reconcilable with each other.” The court’s analysis
concluded that third-party creditor beneficiaries should not be permitted to sue because the creditor retained an
action against the promisee, the original debtor. This result would not apply, however, to donee (gift) beneficiaries
because such a third party would have no claim against the promisee. This analysis would promote a curious
distinction between Pennsylvania and New York third-party beneficiary law.
In New York, Lawrence v. Fox held that a creditor beneficiary could sue in New York and the subsequent case of
Vrooman v. Turner unfortunately limited that holding to creditor beneficiaries. New York courts then struggled to find
“relationships” between the promisee and third party that would support recovery by donee beneficiaries.
In contrast, Pennsylvania allowed donee beneficiaries to sue from the earliest time, and Pennsylvania courts
struggled to discover “exceptions” allowing creditor beneficiaries the right to sue. In 1888, the Pennsylvania
Supreme Court recognized “exceptions” that were not helpful. Adams v. Kuehn, 119 Pa. 76, 13 A. 184 (1888). In a
1925 case, the court began speaking in terms of a third-party beneficiary “principle” rather than “exceptions.” Brill v.
Brill, 282 Pa. 276, 127 A. 840 (1925).
Two years later, the court appeared sensitive to academic criticism that the third-party beneficiary law of
Pennsylvania appeared “doubtful” and this precipitated a review of the case law and academic commentary. After a
brief retrogression, the court approved the analysis of Professor Corbin and held that a third-party beneficiary need
not be in privity nor provide consideration to the promisor in order to have a right to sue under the contract.
Commonwealth ex rel. Schnader v. Great American Indem. Co., 312 Pa. 183, 167 A. 793 (1933).
Today Pennsylvania clearly recognizes the rights of intended beneficiaries to bring actions under the contract.
There is, however, confusion concerning the underlying theory. Pennsylvania has adopted the analysis in § 02 of
the Restatement (Second) of Contracts that is discussed in Chapter 44 below, while apparently clinging to an older
theory that is often read to require both parties to a contract to express an intention to benefit a third party. See Flex
Homes, Inc. v. Ritz-Craft Corp of Mich., 721 F. Supp. 2d 663 (N.D. Ohio 2010) (applying Spires v. Hanover Fire Ins.
Co., 364 Pa. 52, 70 A.2d 828, 830–831 (1950)). Moreover, Pennsylvania law does differ from other jurisdictions in
continuing to distinguish donee and creditor beneficiaries with respect to when their rights vest. Biggins v. Shore,
523 Pa. 148, 565 A.2d 737 (1989).
Practice Resource:
• Corbin § 2. (the third party’s right is a “legal” and “equitable” right).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 43 THIRD-PARTY BENEFICIARY STATUTES
CHAPTER 43 THIRD-PARTY BENEFICIARY STATUTES

the subject matter.

End of Document
§ 43.01 The Rights of Third-Party Beneficiaries May Be Recognized Through

Statute
Statutory recognition of enforceable third-party beneficiary rights may be effected through elaborate statutes that
deal with specific issues such as a test for distinguishing parties with enforceable rights from incidental beneficiaries
who do not have enforceable rights. See, e.g., Mich. Comp. Laws Serv. § 00.1 0 . Or the statutes may be basic
statements of principle recognizing such rights. See, e.g., Cal. Civil Code § 1 and Idaho Code § 2 -102. This
type of statute is the most common. They simply state that a contract made expressly for the benefit of a third party
may be enforced by that party. Regardless of whether that principle has been recognized by statute or case law,
however, the analyses of the issues that arise under that principle in different jurisdictions demonstrate great
similarity and the use of aids such as the Restatements of Contracts and other authorities, including Corbin on
Contracts.
The Georgia statute suggests that third-party beneficiary rights are an exception to the privity requirement, Ga.
Code Ann. § -2-20 though that configuration has yet to cause major problems in its application. The West Virginia
statute focuses heavily upon the protection of a donee beneficiary while creditor beneficiaries were left to sue in
equity. W. Va. Code § - -12.
Many jurisdictions enacted statutes recognizing third-party beneficiary rights under certain types of contracts. Even
when England and Massachusetts would not recognize such rights generally, statutes favored beneficiaries of life
insurance policies. See, respectively, 45 & 46 Vict. c. 75 § 11 (1882); Mass. Gen. Laws (Ter. ed.) c. 175 § 12 .
Other examples of special recognition of third-party rights include laborers and materialmen, mortgagees, and
parties suffering tort injuries caused by a party with liability insurance.
Practice Resource:
• Corbin § .1 (recognizing third-party rights through statutes).

End of Document
§ 43.02 Third-Party Beneficiaries Under the UCC
[1] Liability for Injury Resulting From a Product Purchased Under a Contract Between a Buyer and a
Seller
Decades before the appearance of the products liability principle in Restatement (Second) of Torts § 02 the
earliest drafts of revisions of the Uniform Sales Act that would become the Uniform Commercial Code (UCC)
included a comprehensive enterprise liability concept. Part of this concept recognized the extension of express
or implied warranties to “any natural person who is in the family or household of the buyer or who is a guest in
his home” who sustained personal injury if it was reasonable to expect such a person to use, consume, or be
affected by the product. (This was the original language of UCC § 2- 1 which later became Alternative A of
§ 2- 1 . Thus, if a product purchased under a contract between a buyer and a seller injured a party who was a
member of the buyer’s family, household, or who was a guest, the statute allowed such a party to sue as a
third-party beneficiary of the contract between the buyer and seller.
[2] Horizontal Privity: Who Can Sue?

The original UCC § 2- 1 limited the parties who might be said to be in privity with the buyer, thereby allowing
them to sue, to members of the buyer’s family, household, or guests in the home. Because the developing case
law using warranty theory to pursue products liability actions was uneven, statutory alternatives were added to
the original § 2- 1 language. The original language became Alternative A. Alternative B extended the
horizontal privity line to allow any natural person to sue who was injured in person and who was reasonably
expected to use, consume, or be affected by the product. Such language could be read to eliminate “horizontal
privity.” Alternative C continued that extension without limitation to “natural” persons or injuries to the person.
Loss of bargain damages without bodily injury are recognized under this alternative.
Beyond these legislative modifications, a comment to UCC § 2- 1 stated that it was not the intent of the
drafters to enlarge or restrict the developing case law on whether the seller’s warranties could be extended to
other parties than those parties expressly mentioned in Alternative A. UCC § 2- 1 cmt. 3. See Hyundai Motor
Am., Inc. v. Goodin, 822 N.E.2d 947 (Ind. 2005), for a review of the evolution of UCC § 2- 1 its Alternatives in
different jurisdictions, and its judicial modifications.
Although the comments are not part of the enacted law, courts might choose to judicially extend the horizontal
privity line beyond categories of members of the family or household guests. For example, the Supreme Court
of Pennsylvania concluded that the drafters of UCC § 2- 1 did not intend all changes to come from the
legislature. Kassab v. Central Soya, 432 Pa. 217, 233, 246 A.2d 848, 856 (1968). Courts have extended the
categories of Alternative A to the point of eliminating horizontal privity, and have, in effect, converted Alternative
A to Alternative B without a stroke of the legislative pen.
[3] Vertical Privity: Who Can Be Sued?

Although there is no question that UCC § 2- 1 would extend an express or implied warranty from the buyer’s
immediate seller to parties in “horizontal privity” with the buyer, the section does not directly address what has
been called the “vertical privity” question of who, in the vertical distribution of the product from the manufacturer
through wholesaler to retailer to buyer, can be sued by the injured third party.
Some courts have simply abolished “vertical privity” so that such a third party may sue the manufacturer who
has not dealt with the buyer of the product. In other jurisdictions, however, vertical privity remains a bar.
Nonetheless, the tort theory illustrated in Restatement (Second) of Torts § 02 has become available and is,
by far, the typical theory of choice in bringing such actions. A party who is injured by a defective product but
Page 2 of 2
waits beyond a typical two-year torts statute of limitations period may still have a cause of action under a theory
that the defect breached an implied warranty of merchantability if the product was delivered to the its buyer less
than four years from the filing of such an action under the statute of limitations of UCC § 2- 2 . See Williams v.
West Penn Power Co., 502 Pa. 557, 467 A.2d 811 (1983). A number of jurisdictions, however, have enacted
statutes precluding this possibility.
Practice Resource:
• Corbin § .2 (third-party beneficiaries under the UCC—“vertical” and
“horizontal” privity).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 44 INTENT TO BENEFIT—RESTATEMENTS—

INTERPRETATION
CHAPTER 44 INTENT TO BENEFIT—RESTATEMENTS— INTERPRETATION

the subject matter.

End of Document

INTERPRETATION
§ 44.01 Determining the Intent of the Parties

The cases are legion that state the test of a third-party beneficiary’s rights as an “intention to benefit” test. Stating
the test in that general fashion immediately prompts a number of questions. Does the use of “intention” go to the
purpose or motive of the parties making the contract? Motive is sometimes viewed as the goal inducing the
“intended” means to that goal. “Purpose” may be equated with “motive” or “intention.”
A three-part test to determine when a third party qualifies as an intended beneficiary is as follows: “(1) [w]hen the
terms of the contract are expressly broad enough to include the third party either by name as one of a specified
class, and (2) the said party was evidently within the intent of the terms so used, the said third party will be within its
benefits, if (3) the promissee had, in fact, a substantial and articulate interest in the welfare of the said third party in
respect to the subject of the contract.” Miss. High Sch. Activities Ass’n v. R.T., 163 So. 3d 274 (Miss. 2015). For a
third party to be a third party beneficiary, the contract must have been “made for the benefit of said third party within
the intent and contemplation of the contracting parties.” The benefit to the third party must have been, at least to
some extent, a motivating factor in the parties’ decision to enter the contract. IMS Health Info. Solutions USA, LLC
v. Lempernesse, 2016 U.S. Dist. LEXIS 6262 (D.N.J. Jan. 19, 2016).
Many people may derive benefits under a given contract. Where a manufacturer, Express Metal, contracted with a
freight broker, Translink, to arrange for transporting a product, Translink contracted with Robbins to transport the
product. To recover freight costs that exceeded its estimate, Robbins claimed it was a third-party beneficiary of the
contract between Express Metal and Translink. The court recognized that contracts often benefit third parties. Any
contract to manufacture and sell goods will create beneficiaries in transportation companies, but they are not
intended beneficiaries; they are incidental beneficiaries. Robbins Motor Transp., Inc. v. Translink, Inc., 2009 U.S.
Dist. LEXIS 25189 (E.D. Pa. Mar. 26, 2009). A contract to create a new shopping mall generates more shopping
traffic that may benefit nearby stores. A contract to renovate a dilapidated house may enhance the value of an
adjacent house. These “beneficiaries,” however, are not “protected” beneficiaries if one of the parties breaches the
contract. They are incidental beneficiaries because the parties to the contract did not intend to confer upon them the
right to sue if a promisor under the contract failed to perform. The critical test is whether the original parties
intended to confer that right on the third-party beneficiary they named in the contract.
Courts have stated the test in various ways. One court stated the “ultimate test” or “final test” as whether the parties
intended the promisor to assume a “direct obligation” to the third-party beneficiary. Phila. Indem. Ins. Co. v. Peck,
2007 U.S. Dist. LEXIS 70788 (D. Conn. Sept. 26, 2007) (quoting from the well-known case of Colonial Discount
Co. v. Avon Motors, Inc., 137 Conn. 196, 75 A.2d 507 (1950)). Any number of courts state that the intention to
benefit must be “clear,” as if to emphasize the intention to benefit in terms of conferring a right. Royal & Sun
Alliance Ins., PLC v. Mercury Logistics, Inc., 2011 U.S. Dist. LEXIS 98366 (W.D. Ky. Aug. 31, 2011): “Parties must
clearly state in a contract their intention to benefit a third party.” Other courts may insist on other glosses, such as
the “primary” or “paramount” purpose of the parties must be to benefit the third party. None of these glosses,
however, have proven to be particularly helpful. Indeed, some may be counterproductive. When a lawyer contracts
to draft a will for a testator, the “direct benefit” and “direct obligation” of the lawyer’s performance appears to be to
the testator rather than the beneficiaries the testator seeks to benefit. If the lawyer fails to draft the will to carry out
the testator’s intention, a literally applied “direct obligation” test could be said to prevent an action by the intended
beneficiaries. In Kent v. Iowa, 651 F. Supp. 2d 910 (S.D. Iowa 2009), the court held that it was not necessary to
show an intent to confer a direct benefit on a third party to regard that party as an intended beneficiary.
Page 2 of 2
Newport Insurance issued a lender’s mortgage protection policy to Countrywide which held a mortgage on the
plaintiffs’ home. When a loss occurred, Countrywide released some of the insurance proceeds to the plaintiffs for
repairs. The plaintiffs claimed that they were entitled to additional proceeds as third-party beneficiaries of the
insurance contract between Newport and Countrywide. The court dwelt on whether the insurance contract
conferred a “direct benefit” to parties such as the plaintiffs. Though the policy named only Countrywide as the
“insured,” the policy stated that payment for casualty to the property would be made to “You [Countrywide] and the
mortgagor [plaintiffs].” The court deemed this language as manifesting an intention to confer a direct benefit on the
mortgagors where the insurance proceeds exceeded the mortgagee’s interest. Mosely v. Balboa Ins. Co., 2013
U.S. Dist. LEXIS 158275 (W.D.N.C. Nov. 5, 2013).
There is considerable older support for the view that the intention of the promisee should be dominant since it is the
promisee that is exacting the promisor’s commitment to benefit the third party. The promisor may not be particularly
interested in the third party on whom it is to confer the benefit of the promise. The promisor is induced to perform by
the promised consideration rather than any desire to benefit the third party. On the other hand, there should be
evidence of the promisor’s intention to assume that risk. As will be seen, the Restatement (Second) of Contracts
reflects this dichotomy. Courts have relied heavily upon the third-party beneficiary analyses in both the First and
Second Restatements of Contracts.
Practice Resources:
• Corbin § .1 (intention, purpose, and motive); § .2 (supplementary glosses to “intent
to benefit”).

End of Document

INTERPRETATION
§ 44.02 Intended Beneficiaries Under the Restatements
[1] Four Categories of Beneficiaries Under the First Restatement

In the tortured history of the recognition of third-party beneficiaries, at one period New York was recognizing
creditor beneficiaries but not donee (gift) beneficiaries, while Pennsylvania was recognizing donee but not
creditor beneficiaries. Though both jurisdictions later recognized both kinds of beneficiaries, that historical
dichotomy was embedded when the First Restatement of Contracts was created.
It is often suggested that there are three categories recognized in the First Restatement: “donee,” “creditor,”
and “incidental” beneficiaries. In fact there are four categories, two of which appear under the single “donee”
category. The third party is a “donee” beneficiary if it appears that the purpose of the promisee in the promisor’s
performance was to make a gift to the beneficiary or to confer upon the beneficiary a right against the promisor
to some performance neither due nor supposed to be due from the promisee to the beneficiary. First
Restatement of Contracts § 1 1 . Where the promisee does not intend to make a gift but does intend to
benefit a third party to whom the promisee owes no actual or supposed duty, characterizing the third party as a
“donee” beneficiary is inaccurate. Nonetheless, such a party is an intended third-party beneficiary with a right
against the promisor.
The third party is a “creditor” beneficiary if the promisor’s performance will satisfy an actual or supposed duty of
the promisee to the third party and there is no manifestation of intention to make a gift. First Restatement of
Contracts § 1 1 c . If a third party who may receive some benefit from the performance of the contract fits
neither definition of a “donee” or “creditor” beneficiary, that party is a mere “incidental” beneficiary with no rights
under the contract.
The First Restatement analysis has been criticized as creating watertight compartments that may fail to
recognize the intention of the promisee or of both parties to benefit a third party. Although a number of courts
referred to the First Restatement analysis, some continued to prefer other tests, such as whether there was
evidence that the promisee and promisor intended to create a “direct obligation” to the third party.
[2] “Intended” and “Incidental” Beneficiaries Under the Restatement (Second)

The Restatement (Second) of Contracts eliminates the “donee” and “creditor” categories—at least by name—
because they suggest “obsolete doctrinal difficulties.” Restatement (Second) of Contracts, Introductory Note to
Chapter 14. The new iteration refers only to “intended” beneficiaries. If a third party fails to meet the criteria for
that characterization, the party is a mere “incidental” beneficiary. Restatement (Second) of Contracts § 02.
Restatement (Second) § 02 begins with the phrase, “Unless otherwise agreed.” This allows the parties to
expressly deny any intention of conferring rights upon a third party and clearly resolves any question of
intention to benefit. Where a contract stated, “[t]his Agreement shall not create any right or cause of action in or
on behalf of any person other than HMO or laboratory,” the court cited Corbin for this proposition: “Where
parties expressly deny any intention of conferring rights upon a third party … the critical question of whether
they intended to benefit the third party is resolved.” Agostino v. Quest Diagnostics, Inc., 2011 U.S. Dist. LEXIS
127904 (D.N.J. Nov. 3, 2011). A generalized disclaimer may not be conclusive. “If the intent of the contract was
to directly benefit a third-party, he should not be denied that benefit because of a general disclaimer of intent to
benefit third-parties when that benefit is the very object of the agreement.” Doyle v. Jewell, 2015 U.S. Dist.
LEXIS 47766 (D. Utah 2015).
Absent such an express disclaimer, a two-step process is required to determine whether a person is an
“intended” beneficiary. First, the recognition of a third-party beneficiary right must be “appropriate to effectuate
Page 2 of 3
the intentions of the parties” (both the promisee and promisor). Although contracting parties would almost never
expressly state an intention to confer upon a third party the right to sue the promisor, if the recognition of such a
right was necessary to “effectuate” their intentions, it would be “appropriate” for a court to recognize such a right
in the third party. In Huff v. FirstEnergy Corp., 130 Ohio St. 3d 196, 2011-Ohio-5083, 957 N.E.2d 3, the court
held that a written contract must indicate an intention to benefit a third party if that party is to qualify a third-
party beneficiary. A concurring opinion, however, noted that Section 302 of the Restatement (Second) of
Contracts, adopted in Ohio, does not require the parties to a contract to indicate their intention to benefit a third
party. The opinion states:
As Professor John E. Murray explains in Corbin on Contracts, “The critical right of a third party is the right
to sue the promisor. [However], the promisor and promisee will almost never state that intention explicitly.
Nonetheless, the critical test is whether the language of the contract, the extrinsic evidence interpreting
that language and all the surrounding circumstances manifest an intention by the promisee and promisor to
confer that right on the third party. If so, it is ‘appropriate’ for a court to recognize that right in the third
party.”
Having met the generic requirements of the first step, the second step requires the third party to fit within one of
two additional categories. There is narrow “creditor” (“duty owed”) category where the promisor’s performance
would “satisfy an obligation of the promisee to pay money to the beneficiary” with the effect of making the
promisee a surety of the promisor. Restatement (Second) § 02 (1)(a) and cmt. b. See Prince George’s Hosp.
Ctr. v. Advantage Healthplan Inc., 865 F. Supp. 2d 47 (D.D.C. 2012). The First Restatement “creditor” category
also included third parties to whom the promisee owed only a “supposed” duty. Since there is no suretyship in
that situation, such third parties would not be recognized under this category but could still be included under
the broader category where “the circumstances indicate that the promisee intends to give the beneficiary the
benefit of the promised performance.” Restatement (Second) § 02 1 (emphasis supplied). A failure to fit
within one of these categories will preclude the recognition of an enforceable right in a third party. See
Menasha Corp. v. Thermotech, Inc., 2010 U.S. Dist. LEXIS 48269 (D. Minn. May 17, 2010). Unlike the first
step, which required both promisor and promisee to manifest an intention to benefit the third party, only the
intention of the promisee is considered to fit within this “intent to benefit” category.
[3] Third-Party Reliance Test

No other “tests” are mentioned in the black letter version of the Restatement (Second). Restatement (Second)
§ 02 cmt. d, suggests another test, however. The comment recognizes that either a promise to pay an actual
debt of the promisee to the third party or the promisee’s manifested intention to make a gift would make a third
party’s reliance both reasonable and probable. Indeed, when it is clear that the third party fits within either
category, such reliance is reasonable per se. No actual reliance is necessary. See Merrill Lynch, Pierce, Fenner
& Smith, P.C. v. Greystone Servicing Corp., 2009 U.S. Dist. LEXIS 73767 (N.D. Tex. Aug. 18, 2009) (stating
that a third party’s reliance may evidence an intention to create a third-party beneficiary right).
The comment then addresses cases where the fit is not perfect—where the promise is to perform only an
asserted duty of the promisee or there is a promise to satisfy the duty of a third person. Here, reliance would
not be presumed. Although actual reliance would not be required, it would have to be shown that the third party
would have been reasonable in relying on the promise. Some courts have recognized the desirability of a
reliance test to assist in determining whether the parties intended to benefit a third party. See Wright v. Bank of
Am., N.A., 2010 U.S. Dist. LEXIS 73807, at *11 (N.D. Cal. July 22, 2010); Rae v. Air-Speed, Inc., 386 Mass.
187, 435 N.E.2d 628, 633 n.3 (1982); But the concept has not escaped criticism. Because comment d supplies
no criteria to determine “reasonable reliance,” the test has been called an “empty-hypothetical reliance test.”
Melvin A. Eisenberg, Third Party Beneficiaries, 92 Colum. L. Rev. 1358, 1384 (1992).
[4] A Suggested Third-Party Beneficiary Analysis: Is the Intent to Confer a Right to Sue?
Many phrases have been used to distinguish “intended” from “incidental” third-party beneficiaries, including
“direct benefit,” “direct obligation,” “donee,” “creditor,” and others. If a court focuses only on the intention of the
promisee or both the promisee and promisor, it almost invariably will insist that such intention be “clear.” Courts,
however, shrink from requiring a higher burden or persuasion such as “clear and convincing.” The drafters of
the Restatement (Second) of Contracts searched for improved language and concluded that terms such as
Page 3 of 3
“appropriate to recognize” the intention of both parties if enforcing a third party’s right was necessary to
“effectuate” that intention. Instead of “creditor” beneficiary, the new category is simply a blunt “promise to pay
money.” But even a supposed duty to the promisee could support an intention to benefit a third party if the
circumstances suggested reasonable hypothetical reliance. These and other illustrations clearly indicate that
there is no formulaic statement of a “test” that has captured the imagination of courts.
If a third party qualifies as a third-party beneficiary (a “protected” beneficiary), the party has the right to sue the
promisor if the promisor fails to perform. This is the unstated premise in all of the efforts to articulate the test.
The critical test, therefore, is whether the language of the contract, the extrinsic evidence interpreting that
language, and all of the surrounding circumstances manifest an intention by the promisee and the promisor to
confer that right to sue on the third party. If so, it is “appropriate” for a court to recognize that right.
Consider Consol. Edison, Inc. v. Northeast Utils., 426 F.3d 524 (2d Cir. 2005). In that case, Consolidated
Edison (CEI) had agreed to purchase all of Northeast’s (NU) outstanding shares at a price of $3.6 billion, which
was $1.2 billion above market price. Shortly before the scheduled closing, CEI withdrew, claiming that NU had
suffered material adversity that lowered the valuation of its shares substantially. Had the merger been
completed, NU shareholders as third-party beneficiaries would have been entitled to receive the $1.2 billion
premium. While noting that New York had adopted the analysis in Restatement (Second) of Contracts § 02
the court announced the critical test: Did the contract clearly evidence an intent to permit enforcement by the
third party? The terms of the contract provided a clear answer: the NU shareholders had third-party beneficiary
rights under the contract that expressly became effective and enforceable only upon the completion of the
merger. Since that condition did not occur, the NU beneficiaries’ rights were never activated.
The intention of the parties was easily discovered in this case, but absent such express contract language the
critical question remains. It is not simply whether the parties intended to benefit the third party; rather it is
whether the parties intended to confer an enforceable right of performance on the third party. Like any other
question of intention, it is a question of fact that may be relatively easy or more difficult to answer depending
upon the language and circumstances. There should be no doubt, however, about the question to be answered.
Having discovered the question, it is not difficult to state the test.
Practice Resources:
• Corbin § . (the First Restatement—“donee,” “creditor,” and “incidental”
beneficiaries); § . (the Second Restatement—“intended” and “incidental”
beneficiaries); § . (the Second Restatement—a “third party reliance” test);
§ . (a suggested third-party beneficiary analysis); § . (incidental
beneficiaries).

End of Document

INTERPRETATION
§ 44.03 Interpretation and the Parol Evidence Rule

To determine whether parties intended to confer a right that a third party can enforce against a promisor requires
the interpretation of the contract under all of the surrounding circumstances. The proper interpretation of the third
party’s performance is critical. Where B promises A to pay whatever debts A incurs in a certain undertaking and A
incurs a debt to C, if B’s promise is interpreted as a promise to A to pay C, the parties intended C as a third-party
beneficiary. If, however, B’s promise is interpreted as a promise to pay A so that A may pay C, C has no
enforceable right under the contract between B and A because C is not an intended third-party beneficiary. Publrs.
Consortium, Inc. v. Arsenal Pulp Press, Black Books, Comics One Corp. (In re Publrs. Consortium, Inc.), 2009 U.S.
App. LEXIS 20632 (Sept. 16, 2009) (quoting illustration 3 of the Restatement (Second) of Contracts § 02 .
The traditional guides to interpretation do not change in the context of third-party beneficiary contracts. See, e.g.,
Allstate Ins. Co. v. Sears Roebuck & Co., 2007-Ohio-4977, 2007 Ohio App. LEXIS 4408 (7th Dist.) (evidence of
surrounding circumstances assists the court in holding that a party was an intended third-party beneficiary);
Amburgey v. Atomic Ski USA, Inc., 2007 U.S. Dist. LEXIS 92762 (D. Me. Dec. 17, 2007) (evidence of surrounding
circumstances was admissible to assist in the determination that the defendant was not a third-party beneficiary).
When a person is clearly named as a third-party beneficiary, as a party to the contract, he or she is subject to the
parol evidence rule like any other party. If the writing does not clearly establish a person as a third-party beneficiary,
the parol evidence rule will not preclude evidence to make that determination. In Prime Finish, LLC v. Cameo, LLC,
2012 U.S. App. LEXIS 13812 (6th Cir. July 5, 2012), the court rejected an argument that extrinsic evidence cannot
be introduced to determine whether a party is entitled to recognition as an intended beneficiary. While the parol
evidence rule precludes extrinsic evidence to vary the terms of a contract, the inquiry into third-party beneficiary
status allows a court to consider such evidence to make that determination.
Practice Resource:
• Corbin § . (parol evidence rule).

End of Document

INTERPRETATION
§ 44.04 Identifying the Third Party

There has always been general agreement that the third-party beneficiary need not be specifically identified at the
time the contract is made. When an insurer provides “Medigap” coverage for hospital stays, the hospitals treating
the insured are covered even though the hospitals are not identified at the time the contract is made. Vencor Hosps.
v. Blue Cross Blue Shield, 169 F.3d 677, 680 (11th Cir. 1999). When a contract manifests an intention to create
rights in members of a class, the members are third-party beneficiaries even though not otherwise identified at the
time the contract is formed. Hickman v. SAFECO Ins. Co. of Am., 695 N.W.2d 365 (Minn. 2005) (“borrower” in a
casualty insurance policy issued to a mortgagee when the mortgagor failed to produce insurance coverage covered
the mortgagor). In Clark v. BluePearl Ky., LLC, 2014 U.S. Dist. LEXIS 72246 (W.D. Ky. May 27, 2014), the court
found that the term “practices” in a veterinarian’s employment contract included a non-compete clause enforceable
by a third-party beneficiary. Though a letter of credit named only U.S. Bank under the caption “beneficiary,”
elsewhere the letter stated that it was payable to the order of U.S. Bank, escrow holder, “for the benefit of” the
plaintiff. The court noted that a third-party beneficiary need not be identified at the time the contract is formed. It
held that the plaintiff was a third-party beneficiary with standing to sue. Turquoise Props. Gulf, Inc. v. IberiaBank,
2009 U.S. Dist. LEXIS 97795 (S.D. Ala. Oct. 8, 2009).
Though naming a party at the time of formation is not necessary, the determination of the intention to benefit such a
party may be facilitated when a third party is named. Just because a third party is named, however, does not
conclude the inquiry. See Corrugated Paper Products, Inc. v. Longview Fibre Co., 868 F.2d 908 (7th Cir. 1989). As
is always the case, the language used is important. When parties name a person as “an” intended third party
beneficiary, there may be one or more additional beneficiaries who are not named at the time the contract is
formed. Naming a party as the “only” intended beneficiary, however, indicates an intention that no other party has
such rights. Trepel v. City of New York, 2000 U.S. Dist. LEXIS 13071 (E.D.N.Y. Sept. 11, 2000).
Practice Resource:
• Corbin § . (identifying the third party).

End of Document

INTERPRETATION
§ 44.05 Agents and Trustees

If Ames transfers money to her agent, Barnes, with a direction to deliver the money to Carr, Barnes is mere
custodian of the money. As Ames’s agent, Barnes has a fiduciary obligation to carry out Ames’s directive. If Ames
should then inform Barnes to deliver the money to Davis, Barnes has an obligation to do so. Carr is not a third-party
beneficiary of the contract between Ames and Barnes.
If Ames delivers goods to Barnes in trust for Carr and Barnes promises to deliver the goods to Carr, Barnes is no
longer a mere agent of Ames. He is a trustee holding title to the property in trust for the beneficiary, Carr. Agents
typically do not hold title to their principal’s property. If an agent holds title, the agent is a trustee.
A deposit of funds in a bank checking account, however, is not a trust, and the payee of a check is not a third-party
beneficiary. When Ames draws a check payable to Barnes on Ames’s ordinary checking account, she is ordering
her bank to pay a certain amount of those deposited funds to Barnes as the payee of the check. The bank will not
be liable to pay that amount until the check is presented for payment. Prior to that time, Ames, the drawer, could tell
the bank not to accept the check and the drawee bank would be obligated to follow that directive.
Practice Resource:
• Corbin § .10 (agent—trustee—payee).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 45 BENEFICIARIES OF SPECIFIC TYPES OF

CONTRACTS
CHAPTER 45 BENEFICIARIES OF SPECIFIC TYPES OF CONTRACTS

the subject matter.

End of Document

CONTRACTS
§ 45.01 Mortgagee Beneficiaries

A real estate mortgage is a security interest in the property granted by the owner (the mortgagor) to secure a loan
made by the lender (the mortgagee). If the loan debt is not paid, the mortgagee may foreclose on the property,
which will allow it to be sold. The proceeds of the sale will be used to pay the mortgagee the debt remaining on the
loan. If the foreclosure sale results in a price that covers the entire amount owed including the costs of foreclosure,
the debt has been satisfied. If the proceeds of the sale are insufficient to pay the entire debt, the owner will be liable
for any deficiency.
A buyer of mortgaged real estate does not take the property free of a recorded mortgage unless the mortgage is
satisfied. If the contract of sale is silent concerning the mortgage, the buyer takes “subject to.” The buyer is not
personally liable for the mortgage debt, but if the mortgage is not paid, the mortgagee will foreclose and the
proceeds will be used to pay the outstanding mortgage debt. If the proceeds are not sufficient to pay the debt, the
original owner who mortgaged the property will be liable for such a deficiency judgment.
Where a buyer of mortgage property “assumes” the mortgage, however, the buyer becomes liable on that debt.
Assume that Ames borrows $100,000 from the bank to purchase property. Ames conveys it to Barnes, who agrees
to assume the mortgage, which has a balance of $80,000 remaining to be paid. The mortgagee bank is a third-party
beneficiary of the contract between Ames and Barnes. Presumably, the purchase price of the property that Barnes
agreed to pay would be the value of the unencumbered portion, which would constitute Ames’s “equity of
redemption.” Property worth $200,000 with a mortgage debt of $80,000 would leave Ames with an equity of
redemption in the amount of $120,000.
Practice Resource:
• Corbin § .1 (mortgage beneficiaries).

End of Document

CONTRACTS
§ 45.02 Suretyship and Subrogation

If Barnes fails to perform his assumed duty of paying the mortgage, the Bank may invoke its rights as a third-party
beneficiary to sue Barnes, the promisor. When a buyer such as Barnes assumes a mortgage, however, the
mortgagee (bank) does not surrender its rights against the original mortgagor simply because of the sale. Unless
the bank has agreed to a novation by releasing Ames’s obligation on the mortgage debt and accepting Barnes as
the exclusive debtor, Ames remains liable on the mortgage debt.
Though Ames remains liable, she becomes a surety on the mortgage debt of which Barnes has become the
principal debtor by assuming the debt. If Barnes does not pay, Ames is still liable, and if she does not pay, the bank
may foreclose; if the proceeds are sufficient to pay whatever is owed the bank, neither Barnes nor Ames is liable
even though Barnes lost the property. If there is a deficiency and Barnes fails to pay, Ames is liable for that amount.
When Ames, as a surety, pays the debt to the bank (mortgagee) that the principal debtor Barnes should have paid,
Ames is subrogated to the bank’s right against Barnes. Barnes is unjustly enriched since Ames paid the debt and
Ames is entitled to restitution from Barnes the amount Barnes should have paid.
Suppose that Ames conveys the property to Barnes, who assumes the mortgage. Barnes conveys to Carr, who
takes “subject to” the mortgage but does not assume it. Carr conveys the mortgaged property to Davis who
assumes the mortgage. It is clear that the bank, as a third-party beneficiary, has an action for any deficiency against
Ames and Barnes, but not against Carr, who did not assume the mortgage. The question remains, does the bank
have a cause of action against Davis who did assume the mortgage, but only after there was a break in the
assumption of the mortgage when Carr did not assume that debt?
There are cases holding that there would be no obligation by an assuming grantee such as Davis after a break in
the chain of assumption. These courts base the rights of a third party such as the bank on a subrogation theory.
There can be no subrogation, however, if the grantor (Carr) did not assume the mortgage because Carr was not
indebted to the bank. The better view, then, is that the right of a mortgagee (bank) to bring the action is not properly
based on a subrogation theory, but on the principle that permits a third party to bring an action on a contract made
for its benefit. See, e.g., Schneider v. Ferrigno, 110 Conn. 86, 147 A. 303 (1929).
The Restatement (Second) of Contracts recognizes the mortgagee’s third-party beneficiary right, but it also
recognizes that a grantee assuming a mortgage debt that the grantor has not assumed may have done so by
mistake. Thus, if a grantee such as Davis can prove by clear and convincing evidence that his commitment to
assume the debt was inserted in a deed by a mistake amounting to a scrivener’s error, the deed should be
reformed to state the true intentions of the parties. Restatement (Second) of Contracts § 12 illus. 4.
Practice Resource:
• Corbin § .2 (suretyship, subrogation, and break in the chain of assumption).

End of Document

CONTRACTS
§ 45.03 Construction Contracts
[1] A Subcontractor Typically Is Only an Incidental Beneficiary of a Contract Between the General
Contractor and Owner
Owners make contracts with principal contractors, who in turn make contracts with subcontractors. Does the
subcontractor qualify as a third-party beneficiary of the contract between the owner and principal contractor?
Does the owner qualify as a third-party beneficiary of the contract between the principal contractor and
subcontractor?
Absent a manifestation of contrary intent, a subcontractor is only an incidental beneficiary of the contract
between the owner and principal contractor. BIS Computer Solutions, Inc. v. City of Richmond, 2005 U.S. App.
LEXIS 651 (5th Cir. Jan. 13, 2005). An owner’s claim to third-party beneficiary status under the contract
between the principal contractor and subcontractor will typically meet the same fate. Hawkesorth v. B&M
Constr. Co., 2010 Me. Super. LEXIS 31 (Mar. 31, 2010). Courts recognize that the purpose of such a contract
is to enable the principal contractor to perform its promise. Performance by the subcontractor does not, in itself,
discharge the principal contractor’s duty to the owner. In the traditional terms of the First Restatement of
Contracts, the owner is neither a donee nor a creditor beneficiary. Though it benefits from the subcontractor’s
performance, it is an incidental beneficiary. Nelson v. Anderson Lumber Co., 140 Idaho 702, 99 P.3d 1092
(2004).
[2] Performance Bonds and Payment Bonds

To assure complete performance, owners require contractors to obtain surety bonds. Though the cost of the
bond will find its way into the contract price, it provides the owner with a financially sound promisor. The general
contractor is the obligor and the company issuing the bond is a surety, assuring the owner that the construction
contract will be performed if the general contractor defaults. The owner is a third-party beneficiary of the
contract between the general contractor and bonding company (surety).
If the general contractor fails to pay suppliers for the labor and material used on the project, are the suppliers
third-party beneficiaries under the performance bond? There are cases that view such suppliers as protected
beneficiaries, but the general view is that they are not intended beneficiaries. Cretex Cos. v. Construction
Leaders, Inc., 342 N.W.2d 135 (Minn. 1984). Such suppliers may be third-party beneficiaries of payment bonds,
which are contracts between the owner and a bonding company that promise to indemnify the owner against
losses it might incur when a general contractor fails to pay the suppliers.
In private construction contracts, where the labor and material suppliers are not paid, the owner can be saddled
with mechanics’ liens on the property. If a payment bond is construed to protect the owner only against losses
from mechanics’ liens, the suppliers are mere incidental beneficiaries. If, however, the bond requires the surety
to pay all persons who have contracts with the principal contractor for labor and materials, the suppliers are
intended third-party beneficiaries who can sue under that contract. Fidelity & Deposit Co. v. Rainer, 125 So. 55
(Ala. 1929). See also Board of Education v. Hartford Acci. & Indem. Co., 152 Ill. App. 3d 745, 504 N.E.2d 1000,
105 Ill. Dec. 715 (1987).
Government contracts for work to build or repair government buildings are exempt from mechanics’ liens
because statutes such as the Miller Act (40 U.S.C. §§ 2 0 –270e) are designed to protect suppliers and
laborers through mandatory payment bonds. These payment bonds are expressly intended to benefit the
suppliers, who are intended third party beneficiaries.
Page 2 of 2
[3] Multiple Prime Contractors as Beneficiaries

Instead of contracting with one prime contractor who will contract with subcontractors, an owner may decide to
enter into separate contracts with more than one prime contractor. In one instance, a state building commission
contracted with Hanberry for general construction and with Mechanical Contractors, Inc. for the mechanical
installations in the building. Hanberry claimed that Mechanical’s delays caused Hanberry to sustain losses.
Mechanical’s performance was assured by a “performance-payment” bond issued by Aetna under which
Hanberry claimed third-party beneficiary status. The court held that Aetna issued the bond knowing of
Mechanical’s obligations to cooperate with Hanberry. The bond was Aetna’s guaranty that Hanberry would fully
and faithfully carry out its duties under its contract with the commission. Thus, Hanberry had alleged breaches
of duty expressly assumed by Mechanical. The trial court had erred in sustaining Aetna’s demurrer to
Hanberry’s complaint. Hanberry Corp. v. State Bldg. Com., 390 So. 2d 277 (Miss. 1980).
In another case involving two prime contractors, the court held that a prime contractor may be a third party
beneficiary of a contract between another prime contractor and the owner under certain conditions. They
include instances where the contracts contain substantially the same language requiring prompt performance
and completion by each prime contractor, contain non-interference provisions, and obligate each prime
contractor to pay for damages caused to the work, materials, or equipment of other prime contractors on the
project. Moore Constr. Co. v. Clarksville Dep’t of Electricity, 707 S.W.2d 1 (Tenn. Ct. App. 1985).
Practice Resources:
• Corbin § . (construction contracts—owners, general contractors, and
subcontractors); § . (construction contracts—performance bonds); § .
(multiple prime contractors as beneficiaries).

End of Document

CONTRACTS
§ 45.04 Government Contracts

The great Judge Cardozo stated, “In a broad sense it is true that every city contract, not improvident or wasteful, is
for the benefit of the public. More than this, however, must be shown to give a right of action to a member of the
public . H. R. Moch Co. v. Rensselaer Water Co., 247 N.Y. 160, 164, 159 N.E. 896, 897 (1928).
The distinction between an intention to benefit a third party or parties and an intention to provide a right to sue by
such a party is emphasized in government contracts. Restatement (Second) of Contracts § 1 cmt. a, recognizes
that government contracts “often benefit the public, but individual members of the public are treated as incidental
beneficiaries unless a contrary intention is manifested.”
The classic case is H. R. Moch Co. v. Rensselaer Water Co., cited above. There, a water company failed to
maintain adequate fire hydrant pressure. This resulted in the loss of a company’s warehouse. The court concluded
that members of the public were not entitled to third-party beneficiary protection since, “[a]n intention to assume an
obligation of indefinite extension to every member of the public is seen to be the more improbable when we recall
the crushing burden that the obligation would impose.” H. R. Moch Co., 247 N.Y. at 165, 159 N.E. at 897.
The court was careful to note that government contracts could be enforced by third-party beneficiaries if the
contract displayed a sufficiently clear intention to protect them, as where a water company attempted to charge
higher rates than allowed under its contract with the city. The court held that residents had enforceable rights under
that contract made specifically for their benefit. Pond v. New Rochelle Water Co., 183 N.Y. 330, 76 N.E. 211 (1906).
There can be recognition of such rights, however, when a court can fasten on an explicit promise to benefit third
parties. See, e.g., La Mourea v. Rhude, 209 Minn. 53, 295 N.W. 304 (1940). Under a contract with the city, the
defendant was “liable for any damages done to the work or other structure or public or private property and injuries
sustained by persons.”
Though a government contract almost always manifests an intent to benefit members of the public, it would be
unusual to discover precise language in such a contract manifesting an intention to confer an enforceable right in
every member of the public the contract was designed to benefit. Absent clear language manifesting such an
intention, a member of the public will not be viewed as a protected beneficiary. “When the contract at issue is a
government contract, a plaintiff must overcome an especially strong presumption that nonparties who benefit from
the contract are ‘incidental’ rather than intended beneficiaries.” Moore v. Mortgage Elec. Registration Sys., 848 F.
Supp. 2d 107, 128 (D.N.H. 2012).
When a government contract is at issue, plaintiffs must overcome a presumption that nonparties who benefit
from the contract are incidental, rather than intended, e e ici ies. . Intended third party beneficiary status
isn’t established by “a contract’s recitation of interested constituencies, vague hortatory pronouncements,
statements of purpose, explicit reference[s] to a third party, or even a showing that the contract operates to the
third parties’ benefit and was entered into with them in mi . . Instead, the language of the contract must
show “a clear intent to rebut the presumption that the third parties are merely incidental beneficiaries.”
Jafari v. FDIC, 2015 U.S. Dist. LEXIS 73988, *14–15 (S.D. Cal. June 8, 2015).
In Cooper v. Charter Communs. Entm’ts I, LLC, 2014 U.S. App. LEXIS 14003 (1st Cir. July 23, 2014), the court
found language in a charter license agreement between a municipality and a cable television company that
indicated an intention to benefit individual subscribers that would have permitted individual actions (Restatement
Page 2 of 3
(Second) of Contracts § 1 2 illus. 3). The same contract, however, stated that the enforcement of the promise
would occur only through the municipality seeking damages, specific performance or revocation of the license
granted to the cable company after notification to the company and a 30-day period to allow a cure. The court held
that it could not permit individual actions by third parties to circumvent the elaborate remedial procedures specified
in the contract.
In Astra USA, Inc. v. Santa Clara County, 563 U.S. 110, 131 S. Ct. 1342, 179 L. Ed. 2d 457, 2011 U.S. LEXIS
2592, 79 U.S.L.W. 4212, 22 Fla. L. Weekly Fed. S 901 (U.S. 2011), the court considered form contracts
(Pharmaceutical Pricing Agreements—PPA’s) signed by drug manufacturers with the Department of Health and
Human Services under which the manufacturers agreed to be bound by ceiling prices under the Public Health
Services Act (42 U. S. C. A. § 2 for medications distributed by public hospitals and community health centers
(“340B entities) which provide services to the poor. Santa Clara County operated several 340B entities and
commenced this action against nine pharmaceutical companies alleging overcharges in violation of the ceiling
prices. Since the statute did not authorize private actions, the district court dismissed the complaint. While
recognizing that the 340B entities had no right to sue under the statute, the Ninth Circuit reversed in finding an
intention to benefit the entities. In an opinion by Justice Ginsburg, the court cited the Corbin treatise in responding
to the County argument that where the government uses a contract to secure a benefit, the intended recipient
acquires a right enforceable under federal common law. Reversing the Ninth Circuit, the opinion states,
But see 9 J. Murray, Corbin on Contracts § . … “The distinction between an intention to benefit a third party
and an intention that the third party should have a right to enforce that intention is emphasize where the
promisee is a governmental entity.” Astra USA, Inc., 131 S. Ct. at 1348.
The court explained that the County argument overlooked the fact that the PPA’s simply incorporated statutory
obligations with no negotiated terms. Rather, they were simply vehicles to allow the manufacturers to opt into the
statutory scheme which operated as a condition to the manufacturer’s eligibility to participate in state Medicaid
programs. A third-party action, therefore, would simply constitute an action to enforce the statute by a private party
which the statute does not allow.
Similar recent cases dealt with contracts under the Home Affordable Modification Program (HAMP). The defendant
contracted with Fannie Mae to consider modifications of mortgage loans for eligible parties pursuant to the HAMP
program that allows for such modifications and the prevention of foreclosures. The defendant serviced the loan of
the plaintiffs who met eligibility requirements under the program and sought a modification of their mortgage from
the defendant which refused to grant it. The plaintiffs claimed third-party beneficiary status under the defendant’s
contract with Fannie Mae. The court emphasized the necessity of finding clear language in such a contract to confer
an enforceable right upon such parties under a government contract. The contract language, however, did not
require the defendant to modify loans of eligible parties, but only to consider applications for such modifications.
The court held that the plaintiffs were, like the typical members of the public, only incidental beneficiaries of this
government contract. Simmons v. Countrywide Home Loans, Inc., 2010 U.S. Dist. LEXIS 65031 (S.D. Cal. June 28,
2010). Though the HAMP program can be distinguished from the PPA’s signed pursuant to the Public Health
Service Act, HAMP plaintiffs have not been able to overcome the presumption that third-party beneficiaries to
government contracts are incidental rather than intended beneficiaries. See Cabacoff v. Wells Fargo Bank, N.A.,
2012 DNH 188, 2012 U.S. Dist. LEXIS 158363, at *12–*14 (D.N.H. Nov. 5, 2012) and cases cited therein. In
another case, plaintiff’s loan servicer signed a contract with the Arizona Department of Housing, which was
responsible for running the Arizona Hardest Hit Fund (“HHF”) program. Under that program, “[u]pon notification that
a borrower has been conditionally approved for HHF, the Servicer shall not initiate the foreclosure process or, if the
borrower is already in the foreclosure process, [shall delay] a foreclosure sale for 45 days, with any extensions by
mutual consent of the Eligible Entity and the Servicer.” Unlike other HAMP cases in which the lender was under no
obligation to modify the borrower’s loan, in this case, there was an express clause requiring the defendant to delay
the foreclosure sale at least 45 days, without affording it discretion. Thus, plaintiff was an intended beneficiary of the
program. Martinez v. Cenlar FSB, 2014 U.S. Dist. LEXIS 122633 (D. Ariz. Sept. 3, 2014).
In Armstrong v. Exceptional Child Ctr., Inc., 135 S. Ct. 1378, 191 L. Ed. 2d 471, 2015 U.S. LEXIS 2329, 83
U.S.L.W. 4231, 25 Fla. L. Weekly Fed. S 184 (U.S. 2015), Respondents, providers of habilitation services to
Page 3 of 3
persons covered by Idaho’s Medicaid plan, sued Petitioners, officials in Idaho’s Department of Health and Welfare,
claiming that Idaho violates § 0 of the Medicaid Act by reimbursing providers of habilitation services at rates
lower than § 0 permits. The Supreme Court held that the Supremacy Clause, Art. VI, cl. 2, does not create a
cause of action or an implied private right of action. In a portion of Justice Scalia’s opinion that was joined by three
justices, he explained: “Spending Clause legislation like Medicaid ‘is much in the nature of a co t ct. He
proceeded to consider whether the Respondents should be likened to third party beneficiaries with rights to enforce
the Act. “The notion that respondents have a right to sue derives, perhaps, from the fact that they are beneficiaries
of the federal-state Medicaid agreement, and that intended beneficiaries, in modern times at least, can sue to
enforce the obligations of private contracting parties.” But it is doubtful that providers would be considered intended
as opposed to mere incidental beneficiaries of the Medicaid agreement. That agreement, Justice Scalia wrote, “was
concluded for the benefit of the infirm whom the providers were to serve, rather than for the benefit of the providers
themselves.” Even if providers such as Respondents could be considered intended beneficiaries, Justice Scalia
cited the Corbin treatise for the proposition that “the modern jurisprudence permitting intended beneficiaries to sue
does not generally apply to contracts between a private party and the government …—much less to contracts
between two governments.” He added: “Our precedents establish that a private right of action under federal law is
not created by mere implication, but must be ‘unambiguously co e e . Nothing in the Medicaid Act suggests
that Congress meant to change that for the commitments made under § 0 .
Practice Resource:
• Corbin § . (government contracts).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 46 REMEDIES, POWERS, AND DEFENSES OF
BENEFICIARY, PROMISEE, PROMISOR
CHAPTER 46 REMEDIES, POWERS, AND DEFENSES OF BENEFICIARY,

PROMISEE, PROMISOR
the subject matter.

End of Document
§ 46.01 Rights and Remedies of a Beneficiary

A third-party beneficiary enjoys the same rights and remedies it would have enjoyed if it had been a promisee
instead of a beneficiary. For example, the right of a beneficiary will be subject to unenforceability because of a
failure of consideration or the absence of a writing to satisfy the statute of frauds. A beneficiary’s right will be subject
to an express or constructive condition in the contract. A choice of law clause will apply to a third-party beneficiary
just as it would apply to a promisee. Dartmouth Hitchcock Med. Ctr. v. Cross Country Travcorps, 2010 DNH 102,
2010 U.S. Dist. LEXIS 57351 (D.N.H. June 10, 2010). Where a merger agreement limited the right to a jury trial to
matters that did not arise from the merger agreement, as third-party beneficiaries of the merger agreement, the
plaintiffs’ rights were so limited. Art Capital Partners, Lp v. Tyco Acquisition Corp. Xviii, 71 A.D.3d 1404, 898
N.Y.S.2d 745 (2010). A beneficiary’s right under a life insurance policy is subject to the condition that the premiums
have been paid. Similarly, the beneficiary is entitled to the same legal and equitable remedies enjoyed by a
promisee, and the beneficiary has the same powers as a promisee. The beneficiary may agree to discharge the
promisor’s duty by release, novation, substitute contract, or accord and satisfaction.
An intended beneficiary of a settlement agreement, who did not release his or her claims against a party who
settled, would not be barred from filing their own suit. A beneficiary who has not previously assented to a promise
for his or her benefit may in a reasonable time after learning of its existence and terms may reject a promised
benefit within a reasonable time, and when that occurs, it is as if no promise was made. Ellis v. Holy Comforter St.
Cyprian Cmty. Action Grp., 2016 U.S. Dist. LEXIS 9329 (D.D.C. 2016).
Practice Resource:
• Corbin § .1 (rights, remedies, and powers of a beneficiary).

End of Document
§ 46.02 Rights of the Promisee

A third-party beneficiary contract requires a manifestation of intention, particularly by the promisee, to confer an
enforceable right against the promisor. Since the contract is made for a third party’s benefit, some early English
cases suggested that it could not be enforced by the promisee. Although a few American cases made the same
mistake, the current view clearly allows an action by the promisee. See, e.g., Sanford Inv. Co. v. Ahlstrom Mach.
Holdings, Inc., 198 F.3d 415, 422 (3d Cir. 1999), citing Restatements (Second) of Contracts § 0 which
recognizes a duty in the promisor to the promisee even though it also has a duty to the intended beneficiary.
When the promise to pay a promisee’s debt to a creditor beneficiary is not performed, the promisee’s debt remains
unpaid. Beyond the amount of the unpaid debt, the promisee may have other damages, such as additional interest
payments, or other foreseeable damages. When the third party is a gift (donee) beneficiary, the promisee has no
economic interest to protect and would recover nominal damages at law. When a gift beneficiary is reluctant to
protect its own interest, however, a suit in equity to enforce the contract for its benefit will clearly lie. See Drewen v.
Bank of Manhattan Co., 31 N.J. 110, 155 A.2d 529 (1959). In Drewen, in contemplation of a divorce, the parents’
contract required the father to maintain the two children’s share of the estate, 30 percent each, with a survivor
taking the other’s 30 percent. After the mother died, the father created a new will substantially reducing these
shares and including an in terrorem clause to void bequests by any party contesting the new will. Representing the
mother (promisee of the original contract benefiting the children), the plaintiff sought specific enforcement of the
contract, which was granted. In Wilson v. Hayes, 77 A.3d 392, 407 (D.C. 2013), the court cited § 0 of the
Restatement (Second) of Contracts in support of its statement that “Black letter law precludes a promisee from
obtaining a judgment on behalf of a third party beneficiary for anything other than specific performance.”
Since both the intended beneficiary and the promisee may sue, the promisor must be protected against double
liability. Some courts would not allow a promisee to bring an action unless it was bringing it as a surety that had
already paid the debt that the promisor should have paid to a creditor beneficiary. Yet, when sued by either party, a
promisor could interplead the other party or simply pay the amount into court and allow the court to decide its
allocation. Another possibility is for the court to insist that the judgment be awarded to the beneficiary, at least in
terms of the debt owed.
Practice Resource:
• Corbin § .2 (rights of the promisee).

End of Document
§ 46.03 Vesting of a Third-Party Beneficiary’s Interest
[1] Vesting Under the First Restatement

Parties may modify or rescind a contract they previously made, but if they intend to provide a third party with an
enforceable right under that contract, numerous questions concerning modifications and rescissions are raised.
Must the original parties gain the consent of the third-party beneficiary? Suppose the beneficiary is not yet
aware of the contract, or suppose the beneficiary is aware of the contract but has not yet relied on it? Should
the type of beneficiary (donee or creditor) make any difference? What is the effect of a clause stating that the
original parties reserve the right to modify or rescind the contract without the consent of the beneficiary?
In the pursuit of answering these questions, the First Restatement of Contracts distinguished donee and
creditor beneficiaries. Pursuant to a number of older insurance cases, it applied the “insurance rule” of
immediate vesting to donee beneficiaries, unless the power to vary or rescind the contract was expressly
reserved in the contract. Absent such a reservation, the promisor and promisee were not free to modify or
rescind the contract without the consent of the donee beneficiary, even if the beneficiary was unaware of the
contract made for its benefit. First Restatement of Contracts § 1 2. The rights of a creditor beneficiary did not
vest, however, until the beneficiary either brought an action to enforce the right or relied upon the promise
before the beneficiary became aware of any modification or rescission.
[2] Vesting Under the Restatement (Second)

One of the principal reasons the First Restatement distinguished donee and creditor beneficiaries was to treat
them differently with respect to the power of the promisee and promisor to vary or rescind the duty to the third
party. The Restatement (Second) of Contracts, however, candidly recognized that such a distinction was
opposed to the weight of authority. Restatement (Second) of Contracts § 11 Reporter’s Note. Unless the
original parties have contracted not to do so, the Restatement (Second) recognizes their right to discharge or
modify the contract until the third party has manifested assent to the contract, or justifiably relied, or brought suit
to enforce a right regardless of whether the beneficiary would fit the “donee” or “creditor” classification.
Restatement (Second) of Contracts § 11 . This is now the prevailing view. See Olson v. Etheridge, 177 Ill. 2d
396, 686 N.E.2d 563, 226 Ill. Dec. 780 (1997). If the parties are precluded by the third party’s reliance, it has
been suggested that the third party’s interest should be limited to protecting the reliance interest. Melvin A.
Eisenberg, Third Party Beneficiaries, 92 Colum. L. Rev. 1358, 1419 (1992). The Supreme Court of Indiana
adopted Professor Eisenberg’s position in City of E. Chi. v. E. Chi. Second Century, Inc., 908 N.E.2d 611, 625
(Ind. 2009). Pennsylvania became a conspicuous exception to the adoption of § 11 “vesting” concepts when
a majority of its Supreme Court rejected the Restatement (Second) “vesting” analysis on the footing that the
First Restatement view of immediate vesting of donee beneficiary rights was preferable and should be retained.
Biggins v. Shore, 523 Pa. 148, 565 A.2d 737 (1989).
Though it has become the prevailing view, the Restatement (Second) position is not without criticism. The
notion that “assent” will terminate the original parties’ power to vary or discharge the contract is based in part on
an analogy to offer and acceptance suggested in earlier case law. To complete the analogy, either the promisor
or promisee must invite such “assent.” If the third party otherwise learns of the contract and assents to it, it has
been held that the assent is ineffective since it was not invited by one of the original parties. James v. Zurich-
American Ins. Co., 203 F.3d 250, 257 (3d Cir. 2000).
The original parties’ power to discharge or modify the contract without the beneficiary’s consent is also
terminated when the beneficiary brings suit to enforce its right. If bringing suit is another manifestation of
Page 2 of 2
“assent,” however, it is obviously not “invited” by either original party. There are also issues concerning whether
a beneficiary has “brought suit.” See, e.g., Auer v. Kawasaki Motors Corp., 830 F.2d 535 (4th Cir. 1987), cert.
den., 485 U.S. 905 (1988). A beneficiary may also terminate such power by relying on the promise, even
though knowledge of the promises is not provided by the original promisor or promisee. Reliance to avoid
termination of the power to discharge or modify must be actual reliance as contrasted with the hypothetical
reliance that may be sufficient in a given case to justify original recognition of a third-party beneficiary.
Some have argued that only actual reliance should justify precluding the original parties from rescinding or
modifying the contract. An alternative analysis seems preferable. The protection of a third party’s right is based
upon a contract when the original parties’ expectation interest was to confer such an enforceable right on the
beneficiary. The purpose of such a contract, however, is to protect the expectation of the beneficiary. Thus, a
more promising alternative would protect that expectation by precluding rescission or modification as soon as
the beneficiary is aware of the contract.
Practice Resources:
• Corbin § . (variation or discharge of the beneficiary’s right—“vesting”); § .
(“vesting”—the Second Restatement).

End of Document
§ 46.04 Promisor’s Defenses Against the Beneficiary
[1] An Intention to Provide a Third-Party with a Right Under a Contract Requires All of the Necessary
Elements of an Enforceable Contract
An intention to provide a third party with a right under a contract requires all of the necessary elements of an
enforceable contract. If the agreement is void or if the contract is voidable or otherwise unenforceable at the
time of formation, the right of the beneficiary is subject to such infirmities. The absence of mutual assent,
consideration, or capacity will be a defense against a third party just as it would against a promisee. Defenses
of fraud, the nonoccurrence of express or constructive conditions, mistake, or the promisee’s failure to provide
consideration may be asserted against the third party. Where a passenger injured in an auto accident sought
coverage under the uninsured motorist provision of the owner’s insurance policy, quoting cmt.b of § 0 of the
Restatement (Second) of Contracts, the court held that the passenger’s claim was subject to the two year
statute of limitations provision in the policy. Osmic v. Nationwide Agribusiness Ins. Co., 841 N.W.2d 853 (Iowa
2014).
Nonetheless, the rights of a third party are direct rather than derivative. Once a beneficiary’s rights have vested,
the promisee may discharge any duty of the promisor to the promisee, but not to the third party unless that
power has been expressly reserved in the contract. Moreover, absent a contrary contract term, the right of the
beneficiary is not subject to defenses of the promisee. Bank A transferred assets to Bank B, which promised to
pay A’s depositors. C was a depositor and intended beneficiary. The defense that C’s right against A was
barred by a statute of limitations was not available to B, the promisor. A beneficiary’s right against a promisor,
however, may also be subject to the beneficiary’s own conduct or agreement. Restatement (Second) of
Contracts § 0 . See Strategic Capital Corp. v. New Strong Group Ltd., 2009 U.S. Dist. LEXIS 60035 (S.D.
Tex. July 13, 2009); Liberty Mut. Ins. Co. v. Travelers Indem. Co., 78 F.3d 639 (D.C. Cir. 1996).
Certain defenses that would otherwise be available against the beneficiary can be precluded by the terms of the
contract. Thus, a “loss payable” clause in an insurance policy may state that the insurance shall not be
invalidated by any act of neglect by the mortgagor or owner of the mortgage. Claims and defenses of the
promisor arising out of separate transactions with the promisee are not available against the promisor.
The most conspicuous exception to the rule that the promisor may assert defenses against the beneficiary that
could have been asserted against the promisee is predicated on national labor law policy. Under collective
bargaining agreements, coal companies agreed to contribute to a workers welfare and retirement fund. One of
the coal companies refused to contribute when the promisee of its collective bargaining agreement allegedly
breached the agreement. The United States Supreme Court held that collective bargaining agreements are not
typical third party contracts allowing the breach of one to relieve the company of its contribution. Lewis v.
Benedict Coal Corp., 361 U.S. 459, 80 S. Ct. 489, 4 L. Ed. 2d 442 (1960). Subsequent cases confirmed this
holding.
[2] Promisor’s Absolute Duty

Nothing prevents a promisor from assuming a larger duty than the duty owed by the promisee to the
beneficiary. If there is an absolute promise to pay a certain sum to the third party regardless of defenses the
promisee may have, the promisor is bound to the promise in the teeth of such defenses.
Winston gave Associated Contractors a note of $1,008.37 for a new heating plant in her house that was
guaranteed by the Federal Housing Administration. Winston sold the house to Rouse who agreed to assume
payment of $850 for the heating plant, payable at $28 per month. When Winston defaulted, the United States
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paid the note and took an assignment. It then claimed the same third-party beneficiary rights as the assignor
and demanded payment from Rouse. Rouse refused to pay on the basis of two defenses: (1) Winston had
fraudulently misrepresented the condition of the heating plant, and (2) Associated Contractors failed to install it
correctly.
The appellate court held that Rouse could assert the first defense against the beneficiary because he would
have had that defense against Winston. Whether he could raise the second defense, however, depended upon
the proper interpretation of his promise. If he promised to discharge whatever liability Winston had undertaken,
he could assert the defense; but if his promise was interpreted simply as a promise to pay money to a third
party to whom the promisee (Winston) said she was indebted, it would be immaterial whether Winston was
indebted to Associated Contractors at all. Rouse v. United States, 215 F.2d 872 (D.C. Cir. 1954).
[3] Arbitration Clauses

When the terms of the contract clearly subject the third party to arbitration or clearly exclude the third party from
arbitration, the contract terms are respected. As is so often the case, however, the terms are not always clear
and the question will be which “parties” are subject to arbitration.
When the language is not explicit, but a reasonable interpretation of the language and surrounding
circumstances allows the inclusion of the beneficiary within the arbitration process, the beneficiary will be
subject to arbitration. Restatement (Second) of Contracts § 0 cmt. b. Thus, when an auto insurance policy
defined “insured” as anyone making a claim and further stated that the “insured” was subject to arbitration, the
court found that a victim of an accident who claimed third party beneficiary status was subject to arbitration
even though she had not signed the policy containing the clause. Johnson v. Pennsylvania Nat’l Ins. Cos., 527
Pa. 504, 594 A.2d 296 (1991). Accord: Ex parte Dyess, 709 So. 2d 447 (Ala. 1997); Benton v. Vanderbilt Univ.,
137 S.W.3d 614 (Tenn. 2004).
Practice Resources:
• Corbin § . (promisor’s defenses against the beneficiary); § . (promisor’s
defenses—interpretation—absolute duty); § . (promisor’s defenses—
arbitration).

End of Document
§ 46.05 Cumulative Remedies of a Creditor Beneficiary

A gift (donee) beneficiary is limited to a cause of action against a promisor since no duty is owned to the beneficiary
by the promisee. When the promise is to pay the debt of the promisee to a third party, however, the beneficiary
does not release the promisee by seeking to recover the amount of the debt against the promisor. A promisee does
not extinguish such an obligation by a contract with another party who promises to pay the debt. Indeed, there is no
requirement that a creditor pursue its beneficiary status. It may choose to recover directly from the original debtor-
promisee. If the creditor makes that choice and recovers from the promisee, the promisee has the status of a surety
who has paid a debt that should have been paid by the promisor as principal debtor. The surety, therefore, may
recover that payment from the promisor.
Whether the creditor sought to recover from either the promisor or promisee, an issue arises as to whether the
creditor had made an irrevocable election. Did a failure to recover from the elected defendant preclude a
subsequent action against the remaining party? In one case, the court rejected an argument that a creditor was
entitled to a remedy against either the promisee or the promisor, but not both, and once made, the election would
have the effect of releasing the non-elected party. The court held that the rights of a third-party creditor beneficiary
are cumulative, although it is entitled to only one satisfaction of the debt. Erickson v. Grande Ronde Lumber Co.,
162 Or. 579, 94 P.2d 139 (1939). Restatement (Second) of Contracts § 10 adopts this analysis.
A novel theory was suggested in Hesse v. Long & Foster Real Estate, Inc., 2012 U.S. Dist. LEXIS 57524 (E.D. Va.
Apr. 23, 2012), where an associate in the defendant’s real estate agency was contractually bound to maintain
liability insurance levels of $500,000 for each occurrence, he maintained only $100,000 of such coverage. When an
accident occurred, the injured plaintiffs claimed third-party beneficiary status to recover $400,000 from the
defendant that would have been available to pay for their injuries had the defendant enforced its contract with the
salesman.
Putting aside the considerable doubt as to whether there was any intention on the part of the defendant and the
salesman to confer a right on such third parties, the court noted that third parties have a right to recover only
against promisors absent some independent basis for recovering against a promisee. Unlike the creditor beneficiary
situation where a promisee still owes a debt to the third party, the defendant owed no previous obligation to the
plaintiffs. Nor was there any evidence of any intention to make a gift to the plaintiffs.
Practice Resource:
• Corbin § . (cumulative remedies of the creditor beneficiary).

End of Document
§ 46.06 Statutes of Limitations

In the earlier discussion of the promisor’s defenses against the beneficiary, we noted that the statute of limitations
barring the promisee’s duty to the beneficiary would not necessarily bar the promisor’s duty. Nonetheless, the right
of a beneficiary does arise from the contract between the promisor and promise. As such, the beneficiary will be
subject to the statute of limitations, which will begin to run at time that contract is breached. Questions have arisen,
however, about when the statute begins to run against a beneficiary who is unaware of the contract made for the
beneficiary’s benefit. The courts demonstrate a split of authority on this issue.
A property agreement between the parents of two children required the father to give to the children 50 percent of
the net proceeds of a real estate sale. The father instead invested the proceeds in a business. The children brought
an action at the time they became aware of the contract, 21 years later, when their father died. The defendant
claimed that the plaintiffs were subject to the six-year statute of limitations. Instead of the typical application of the
contract rule that measures the statute from the time the cause of action accrued, regardless of the injured party’s
knowledge of the breach, the court applied a tort-like discovery rule delaying accrual until the injured party
discovers or could have discovered the injury. Sodora v. Sodora, 338 N.J. Super. 308, 768 A.2d 840 (2000). A
Nevada court suggests a similar analysis. Bemis v. Estate of Bemis, 114 Nev. 1021, 967 P.2d 437 (1998).
California courts, however, appear to adhere to the traditional analysis. In Skylawn v. Superior Court, 88 Cal. App.
3d 316, 151 Cal. Rptr. 793 (1979), a judgment creditor failed to file suit within the statute of limitations because he
was unaware of the contract made for his benefit. Nonetheless, the court held that the statute was applicable
regardless of his lack of awareness.
Practice Resource:
• Corbin § . (the statute of limitations).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 47 ASSIGNMENTS—PRELIMINARY ANALYSIS—

HISTORY— TERMINOLOGY
CHAPTER 47 ASSIGNMENTS—PRELIMINARY ANALYSIS—HISTORY—

TERMINOLOGY
the subject matter.

End of Document

§ 4 .01 Assignment Occurs When One Party to a Preexisting Contract

Presently Transfers Its Right in That Contract to a Third Party
The last six chapters explored contract issues that arise when a promisor and promisee agree to confer an
enforceable right on a third-party beneficiary. To achieve that result, the promisor and promisee had to form a
contract manifesting their mutual intention to confer such a right on the beneficiary. In this and succeeding chapters,
we explore unilateral transfers of contract rights that require no mutual assent because such transfers are not
contracts. They are not promises to perform in the future. Rather, they manifest present transfers of existing
contract rights. McCrea v. Commerce Title Co., 2009 Tex. App. LEXIS 5597 (July 22, 2009). Without notifying or
seeking the consent of the transferee, one party to a preexisting contract may decide to transfer its right in that
contract to a third party. Such a transfer is called an assignment. In Smith v. Boston Mut. Life Ins. Co., 2013-Ohio-
2510, 2013 Ohio App. LEXIS 2481 (1st Dist.), the court cited the Corbin treatise and § 1 of the Restatement
(Second) of Contracts in holding that a nongratuitous assignment may not be revoked unless the power to revoke is
preserved.
Ames agreed to purchase a computer from Barnes at a contract price of $10,000. Without notifying, must less
receiving the consent of, obligor Barnes, Ames may assign the right to the computer to Carr. It makes no difference
why Ames is assigning the right to Carr. The assignment is not a contract; it is present transfer of Ames’s right to
Carr. Ames had been the promisee of Barnes’s promise. By the unilateral act of assigning that right to Carr, Ames
has become an assignor who has surrendered that right. The assignment extinguished the contract right in Ames
and recreated the same contract right in Carr. Because of the assignment over which Barnes had no control,
Barnes has a new obligee: Carr. Carr is the party to whom Barnes owes the duty to deliver the computer. The
assigned right is subject to any limitations to which it had been subject when it was Ames’s right. An assignor can
only assign the right the assignor has. The famous old phrase is that the assignee (Carr) stands in the shoes of the
assignor (Ames).
Barnes is (2013) entitled to be paid the contract price for the computer. In addition to assigning the right to the
computer, Ames can also delegate to Carr the duty to pay the $10,000 purchase price. Unlike her assignment of the
right, however, Ames may not extinguish her duty to Barnes simply by delegating it to Carr. Like an assignment of
the right, a delegation of the duty is a present transfer, but Carr will not be liable to perform that duty unless he
assumes it. Even if he assumes the duty, Ames would not be released in the event that Carr fails to pay the
$10,000. By his agreement with Ames to assume the duty to pay Barnes $10,000, Carr has become the principal
debtor and Ames is the surety. Barnes has become a third party (creditor) beneficiary of the agreement between
Ames and Carr.
Practice Resource:
• Corbin § .1 (preliminary analysis—distinguishing beneficiary contracts).

End of Document

§ 4 .02 An Incorporeal Contract Right Is Often Called a “Chose in Action”

The subject matter of an assignment—that which is being assigned—is an incorporeal contract right. It is often
called a “chose in action.” The term “chose” is French in origin and expresses a thought such as “res” in Latin or
“thing” in English. A tangible “thing” is a chose in possession—my automobile, my hat, my book, or the like. If Ames
lends $10,000 to Barnes, Barnes has a chose in possession as long as he has the $10,000. When he spends the
$10,000, he no longer has any “chose.” Ames, however, has a “chose in action” against Barnes for the repayment
of the $10,000 and any interest the parties may agree upon. If Ames agrees to work for Barnes at a salary of
$1,000 per week, Ames has a chose in action against Barnes for the salary.
One case defines “chose in action” as it defined in a legal dictionary: a “right to receive or recover a debt, demand,
or damages on a cause of action ex contractu or for a tort or omission of a duty.” Picadilly, Inc. v. Raikos, 582
N.E.2d 338, 340 (Ind. 1991) (quoting Black’s Law Dictionary, 219 (5th ed. 1979)). Restatement of Contracts
(Second) § 1 cmt. a, distinguishes a contract right from what it calls the much broader term, “chose in action,”
which would include debts of all kinds, tort claims, rights to recover possession or ownership of real or personal
property, various types of instruments that embody property rights, and rights to intangible property. The
Restatement coverage does not extend to non-contractual rights and, with limited exceptions, neither does Corbin
on Contracts. We will, therefore, discuss the transfer of contractual rights and duties rather than choses in action.
Practice Resource:
• Corbin § .2 (what is a chose in action?).

End of Document

§ 4 .03 Historical Development of the Law of Assignment

With only a few exceptions, the early common law viewed an attempted assignment of a contract right as having no
legal effect whatsoever. The notion that recognizing assignments would enhance litigation by encouraging
champerty and maintenance is undermined by the fact that assignments were deemed ineffective before the
development of the law relating to maintenance. The better explanation is that contract rights were viewed as too
personal to be placed in hands other than the party selected by the obligor. In early English history, enforceable
contracts were limited to contracts under seal, recognizances and specialties, and promissory debts in half-
completed exchanges. There was no felt need for a simple law of assignment. Moreover, with such an emphasis on
formal documents and physical objects, it was difficult to envision how an incorporeal contract right—a “chose in
action”—could be delivered.
In typical common law fashion, fictions evolved to recognize the assignment of rights. The major fiction was the use
of the power of attorney by which the owner of a chose in action authorized another to enforce it in the name of the
owner and to keep the proceeds so obtained. While insisting that a chose in action was not assignable, the
common law courts gave such a power of attorney full effect.
Later, words of assignment were recognized as allowing the use of the assignor’s name, but the “taught law”
continued to state as late as the early twentieth century that a chose in action was not assignable. As early as 1458,
however, where an assigned right was given in exchange for promised compensation that was not paid, the
Chancellor granted relief and committed the defendant to jail. M. P. & J. B. v. J. R., 37 Hen. 6, f. 13, pl. 3 (1458).
The Chancellor would also permit the assignor to sue in his own name. The traditional statement was that a chose
in action was enforceable in equity, but not at common law.
The legal theories were very slowly evolving, but “the forces of human convenience and business practice were too
strong for the common-law doctrine” that choses in action are not assignable. Gurski v. Rosenblum & Filan, LLC,
276 Conn. 257, 267, 885 A.2d 163, 168 (2005) (quoting Murray on Contracts, § 1 (3d Ed.1990), which quoted the
statement from Union Life Ins. Co. v. Priest, 694 F.2d 1252, 1255 (10th Cir. 1982)). In the United States, aided by
legislation such as real party in interest statutes that formally declare contract rights and other choses in action to
be assignable and attendant changes in procedural rules, American courts exercised their powers in favor of
assignees. The modern law of assignment, eschewing the distinction between law and equity or the difference in
“equitable interests” and “legal title,” was greatly facilitated by the First Restatement of Contracts and has been
expanded by the Restatement (Second) of Contracts. See Restatement (Second) of Contracts §§ 1 –343. Citing
the Corbin treatise, the United States Supreme Court reviewed the history of assignments in Sprint Communs. Co.,
L.P. v. APCC Servs., 554 U.S. 269, 128 S. Ct. 2531, 171 L. Ed. 2d 424 (2008).
Practice Resources:
• Corbin § . (historical development of the law of assignment); § . (assignment
distinguished from power of attorney or agency).

Page 2 of 2
End of Document

§ 4 .04 Contract Rights as “Property”

The term “property” denotes subject matter, typically physical property such as land or automobiles. The owner of
the property has rights against the actions of anyone who would interfere with the enjoyment of the property. The
owner has right in rem—in the thing, the tangible property itself—against the world.
Contract rights are not “property” in the usual sense of that term. A contract right is an intangible, abstract, right
against a particular party who has the correlative duty to perform, and thereby satisfy the other party’s contract
right. When Ames agrees to perform services under a contract with Barnes, Ames has a right against Barnes—not
against the whole world. Ames’s right, therefore, is in personam. Similarly, Barnes has an in personam right against
Ames and each of them has a correlative duty to the other to satisfy the other’s right.
Contract rights, though intangible, are “property” in the sense that they can be assigned. They can be and typically
are sold. Though they are “property” rights in that sense, they remain rights against specific individuals rather than
rights against the whole world.
Practice Resource:
• Corbin § . (is a contract right “property”?).

End of Document

§ 4 .05 Assignment of Contracts
[1] Normally, Contract Rights Are Assignable and Duties Subject to Delegation
Unless the parties otherwise agree, contracts rights are assignable unless the assignment materially changes
the duty of the obligor or materially increases the obligor’s risk. Similarly, duties under a contract are normally
delegable unless the obligee has a substantial interest in having the original obligor perform the duties.
Questions surrounding whether a right is assignable or a duty is delegable and the criteria used by courts to
make those determinations are explored in Chapter 49 below.
In the absence of a statute or a contract provision to the contrary, there are no prescribed formalities that must
be observed to make an effective assignment. Easton Bus. Opportunities, Inc. v. Town Exec. Suites, 230 P.3d
827, 832 (Nev. 2010). It is not always easy to determine whether or not the assignee has been invested with
the rights of the assignor, or has assumed the performance of the assignor’s duties. Unless the assignee has
contracted to assume the duties, no action for breach can be brought against the assignee.
If the words of the assignment clearly purport to transfer only the assignor’s rights, the interpretation is simple.
The interpretation is difficult if the language fails to distinguish rights from duties, as where the assignor
purports to assign “the contract” or “all of my rights under the contract.” In the absence of other evidence, both
the First and Second Restatements of Contracts indulged the presumption that such general language
manifests an intention to assign rights and delegate duties and the assignee has assumed such delegated
duties. First Restatement of Contracts § 1 Restatement (Second) of Contracts § 2 . Friendship Home
Healthcare, Inc. v. Procura, LLC, 2010 U.S. Dist. LEXIS 10314 (M.D. Tenn. Feb. 5, 2010). While recognizing
the presumption in § 2 a lower court noted that it does not apply in the face of contrary authority, which the
court discovered in Arizona precedent. Nat’l Retail Dev. Partners I, LLC v. Maness (In re Mortgs. Ltd.), 405
B.R. 669 (Bankr. D. Ariz. 2009).
The Restatement (Second) presumption replicates the language of the Uniform Commercial Code (UCC). The
UCC presumes that such an assignment in general language is both an assignment of rights and delegation of
duties. When, for example, a party assigned the right to buy uncut timber, the court presumed the assignee’s
assumption of the duty to pay for the timber. Otherwise the assignee would be unjustly enriched in taking the
timber without paying for it. Kirby Lumber Co. v. R. L. Lumber Co., 279 S.W. 546 (Tex. App. 1926).
A recent case suggests a possible contradiction between the usual distinction between assigning rights and
delegating duties and the presumption that general language of assignment includes the delegation of duties—
assuming the duties are otherwise delegable. In Selective Ins. Co. of America v. Hudson East Pain
Management Osteopathic Medicine, 210 N.J. 597, 46 A.3d 1272 (2012), individuals assigned their rights to
payment for medical treatments to the providers of the treatments. The insurer sought information from the
providers concerning their ownership structures, billing practices, and compliance with legal requirements on
the footing that the policies required each insured to cooperate and the assignments were also delegations of
the insureds’ duties. The trial court granted summary judgment for the insurer. The Appellate Division reversed
by making the fundamental distinction between the assignment of rights and delegation of duties and holding
there was no delegation. On appeal, the New Jersey Supreme Court noted the Appellate Division’s reliance on
the Corbin treatise in distinguishing assigning right and delegating duties which it contrasted with § 2 of the
Restatement that treats general language assignment of rights as including a delegation of duties. Since the
record did not reveal the assignment language in this case, the court stated that it was “unable to conclude
whether the views expressed in Corbin or those expressed in the Restatement should determine the parties’
relation to one another in light of the defendant’s status as an assignee.” The quoted statement could be read
to suggest contrary views between the treatise and Restatement. In fact, the historic distinction between
Page 2 of 2
assigned rights and delegated duties continues without change as does the presumptive interpretation of
general assignment language that, absent contrary manifestations of intention including surrounding
circumstances, general language such as the assignment of the “contract” will be presumed to constitute both
an assignment of the right and a delegation of duty. The Corbin treatise treatment of these concepts is and
always had been totally consistent with the views of the Second Restatement of Contracts. Indeed, many of
Professor Corbin’s views are strewn throughout the Second Restatement of Contracts.
The court concluded that, assuming a delegation of duty, the duties claimed by the insurer extended well
beyond any duty in the policies. Like an assignment of rights where the assignee can take only the rights of the
assignor, a delegation of duties cannot delegate duties that do not exist.
[2] Exceptions to the Presumption That an Assignee Has Assumed Delegated Duties
There are exceptions to the presumptions in both the Restatement (Second) and the UCC. The presumption
that the assignee has assumed delegated duties is removed when an assignment of “the contract” is an
assignment made as security to assure the repayment of a loan. UCC § 2-210 cmt. 5; Restatement (Second) of
Contracts § 2 cmt. b. See Hyosung Am. v. Sumagh Textile Co., 137 F.3d 75, 80 (2d Cir. 1998). When a
subcontractor made a general assignment of his contract rights to a bank to secure a loan, the court held that
the presumption that the assignee assumes duties did not apply since it is commonly understood that such
lender-assignees do not assume such duties. The bank would not be unjustly enriched in having the loan
repaid. Newton v. Merchants & Farmers Bank, 11 Ark. App. 167, 668 S.W.2d 51 (1984).
Another possible exception to the presumption occurs when a buyer of real property assigns its rights in
general terms and the seller seeks the remedy of specific performance against the assignee. In a well-known
case, the lower court granted specific performance, but the court of appeals reversed holding that the law of
New York would not permit the inference of a promise by the assignee to perform the assignor’s duty absent
circumstances indicating a contrary intention. One such circumstance in a contract for the sale of land would be
where the assignee sought specific performance of the seller’s duty to convey the land on the footing that “he
who seeks equity must do equity.” Since the assignee did not seek specific performance or otherwise manifest
an intention to perform the assignor’s duty to purchase the land, the assumption of the duty by the assignee
would not be inferred. Langel v. Betz, 250 N.Y. 159, 164 N.E. 890 (1928).
An assignment of a right to purchase land was traditionally viewed as comparable to a sale of land that was
“subject to” a mortgage. There is no presumption that such a buyer assumed the duty to pay the mortgagee.
Recognizing the line of cases represented by Langel, Restatement (Second) contains a conspicuous caveat. It
states that the American Law Institute expresses no opinion whether the presumption of assumed duties in the
assignee applies to a purchaser of contract rights for the sale of land. The caveat appears in the black letter
statement following § 2 2 .
Practice Resource:
• Corbin § . (can a “contract” be assigned?).

End of Document

§ 4 .06 The Meaning of “Assignment”

The term “assignment” is sometimes used to denote the assigning party’s action. It is also used to denote the
change in legal relations effected by that action. It can also refer to the writing evidencing an assignment. There is
nothing remarkable about such variation in usage since similar usages can be observed with respect to the
meaning of the term “contract” itself. The use of the term “assign” or “assignment,” however, is not conclusive.
In California Ins. Guarantee Assn. v. Workers’ Comp. Appeals Bd., 203 Cal. App. 4th 1328, 138 Cal. Rptr. 3d 24
(2012), medical providers entered into “collection agreements” with Pinnacle Lien Services under which Pinnacle
would receive a percentage of the amount collected for its services. The plaintiff, CIGA, was created by legislation
to establish a fund to pay insureds when insurers become insolvent. It assumed the obligations of workers’
compensation insurers when they became insolvent. It refused to pay the claims of the medical providers presented
by Pinnacle because the agreements between the providers and Pinnacle included the terms “assign” and
“reassign” as well as referring to Pinnacle as an “assignee.” Citing the Corbin treatise, however, the court noted that
the use of the word “assign” is not conclusive. Reading the agreements in context, the court concluded that the
agreements made clear that the providers retained full ownership of their accounts receivable, retained the right to
terminate Pinnacle and pursue the accounts themselves, and retained the right to approve certain settlements
effected by Pinnacle. Thus, the providers merely transferred to Pinnacle the task of collecting their accounts
receivable for a fee. The medical providers did not assign their claims to Pinnacle.
There are no prescribed formalities required to effect an assignment. A manifestation of intention to make a present
transfer of rights to the assignee is sufficient. Courts must look to the substance rather than its form to determine if
the assignor intended to transfer a present interest in a subject matter. LPP Mortg., Ltd. v. Boutwell, 36 So. 3d. 497
(Ala. 2009). In Brown v. Blue Cross Blue Shield of Tenn., Inc., 2015 U.S. Dist. LEXIS 74306 (E.D. Tenn. June 9,
2015), a medical provider had no standing to sue as an ERISA beneficiary even though patients authorized the
medical provider to receive direct Medicare payments. While there is a split of authority on this issue, the better
view is that “forms providing for direct payment do not constitute an assignment . Here, the Benefits Forms did
not assign any patient’s ERISA rights, but rather merely provided for direct payment from the insurer to the provider.
The court explained that an assignment “divests the patient of their own right to pursue ERISA eme ies. . Thus,
such a provision should constitute an assignment only when the assignor evinced a clear intent to transfer rights to
the assignee.”
A valid assignment may be effected even though the parties anticipate that some material aspects of the deal will
be “papered” later with the execution of additional documents. Larson v. Warner Bros. Entm’t, Inc., 504 F. App’x
586 (9th Cir. 2013), aff’d 2016 U.S. App. LEXIS 2507 (9th Cir. 2016). Absent a requirement in the contract or by
statute, the manifested intention to assign a contract right need not be in writing. Mass. Mut. Life Ins. Co. v.
Sanders, 787 F. Supp. 2d 628 (S.D. Tex. 2011). If, however, a right is assigned under a contract for the sale of
land, the land contract provision of the statute of frauds requires that it be in writing. Other statutes may also be
applicable to assignments; these include UCC applications that are explored in the next section.
Practice Resource:
• Corbin § . (meaning of assignment—form of assignment—statute of frauds).

Page 2 of 2
End of Document

§ 4 .0 Assignments Under the UCC

The great bulk of assignments in modern commerce occur in the context of commercial financing governed by the
UCC. UCC Article 2, dealing with contracts for the sale of goods, made radical changes in contract law that were
later assimilated in the Restatement (Second) of Contracts for contracts other than those that concern a sale of
goods. See John E. Murray, Jr., The Article 2 Prism: The Underlying Philosophy of Article 2 of the Uniform
Commercial Code, 21 Washburn L.J. 1 (1981). It is, however, in UCC Article 9, which deals with security interests in
personal property, that assignment law is affected.
Merchants require financing to purchase inventory, equipment, and pay expenses. Lenders require security
(collateral) to assure repayment of loans to the merchants. As security, the merchants assign “accounts,” which are
contract rights with customers not only for goods but also for services, whether the contract has been performed or
is to be performed. Since commercial financing is filled with such assignments, it is often difficult to determine
whether the merchant-debtor has sold the accounts to the lender or simply granted a security interest in the
accounts. Because the distinction is often blurred, Article 9 applies to either the sale or assignment of accounts as
well as security interest in accounts. Thus, the requirements of Article 9 must be met for a creditor (lender) to have
an attached, enforceable, and perfected security interest in accounts that have been assigned.
Transfers that are not viewed as typical commercial financing assignments are not within the scope of Article 9.
These include assignments for wages (which are often subject to other statutory requirements) and assignments of
accounts as part of the sale of the business. Also not governed by Article 9 are transfers of rights to payment under
a contract to an assignee who is to perform under the contract and assignments of accounts in whole or partial
satisfaction of a pre-existing debt.
Practice Resource:
• Corbin § . (Uniform Commercial Code—assignments).

End of Document

§ 4 .0 Effect of Public Policy on Assignments
[1] Certain Rights Are Not Assignable for Public Policy Reasons
Certain rights are not assignable for public policy reasons found in statutes or the common law. The
assignment of future wages by public officers or employees has been prohibited because it could impair faithful
and efficient public service. Such a prohibition, however, would not affect earned commissions, salary, or
pension benefits. A wife may be prohibited from assigning future alimony payments that could result in the
dissipation of funds intended for her maintenance and the maintenance of children. A corporation president or
other officer has no authority to assign the funds of the corporation to satisfy personal obligations. United States
v. Two Bank Accounts, 2009 U.S. Dist. LEXIS 24129 (D.S.D. Mar. 24, 2009). A general rule precludes the
transfer of amounts due under public contracts made by the United States, although an exception allows
amounts of $1,000 or more due from the United States to be assigned to banks and other financing institutions
unless the contract prohibits such assignments.
[2] Statutes Regulating the Assignment of Wages and Structured Settlements

The most pervasive type of statutory prohibition appears in state statutes prohibiting the assignment of wages;
the goal is to protect wage-earners against unscrupulous parties. A Federal Trade Commission regulation
makes wage assignments to a lender or retail installment seller an unfair credit practice. Wage assignments are
an unfair credit practice unless they are (1) revocable at the will of the debtor, (2) payroll deductions or similar
arrangements authorized by the consumer, or (3) the assignment applies to wages or earnings already earned
at the time of the assignment. This regulation has had a significant effect on several state statutes regulating
wage assignments. 16 C.F.R. § .2.
More recent statutes have dealt with arrangements between factoring companies who may have engaged in
aggressive marketing in promising to pay heavily discounted lump sums to parties in exchange for assignments
of future payments under structured settlement agreements. Numerous states enacted structured settlement
protection acts to require judicial supervision of such assignments to ascertain that they are fair and
reasonable.
[3] Assignability of Tort Claims

The common law was slow to recognize the assignability of tort claims for injury to property. A claim to
unliquidated damages for tortious injury to the person or reputation is still not assignable. Actions for injuries
that did not survive the death of the victim are too personal to be assigned. The purpose is to prevent trafficking
in the pain and suffering of others by champertous strangers who would seek to purchase such causes of
action.
While some courts distinguish the assignment of a tort claim from the assignment of the proceeds of such a
claim that would not be identified until the assignor’s personal injury claim had been reduced to judgment or
settlement, other courts find this to be a distinction without a difference. Auto insurance policies, however,
contain subrogation clauses to allow insurers to recover amounts paid for medical expenses from such
proceeds. The majority view allowing such recoveries suggests a difference between subrogation that only
operates to require contribution and indemnity or impose an equitable lien on the proceeds from an assignment
that transfers the entire claim. Other courts remain unpersuaded by the distinction.
The assignment of a right to recover unpaid legal fees was not against public policy. The court explained that
the case did not involve an improper delegation of legal services, nor was it the assignment of a tort claim. It
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was simply an effort to collect unpaid fees, the right to which fees was properly assigned. Burnison v. Johnston,
277 Neb. 622, 764 N.W.2d 96 (2009). Since King could not pay a $20 million judgment, the plaintiffs agreed to
take only $200,000 from him and an assignment of his rights against his insurers in exchange for a covenant
not to sue him for the remaining $19.8 million. With respect to King’s assignment, the court noted that certain
rights under an insurance policy may be assigned. It held that, where an insured is unable to pay the full
amount of damages to a plaintiff, it may give the plaintiff a partial money settlement and assign its rights to sue
the insurers on such an accrued cause of action. CE Design, Ltd. v. King Supply Co., LLC, 2012 U.S. Dist.
LEXIS 101310 (N.D. Ill. July 20, 2012).
STA assists its customers in obtaining adjustments from telephone companies for improper billing practices. In
exchange for the assignment of their claims, STA agreed to pay five of its customers $10 each and 70 percent
of any recovery obtained from Southwestern in a class action for assessing its customers for municipal services
fees which had allegedly been exempted under local ordinances. Southwestern argued that allowing an
assignee to purchase the right to serve as the class representative in a class action was against public policy
since it promoted the commercial marketing of class actions. Though it recognized that an assignment could be
inoperative because of public policy or a statute, the court noted that STA had pre-existing relationships with
these customers and represented them and others concerning alleged overcharges to phone bills. The court
viewed STA as a valid class member and the assignments did not offend public policy. Southwestern Bell Tel.
Co. v. Mktg. on Hold Inc., 308 S.W.3d 909 (2010).
Practice Resource:
• Corbin § . (public policy—assigning wages, claims against the government,
structured settlements, and tort claims).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 48 GIFT ASSIGNMENTS
CHAPTER 48 GIFT ASSIGNMENTS

the subject matter.

End of Document
§ 4 .01 Gift Assignments of Contract Rights

Human convenience and business practices not only induced the recognition of the assignment of choses in action
for consideration, they also induced courts to recognize gratuitous assignments. A power of attorney required no
consideration and an assignment was once viewed as nothing more than a power of attorney. So long as it was
unrevoked or not otherwise legally terminated, the assignee had authority to collect the assigned claim. The early
arguments precluding assignments without consideration are long gone. First Restatement of Contracts § 1 0 and
Restatement (Second) of Contracts § 1 both recognize the validity of a gratuitous assignment. Unlike
assignments for consideration, however, gift assignments are revocable.
Practice Resource:
• Corbin § .1 (gratuitous assignment of contract rights).

End of Document
§ 4 .02 General Requirements of an Irrevocable Gift Assignment
[1] An Assignor May Provide a Testimonial Document Representing the Contract to the Assignee
The gift of a chattel is accomplished by its physical delivery to the donee accompanied by appropriate
expressions of donative intention. The gift of a contract right, however, is not accompanied by delivery of the
subject matter. To make a gratuitous assignment, the assignor may hand a testimonial document representing
the contract to the assignee, but it is not the document that is valued by the assignee; it is the money or other
property to which the holder of the right is entitled.
This difference was material to our ancestors, who could not conceive of the transfer of such a “chose in
action.” The solution was to require some testimonial document or other physical symbol of the “right” being
given. Just what kinds of documents or symbols are appropriate will be considered in the sections that follow.
At this point, it is only important to note that the requirements concerning delivery and expressions of donative
intent for an effective gift of a chattel are the same for a gratuitous assignment of a contract right.
[2] Assignor Must Surrender “Dominion” and “Control”

Since an irrevocable gratuitous assignment requires the assignor to have extinguished its right, it necessarily
requires a manifestation of surrender of any “dominion” or “control” in that chose in action. If the evidence
indicates that a gift assignment of a chose in action has been completed, it necessarily means that the assignor
has surrendered all dominion and control in that contract right. The challenge is to determine what acts are
sufficient to evidence such an irrevocable assignment.
A purported assignee’s mere possession of a document that represents the right is not conclusive. In a famous
case, the court noted that the delivery of a slip of paper containing a list of several sums that were totaled to the
figure $2,316 did not deprive the alleged donor of dominion and control of amounts owed to her. After the
transfer of the paper, her dominion and control remained intact. The court emphasized the test to be a transfer
“that, in conjunction with the donative intention … completely stripped the donor of his dominion of the thing
given, whether that thing was a tangible chattel or a chose in action.” Cook v. Lum, 55 N.J.L. 373, 26 A. 803
(1893). A signed writing, however, may be sufficient. In Cascades Dev. of Minn., LLC v. Nat’l Specialty Ins., 675
F.3d 1095 (8th Cir. 2012), the court held a gratuitous assignment irrevocable if it is writing, either signed or
under seal. In Lucas v. United States, 775 F.3d 544, 2015 U.S. App. LEXIS 186 (2d Cir. 2015), the court held
that a gratuitous written assignment of the donor’s statutory cause of action was valid.
Instead of an ordinary slip of paper, if the document were the kind of testimonial document that is normally
surrendered in enforcing the right it represents, it would constitute much stronger evidence of the intention to
make an irrevocable gift assignment, but it would not be conclusive. To make the gift assignment irrevocable,
the surrender of such a document must be accompanied by acts and expressions of the donative intent to
make the gift irrevocable.
[3] Gifts Causa Mortis and Inter Vivos

A gift inter vivos is made during the lifetime of the donor who delivers it to the donee with the intention of
making the donee the absolute owner of the gift. A gift “causa mortis” is made in expectation of the donor’s
apprehension of the donor’s own death and on the condition that if the donor survives, or changes his or her
mind or if the donee does not survive the donor, the gift will be returned to the donor.
A gift assignment causa mortis is revocable if the donor lives; a gift inter vivos is not. Nonetheless, the basic
rules applicable to either type of gift are otherwise the same. Rosenberg v. Broy, 190 Cal. App. 2d 591, 596, 12
Cal. Rptr. 103, 106 (1961). A gratuitous assignment inter vivos may be irrevocable although it is conditional
Page 2 of 2
upon the occurrence of an uncertain event. If Ames delivers a written assignment of a contract right to Barnes
who is running for governor with instructions to return it only if Barnes is not elected, the assignment is effective
from the time of its delivery to Barnes.
Whether a gift is causa mortis or inter vivos, the donative intention must be proved by the donor’s expressions
in addition to delivery and, in either case, such evidence must be clear and convincing to enforce the gift if it is
offered after the donor’s death. When there is unequivocal proof of donative intent, however, courts have
recognized constructive or symbolic delivery. Catherine, depressed after an auto accident, indorsed a check in
blank received in settlement of the accident claim and left it on the kitchen table together with a note for Robert,
with whom she lived. The note expressed her love for Robert and sought his forgiveness for her “taking the
easy way out.” Another note stated that she “bequeathed” all of her possessions to Robert including the check.
She left the apartment building and jumped to her death. The court held that Catherine had done all that she
could to effect a constructive delivery of the check to Robert and the delivery was sufficient to constitute a gift
causa mortis of the check. Scherer v. Hyland, 75 N.J. 127, 380 A.2d 698 (1977).
Practice Resources:
• Corbin § .2 (gifts causa mortis and inter vivos); § . (general requirements
of an irrevocable gift assignment—delivery); § . (meaning of “dominion and
control”).

End of Document
§ 4 .03 Gifts of Bank Accounts
[1] An Irrevocable Gift of a Bank Account Can Be Effected by Extinguishing the Depositor’s Right
Against the Bank and Substituting the Right in the Assignee
An irrevocable gift of a bank account can be effected by extinguishing the depositor’s right against the bank and
substituting the right in the gratuitous assignee. A written assignment to the assignee or other authorization to
the bank can effect such an assignment. The same end can be accomplished by a new and original deposit to
a bank in the name of the donee.
If the depositor makes a new agreement with the bank that attempts to create new rights in the donee while
retaining power, an irrevocable gift may not be created. Thus, if Ames alters her bank account to indicate that
Ames is a “trustee for Barnes,” absent other evidence of a gift intention, courts will not view the right as
irrevocably transferred. If there is sufficient evidence of an intention to create a genuine trust relation, the gift
will be effective, notwithstanding the retention of technical “dominion” and “control.”
It is not uncommon for a depositor to alter the account to make it payable to either the depositor or a named
person and to a survivor in case of the death of either party. When the expressions of the depositor are clear,
there is no reason for denying validity to such a contract. In one case, a decedent changed his account to a
joint account in his name and the name of his sister payable to either one or the survivor. The court found that
setting up the account in this fashion provided presumptive evidence of donative intent, which was effective
absent evidence disproving such intent. In re Estate of Mueth, 33 Ill. App. 2d 449, 179 N.E.2d 695 (1962).
[2] Delivery of a Savings Bank Passbook with Sufficient Donative Intention Will Be Constructive
Delivery of the Account
The delivery of more or less formal documents accompanied by a sufficient expression of donative intent will be
an effective gratuitous assignment of the right evidenced by the document. The classic example is delivery of a
savings bank passbook with sufficient donative intention will be constructive delivery of the account. The
delivery of a key to a suitcase containing such a document with sufficient expressions of donative intention will
also be effective. The delivery of a key to a safe deposit box with sufficient expressions will constitute an
effective symbolic delivery of the contents.
A court found the delivery of bonds to be evidence of an effective assignment although the donor retained a life
estate in the bonds. Robinson v. Pero, 272 Mass. 482, 172 N.E. 599 (1930).
An owner of bonds directed his nephew, the joint tenant of his safe deposit box, to give bearer bonds inside the
box to the owner’s sister. The court held that the nephew became a trustee of the bonds with a duty to carry out
the owner’s causa mortis gift to the sister. Crilly v. Detter, 142 F. Supp. 490 (D. Kan. 1956).
Collins handed his housekeeper an envelope containing stock certificates and said, “If anything happens to me,
these stocks are yours.” The court found an effective causa mortis gift notwithstanding the absence of an
endorsement on the certificates. Titusville Trust Co. v. Johnson, 375 Pa. 493, 100 A.2d 93 (1953).
Delivery of a life insurance policy with donative intent to the named beneficiary of the policy may preclude the
insured from later changing the beneficiary. Aetna Life Ins. Co. v. Putnam, 88 F. Supp. 133 (D. Me. 1950).
A daughter was the named beneficiary in her father’s life insurance policy. The father’s subsequent inter vivos
gift of the policy to his common law wife was held sufficient to change the beneficiary notwithstanding the failure
to provide the required notice to the insurer to make the change on its records. Clarke v. Edwards, 74 So. 2d
912 (Ala. 1954).
Page 2 of 2
Practice Resources:
• Corbin § . (gifts of bank accounts); § . (deposit books, keys to deposit
boxes, bonds, stocks, insurance, and documents of title).

End of Document
§ 4 .04 Gifts of Negotiable Instruments

If Barnes delivers a written assignment to Carr that orders his debtor, Ames, to pay the $10,000 debt to Carr, courts
would normally construe such a writing to evidence an assignment of Barnes’s right against Ames to Carr. If,
however, Barnes sent the same writing to Ames, the debtor, it would not be an assignment since Barnes’s
instruction is revocable. An order from an obligee such as Barnes to his obligor, Ames, to pay Carr does not make
Carr an assignee.
Similarly, if Barnes draws a check on his bank in the amount of $10,000 payable to Carr, Carr is not an assignee of
the funds in the bank. Barnes has not surrendered control over the instrument. Before the check is paid by the
drawee bank, Barnes may issue a stop payment order and the bank must follow it. As payee, Carr would not have
rights against the bank until the check has been presented for payment and accepted by the bank on which it is
drawn. Such a typical check meets the elements necessary to make it a negotiable instrument. The transfer of such
an instrument occurs through “negotiation” which requires an indorsement unless the instrument is a “bearer”
instrument (e.g., a check payable to “cash”) which may be negotiated by mere delivery without any indorsement.
Coleman v. BAC Servicing, 104 So. 3d 195 (Ala. Civ. App. 2012).
If a transferee of a negotiable instrument takes it for value, in good faith and without notice of infirmities listed in the
governing statute, Article 3 of the Uniform Commercial Code (UCC), the transferee qualifies as a “holder in due
course,” who is not subject to numerous defenses to which an ordinary assignee would be subject. See Fine v.
Sovereign Bank, 671 F. Supp. 2d 219 (D. Mass. 2009). A gratuitous assignee does not give value and would not
qualify as a holder in due course.
Practice Resource:
• Corbin § . (order documents—negotiable instruments).

End of Document
§ 4 .05 Written Assignments or Delivery of the Contract Document

After gratuitous assignments through the delivery a sealed writing were recognized, there was some resistance to
effecting an assignment through the delivery of an unsealed writing. The resistance was overcome, and unsealed
gratuitous assignments, along with evidence of donative intent, were held to take effect upon the delivery.
Pascal signed and delivered a letter to his executive secretary stating, “I hereby give you” a certain percentage of
royalties from the musical stage version and film version of Pygmalion although that version (later to be named My
Fair Lady) was yet to be created. Pascal, however, owned the exclusive rights to produce it. The court held the
letter to be an operative gratuitous assignment since there was nothing left for Pascal to do to make an irrevocable
transfer of part of his right to receive royalties for the as yet unproduced play and film. Speelman v. Pascal, 10
N.Y.2d 313, 178 N.E.2d 723 (1961).
Under the First Restatement of Contracts § 1 delivery of an existing contract document with sufficient evidence
of donative intent was not recognized as effective to assign the contract right evidenced by the document. The
Restatement (Second) of Contracts, however, adopted the earlier view of Corbin on Contracts in finding no sound
reason to reject such a manifestation of intention since the delivery of other documents no more formal than
ordinary contract documents had been recognized as effective. Restatement (Second) of Contracts § 22 cmt. d
and illus. 5.
Practice Resource:
• Corbin § . (gift of the assignor’s written assignment of the contract or delivery of the
contract document).

End of Document
§ 4 .06 Gift Assignments by Oral Communication

Courts generally hold that an irrevocable gift assignment cannot be made by a mere oral communication without the
delivery of a writing evidencing the assigned right. There are rare exceptions to be found in the case law,
nonetheless.
For example, the Supreme Court of Nebraska recognized that delivery is normally required to evidence an inter
vivos gift, but here the evidence was clear that a decedent did not intend certain loans to be repaid and a jury found
the decedent intended the debts to be forgiven. The court held that the evidence was sufficient to prove a valid inter
vivos gift. Guardian State Bank & Trust Co. v. Jacobson, 220 Neb. 235, 369 N.W.2d 80 (1985). The Guardian State
Bank court relied upon Dinslage v. Stratman, 105 Neb. 274, 180 N.W. 81 (1920), which is often viewed as the high
water mark of cases supporting an oral gift assignment without delivery of any writing.
There is no escape from the need for a careful analysis of the evidence of donative intent since delivery of a
document is strong evidence of such intent. If a document no longer exists or cannot be located, alternative
evidence of such intent may be sufficient.
Practice Resource:
• Corbin § . (gift assignment by oral communication).

End of Document
§ 4 .0 Revocation of Gift Assignments

In the absence of other facts, an assignment without consideration or donative intent plus actual, constructive, or
symbolic delivery may be directly or indirectly revoked. It is automatically revoked upon the death of the assignor,
notice to the assignee that it has been revoked, or the assignor’s subsequent assignment to another assignee that
manifests the assignor’s intention to revoke the earlier assignment.
Before revocation, however, if the assignee obtains payment or satisfaction of the duty from the obligor, or is
awarded a judgment against the obligor on the assigned right, or effects a novation with the obligor by accepting a
substitute obligor, the assignment becomes irrevocable. Restatement (Second) of Contracts § 2 . A gratuitous
assignment may also become irrevocable upon reasonable detrimental reliance by the gratuitous assignee if
irrevocability is necessary to avoid injustice.
Practice Resource:
• Corbin § .10 (revocation of gift assignments).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 49 ASSIGNABILITY AND DELEGABILITY—

FREEDOM AND LIMITATIONS
CHAPTER 49 ASSIGNABILITY AND DELEGABILITY—FREEDOM AND

LIMITATIONS
the subject matter.

End of Document

§ 4 .01 Limitations on Assignment of Rights and Delegations of Duties
[1] The General Principle of Free Assignability of Rights and Delegation of Duties Is Subject to
Limitations.
The general principle of free assignability of rights and delegation of duties is subject to limitations. The
Restatement (Second) of Contracts and the Uniform Commercial Code (UCC) are in agreement that, unless
precluded by statute or contract, contract rights are assignable unless the assignment would materially change
the duty of the obligor or materially increase the risk the obligor undertook when the contract was formed.
Restatement (Second) of Contracts § 1 2 UCC § 2-210 1 . Contract duties are delegable unless a
substantial reason is given why a delegated performance is not as satisfactory as personal performance.
Restatement (Second) of Contracts § 1 cmt. c. Thus, to determine whether a right is assignable or a duty is
delegable, it is necessary to examine the effects of such a transfer on the obligor, who is to perform the duty for
a new obligee, or the effects on an obligee, who is to receive performance from a new obligor.
An assignment of a right to receive money hardly amounts to a material enlargement of the debtor’s risk. It
should make no material difference to the obligor that it is required to pay a different party with whom it need
have no personal contact. Similarly, where an online agreement allowed a bank discretion to choose among
three methods of payment of its customer’s bills, the court upheld an assignment of the bank’s right and
delegation of its duty since it could discover no material difference in the risks or expectations of the plaintiff
bank customer. Johnson v. Bank of Am., N.A., 2010 U.S. Dist. LEXIS 38080 (D.S.C. Apr. 15, 2010). Pursuant
to the rule expressed in § 22 2 of the Restatement (Second) of Contracts, an anti-assignment provision does
not prohibit the assignment of a contractual right to sue for money damages: “A contract term prohibiting
assignment of rights under the contract, unless a different intention is manifested, (a) does not forbid
assignment of a right to damages for breach of the whole contract or a right arising out of the assignor's due
performance of his entire obligation[.]” Omicron Safety & Risk Techs., Inc. v. UChicago Argonne, LLC, 2015
U.S. Dist. LEXIS 27478 (N.D. Ill. Mar. 6, 2015).
As contrasted with the mere payment of money, it is often suggested that rights under a contract for personal
services are not assignable. Yet, as will be seen in a subsequent section, that statement is not always correct.
For instance, when professional sports franchises are sold, the assignment of contract rights to athletes’
services is upheld.
On the other hand, a contract right to have an operation performed by a particular surgeon or a contract right to
have representation by a particular lawyer would not be assignable, just as the duties of the surgeon and
lawyer are not delegable. Procrustean categories will not do; there is no escape from an engagement with the
particular facts of an attempted assignment of rights or delegation of duties to determine whether there are
material or substantial effects on the obligor’s duty or the obligee’s right.
Just as a creditor’s assignment of a right to receive payment may be assigned because it has no material effect
on the obligor’s performance, a buyer’s assignment of its right to purchase land, without more, suggests no
increased risk to the seller. As an agent for an undisclosed principal, Venture, US Golf purchased golf balls
from WPI. When Venture claimed breach of warranties, WPI argued that it had no duty to such an undisclosed
principal under the UCC. Noting the total lack of any UCC authority for such a statement, the court referred to
the liberal assignability of rights suggested in the UCC and stated:
There is no difference, from WPI’s perspective, between having to deliver golf balls to Venture because
Venture was US Golf’s undisclosed principal and its having to deliver golf balls to Venture because US Golf
assigned its rights under the contract of sale.
US Golf Sys. v. WPI Acquisition Corp., 1992 U.S. Dist. LEXIS 2676, at *8–*9 (N.D. Ill. Mar. 6, 1992).
Page 2 of 2
When there is a delegation of duty as well as an assignment of right, the UCC recognizes that, since the
obligee has a stake in the reliability of the party with whom it has dealt, it is “entitled to due assurance that any
delegated performance will be properly forthcoming.” UCC § 2-210 cmt. 6.
[2] Assignability of Express Warranties

In another case, manufacturer had provided an express warranty of a new roof to the original owners; the
warranty did not explicitly extend to subsequent purchasers. The right was assigned to Collins when it
purchased the property. Collins’s later breach of the warranty failed in the district court for lack of “privity.” On
appeal, the Second Circuit Court of Appeals certified the question to the Illinois Supreme Court, which held that
the assignee of an express warranty acquires privity with the warrantor by virtue of a valid assignment. Collins
Co. v. Carboline Co., 125 Ill. 2d 498, 532 N.E.2d 834, 127 Ill. Dec. 5 (1988).
[3] Assignability of Output and Requirements Contracts

When a buyer agrees to purchase its requirements or a seller agrees to deliver its output for a given period, the
assignment of rights and delegation of duties may suggest material risk changes precluding such transfers.
For more than three years, Terminal Company had been supplying Frederick, a local Baltimore ice cream
maker, with all the ice it required up to 250 tons per week. With more than two years remaining on the contract,
Frederick assigned his right to Crane, which had plants in Maryland and Pennsylvania. The court noted that
while Terminal had supplied Frederick with varying amounts of ice, it now faced the possibility of providing
Crane with 250 tons every week or with no tons in other weeks if it became more advantageous for Crane to
produce ice cream in Pennsylvania. Although the court suggested that the rights and duties were so personal
that they could not be assigned or delegated, that rationale limps badly. The essential determination was the
change in risk to Terminal, which found itself dealing with a party who had an alternate source of ice and could,
therefore, require materially different performance. Terminal had not assumed those risks in its contract with
Frederick. Crane Ice Cream Co. v. Terminal Freezing & Heating Co., 147 Md. 588, 128 A. 280 (1925).
The case also reflects the pre-UCC view that rights under requirements and output contracts were not
assignable. Boston Ice Co. v. Potter, 123 Mass. 28 (1877). UCC § 2- 0 cmt. 4, suggests that whether an
existing output or requirements contract continues upon the sale of a business is “outside the scope” of Article
2. Assuming the contract does continue, however, the output or requirements “continue to be measured by the
actual good faith or requirements under the normal operation of the enterprise prior to sale.” Id.
Practice Resources:
• Corbin § .1 (limitations on assignment of rights and delegation of duties);
§ .2 (assignment may not materially affect performance); § . (payment,
land, goods, express warranty, output, and requirements contracts).

End of Document

§ 4 .02 Assignment and Delegation in Personal Service Contracts
[1] Rights to Personal Services Contracts May Sometimes Be Assigned

When the right sought to be assigned is a right to personal services, the immediate reflex cautions against
assignment. Contracts between doctors and patients, lawyers and clients, teachers and school districts, and
innumerable other relationships suggest that such rights involve “trust and confidence” and that they are “too
personal” to be assigned. An artist may agree to do portraits only of parties with faces or features that are
interesting to the artist, precluding the assignment of a right under that contract. Yet, there are situations in
which rights to personal services can be assigned.
A court rejected the argument of a popular television news anchor who argued that the rights under his contract
with the original corporate owner of a station could not be assigned; the court found that there was no material
change of any kind in his duties or in his compensation under the new ownership. Evening News Asso. v.
Peterson, 477 F. Supp. 77 (D.D.C. 1979).
Another court recognized that applicable North Carolina law precluded assignment of personal service
contracts involving special skills and personal relationships. But the court found that when the character of the
contract performance and the resulting obligations do not change, as in the assignment of players’ contracts in
the sale of a professional basketball franchise, such contract rights may be assigned. Munchak Corp. v.
Cunningham, 457 F.2d 721 (4th Cir. 1972).
[2] Duties Involving Unique Abilities Are Not Delegable Because There Is No Objective Standard of
Measurement
Lumberman Mutual Casualty Company delegated its duty Aetna to make discretionary decisions concerning
the ability of their insureds who were receiving disability payments to resume work that would discontinue such
payments. When the plaintiff’s payments were stopped, she argued that Lumberman’s duty was not delegable.
Citing § 1 of the Restatement (Second) of Contracts, the court noted that the common law prohibited the
delegation of duties under a personal services contract such as the duties of an opera singer to perform even if
the delegate was equally or more famous. Here, however, the plaintiff was insured under a group policy. It was
not a personal service contract and the plaintiff had no interest in the persons making the discretionary decision
concerning her ability to work and the discontinuation of payments. She had no right to choose the persons
making such decisions. Thus, Lumberman did nothing fundamentally different from choosing such decision-
makers from its own personnel. The duty was delegable. Aschermann v. Aetna Life Ins. Co., 689 F.3d 726 (7th
Cir. 2012).
Skilled professionals, however, may not unilaterally delegate their duties to others. The classic statement
comes from the Supreme Court of California:
All painters do not paint portraits like Sir Joshua Reynolds, nor landscapes like Claude Lorraine, nor do all
writers write dramas like Shakespeare or fiction like Dickens. Rare genius and extra-ordinary skill are not
transferable, and contracts for their employment are therefore personal, and cannot be assigned. But rare
genius and ordinary skill are not indispensable to the workmanlike digging down of a sand hill or the filling
up of a depression to a given level, or the construction of brick sewers with manholes and covers, and
contracts for such work are not personal, and may be assigned.
Taylor v. Palmer, 31 Cal. 240, 247–248 (1866).
There is no objective standard to measure the duty of a physician, lawyer, artist, or musician. A duty under a
contract to select entertainers, musicians, lecturers, and others for certain performances could not be
Page 2 of 2
delegated. Standard Chautauqua System v. Gift, 120 Kan. 101, 242 P. 145 (1926). This would be true even if
the delegate had a superior reputation as a producer.
The duty of a corporation may appear delegable since the obligee is relying on the impersonal corporation for
performance. If, however, the obligee has contracted with a medical, legal, or other corporation because of the
particular skills of a given professional, the duty may not be delegated.
Sometimes it may be easily determined that the contracted-for duties of highly skilled professionals and others
providing personal services are not delegable. Other situations, however, may require a closer analysis. A duty
to provide moving and storage services was held to be delegable where the court found no personal
relationship, unique skill, or knowledge involved in its performance. In re Compass Van & Storage Corp., 65
B.R. 1007, 1011 (Bankr. E.D.N.Y. 1986).
A defendant contracted with Virginia Coffee Service to install and maintain cold drink vending machines in the
defendant’s branch locations. Beyond installation and maintenance, Virginia’s duty involved supplying
beverages in the machines and payment of commissions to the defendant. Virginia assigned its rights under the
contract as part of the sale of its business to Macke. The defendant had previously rejected Macke as a
supplier. Nonetheless, the court held that the duties were delegable. Macke Co. v. Pizza of Gaithersburg, Inc.,
259 Md. 479, 270 A.2d 645 (1970).
The Macke court referred to the classic case of British Wagon Co. v. Lea & Co., 5 Q.B.D. 149 (1880), in which
the court held that a duty to keep railway cars in good repair was also delegable. No particular skill was
involved in keeping the cars in good repair or in installing, maintaining, and supplying the vending machines. It
should have made no material difference to the obligee that these duties were being performed by an assignee
to whom the duties were delegated. It is, however, important to note that a contract may preclude the
delegation of duties that would otherwise be delegable.
[3] A Relationship of “Trust and Confidence” Between the Original Parties May Preclude Delegation of
Duties
A relationship of trust and confidence may exist between the original parties to a contract; the existence of such
a relationship may preclude delegation of duties. The professional services of physicians and attorneys often
provide illustrations of this type of relationship, but other examples can be found. If a manufacturer agrees to an
exclusive dealing arrangement with a distributor who agrees to use its best efforts in promoting the sale of the
manufacturer’s product, such a relationship is clearly one of trust and confidence and the duty cannot be
delegated.
Berliner was such a distributor of Hagen-Dazs ice cream and it continued in that role after Hagen-Daz was
acquired by Pillsbury. Berliner refused to sell its distributorship to Pillsbury, but it agreed to sell to Dreyers,
which produced a premium ice cream competing with Hagen-Dazs. Pillsbury’s termination of Berliner was
upheld on the footing that it defied common sense for a manufacturer to leave the exclusive distribution of its
product in the hands of a competitor. Berliner Foods Corp. v. Pillsbury Co., 633 F. Supp. 557 (D. Md. 1986).
Accord Sally Beauty Co. v. Nexxus Products Co., 801 F.2d 1001 (7th Cir. 1986).
Practice Resource:
• Corbin § . (assignment of right and delegation of duty—personal services).

End of Document

§ 4 .03 Assignment of Covenants Not to Compete
[1] A Covenant Not to Compete Is Assignable if the Contract Signed by the Employee Expressly States
So
Since it is common to assign employees’ contract rights when a business is sold, the assignment of a right to
hold an employee to an agreement not to compete with the employer for a certain period within a certain
geographic area after leaving the employ may appear to be assignable. The extant case law, however,
suggests a different view. A terminable-at-will employee who has signed a non-compete agreement may have
been willing to suffer such a restraint because of his or her knowledge of the employer in whom the employee
reposed trust and confidence. Such an employee does not assume the risk of suffering such a restraint at the
discretion of a stranger. Smith, Bell & Hauck, Inc. v. Cullins, 123 Vt. 96, 101, 183 A.2d 528, 532 (1962). See
also Sisco v. Empiregas, Inc. of Belle Mina, 237 So. 2d 463 (Ala. 1970). If the contract signed by the employee
expressly states that it is assignable, the intention of the parties controls. Abalene Pest Control Serv. v. Hall,
126 Vt. 1, 7, 220 A.2d 717, 720 (1966).
When such non-compete rights under a given personal service contract are not assignable, an attendant
question is whether a change in the form in which an employer does business involves an “assignment” of
rights at all. Where an employer was converted from a wholly owned subsidiary to an integral part of the
surviving corporation, the court held that no assignment of the covenant not to compete had occurred.
Alexander & Alexander, Inc. v. Koelz, 722 S.W.2d 311, 313 (Mo. Ct. App. 1986). Under this view, a stock
acquisition of another company would not involve an assignment of such rights. See Zambelli Fireworks Mfg.
Co. v. Wood, 592 F.3d 412, 423 (3d Cir. 2010). In HD Supply Facilities Maint., Ltd. v. Bymoen, 125 Nev. 200,
210 P.3d 183 (2009), the court distinguished a merger involving the acquisition of assets that preclude the
assignability of noncompetition agreements from mergers where corporations unite into a single corporate
existence pursuant to a state merger statute.
As one court recently suggested, “Many jurisdictions have examined whether noncompete and other restrictive
covenants can be assigned absent a specific assignment provision and have come down on both sides of the
issue. The split of authority is such, in fact, that there is even a difference of opinion as to which position
represents the majority view.” Great Am. Opportunities, Inc. v. Cherrydale Fundraising, LLC, 2010 Del. Ch.
LEXIS 15 (Jan. 29, 2010) (reviewing case law).
[2] Change in the Form of Ownership Should Not Be Conclusive

The question of whether an employee should be held to a non-compete clause should not be decided as a
matter of form. Corporate ownership and direction change over time. Stockholders change, boards of directors
change, chief executives, and other corporate officers change. A corporate manager who has signed a non-
compete agreement may have placed trust and confidence in a chief executive officer, but would not have
assumed that risk for the CEO’s substitute. A salesperson’s willingness to sign such an agreement, however,
may have nothing to do with the chief executive officer.
[3] Clauses in Insurance Policies Precluding Assignment Without the Insurer’s Consent Will Be Upheld
Trust and confidence issues are also raised in relation to fire insurance policies. Such a policy may be issued,
in part, on the basis of the character and reputation of the insured. Clauses in policies precluding assignment
without the consent of the insurer are upheld. A mortgagee of insured property protected under a loss-payable
clause, however, is generally free to assign his rights absent a restriction in the policy. Once a loss has
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occurred, an assignment of the proceeds payable under the policy will be effective regardless of conditions in
the policy concerning assignments.
Practice Resource:
• Corbin § . (assignment of covenants not to compete—insurance policies).

End of Document

§ 4 .04 Effect of Delegating Duties

An assignment of a right extinguishes the right in the assignor and recreates the right in the assignee. If the
assignor also delegates its duty, the assignee’s assumption of a delegated duty does not discharge the duty in the
assignor. Otherwise, any assignor could effect a novation by the simple unilateral delegation of its duty. The
defendant claimed that by assigning its right under a contract agreement, it also delegated its duties and was
necessarily relieved of any liability. In Indus. Dev. Bd. v. Russell, 124 So. 3d 127, 2013 Ala. LEXIS 26 (Ala. 2013),
the court distinguished the assignment of rights and delegation of duties. Citing § 1 of the Restatement (Second)
of Contracts, it noted: e e y speaking, upon assignment of a right, the assignor’s interest in that right is
extinguished; however, upon the delegation of a contractual duty, the delegating party remains liable under the
contract, unless the contract provides otherwise or there is a o tio .
Reserves planned a 185 home residential community. Crystal agreed to purchase 30 of the 185 unimproved
residential lots and to pay its pro rata share of development costs. It then assigned its rights and delegated it duties
to Belle Via which later refused to pay development costs. Reserves sued Crystal and Belle Via. Citing § 1 1 and
(3) of the Restatement (Second) of Contracts, the court noted that Crystal’s duties could be delegated but unless
Reserves (the obligee) had otherwise agreed by entering into a novation that released Crystal from its obligation,
neither the delegation of Crystal’s duties nor the assumption of those duties by Belle Via discharged Crystal’s duty
to Reserves. Reserves Dev. LLC v. Crystal Props., LLC, 986 A.2d 362 (Del. 2009).
Western Oil Company assigned to Amoco its right to oil produced from certain fields owned by a partnership.
Western notified the partnership that it should look exclusively to Amoco for payment. The partnership stated that it
would allow Amoco to take the oil only on condition that Western expressly recognize its continuing liability under
the contract. Western refused, repeating its renunciation of liability under the contract. The partnership terminated
the contract and assigned its rights against Western to Bliss and Wetherbee. The court held that Western could not
release itself from liability, and its anticipatory repudiation of the contract was properly treated as a breach by the
partnership, which allowed the partnership to cancel the contract. Western Oil Sales Corp. v. Bliss & Wetherbee,
299 S.W. 637 (Tex. App. 1927).
The partnership could have continued the contract with Amoco without appearing to agree to a novation by its
conduct. It could have provided a clear notice to Western that it was receiving the delegated performance of Amoco
“without prejudice,” “under protest,” or similar language. Such a reservation of rights precludes a finding of novation
or discharge of the repudiating assignor. Restatement (Second) of Contracts § 2 2 referring to UCC § 1-20 .
(UCC § 1- 0 in the revised version of UCC Article 1 is identical to § 1-20 . The section is designed to allow
performance to continue despite a pending dispute.
Practice Resource:
• Corbin § . (effect of delegating legal duties—novation distinguished).

End of Document

§ 4 .05 Assignment of Conditional and Executory Rights and Duties

If Ames has agreed to paint Barnes’s house in exchange for Barnes’s promise to pay Ames $10,000, Barnes’s duty
to pay the $10,000 is constructively conditioned on Ames’s performance. Nonetheless, Ames may assign her
conditional right to the $10,000 to Carr under this executory contract. Like any other assignee, Carr takes only the
right that Ames had to assign—a right subject to the condition that Barnes’s house will be painted by Ames or, if the
duty is delegable, by another competent painter. The fact that a contract right is very often constructively conditional
on the performance of the assignor, or expressly conditional on the occurrence of some other event, does not
prevent the right from being assigned. Restatement (Second) of Contracts § 20 cmt. c. See Advanced Testing
Techs., Inc. v. Desmond (In re Computer Eng’g Assocs.), 337 F.3d 38, 46 n.13 (1st Cir. 2003).
Practice Resource:
• Corbin § . (assignment of conditional rights—executory rights and duties).

End of Document

§ 4 .06 Assignment of Option Contract Rights

An offer creates a power of acceptance only in the offeree. An option contract, however, creates a contract right to
an irrevocable power of acceptance in the option holder. Since the option holder not only has a power of
acceptance but also a contract right to exercise that power regardless of the wishes of the obligor, such a contract
right is assignable. Restatement (Second) of Contracts § 20 cmt. a. Although the contract may expressly limit the
exercise of the irrevocable power of acceptance to the option holder, in the absence of such a provision, the right
under the option contract is assignable. See Melrose Enters. v. Pawtucket Form Constr. Co., 550 A.2d 300 (R.I.
1988).
A commercial property lease included an option to purchase the property. The lessees assigned the entire lease,
including the option. The assignee exercised the option, which the owner resisted. Although the lease stated that its
terms were binding on the parties’ assigns, the court deemed this language unnecessary to support its holding that
there had been an effective assignment of the option to purchase the property. Smithfield Oil Co. v. Furlonge, 257
N.C. 388, 126 S.E.2d 167 (1962).
Practice Resource:
• Corbin § . (assignment of option contract rights).

End of Document

§ 4 .0 Prohibition of Assignment
[1] Contractual Prohibition of Assignment

Older cases reflected a split of authority on the enforceability of contract provisions prohibiting the assignment
of rights. Some courts denied enforcement on the ground that such provisions constitute restraints on the
alienation of property. Other courts categorically rejected that view since the policy underling restraints on
alienation had only a limited application to contract rights. Neither of these absolute views reflects the current
view.
Modern contract law favors the free assignability of contract rights, and it therefore construes anti-assignment
clauses narrowly. Easton Bus. Opportunities, Inc. v. Town Exec. Suites, 230 P.3d 827, 830 (Nev. 2010). Earlier
we noted that general language assigning “the contract” is presumptively construed as both an assignment of
rights and a delegation of duties. Language prohibiting the assignment of “the contract,” however, is
presumptively construed narrowly to prohibit only the delegation of duties and not the assignment of rights.
A contract contained the following provision:
[T]his contract is not assignable by [Digital Media] and shall be binding upon the heirs, legal
representatives, successors and assigns of the parties hereto.
The plaintiff argued that the anti-assignment clause absolutely prevented Digital Media from assigning its rights.
The court explained:
[P]arties may include an anti-assignment provision in the contract, prohibiting (1) the assignment of rights,
(2) the assignment of duties, or (3) both. But, careful detail must be given to the language of such
o isio . [T]he anti-assignment provision merely prohibits the assignment of “the contract,” but failed to
detail whether the prohibition applies to the assignment of rights, duties, or both.
Relying on the construction of such language presumed by both Restatement (Second) of Contracts § 22 1
and UCC § 2-210 the court construed the general language prohibiting assignment as precluding only the
delegation of duties. Traicoff v. Digital Media, Inc., 439 F. Supp. 2d 872 (S.D. Ind. 2006).
[2] Absolute Prohibition of Assignment Distinguished from a Promise That Creates a Duty Not to
Assign
The court’s caveat that “careful detail must be given to the language” of an anti-assignment clause is well
taken, not only to assure that it applies to both delegation of duties and the assignment of rights. Even when a
court recognizes that language applies to assignment of rights, the narrow construction of anti-assignment
clauses distinguishes between a duty not to assign and a prohibition against assignment. One court has clearly
set forth this distinction:
The contract may contain a promise by one or both parties to refrain from assigning . The promise
creates a duty in the promisor not to assign. It does not deprive the assignor of the power to assign and its
breach, therefore, would simply subject the promisor to an action for damages while the assignment would
be effective.
Rumbin v. Utica Mut. Ins. Co., 254 Conn. 259, 271–272, 757 A.2d 526, 533 (2000), quoting J. Murray, Jr.,
Contracts § 1 (3d Ed. 1990). Other cases make this distinction which is supported by Restatement (Second)
of Contracts § 22 2 .
There remains a question as to just how clear the language must be in order to constitute an absolute
prohibition of assignment rather than a mere promise that creates a duty not to assign. Many courts require
express language that makes any attempt to assign rights wholly “void” or “invalid.” See Pravin Banker Assocs.
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v. Banco Popular Del Peru, 109 F.3d 850, 856 (2d Cir. 1997). Where a provision stated that a party “shall not
have the power to sell or mortgage or encumber … periodic payments [under a structured settlement] … by
assignment or otherwise,” the court concluded that the attempted assignment was legally invalid since there
was a prohibition against the power to assign. No More Waiting LLC v. Hack, 2010 Conn. Super. LEXIS 1035
(May 24, 2010). While fully agreeing with the distinction between a duty not to assign and a manifested
intention of surrendering a power to assign, a few courts are critical of what may be termed a “magic words”
approach; these courts are willing to consider all of the surrounding circumstances to determine whether the
parties intended the power to assign to be surrendered notwithstanding the absence of “magic words” such as
“void,” “invalid,” or “of no effect.” Bank of Am., N.A. v. Moglia, 330 F.3d 942, 947–948 (7th Cir. 2003).
In Condo v. Conners, 266 P.3d 1110 (Colo. 2011), an anti-assignment clause stated that a party “shall not sell,
assign, pledge or otherwise transfer any portion of its interest” in a particular fund without the approval of other
members of the fund. The trial court held that the assignment was ineffective. The court of appeals affirmed.
The Supreme Court of Colorado reviewed the “classical” versus “modern” approaches to anti-assignment
clauses. The court of appeals had applied the “classical” approach under which an assignment made in
violation of an anti-assignment clause is void ab initio because the assignor was powerless to assign the right.
Under the “modern” approach as evidenced by the opinion in Rumbin v. Utica Mutual Ins. Co., supra, a mere
promise not to assign creates only a duty in the promisor (assignor) not to assign. It does not surrender the
power to assign. To prohibit the assignment, the clause must restrict the power to assign, which may be
evidenced by language stating that any such assignment shall be deemed “void” or “invalid.” The court
hastened to add that not all jurisdictions require “magic words” to preclude the “power” to assign. The
Restatement (Second) of Contracts does not adopt the formulaic “magic words” requirement; it recognizes only
a duty not to assign unless “a different intention is manifested” § 22 2 cmt. c). Though agreeing with the
holding in the court of appeals that the power to assign had been surrendered under the anti-assignment
clause, the instant court was careful to note that its holding should not be read as a blanket rejection of the
“modern” approach in favor of the “classical” approach applied by the court of appeals. Rather, noting that the
Restatement’s view that the modern approach is necessarily dependent on the circumstances, the court
“narrowly” held that the strict “magic words” approach was inapplicable to the present case. The
“circumstances” in this case included an important statutory mandate (C.R.S. 7-80-108) of giving “maximum
effect” to the operating agreement, which contained the anti-assignment clause that the court read as
prohibiting the power to assign.
In GOE Lima, LLC v. Ohio Farmers Ins. Co. (In re GOE Lima, LLC), 2012 Bankr. LEXIS 1172 (N.D. Ohio Mar.
19, 2012), a performance bond stated that no right of action shall accrue on this Bond for any person other than
the owner, its executors, heirs, administrators or successor. The court recognized that such bonds typically
disclaim the rights of assignees without the consent of the obligor since the named individual’s capacity to
perform and other capabilities can be material as to a surety’s decision to provide a bond. Here, however, the
owner did not assign any rights it had under the contract since the contract had been terminated. Rather, the
owner assigned its right to damages which was not precluded by the anti-assignment provision.
[3] Otherwise Non-delegable Duties Can Be Made Delegable by the Express Agreement of the Parties
It is important to recall that duties requiring artistic talent, skills, unique abilities, or personal relationships are
not delegable because the obligee has a substantial interest in having the duty performed by the original
obligor. Such otherwise non-delegable duties, however, can be made delegable by the express agreement of
the parties. Similarly, if the duty is ordinarily delegable because it requires no particular skill or talent, the
parties may nonetheless agree that it can be performed only by the original obligor.
[4] Anti-assignment Clauses Under the UCC Are Enforceable

UCC § 2-210 2 proclaiming the free assignability of the rights of a seller or buyer of goods, begins with the
phrase, “Unless otherwise agreed.” Anti-assignment clauses under the UCC are enforceable. Under UCC § -
406(d) (formerly § - 1 however, a clause prohibiting the assignment of certain types of contract rights will
not enforced. It is important to understand how these sections are reconciled.
Even at common law, restrictions on the right to assign the payment of money were viewed with disfavor. In our
earlier description of UCC assignments, we saw the critical importance of the continuous assignment of
Page 3 of 3
accounts as the lifeblood of the commercial financing system in a free market credit economy. As suggested by
one court:
Accounts and other simple promises to pay are important collateral in modern commercial transactions,
and their value as collateral is maximized by stripping them of encumbrances, such as an antiassignment
clause unlikely to be noticed in the haste of transacting.
Bank of Am., N.A. v. Moglia, 330 F.3d 942, 948–949 (7th Cir. 2003).
The essential UCC Article 9 concern, therefore, is to ascertain the free transferability of accounts that are
important for commercial financing. It is not designed to make anti-assignment clauses unenforceable in other
contracts involving accounts. Thus, Article 9 lists exceptions to which its anti-anti-assignment provision does
not apply. If the accounts of a business are assigned as part of the sale of the business out of which the
accounts arose, an anti-assignment clause would be enforced because prohibiting this kind of assignment does
not interfere with commercial financing that involves the assignment of accounts to factoring companies that
supply the necessary financing to businesses on a continuing basis. UCC § -10 (formerly § -10 .
Other exceptions include an assignment of wages (UCC § -10 (formerly § -10 an assignment of
accounts for collection purposes only (UCC § -10 (formerly § -10 an assignment of a single
account to pay a preexisting debt (UCC § -10 (formerly § -10 and an assignment of a right
represented by a judgment other than a judgment on a right to payment that was collateral (UCC § -10
(formerly § -10 h .
Several cases have also arisen concerning a transfer of an interest in or claim under a policy of insurance.
These transfers were excluded under the pre-1999 version of Article 9. The revised version continues to view
Article 9 as inapplicable to such assignments with only a very limited exception. UCC § -10 states that
Article 9 does not apply to the transfer of an interest in or an assignment of claim under a policy of insurance
“other that an assignment by or to a health-care provider of a health-care-insurance receivable and any
subsequent assignment of the right to payment, but Sections 9-315 and 9-322 apply with respect to proceeds
and priorities in proceeds.”
Practice Resources:
• Corbin § . (contractual prohibition of assignments—antiassignment clauses);
§ .10 (UCC—anti-assignment provisions).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 50 CONDITIONAL AND FUTURE RIGHTS—
AFTER-ACQUIRED PROPERTY
CHAPTER 50 CONDITIONAL AND FUTURE RIGHTS—AFTER-ACQUIRED

PROPERTY
the subject matter.

End of Document
§ 50.01 Assignment of Future Rights
[1] Common Law Treatment of Future Rights

If an assignment is a present transfer of an existing right, it would appear to be impossible to assign a right
expected to arise in the future since such a right is not presently existing. If assignments are viewed as though
they are transfers of chattels, the statement that nothing can be assigned that does not exist rings true. As we
saw earlier, however, an assignment was not viewed in the same fashion as the transfer of tangible things. The
common law found its analysis in the power of attorney that allowed the holder of the power to require
performance of the assigned right and the proceeds to be retained by the holder-assignee. Under the analogy
of a transfer of chattels, the transfer of a future right could inspire equitable relief when the right materialized
based on the equitable maxim that equity regards as done what ought to be done.
Common law courts were no strangers to fictions and the transfer of a future right illustrated that tendency
through the use of the phrase “potential existence.” When a builder assigned future progress payments or a
plumber assigned future payments under a contract it had not performed, a court could find “equitable title” in
the assignee at the time of the assignment because the right had “potential existence.” These types of cases
involved existing contracts in which the future rights were promised, but courts also recognized “continuing
relationships.” In one such case, a printer who had regularly performed printing work for the Mayor and
Aldermen of New York assigned his “right” to a future printing job despite the fact that he had no contract for the
work. Field v. Mayor, etc., of New-York, 6 N.Y. 179 (1852).
Over a century later, a theatrical producer had the exclusive right to create a musical stage and film version of
the play Pygmalion, but had not taken any steps to do so. He assigned a portion of his royalty rights to the non-
existent productions. Citing Field, the court found that the assignment was effective. Speelman v. Pascal, 10
N.Y.2d 313, 178 N.E.2d 723 (1961). The assignment of the right to royalties on what was to become the
famous play and film My Fair Lady was much more than a mere hope because Pascal had the exclusive right to
create the production and to receive the royalties. The Field case, however, was based exclusively on past
relationships since the printer had no right to any future work.
[2] Future Rights Under the Restatement (Second) of Contracts

The modern view clearly reflects its provenance. Restatement (Second) of Contracts § 21 recognizes that an
assignment of rights expected to arise out of an existing employment or continuing business relationship is as
effective as an assignment of a presently existing right. They are not assignments of future rights that have yet
to mature; they are present assignments of existing rights. See In re M. Fabrikant & Sons, Inc., 385 B.R. 87
(Bankr. S.D.N.Y. 2008).
If otherwise permitted by statute, where a worker has a contract terminable-at-will and, at the beginning of the
month, assigns wages he will earn three weeks later, such an assignment would be effective. Though the
worker has no contract right to such wages until they are earned, the worker has an existing employment. If a
seller of brick receives oral assurances that it will be the supplier of brick on a large construction project, the
absence of a written contract to make its right enforceable does not prevent its present assignment of such a
right. If there is no existing contract, continuing employment, or other continuing business relationship, any
purported assignment is a mere promise to assign, the enforcement of which would require the same kind of
proof as any promise. Restatement (Second) of Contracts § 21 2 and cmt. d.
Page 2 of 2
Practice Resources:
• Corbin § 0.1 (assignment of “future” and conditional rights); § 0.2 (the modern
view—Restatement (Second) of Contracts).

End of Document
§ 50.02 Assigning Future Rights in After-Acquired Property—UCC

In terms of its importance to the daily operation of business, the most important illustration of the assignment of
future rights occurs under Article 9 of the Uniform Commercial Code (UCC). Merchants require loans to pay for new
inventory, equipment, and other expenses. To assure repayment of the loans, creditors take security interests not
only in the existing inventory, equipment, and customer accounts of the merchant debtors, but in the inventory,
equipment and accounts that will flow through the debtor’s business in the future. This is called “after-acquired”
property. Article 9 facilitates commercial financing by allowing a merchant to grant one security interest in all
present and after-acquired property so that the creditor’s security interest attaches to replacement inventory and
equipment as soon as the merchant obtains rights in the collateral. The security interest in the after-acquired
property is perfected in the same manner as a security interest in existing property, namely by the filing of a
financing statement in an appropriate county office to create a public record of the security interest which informs
potential future creditors that the debtor’s property is already subject to a security interest and any subsequent
security interest in the same collateral will be subject to the interest recorded in the financing statement of the
creditor who was first to file. These issues are governed by Article 9 of the UCC which is explored in materials
dealing with security interests.
Practice Resource:
• Corbin § 0. (assigning future rights in after-acquired property).

End of Document
§ 50.03 Partial Assignments

Once the assignability of contract rights was generally recognized, other issues became prominent. One of them
was the difficulty a promisor may confront when a promisee makes several partial assignments of the contract right.
The promisee may numerous claimants and a similar number of lawsuits should it choose to contest the validity of
the claims. Since common law had no procedures to react effectively to this situation, the flexibility of equity was
summoned to react.
The fusion of law and equity and the modernization of procedures have produced the current general rule that a
partial assignment is operative as to a partial right as if it were a separate right. Restatement (Second) of Contracts
§ 2 1 . The flexible procedures of modern courts allow the partial assignee to join all other partial assignees in the
suit as plaintiffs or defendants. If the partial assignee does not join other claimants, the obligor may allow the suit to
proceed or it may seek the dismissal of the suit for non-joinder of necessary parties. Restatement (Second) of
Contracts § 2 2 . See also Booker v. Everhart, 294 N.C. 146, 240 S.E.2d 360 (1978). Where an employee
assigned part of his future wages to a creditor without the consent of the employer, the court cited Corbin on
Contracts in holding that a partial assignment cannot be enforced against a party without his consent or the joinder
of all persons entitled to the various parts of the debt. The court noted that the employer should not be held to
multiple lawsuits that were not contemplated in the original contract. Space Coast Credit Union v. Walt Disney
World Co., 483 So. 2d 35 (Fla. Dist. Ct. App. 1986).
Some older cases held that a partial assignment is not effective against a subsequent assignment of the entire
right, or against attaching creditors, or the trustee in bankruptcy. Nonetheless, the fact that an assignment is partial
should be irrelevant in this or any other regard. A partial assignment should be held to be effective in the same
fashion as an assignment of the assignor’s total right under the contract. After notice of an assignment, payment in
full to the assignor or to a second assignee does not discharge the debtor, nor does a compromise agreement or an
accord and satisfaction.
Practice Resource:
• Corbin § 0. (partial assignments).

End of Document
§ 50.04 Assignment of Powers and Privileges

Legal rights are often accompanied by powers, privileges, and immunities. Thus, the owner of a legal right to
receive the payment of money has the legal privilege of bringing suit to collect it, and the owner’s assignee typically
receives the same privilege even though there may not be any expression of the privilege in the assignment. The
holder of an option to purchase land has a conditional right to such a conveyance, the power to convert that right to
one of immediate conveyance, and immunity from the owner’s revocation of the offer. The option holder also has
the power to assign the privilege, immunity, and power to an assignee. If, however, the option required rendition of
a personal service by the option holder, the assignment of the option would not create in assignee the power of
performing the condition to convert the right into an immediate right to conveyance of the property.
Another example of the inability to assign an accompanying privilege occurred in a Massachusetts case where the
conveyance of a tract of land was accompanied by granting a privilege to the purchaser of taking whatever ice he
required for his own use, but not to sell or give away. The contract stated that the privilege was not assignable.
Proctor v. Union Coal Co., 243 Mass. 428, 137 N.E. 659 (1923). Even in the absence of such a provision, however,
the privilege should be seen as having been limited to the original buyer since it was to be determined by his needs
rather than the needs of an assignee.
Practice Resource:
• Corbin § 0. (assignment of powers and privileges).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 51 LEGAL EFFECTS OF ASSIGNMENT—

DEFENSES AND PRIORITIES
CHAPTER 51 LEGAL EFFECTS OF ASSIGNMENT—DEFENSES AND

PRIORITIES
the subject matter.

End of Document

§ 51.01 Defenses to Which the Assignee is Subject

Throughout three centuries of American contract law, courts have consistently repeated the truism, “The assignee
stands in the shoes of the assignor.” A twenty-first century opinion refreshes the statement without changing its
meaning: “[T]he common law puts the assignee in the assignor’s shoes, whatever the shoe size.” Olvera v. Blitt &
Gaines, P.C., 431 F.3d 285, 289 (7th Cir. 2005) (Posner, C. J.). The same principle is often found in other familiar
language: “[T]he rights of an assignee can rise no higher than those of the assignor.” Arnold M. Diamond, Inc. v.
Gulf Coast Trailing Co., 180 F.3d 518, 524 (3d Cir. 1999).
If the right of the assignor is voidable, unenforceable, subject to express or constructive conditions that have not
occurred, subject to a statute of limitations that has expired, Bayside Holdings, Ltd. v. Viracon, Inc., 2012 U.S. Dist.
LEXIS 58219 (D. Minn. Apr. 26, 2012), or any other defense, the same right in the assignee is subject to the same
defenses. If a contract requires arbitration, the assignee can pursue its rights only in arbitration. Star Windshield
Repair, Inc. v. Western Nat’l Ins. Co., 768 N.W.2d 346 (Minn. 2009). If the applicable statute of limitations has
expired on a contract right before it is assigned, the right is subject to the statute of limitations in the hands of the
assignee. See Mt. Peaks Fin. Servs. v. Roth-Steffen, 778 N.W.2d 380 (Minn. Ct. App. 2010).
In the next section, we will see how the assignee may also be subject to setoffs and counterclaims from separate
transactions that accrued prior to notice of the assignment.
Practice Resource:
• Corbin § 1.1 (defenses to which the assignee is subject).

End of Document

§ 51.02 Counterclaims and Set-Offs

When a promise is not enforceable because it lacks consideration or because a condition has not occurred or is
unenforceable for any number of other reasons, the promisor may establish those defenses, and they will deny a
remedy to the promisee. The promisee, however, has not committed a breach. The promisee is simply precluded
from a remedy against the promisor. If, however, a defendant has a counterclaim, it is because the plaintiff has
committed a breach of duty. When a defendant asserts a counterclaim, set-off, or recoupment, the defendant is not
denying its own wrongful breach; it is asserting a claim that will adjust the remedy against it.
A counterclaim, set-off, or recoupment arising out of the same transaction from which the assignee’s claim was
created may be asserted against the assignee as if it were a complete defense. The fact that some of the events
creating it arose after the assignment does not affect its operation. Notification to the obligor of the assignment is
irrelevant with respect to such defenses or claims arising out of the same transaction. When, however, the obligor
has a claim against the assignor arising out of a separate transaction, notification of the assignment and the
maturity of the claim are particularly relevant. Where an assignee asserted claims against a plumber for breaches of
contract on two projects with the assignor, the plumber claimed a set-off for money owed to him on two other
projects with the assignor. The court held that an assignee is subject not only to an obligor’s defenses arising out of
the assigned contract, but to set-offs arising out of separate transactions with the assignor. Resort Point Custom
Homes, LLC v. Tait, 2010 Del. Super. LEXIS 144 (Apr. 7, 2010). Certain requirements, however, must be met to
effect a set-off.
An obligor purchased lumber from a supplier that assigned its right to a bank. The bank notified the obligor of the
assignment. The obligor sought to assert a set-off against the bank’s claim based on a prior (separate) contract for
lumber with the supplier that the obligor claimed the supplier had breached. The court noted that, under the Uniform
Commercial Code (UCC), such a set-off based on a separate transaction would be recognized only if it “accrued”
prior to the assignee-bank’s notification of the assignment to the obligor. The court explained that the UCC sought
to recognize unrelated set-offs to avoid undue prejudice to the obligor while still allowing the assignment to have
commercial value as a security device. If the obligor were permitted to assert any defense, set-off, or counterclaim,
regardless of when such claims became available, the use of assignments as security devices would be severely
undermined. The balance was struck, therefore, by allowing unrelated set-offs and counterclaims that had “accrued”
prior to notification of the assignment. Seattle-First Nat’l Bank v. Oregon Pacific Industries, Inc., 262 Or. 578, 500
P.2d 1033 (1972). UCC § - 0 2 (formerly § - 1 . See also Restatement (Second) of Contracts § 2.
“Accrued” was chosen in relation to statutes of limitation to determine when a cause of action exists. Under UCC
§ 2- 2 2 a cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of
knowledge of the breach. The definition of “notice” under the UCC requires no particular formality. An obligor would
“receive notice” when it comes to its attention or the notice is duly delivered at a place held out by the obligor as the
place for receipt of such communications. UCC § 1-202 e . (The revised form is substantially similar in the
predecessor section, § 1-201 2 . It is important to note that the filing of an Article 9 financing statement required to
perfect a security interest does not, by itself, qualify as notice of an assignment to an obligor.
Practice Resources:
• Corbin § 1.2 (counterclaims arising out of the original transaction); § 1.
Page 2 of 2
(counterclaims from separate transactions).

End of Document

§ 51.03 When the Original Transaction Is Void or Voidable

If an agreement is void, there was never any right to assign. When a contract is voidable, however, the obligor’s
power of avoidance is not affected by the assignment. Similarly, a contract may be unenforceable because it does
not meet the requirements of the statute of frauds, a defense equally available against the assignee. If the contract
was avoided prior to the assignment, the assignee took nothing under the assignment. If the time for exercising a
power of avoidance has not expired after the assignment, it is still available to the obligor against the assignee. If a
contract is voidable because of fraud, but the defrauded party takes no action and continues with the agreement,
the power of avoidance is not available against an assignor or assignee.
The right of an assignee is also subject to a power to terminate the obligor’s duties which is expressly reserved in
the contract and is exercised by notice. A franchised auto dealer sought to assign its franchise, and the franchisor
exercised a reserved power of termination because the franchisee had failed to construct a new showroom as
required by the franchise agreement. The court noted that, due to the failure, the transfer of the franchise could not
be made “free and clear” of the franchisor’s power of termination. Thus, the franchisor’s rejection of the proposed
transfer was not in violation of the state franchise protection act. Maple Shade Motor Corp. v. Kia Motors Am., Inc.,
2008 U.S. App. LEXIS 625 (3d Cir. Jan. 11, 2008).
Practice Resource:
• Corbin § 1. (original transaction void or voidable).

End of Document

§ 51.04 Discharge of Contract Rights and Duties

Release, rescission, accord and satisfaction, and novation are among the many ways in which a contract duty may
be discharged. But the obvious method of discharging a duty is by performance. An obligor’s duty to pay money is
discharged by payment. If the obligee has assigned the right to the money, but the obligor is neither actually nor
constructively aware of the assignment and, in good faith, pays the debt to the obligor, the assignee has a claim
only against the assignor since the obligor is discharged.
The significance of notice was emphasized in the following case. Smith obtained a judgment against Mallick and
assigned his right to eDebt which promised to pay Smith 60 percent of any future proceeds collected. eDebt notified
Mallick of the assignment. The absence of any action for a year, however, led Smith to request a reassignment from
eDebt. The reassignment was made, but Smith failed to notify Mallick. Shortly after the reassignment, eDebt
accepted $20,000 and real property from Mallick in satisfaction of the debt and marked the judgment note against
Mallick “satisfied.” When Smith objected to this arrangement, eDebt and its president “vanished.” In Smith’s action
against Mallick, the court relied on Restatement (Second) of Contracts § in noting that an assignee need not be
aware of an assignment, but an assignee takes subject to all claims and defenses that accrued prior to notice of the
assignment. Smith could have protected himself by notifying Mallick of the reassignment. His failure to notify Mallick
left him with a cause of action against eDebt, which now was nowhere to be found. Smith v. Mallick, 514 F.3d 48
(D.C. Cir. 2008).
The single exception to payment by an obligor before it is notified of an assignment occurs with respect to a failure
to procure symbolic writings or documents that are normally surrendered when the right is assigned. An obligor who
performs without insisting on such documents assumes the risk that the party receiving performance does not have
the documents. In effect, the failure to receive the documents constitutes constructive notification that the right of
the other party has already been assigned. Restatement (Second) of Contracts § cmt. h. See In re Columbia
Pacific Mortgage, Inc., 22 B.R. 753, 756 (W.D. Wash. 1982).
Just as payment by the obligor prior to notification will discharge the obligor’s duty, other methods of discharge will
do the same. If, for example, the original parties agree to a rescission before the obligor has any notice of the
assignment, the obligor’s duty is discharged. Frankford Trust Co. v. Stainless Steel Services, 327 Pa. Super. 159,
475 A.2d 147 (1984). The same result would apply to discharge of the obligor’s duty by novation, substituted
contract, or accord and satisfaction.
Practice Resource:
• Corbin § 1. (discharge—payment, release, accord and satisfaction—symbolic
writings).

End of Document

§ 51.05 Modifications After Notice of Assignment

Parties often modify their contracts for a variety of reasons. In construction projects, “change orders” are common.
Modifications in government contracts are sometimes required by budget cuts and changes in government
regulations. The assignment of a contract right does not necessarily preclude a good faith modification of the
contract by the original parties. The UCC recognizes that a good faith modification of an assigned contract is
effective. UCC § - 0 (formerly § - 1 2 .
If performance that has been completed creates a right to payment, the assignee owns that right and it cannot be
changed without the consent of the assignee. When the rights are executory, however, there may be sound
reasons for permitting good faith modifications after an assignment and notification thereof.
In Smith v. Mallick, 514 F.3d 48(D.C. Cir. 2008), where the debtor, without notice of an assignment, paid the debt to
the assignor, the court applied the general rule that an assignee takes subject to claims and defenses that accrue
prior to notification. While recognizing the general rule that, after notice of an assignment, the obligor pays the
assignor at its peril, another court determined that the rule was subject to an exception where a general contractor
made advances to a subcontractor to allow completion of the work. St. Paul Fire & Marine Ins. Co. v. James I.
Barnes Constr. Co., 59 Cal. 2d 691, 700, 381 P.2d 932, 938 (1963).
Assignees may also agree to modifications. In one case, a seller of land assigned his rights to installment
payments. The obligor-buyers entered into a modification of the contract with the assignee. The assignor objected,
claiming that the assignor retains the right to enter into a good faith modification as set forth in Restatement
(Second) of Contracts § 2 . The court rejected this argument, reminding the assignor that UCC §
recognizes the right of an assignee to modify the duty of the obligor. Kelly v. Lord, 173 Vt. 21, 38–39, 783 A.2d 974,
988 (2001).
Practice Resource:
• Corbin § 1. (modifications after notification of assignment).

End of Document

§ 51.06 Agreements Not to Assert Defenses

A mere assignee can take only the rights of the assignor. The transferee of a negotiable instrument, however, may
have greater rights than the transferor. Instruments such as checks, drafts, or promissory notes, are “negotiable”
when they meet certain formal requirements. When the transferee of a negotiable instrument meets the
requirements of a “holder-in-due-course” under UCC § - 02 the transferee takes free of all other defenses (except
for certain “real” defenses such as incapacity, duress, fraud in the execution, or a discharge in insolvency
proceedings). Thus, the transferee has rights that are greater than the rights of the transferor. The essential
rationale for this is to promote the free transferability of these important substitutes for money, which are not only
safe and convenient, but facilitate trade and commerce.
Consumers sometimes signed promissory notes that would be “negotiated” to parties closely connected with the
seller; these parties would claim holder-in-due-course status and thereby avoid the typical defenses that a buyer of
goods or services would have been able to assert against the seller. These “close connectedness” relationships
were criticized and the transferee faced the possible loss of holder-in-due-course status. The seminal case is Unico
v. Owen, 50 N.J. 101, 232 A.2d 405 (1967).
Sellers, therefore, began to include waiver of defenses clauses in their printed forms; the clauses were designed to
achieve the effect of holder-in-due-course status in ordinary assignments without the use of negotiable instruments.
The consumer buyer was no more aware of the ramifications of these boilerplate clauses that he or she was of
losing the great bulk of defenses to parties claiming holder-in-due-course status. Criticism of such waiver of
defenses clauses induced a 1975 Federal Trade Commission regulation requiring every consumer credit contract to
contain a conspicuous notice that the holder of such a contract would be subject to all claims and defenses that the
buyer could have asserted against the seller of the goods. 16 C.F.R. § .2. The same requirement is found in
state legislation and also in UCC § - 0 .
Practice Resource:
• Corbin § 1. (agreements not to assert defenses—waiver—“close connectedness”—
estoppel).

End of Document

§ 51.0 Equities of Third Persons Against an Assignor
[1] Latent Equities

An assignee takes subject to many defenses and counterclaims that the obligor could assert against the
assignor though the assignee is a purchaser of the assigned right for value without notice of such defenses or
counterclaims. Such an assignee, however, takes free of “latent equities” of others except the obligor.
Ames has a claim against Barnes. Ames is induced by fraud to assign the claim to Carr. Carr assigns it to
Davis, who takes it for value and without notice of the right of Ames. Under these facts, Davis would be subject
to the defenses that obligor Barnes had against original assignor Ames, but Davis would not be subject to the
claims of the defrauded Ames against Carr. If, however, the assignee is not a purchaser for value, the
assignee’s claim is subject to such a latent equity.
[2] Non-latent Equities

Alternatively, there are equities of third parties that are not “latent.” For example, a building contractor provides
to the owner a surety bond that may expressly secure the payment of laborers and materialmen, who have the
power to place a lien on the project. The builder may also assign its right to future payments to a bank to secure
loans necessary to complete the project. With respect to the assignee bank, the surety, laborers, and
materialmen are third parties with equitable claims to payment from the fund covered by the assignment, but
they are not “latent” equities. If the builder does not perform, the building will be completed at the expense of
the surety, who is then subrogated to the rights of the owner as a creditor against the defaulting builder. Since
the owner would be preferred over the assignee of the builder, when the builder does not perform, the surety is
preferred over the assignee. The surety will also have to pay the laborers and materialmen and becomes
subrogated to their rights. Like any other assignee, the right of the assignee bank is conditional on the builder’s
performance; if the builder has no right to payment, neither does its assignee. Thus, the assignee’s rights are
inferior to the claims of laborers and materialmen.
Practice Resource:
• Corbin § 1. (equities of third persons against an assignor).

End of Document

§ 51.0 Assignor’s Duties to Assignee

While more difficult questions typically arise between obligors and assignees, the assignment transaction involves
contractual promises and warranties, express and implied, between the assignor and assignee. As noted earlier,
until an obligor has notice of the assignment, it is necessary for the obligor’s protection that the assignor still retains
the power to discharge the obligation. Thus, the obligor’s payment to the assignor prior to notice of the assignment
discharges the obligation. Similarly, an accord and satisfaction or voluntary release upon which the obligor relies
will operate as a discharge of the debt.
However effective these or other valid methods of discharging the duty of the obligor, a discharge without the
consent of the assignee violates an implied promise by the assignor that it will do nothing to prevent or impede
enforcement of the assignee’s right. In one case, a buyer of sugar assigned its right but released the obligor. The
assignee was entitled to the difference between the contract price and the reasonable market value of the sugar. P.
N. Gray & Co. v. Cavalliotis, 276 F. 565 (D.C.N.Y. 1921), aff’d, 293 F. 1018 (2d Cir. 1923). If the assignor has
enriched itself by wrongful collection from the obligor, the assignee has a claim in restitution for the amount
received.
The assignor makes “transfer” warranties to the assignee analogous to warranties made in the transfer of
negotiable instruments for consideration but without indorsement by the transferee. A party who purports to assign
a contract under seal or for value warrants to the assignee that it will do nothing to impair the value of the
assignment; it warrants further that it is unaware of facts that would result in such impairment. Restatement
(Second) of Contracts § . It warrants that the assigned rights exists, that it is valid, and it is not subject to
limitations or defenses other than those that were stated or apparent at the time of the assignment. See Universal
Holdings II Ltd. P’ship. v. Overlake Christian Church, 2003 Wash. App. LEXIS 2269, at *10 (Sept. 25, 2003).
The assignor warrants the authenticity of any writing that induced the assignee to accept the assignment, but there
is no implied warranty that the obligor is solvent or that it will perform the obligation. Promises or representations of
fact to the assignee are treated in the same fashion as express warranties in contracts for the sale of goods. UCC
§ 2- 1 .
Like implied warranties in sale of goods contracts, assignment warranties may be disclaimed by clear language. In
one case, the disclaimer stated:
DISCLAIMER. EXCEPT AS SET FORTH IN THIS SECTION 2, [SIGNET] HAS NOT HERETOFORE MADE,
NOR DOES IT MAKE BY THIS AGREEMENT, ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR
IMPLIED OF ANY KIND OR NATURE.
CoreStates Bank, N.A. v. Signet Bank, 1996 U.S. Dist. LEXIS 12673, at *19–*20 (E.D. Pa. Aug. 23, 1996).
The phrase, “without recourse,” however, is insufficient to disclaim the assignor’s warranties. It merely emphasizes
that the assignor does not guarantee the obligor’s solvency or performance. Indiana Nat’l Bank v. State Dep’t of
Human Servs., 880 P.2d 371 (Okla. 1994).
The implication of warranties by an assignor depends upon the circumstances of the assignment. There is little if
any basis for implying such warranties in a gratuitous assignment as contrasted with an assignment for value or to
secure an antecedent debt.
Page 2 of 2
Practice Resource:
• Corbin § 1. (assignor’s duties to assignee—warranties).

End of Document

§ 51.0 Priorities Among Successive Assignees of the Same Right
[1] Priorities Under Common Law

If there is more than one assignment of the same right, priorities among successive assignees is typically
governed by statute. Absent a statute, the common law manifested the “New York” or “American” view that
gave priority to the first assignee on the logical footing that once a right has been assigned, the right is
necessarily extinguished in the assignor, who has nothing left to assign. Superior Brassiere Co. v. Zimetbaum,
214 A.D. 525, 212 N.Y.S. 473 (1925).
The “English” view gave priority to the assignee who first notified the obligor of the assignment; this view is
traced to Deare v. Hall, 3 Russ. 1, 48 (1828). The theory was that, until notification occurred, the assignee’s
ownership of the right was not complete.
A third view presents a compromise position sometimes called the “four horsemen” or “Massachusetts” view.
This view is espoused by First Restatement of Contracts § 1 and Restatement (Second) of Contracts § 2.
The theory begins with the logic of the New York view and states the general rule that the first assignee in time
prevails unless the first assignment is ineffective, revocable, or voidable by the assignor or subsequent
assignee. Even if the assignment is not subject to such infirmities, a subsequent assignee who is unaware of
the previous assignment will prevail if, in good faith, it gives value and obtains (1) payment or satisfaction from
the obligor, (2) a judgment against the obligor, (3) enters into a novation with the obligor, or (4) is in possession
of a symbolic writing that is normally surrendered with the assignment. See JW & JJ Entm’t, LLC v. Sandler,
2013 U.S. Dist. LEXIS 165424 (D. Md. Nov. 20, 2013).
The common law rules as to priority among successive assignees apply to wage claims, rights under insurance
policies, bank accounts, and some other transactions. The number of these assignments, however, pale by
comparison to assignments in commercial financing, and these are governed by the UCC.
[2] Priorities Under the UCC

Prior to the UCC, priorities among successive assignees were uncertain because the outcomes would differ
depending on whether a jurisdiction applied the “New York,” “English,” or “Massachusetts” rules. The federal
Bankruptcy Code made the situation even more complex and difficult.
The Bankruptcy Code is designed to provide an insolvent debtor with a fresh start by discharging its debts. At
the same time, fairness requires assets of the debtor to be marshaled and distributed equitably among its
creditors. To avoid allowing the debtor to prefer one or more of its creditors to the disadvantage of others, the
Bankruptcy Act makes preferential transfers voidable if the transfers occur within a certain period prior to
bankruptcy. The trustee in bankruptcy could avoid such preferential transfers to pay for past (antecedent) debt
and collect and recover the payment, which would then be included among all of the assets to be distributed
equitably. See 11 U.S.C. § . Debtors, however, assigned accounts receivable in exchange for new value
rather than antecedent debts. These exchanges were not subject to being avoided as preferential transfers.
A 1938 Amendment to the Bankruptcy Act provided that a transfer was “deemed” to take effect with respect to
preferences only when it was “so far perfected” that it would prevail against a bona fide purchaser under state
law. If it was not “so far perfected,” the transfer was “deemed” to have been made prior to the filing in
bankruptcy, making it a preferential transfer. Merchants engaged in “nonnotification” financing; that is, they
would assign their rights to payments by customers (accounts) without notifying the obligor-customers for
goodwill reasons. If the state law followed the “English” view that assignments were not complete until the
assignee notified the obligor, such nonnotification assignments would never be complete and were, therefore,
Page 2 of 3
subject to being avoided as preferential transfers since they would be “deemed” to have occurred just prior to
the debtor’s filing for bankruptcy. The United States Supreme Court confirmed this outcome in Corn Exchange
Nat’l Bank & Trust Co. v. Klauder, 318 U.S. 434, 439, 63 S. Ct. 679, 87 L. Ed. 884 (1943).
The desire to continue such nonnotification financing inspired a number of new state statutes and amendments
to the Bankruptcy Act. The critically important change occurred with the enactment of the UCC; the UCC
superseded sundry state statutes that were uneven in effectiveness. Under the UCC, an assignee obtains
priority over other assignees, regardless of which assignment was first in time, by perfecting a security interest
in the assigned account. “Perfection” of the security interest occurs through filing a financing statement in an
appropriate public office. The “first to file” rule prevails.
[3] Priorities of Assignees Versus Creditors

General creditors of the assignor have no security interest in a specific asset. Thus, an assignee that does have
a specific interest in the right assigned will prevail over a general creditor. When their house burned down, the
Helmses contracted with Belfor to rebuild their home in exchange for an assignment of their homeowner’s
insurance proceeds. At the completion of the rebuilding, the Helmses owed Belfor the amount they promised to
pay, $217,871.72, but paid him only $96,182.57. A state court found that the Helmses had assigned the
insurance proceeds to Belfor. The Helmses did not appeal the judgment of the state court. They filed
bankruptcy in the instant court and listed a portion of the insurance proceeds in their petition. The contest in this
court was between Belfor and the Helmses’ other creditors, as represented by the trustee in bankruptcy. The
court held that an effective assignment extinguishes the right in the assignor and places the proceeds in a
constructive trust for the assignee (Restatement (Second) of Contracts § 1 . Thus, where money is assigned
to a creditor, the assignment is “perfected” when it occurs, not when the money is later disbursed. While the
court noted certain exceptions, none of the exceptions were present. Belfor USA Group, Inc. v. Helms (In re
Helms), 467 B.R. 374 (Bankr. W.D.N.C. 2012).
When a creditor secures a writ of attachment as to certain accounts of the obligor, including the assigned
account, both the assignee and the attaching creditor have an interest in the same chose in action. It is
generally held that the one first in point of time has the better right. The assignee, however, has the greater
equity because it relied on a particular claim in giving value to the assignor, while the attaching creditor
originally relied only on the obligor’s general credit. Thus, when the assignment occurs prior to the judicial lien,
the assignee prevails regardless of any notice to the obligor. If, however, before it was notified of the
assignment, the obligor paid the attaching creditor, the obligor is protected against further liability. It has been
held that, even though an assignee did not notify the obligor of the assignment until after the entry of judgment
for an attaching creditor, the assignee still has priority if notice of the assignment is given before the debtor has
satisfied the judgment. McDowell, Pyle & Co. v. Hopfield, 148 Md. 84, 128 A. 742 (1925); Restatement
(Second) of Contracts § 1 2 .
If the assignment is governed under UCC Article 9, an attaching creditor is considered to be a “lien creditor.”
UCC § -10 2 . An Article 9 assignee that has not perfected its assigned right is subordinate to a lien creditor.
While the assignment of many types of collateral may be perfected by either filing a proper financing statement
or taking possession of the collateral, with only one exception, the perfection of the collateral called “accounts”
is perfected by filing. UCC § - 1 cmt. 2. The exception occurs when the assignment does not transfer a
significant part of the outstanding accounts. In that situation, the assignment is perfected by the attachment of
the security interest and no filing is necessary. UCC §§ -20 and 9-309(2). Regardless of how it is perfected,
the perfected assigned right takes priority over the interest of a lien creditor in the same right. UCC § -
317(a)(2).
Practice Resources:
• Corbin § 1.10 (priorities—common law successive assignees); § 1.11
(priorities under the UCC); § 1.12 (priorities—assignees versus attaching
creditors).

Page 3 of 3
End of Document
Corbin on Contracts Desk Edition > CHAPTER 52 JOINT AND SEVERAL CONTRACTS
CHAPTER 52 JOINT AND SEVERAL CONTRACTS

the subject matter.

End of Document
§ 52.01 Multiple Parties to a Contract
[1] Under Common Law, a Promise of the Same Performance by Two or More Promisors Created a
“Joint” Obligation
It takes only one party to make a promise, but at least two to make a bargain. As the number of promisors and
promisees increases in a given contract, the complexity grows. A and B may promise to pay C $100,000. If the
promise was stated as, “We, A and B, promise to pay C $100,000,” C can obtain a judgment against both A and
B and may execute the judgment on the property of either A or B. Each party is bound to pay C $100,000,
although one full payment by either A or B of $100,000 would discharge the duty of both A and B.
Where two departments of the state government promised to pay for processing of pork, the court cited
Restatement (Second) of Contracts § 2 1 in holding that, where two or more parties to a contract promise
the same performance to the same promisee, each party is bound for the whole performance, whether the duty
is joint, several, or joint and several. J & B Sausage Co. v. Dep’t of Mgmt. & Budget & Dep’t of Educ., 2009
Mich. App. LEXIS 1264 (June 4, 2009). The court in AAA Bonding Agency, Inc. v. United States Dep’t of
Homeland Sec., 596 Fed. Appx. 294, 2015 U.S. App. LEXIS 457 (5th Cir. Tex. 2015) cited the Corbin treatise
for the distinction between (1) a joint and several obligation, and (2) a several obligation—that is, whether the
obligors “promise[d] one and the same performance or … two different performances.” Before statutory
changes throughout the country, where the promise was in the form of a “joint” promise, the common law would
compel both promisors to be joined in any action to enforce their joint promise. If the promisee brought an
action against only one, a demurrer would be sustained because the other was not joined, even if the other was
dead, insolvent, or beyond the jurisdiction.
[2] Separate Promises of a Single Performance Created “Several” Liability

A and B could make separate promises by signing separate documents though still only promising one
payment of $100,000 to C. Common law courts would view such separate promises as creating “several”
liability, which C could enforce against either promisor and obtain separate judgments against A or B. If the
promise of A and B of the same performance could be characterized as “joint and several,” C could bring an
action against either A or B. The substantive liability of A or B is not an issue since, individually and collectively,
they owed a duty of payment to C of $100,000.
Common law courts, however, viewed promises by two or more promisors of the same performance to be
“joint” absent some language that could be interpreted to make them “joint and several.” In Stable v. Walmac
Stud Mgmt., LLC, 2014 U.S. Dist. LEXIS 35718 (E.D. Ky. Mar. 19, 2014), plaintiffs James, Kevin and Bryan,
entered into a “mare agreement” with the defendant under which the plaintiffs would receive the proceeds for
mares they delivered for breeding. The plaintiffs agreed to pay expenses for each mare. They delivered 10
mares to the defendant but did not receive payment of the proceeds. The defendant claimed that Bryan had an
individual obligation to pay the expenses. The court stated the general rule that, absent a demonstrated
contrary intent, where two or more parties make a promise to the same promisee, the promise will be construed
as promising the same performance (citing § 2 of the Restatement (Second) of Contracts). An obligation
given by two or more persons is usually assumed to be a joint obligation unless there are distinct words of
severance that make the obligation several or joint and several. Herrera v. Eastside Wok, Inc., 2014 U.S. Dist.
LEXIS 164901 (S.D.N.Y. Nov. 25, 2014). The court in Bob Spain Real Estate Servs. v. Cox, 2015 Wash. App.
LEXIS 100 (Wash. Ct. App. Jan. 27, 2015) cited the presumption referenced in Restatement (Second) of
Contracts § 2 cmt. c: “When two or more persons undertake a contractual obligation they are presumed to
undertake it jointly and ‘words of severance’ are necessary to overcome the es m tio . . This presumption
Page 2 of 3
is strengthened when the promisors undertook to accomplish together a single result.” In Bob Spain Real
Estate, Cox and Lopinto were joint owners of the family residence, and they intended to sell together their
undivided interests in the residence. The opening line of the listing agreement defined the parties as one seller.
It contained no language severing one seller’s obligations or liability from another seller’s duties or
responsibility.
Modern courts are willing to consider manifestations of contrary intention in any form. Restatement (Second) of
Contracts § 2 cmt. b. Where a promisor’s liability is “several” and not “joint,” he is presumed to be 100
percent liable for the performance of the promise but, upon performing the promise, could recover nothing from
other promisors since he is not “jointly” liable. Where, however, that presumption could lead to an absurd result
in relation to the manifested intention of the parties, a courts may treat the presumption as rebutted. Int’l
Marine, LLC v. Delta Towing LLC, 2013 U.S. Dist. LEXIS 156973 (E.D. La. Oct. 31, 2013).
Jeanne and Gina DeRaimo signed a contract referring to them in the singular as “buyer” of a to-be-built
condominium. They refused to complete the sale on the footing that the finished building did not meet
specifications. Jeanne moved that the action against her should be dismissed because of the failure to join an
indispensable party, since both had contracted for an equal and indivisible interest in the property. If Gina was
an indispensable party under Federal Rule of Civil Procedure 19(a), rule 19(b) requires dismissal when joinder
of the other party is not feasible.
Relying on Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399 (3d Cir. 1993), the court held
that whether co-promisors are liable as “joint” or “joint and several” promisors was determined in Pennsylvania
as a matter of construction or interpretation rather than a rule of law. While the instant court recognized the
common law presumption that liability is “joint,” the Janney court also recognized a “strong trend in favor of the
principle that co-signers or co-obligors on a contract are jointly and severally liable for its performance.” Janney,
at 405. Since courts often find joint and several liability, even though the promise is phrased in the singular, the
court held that Jeanne and Gina were jointly and severally liable. The motion to dismiss for failure to join an
indispensable party was denied. Carriage House Condos. GP, Inc. v. Deraimo, 2008 U.S. Dist. LEXIS 4653
(E.D. Pa. 2008). Accord Braverman Kaskey, P.C. v. Toidze, 2011 U.S. Dist. LEXIS 117569 (E.D. Pa. Oct. 11,
2011).
[3] Statutory Changes to Common Law Rules

State statutes have been enacted to overcome the common law compulsory joinder of joint promisors and
related common law rules. DKN Holdings LLC v. Faerber, 2015 Cal. LEXIS 4652 (Cal. 2015). These rules
required a judgment for or against all promisors, the discharge of joint promisors by a judgment against co-
promisors, that actions against deceased joint promisors be barred while surviving promisors remain liable, and
that discharge of some joint obligors by release, rescission, or accord and satisfaction releases all obligors.
It is important to emphasize that a typical statute does not change the substance of the obligation. Thus, where
an obligation for the same performance among three joint promisors was substantively “joint,” the statute
merely changes the common law requirement that joint contractors sue and be sued jointly by recognizing that,
“for the purpose of action thereon,” such contracts are “deemed to be joint and several” without affecting the
substantive rights of the parties. Clayman v. Goodman Properties, Inc., 518 F.2d 1026, 1032 (D.C. Cir. 1973),
quoting D.C. Code § 1 -2101. By such a statutory conversion of “joint” into “joint and several,” less than all joint
promisors can be sued although each remains liable for performance and those who fail to perform have
suretyship obligations to joint promisors who do perform.
Practice Resources:
• Corbin § 2.1 (multiple parties to a contract—“joint,” “several,” “joint and
several”—statutory changes to common law doctrines); § 2. (promises of one
performance made by two or more persons); § 2. (effect of non-joinder of a
joint promisor and of a judgment against one only).

Page 3 of 3
End of Document
§ 52.02 Suretyship Obligations

When a promise states, “We, A and B, promise to pay C $100,000,” their joint substantive liability is clear. They are
both principal debtors, but they are also sureties of each other. Absent a contrary agreement between them, each
has an equitable obligation to pay his or her respective share. Thus, if A pays the full $100,000 to C, A is entitled to
contribution from B in the amount of $50,000. See Sound Built Homes v. Windermere, 118 Wn. App. 617, 72 P.3d
788 (2003).
Castoro and D’Ipollito were co-obligors on a debt owed to Trenton Trust, which it had reduced to judgment. Castoro
refused to pay his share. D’Ipollito made payments but had insufficient funds to pay the entire debt and Trenton
Trust levied on D’Ipollito’s house. Castoro purchased the house at a sheriff’s sale for less than half of D’Ipollito’s
market value equity in the house and brought an action to evict D’Ipollito. D’Ipollito petitioned for reconveyance of
the house or a money judgment against Castoro for his half of the payment due Trenton Trust. Castoro claimed that
he had no duty to contribute to the payment of the debt until his co-guarantor, D’Ipollito, had paid more than his
proportionate share. Citing Corbin on Contracts, the court held that the duty of an obligor to exonerate a co-obligor
arises upon the maturity of the debt and before any payment has been made. The court ordered the house to be
held by Castoro in constructive trust with the single obligation of reconveying it to D’Ipollito. D’Ippolito v. Castoro,
51 N.J. 584, 242 A.2d 617 (1968).
Practice Resource:
• Corbin § 2.2 (co-obligors—the suretyship dimension).

End of Document
§ 52.03 Whether Two or More Promisors Have Promised a Single

Performance or Separate Performances is a Question of Interpretation
Whether two or more promisors have promised the same (single) performance or have each promised a limited and
separate performance is a question of interpretation. Int’l Marine, LLC v. Delta Towing LLC, 2013 U.S. Dist. LEXIS
156973 (E.D. La. 2013). If a supplier of goods, C, receives an order for goods from A and B that requires separate
deliveries to each buyer, each of whom is to be charged separately, C may not get a judgment against either buyer
for goods shipped to the other, nor may C get a judgment against both A and B as if they are jointly liable.
Suppose, however, that B’s credit is poor and C tells A that no goods will be shipped to B unless A becomes a
surety for B. A agrees. With respects to the goods delivered to A, C can get judgment only against A. But with
respect to goods delivered to B, both A and B are liable for the same performance and both can be joined in an
action for failure to pay for the goods delivered to B. Though A was a surety or guarantor of B’s debt to C, such a
guarantor is promising the same performance as the principal debtor (B) and is jointly or jointly and severally liable
for that debt.
If a transaction takes the form of a single contract and the promisors’ expression leads a reasonable promisee to
understand that each one promises the entire compensation, the promisors are bound, either jointly or jointly and
severally, according to that reasonable understanding. Where two or more persons have a common interest in
property and contract to pay for improvements to that property, absent a clear expression to the contrary, the
promisee is reasonable in assuming that they are all promising the agreed compensation. If two or more owners of
corporate shares contract with a broker to sell all of their shares, absent contrary expressions, the broker is
reasonable in assuming that all the promisors are responsible for the broker’s commission rather than some
proportionate share of that commission. As usual, however, there is no escape from the necessity to interpret the
promise.
Tony Williams was a member of a recording quintet known as “The Platters.” He was informed that he would be
breaching a contract with a recording company if he performed individually for another record company. The
contract stated that the “artist” would not perform for another recording company. In Williams’s declaratory judgment
action, the court noted that a statute had converted joint obligations into joint and several obligations. Nonetheless,
the court concluded that the term “artist” as used in the contract referred to the quintet and not the individual
members. Williams v. Mercury Record Corp., 295 F.2d 284 (7th Cir. 1961).
Practice Resource:
• Corbin § 2. (promises of separate performances by two or more persons).

End of Document
§ 52.04 Effect of the Death of a Joint Obligor

Assume Ames and Barnes have signed a document stating, “We promise to pay Carr $100,000” for services and
Carr then renders the services. Before Carr is paid, Barnes dies. At common law, Barnes’s estate was discharged
from any liability on the outstanding debt to Carr, even if, as between Ames and Barnes, Barnes was the principal
debtor and Ames was the surety or even if Ames was insolvent. There never was any justification for such an
onerous result and the rule has been abolished throughout the country by statute or decision. Even at common law,
however, if Ames and Barnes had signed a document stating, “We jointly and severally promise to pay Carr
$100,000,” Barnes’s death would not relieve his estate from an action to enforce the promise.
The obligation of members of a partnership was “joint” at common law, though equity allowed an action against a
deceased partner. Modern statutes making “joint” obligations effective “jointly and severally” are applicable to
partnerships. Under the Uniform Partnership Act, partners are jointly and severally liable.
Practice Resource:
• Corbin § 2. (effect of death of a joint obligor).

End of Document
§ 52.05 Effect of Release of Liability
[1] Distinctions Between Contract and Tort Obligations

Where two or more persons are obligated to render the same performance, there are distinctions between
contract and tort obligations. An obligee is entitled to no more than full compensation whether there are two or
more breaching contract promisors who owed the same performance or two or more tortfeasors responsible for
the harm caused. Measuring the compensation for a tort injury, however, allows greater discretion by a court or
jury.
As seen earlier, when two or more promisors are bound to render the same performance, there is a suretyship
relationship between the parties. As between joint tortfeasors, no such common law suretyship or right to
indemnity existed. Modern statutes, however, do provide for contribution between tortfeasors.
The previous sections of this chapter have explored the often curious common law distinctions between “joint”
and “joint and several” liability for contract obligors. This complexity never attended tort actions. When two or
more persons are responsible for the same tortious injury, they are jointly and severally liable. Nonetheless,
there has been vast confusion over releases of liability, which we consider now.
The rule that a voluntary release of one of a number of obligors for a single performance discharges all others
operated as a trap for the unwary obligee of a contract or tort obligation. The fact that two or more tortfeasors
were jointly and severally liable had no bearing on the rule. Even where a statute overcomes this common law
rule, the statute does not solve all questions concerning the proper interpretation and construction of a given
release.
In one case, Sims was injured in an accident while riding on a Honda motorcycle. He signed a release
regarding the tortfeasor who had caused the accident. The boilerplate language of the release, however, also
released “any and all persons, firms and corporations” from “any and all claims” arising from the accident. Sims
then brought a products liability action against the Honda Motor Company. Honda answered that Sims was
barred by the language of the general release he had signed. In questions certified to the Connecticut Supreme
Court, the essential question was whether the “any and all” boilerplate language included Honda.
In this case of first impression, the court considered analyses from other jurisdictions. It rejected the “flat bar”
rule, which required a literal interpretation and precluded parol evidence of any other manifestation of intent. It
also rejected the “specific designation” rule. Under this rule, a release discharges only expressly identified
tortfeasors; this effectively rejects general releases. Finally, the court decided to apply the “intent” rule. The
“intent” rule allows parol evidence and does not require a specific designation of a tortfeasor. Sims v. Honda
Motor Co., 225 Conn. 401, 623 A.2d 995 (1993).
Restatement (Second) of Contracts § 2 recognizes that discharge of one joint promisor by release,
rescission, or accord and satisfaction discharges other promisors unless the discharged promisor was a surety,
the duties are joint and several, or the common law rule was changed by statute. A co-promisor who is not
generally discharged is still discharged pro tanto for any consideration received by the obligee in the discharge
of another promisor.
If an obligee does any act that materially increases the risk that one who is in a position as surety for another
will not be exonerated or indemnified, the surety is discharged from a duty to the obligee. Thus, if an obligee
releases a principal obligor with reason to know that the other obligors are sureties, the obligee is increasing
the risk of the surety obligors. The release of such a principal obligor, therefore, releases the others only to the
extent that they have a right to be exonerated and indemnified by the principal obligor.
[2] Release with Reservation of Rights

Page 2 of 2
To avoid the release of all obligors through the release of one obligor, the obligee could simply provide a
covenant not to sue. Such a promise had to be supported by consideration. Though not a “release,” it was a
good defense even though all obligors could still be sued in one action and execution could be levied on all
obligors who were not parties to the covenant not to sue. By not calling it a “release,” the courts could maintain
at least superficial consistency in the common law view that a release of one releases all, but a covenant not to
sue does not discharge the others. Eventually, a “release” with a “reservation of rights” would be deemed to be
nothing more than a covenant not to sue. Bacik v. Weaver, 173 Ohio St. 214, 217, 180 N.E.2d 820, 823 (1962).
If an obligee covenants much more broadly that it will not sue a settling obligor or others, the other obligors are
third-party beneficiaries of the contract between the obligee and settling obligor. If the obligee make a covenant
that the settling obligor will not be called upon either by the obligee or other obligors to pay anything more, the
other obligors are discharged to the extent that they are sureties for the settling obligor and the obligee can
compel them to pay only their respective appropriate shares of the balance.
[3] Release with Oral Reservation of Rights

The curious history of the release with a reservation of rights which transformed it into a covenant not to sue led
some courts to an absurd construction. Where a release or accord and satisfaction with one obligor failed to
expressly reserve rights against others, parol evidence will not be admitted of a prior oral understanding that
the others were not to be released. Since such a release does not contradict or vary the parties’ agreement nor
does it purport be a fully integrated or complete and exclusive statement of the parties’ contract, the parol
evidence rule should have no application. Courts make efforts to avoid such a perversion of the parol evidence
rule. See, e.g., Breen v. Peck, 28 N.J. 351, 146 A.2d 665 (1958); Couillard v. Charles T. Miller Hospital, Inc., 92
N.W.2d 96 (Minn. 1958).
A boilerplate release containing general language that includes “all other persons, firms, corporations,
associations or partnerships” may be reformed if the signer can establish clear and convincing evidence that
the parties did not intend the quoted language to be part of the contract. Hess v. Ford Motor Co., 27 Cal. 4th
516, 117 Cal. Rptr. 2d 220, 41 P.3d 46 (2002).
Practice Resources:
• Corbin § 2. (release of one co-obligor without receiving full payment or its
equivalent); § 2. (release with reservation of rights—covenant not to sue an
obligor) § 2.10 (effect of release with an oral reservation of rights).

End of Document
§ 52.06 Discharge by Payment

When two or more persons have promised the same performance, the duty can be discharged in the same ways as
any other contractual duty. The obvious method of discharge is performance. Other types of discharge include
release, rescission, accord and satisfaction, impossibility or impracticability of performance, the obligee’s failure of
consideration, or other uncured material breach or nonperformance of a condition. If an obligee executes a proper
release or agrees to a discharge by novation or substitute contract, the legal duties of the obligors are discharged.
If a claim is unliquidated in amount, as in a tort claim, the receipt of payment by one of the obligors as the full and
agreed equivalent of the injury suffered is an accord and satisfaction that discharges the paying obligor and other
obligors. If the sum due is liquidated, a receipt of something other than money as the full and agreed equivalent of
the debt discharges all obligors with respect to that performance. Where such full satisfaction has been received, an
express reservation of rights has no operative effect since there are no rights to any other performance by any
obligor. Whether a performance by an obligor was received as the full equivalent and satisfaction of the obligee’s
claim is a question of fact.
When two or more parties promise the same performance, rendition of part of the exact performance is a discharge
pro tanto of all obligors. They all owe only the remaining performance. The rendition of part performance, however,
is not consideration for an obligee’s promise to accept it as full performance. As in contract law generally, any new
or different consideration accepted by the obligee will discharge the duties of the obligors to the extent agreed
upon. If an obligee accepts the substituted consideration as full performance, the duties of all obligors are
discharged; if the obligee accepts it as a third of the performance due, the obligors continue to owe the other two-
thirds.
This analysis is correct even if an individual obligor makes the agreement with an obligee with the express
understanding that it will not affect the obligations of the other obligors. The obligee is entitled to only one
satisfaction. Allowing a full recovery against the other obligors would exceed that satisfaction and place the obligee
in a better position than it reasonably expected to be in through the obligors’ performance.
Practice Resources:
• Corbin § 2.11 (discharge of the duties of co-obligors by payment or other agreed
satisfaction); § 2.12 (payment received by one obligor must be credited in favor of all).

End of Document
§ 52.0 Promises Made to More Than One Person Jointly or Severally

Just as multiple promisors may have promised the same performance to a single obligee, multiple promisees may
have a right to the same performance by a single obligor. If Ames promises to perform a duty to Barnes and Carr, it
will be necessary to determine if Barnes and Carr have joint rights, several rights, or joint and several rights against
Ames. If Ames promises separate and distinct performances for Barnes and Carr, each promisee has “several”
rights. If Ames promises the same performance to Barnes and Carr, their rights are either “joint” or “joint and
several.”
Earlier in this chapter, we noted that two or more promisors of the same performance are presumed to be making a
“joint” promise. Words or other evidence of severance would be necessary to characterize such promises as
“several.” In Newport Yacht Club v. City of Bellevue, 2011 U.S. Dist. LEXIS 129923 (W.D. Wash. Nov. 9, 2011), the
defendant argued that Newport Yacht Club was not a party to the settlement agreement and asked the court to read
a “several obligation” into the agreement. Citing § 2 2 of the Restatement (Second) of Contracts, the court
declined since the defendant failed to offer evidence sufficient to overcome the presumption that contractual
promises are owed to promisees jointly. With respect to whether rights are joint, several, or joint and several,
however, there is no such presumption. Rather, absent contrary evidence, the rights will be viewed as “joint.”
Restatement (Second) of Contracts § 2 cmt. b.
What difference does it make if the obligees’ rights are determined to be “joint” or “several”? If Ames makes a
promise to render a single performance for Barnes and Carr, it would generally appear to require Ames to defend
only one lawsuit. Barnes and Carr, therefore, would be required to become co-plaintiffs in an action against Ames.
Suppose, however, that Ames wrote a letter offering salaries and sales commissions to Barnes and Carr on the
assumption that they would work together. A court may still conclude that Barnes and Carr each had “several” rights
even though no language of severability appeared in the promise to pay commissions. They each had their own
expense accounts and each recorded their sales as the basis for their commissions. See St. Regis Paper Co. v.
Stuart, 214 F.2d 762 (1st Cir. 1954).
Under modern rules, if a joint promisee refuses to participate as a co-plaintiff, the other obligees may compel its
joinder, if not as a plaintiff, as a defendant. Such a proceeding would allow for a determination of all rights in one
proceeding.
When Barnes and Carr are entitled to the same performance of the payment of $100,000 from Ames, either could
sue to recover that amount. Disputes between them over this amount would be a matter of separate decision.
Where the obligation is the form of a negotiable instrument that is made payable to Barnes or Carr, either can
negotiate, discharge, or enforce the instrument. If, however, the instrument is made payable to Barnes and Carr, it
may be negotiated, discharged, or enforced only by both.
Practice Resource:
• Corbin § 2.1 (multiple obligees).

Page 2 of 2
End of Document
§ 52.0 Survivorship of Joint Rights

When a joint obligee died, Chancery recognized the executor of the estate as having the same rights as the
obligee, with ample remedy to recover the obligee’s share of the recovery. This was not the rule at common law,
however, where, absent a contrary intention, only the surviving obligees were entitled to receive performance,
discharge the obligor, or seek a money judgment. This rule of the common law continues at the present time but
only as a rule of convenience that makes it unnecessary to join the representative of a joint promisee as a plaintiff in
an action for a money judgment. Restatement (Second) of Contracts § 01. Whether the estate of the deceased
obligee has an interest in the recovery would depend on the agreement among the obligees or the law governing
their relationship.
Practice Resource:
• Corbin § 2.1 (survivorship of joint rights).

End of Document
§ 52.0 Every Oblige Owes Co-Obligees a Duty of Good Faith

At common law, one joint obligee of the same performance could discharge the duty of the obligor and no rights
would remain for the other obligees to enforce. Thus, one obligee could accept performance by the obligor or
otherwise release the obligor without any participation by the other obligees. Payment to one obligee such as a
partner is effective to discharge the obligor’s duty even if the partnership has been dissolved or the partners have
agreed on other arrangements among themselves.
Every obligee, however, owes co-obligees a duty of good faith. The duty may rise to a fiduciary obligation if the
obligees are partners. If an obligee enters into an accord and satisfaction or any other type of agreement that will
discharge the obligor, but which will operate as a fraud on a co-obligee, the discharge is voidable unless the obligor
has given value or changed its position in good faith without knowledge or reason to know of the violation.
Restatement (Second) of Contracts § 00 2 .
Practice Resource:
• Corbin § 2.1 (power of one joint promise to discharge the obligor).

End of Document
§ 52.10 Application of Statute of Limitations to Multiple Obligors and

Obligees
One obligor has no power to toll the running of the statute of limitations in favor of a co-obligor or to revive the
obligation after it has been barred, either by making a new promise to pay or by making a payment on account.
Such a power, however, may have been expressly or impliedly conferred on an obligor by its co-obligors. Thus, if a
partnership confers the power to create a partnership debt on one partner, the same partner ought to be able to
revive an existing debt by a new promise or payment. On the other hand, not every close relationship between co-
obligors confers such a power on one obligor. In one case, a husband and wife were co-obligors on a promissory
note and they later divorced. The court held that the husband’s subsequent letters acknowledging the debt did not
restart the statute of limitations on the wife’s obligation. Matson v. Weidenkopf, 101Wn. App. 472, 3 P.3d 805
(2000).
Since a payment or new promise made by one obligor to one of two or more joint obligees operates as a promise to
pay all obligees, it will toll or renew the statute of limitations in favor of them. This would not be the case if the
obligor owed a separate payment or other performance to each of the obligees.
Earlier in the chapter, we noted the right of a joint obligor that makes a payment in excess of its share to be
reimbursed by its co-obligor. The statute of limitations begins to run on such reimbursement from the date it
accrues; this is normally viewed as the date on which a cause of action exists.
Practice Resource:
• Corbin § 2.1 (application of statute of limitations to multiple obligors and obligees).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 53 VARIETIES OF BREACHES OF CONTRACTS—

TOTAL AND PARTIAL BREACHES
CHAPTER 53 VARIETIES OF BREACHES OF CONTRACTS—TOTAL AND

PARTIAL BREACHES
the subject matter.

End of Document

§ 53.01 There Is No Breach of Contractual Duty When There Is Legal

Justification for Nonperformance of the Promise
An executory contract creates rights and correlative duties, but performance of a duty under a contract is not due
until the time for that performance arrives A contract is breached if a party fails to perform when performance is
due. EastBanc, Inc. v. Georgetown Park Assocs. II, L.P., 940 A.2d 996 (D.C. 2008), quoting the Corbin treatise. A
promise to pay $10,000 on June 1 is not due prior to that time. Beyond the mere passage of time, express or
constructive conditions must occur before the duty is activated. A duty to purchase a house for $400,000
conditioned on the buyer’s ability to obtain a sufficient mortgage loan by a certain date will never be activated if the
buyer cannot obtain the loan by that date. A duty to pay $10,000 in exchange for having one’s house painted does
not become due until the house is painted, absent a contrary agreement concerning prior payments. Any duty may
be excused if performance becomes impossible or commercially impracticable. A duty may be subject to a power of
termination that may be exercised to discharge the duty. The parties may agree to rescind their contract by a
mutual surrender of their respective rights that discharges their respective duties. It is only where a duty is due and
not performed that a contract is breached.
Practice Resource:
• Corbin § .1 (when non-performance constitutes a breach).

End of Document

§ 53.02 Constructive Conditions of Cooperation Exist in Most Contracts That

Preclude One Party from Hindering the Other Party’s Performance
Beyond expressed legal duties, a contract may contain implied duties that the parties did not consciously consider.
There are constructive conditions of cooperation in every contract that preclude one party from hindering the other
party’s performance. Under the doctrine of prevention, a party may not rely on the failure of another to perform a
condition precedent where the first party has frustrated or prevented the occurrence of the condition. Ferguson v.
Lion Holding, Inc., 478 F. Supp. 2d 455 (S.D.N.Y. 2007). Constructive conditions also require reasonable
cooperation with the other party in allowing the performance. Under a contract to remodel a home, the owner must
allow reasonable access to the home and otherwise refrain from interfering with the work. There is an overall
implied covenant of good faith in every contract. Prior to the time for performance, a party’s manifestation that it will
not perform when the time arrives constitutes an anticipatory repudiation that may be treated as a total breach of
contract. (For a discussion of anticipatory repudiation, see Chapter 54 below.)
Practice Resources:
• Corbin § .2 (breach of duty assumed impliedly or unintentionally); § . (prevention
or hindrance of performance as a breach).

End of Document

§ 53.03 Breaches Vary in Extent and Importance

A breach may be large or small, total or partial, material or immaterial. See In re Nig. Charter Flights Contract Litig.,
520 F. Supp. 2d 447, 454 (E.D.N.Y. 2007) (quoting the Corbin treatise). A builder who promises to build a house
may breach at the inception of the contract by failing to perform at all or by barely beginning the excavation for the
foundation when it abandons the project. Another contractor may complete the entire building precisely in
accordance with specifications except that it used pipe throughout the house of equal quality than required by the
specifications but a different brand. (See the discussion of Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239, 129 N.E.
889 (1921), found in § .02[1 above). Although a breach has occurred in both of these cases, they are clearly not
of the same size, importance or severity.
Practice Resource:
• Corbin § . (breach may vary in extent and importance)

End of Document
1-53 Corbin on Contracts Desk Edition § 53.04A

§ 53.04 UCC, “Perfect Tender,” “Substantial Impairment of Value,” Material

Breach
The Uniform Commercial Code governs contracts for the sale of goods where the breach of contract concept
appears to be radically different. While there are clear differences, they are not as radical as they first appear. A
delivery of non-conforming goods may be rejected for any defect, even a slight, unimportant defect, under § 2- 01.
Sometimes referred to as the “perfect tender” rule (an absolute right to reject for any defect) which not only requires
the goods to be perfect but the tender of delivery to be perfect, the rule appears draconian on its face. It is,
however, mitigated in several different ways.
First, the parties contract may state that the goods may not be rejected unless a defect reaches certain levels. The
contract may state that the only remedy for a rejection of the goods would be a return of the purchase price or other
limited remedy § 2- 1 1 . Second, if the contract is one authorizing or requiring the shipment of goods in
installments, a shipment may be rejected only if it substantially impairs the value of the goods to the buyer (a
standard that courts tend to equate with “materiality”). Third, a rejection of goods in bad faith (e.g., taking
opportunistic advantage of an unimportant defect to escape the bargain) will not be effective. Fourth, even where a
rejection is effective, if time remains under the contract, the seller has the right to “cure” the nonconformity § 2-
508(1)). The seller’s right to cure may be extended beyond the time for performance if the seller has reason to
believe that the buyer would allow it through a money allowance or otherwise § 2- 0 2 . Five, the buyer has only
reasonable time to inspect the goods and to decide whether to reject them. If the buyer indicates he is accepting the
goods or accepts by using the goods or accepts by silence in not rejecting within a reasonable time, § 2- 0 his
power of rejection ceases. If the buyer seeks to thrust accepted goods back on the seller, he may pursue a
revocation of acceptance only if a nonconformity substantially impairs the value of the goods to the buyer and either
the buyer could not have discovered the defect in time to reject or was assured that the defect would be cured and
it was not cured § 2- 0 . The buyer must notify the seller of any substantial impairment within a reasonable time
after he discovered or should have discovered it. Failure to notify in time will bar a buyer from any remedy § 2-
607(3)(a)).
Practice Resource:
• Corbin § . .

End of Document

§ 53.05 Remedies for Breach
[1] Any Breach Gives Rise to a Cause of Action

Any breach, partial, total, immaterial, or material, gives rise to a cause of action for damages or equitable relief.
If a buyer breaches an installment contract by failing to pay the price of an installment, an action may lie for that
installment even though the contract otherwise continues. The failure of a seller to deliver conforming goods in
one installment is a breach, but it will not be a ground for the buyer’s rejection unless the nonconformity
substantially impairs the value of that installment and cannot be cured. Uniform Commercial Code (UCC) § 2-
612(2).
Though an action will lie for a single breach of an installment contract, if no action is brought until there is a
second breach, only one action will lie for both breaches, resulting in a single judgment for both. The rule is
designed to avoid unnecessary litigation and vexatious lawsuits in accordance with the classic prohibition about
“splitting a cause of action.” The same rule applies to any contract requiring a series of performances such that
a series of breaches can occur.
The rule would not apply to breaches of separate and independent contracts between the same parties. Unless
a court ordered consolidation of actions brought on separate contracts, separate actions are maintainable.
Negotiable bills and notes given as payment for installments under a single contract are, nonetheless, regarded
as separate contracts on which separate actions can be maintained.
[2] Effect of the Statute of Limitations

A statute of limitations begins to run when the cause of action “accrues”—when it could have been brought for
the breach. Thus, the statute would run for each partial breach when an action could have been brought for
each partial breach.
In one instance, an insured sought to recover disability benefits and the insurer raised a statute of limitations
defense. The court held that, under an installment contract, the statute runs only against each installment as it
becomes due. Citing Corbin on Contracts, the court noted that a party is permitted to recover only those missed
payments that came due if the statute of limitations had not expired when the suit was filed. Pierce v. Metro.
Life Ins. Co., 307 F. Supp. 2d 325 (D.N.H. 2004).
Where, however, the defendant made diminished installment payments on a trademark agreement and would
not negotiate concerning such payments, a breach amounting to a repudiation occurred in 1993. The court held
that, allowing the plaintiff to pursue its claims after standing idly by until 2007 would undermine the relevant
statute of limitations. R.C. Beeson, Inc. v. Coca Cola Co., 2009 U.S. App. LEXIS 15409 (3d Cir. July 13, 2009).
Whether a prior partial breach could be joined in a later action for two or more breaches would depend upon
whether the statute had expired for the earlier partial breach. There are exceptions, as where a builder is
entitled to progress payments but forbears to sue until the entire structure is completed. The statute would
begin to run when the action for the whole price was maintainable.
[3] A Series of Transactions May Merge Into One Running Account

When a purchaser has a running account with a seller involving a series of separate purchases and sales, there
is only one right of action for a balance due at a given time. There is an implied agreement based on the
custom of such running accounts that the separate transactions in the account are merged into one.
Page 2 of 2
Practice Resources:
• Corbin § . (remedy available at once for any breach); § . (contracts to pay
money or deliver goods in installments); § . (only one action available for all
previous breaches); § . (effect of statute of limitations on actions for a partial
breach); § .10 (breaches of separate contracts—negotiable notes); § .11 (a
series of transactions may merge into one running account); § .1 (rule
against “splitting a cause of action”); § .1 (severability for purpose of different
remedies).

End of Document

§ 53.06 Breach by Repudiation

An unexcused failure of performance when due is a breach that may or may not be a total (material) breach that
can end the contract. If the remaining performance under the contract is not yet due, the failure may very well only
constitute a partial and immaterial breach. If, however, a failure of performance is accompanied by an anticipatory
repudiation of the remainder of the performance that is not yet due, the entire contract may be treated as a present
and total breach that discharges the aggrieved party from any further duty under the contract. In Nat’l Util. Serv. v.
Cambridge-Lee Indus., 2006 U.S. App. LEXIS 24226 (3d Cir. Sept. 25, 2006), the court cited the Corbin treatise in
holding that in a continuous or installment contract, the first instant of a continuing breach, alone, is not a “total”
breach unless accompanied by an anticipatory repudiation of future obligations under the contract. In A & F Fire
Protection Co., Inc. v. Feit, 2015 N.Y. Misc. LEXIS 1559, 2015 NY Slip Op 50690(U), 47 Misc. 3d 144(A), 16
N.Y.S.3d 791 (N.Y. App. Term 2015), plaintiff entered into an agreement to pay defendant BTU Design Corp. (BTU)
for the purchase, installation and testing of a fire pump. After the fire pump was installed, the parties failed to agree
upon the procedure for testing the fire pump, and BTU conditioned its performance of testing on plaintiff’s providing
a letter that would limit BTU’s responsibilities with respect to the testing of the pump. “BTU’s demand for
extracontractual terms as a condition for testing the fire pump constituted a repudiation of one of the terms of the
agreement between plaintiff and T .
Practice Resource:
• Corbin § .12 (breach by repudiation of obligation).

End of Document

§ 53.0 Successive Breaches of “Continuing” Contracts

Contracts such as those requiring the delivery of goods in installments are distinguished from “continuing contracts”
such as a contract to furnish support for a person for life. Similarly, contracts to keep roads or fences or buildings in
good repair or to furnish heat for a building are “continuing contracts.” Failure to perform the services for a
substantial period is certainly a breach of contract, but there may be less clarity in determining breaches of these
contracts when compared with installment contracts. Yet, there is no justification for distinguishing the treatment.
While a given installment of goods or payment for goods is a much more defined performance than caring for a
person, they both involve a series of performances over a period of time and both are susceptible to a series of
breaches for which actions can be maintained. Both are subject to outright repudiation. The supposed difference in
classification serves no useful purpose.
Where a plaintiff performed editorial work which expanded as the work progressed with alleged promises from the
defendant that were not kept. The plaintiff was aware of the breaches by 1999, but did not file her complaint until
2005. The court held that her claim was not barred by the statute of limitations because she alleged a continuing
breach that began in 1999 but continue to accrue. Quoting from the Corbin treatise, the court noted that a contract
requiring continuous performance is capable of “partial” breaches as well as a total breach by repudiation or other
material failure of performance. If the breaches are partial and on-going, each re-commences the statute of
limitations allowing damages to be awarded beginning from the date calculated by subtracting the limitations period
from the date of filing. Kwan v. Schlein, 441 F. Supp. 2d 491 (S.D.N.Y. 2006). Where a City contracted to sell water
to the Rural Water District and the District agreed not to resell water outside the District’s area, a court concluded
that the District breached the contract “each time it added a new customer outside its boundaries,” thus
commencing a new limitations period. Citing the Corbin treatise, the court explained that “[a] continuing contract
may be partially breached, and each partial breach is a separate legal claim on which the parties can sue.” City of
Hiawatha v. Rural Water Dist. No. 2, 2015 Kan. App. Unpub. LEXIS 1033 (Kan. Ct. App. Dec. 4, 2015).
Practice Resource:
• Corbin § .1 (successive breaches of “continuing” contracts).

End of Document

§ 53.0 Breaches of Employment Contract by the Employer

A wrongfully discharged employee has a cause of action for all past and future wages that would have been earned
had the employer not breached the contract. If the employee has completed his or her services and the only
remaining duty is on the employer to make a series of deferred compensation or pension payments to the
employee, an action lies for each installment as it becomes due. This appears to be true notwithstanding a flat
repudiation by the employer. If the employee has not been discharged and the contract has not been repudiated, an
immediate action could be brought for nonpayment of any installment of wages that have become due. If two or
more wage installments are due, a single action lies for both installments. Each non-payment is a partial breach.
Practice Resource:
• Corbin § .1 (breach by employment contract).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 54 BREACH OF CONTRACT BY ANTICIPATORY

REPUDIATION
CHAPTER 54 BREACH OF CONTRACT BY ANTICIPATORY REPUDIATION

the subject matter.

End of Document

REPUDIATION
§ 54.01 Origins of the Doctrine of Anticipatory Repudiation

The leading case establishing that an action for damages can be maintained at once for an anticipatory breach of
contract is the English case of Hochster v. De la Tour, 2 El. & Bl. 678 (1853). Hochster contracted in April to work
as De la Tour’s courier for three months commencing on June 1. On May 11, De la Tour informed Hochster that he
was discharged, thereby renouncing the contract. Hochster sued on May 22. Defense counsel argued that there
could be no breach of the contract until June 1 since no performance by De la Tour was required until that time, and
Hochster would have to remain ready and willing to perform on that date. Thus, he could not accept another
position prior to that date and continue to have a cause of action against the defendant. The court, therefore, was
confronted with the question of whether an action for breach of contract could be brought prior to the date of
performance.
The court noted precedent holding that a man who promised to marry on a certain date but married another prior to
that date was “instantly liable” for breach of promise. A promise to lease property was immediately breached when
it was leased to another before the commencement date of the first lease agreement. A promise to sell goods was
breached immediately if the goods were sold to another prior to the time of delivery under the first contract. The
critical question, however, was whether a plaintiff such as Hochster must remain ready to perform on the
commencement date notwithstanding the clear statement that De la Tour would not perform on June 1 or thereafter.
It is sometimes suggested that the court recognized only three possibilities for the innocent Hochtser if he wanted to
contract with another before June 1: (1) renounce the contract, leaving him with no remedy against De la Tour; (2)
ignore De la Tour’s communication and stand ready to perform by forbearing other employment, or (3) treat the
renunciation as an immediate breach even though the time for the defendant’s performance had not arrived. The
court, however, recognized that the renunciation of the contract prior to the time for performance “dispenses with a
condition to be performed in the meantime by the other.” Thus, the repudiation excuses the innocent party from the
constructive condition of being ready and willing to perform when the time for performance arises.
If Hochster could accept other employment prior to June 1 without surrendering his right to sue De la Tour for
breach as of June 1, there would be no reason to allow the action to commence on May 22. Nonetheless, the court
decided that the action could be commenced immediately. Though it was not the first case to allow an anticipatory
repudiation to be treated as a breach prior to the time for performance, the reported arguments and court responses
in Hochster v. De la Tour provided an especially clear statement of the fundamental error leading to the acceptance
of the doctrine of anticipatory repudiation. Thus, it became the leading authority in support of the doctrine.
With the exception of Massachusetts, the anticipatory repudiation doctrine set forth in Hochster has been accepted
in both England and the United States. See Franconia Assocs. v. United States, 536 U.S. 129, 122 S. Ct. 1993, 153
L. Ed. 2d 132 (2002), quoting the Corbin treatise. See also Chester Med. Diagnostic, P.C. v. Kemper Cas. Ins. Co.,
21 Misc. 3d 1108(A), 873 N.Y.S.2d 232 (Civ. Ct. 2008) (citing a 1911 case which cited Hochster v. De La Tour). Its
curious provenance, however, has led some courts to surround it with distinctions and qualifications.
Practice Resources:
• Corbin § .1 (anticipatory breach of contract); § .2 (the leading case is Hochster v.
De la Tour); § . (objections to the rule of Hochster v. De la Tour).
Page 2 of 2

End of Document

REPUDIATION
§ 54.02 Extent to Which Repudiation Must Be Definite and Unequivocal—

Modifications of the Restatement (Second) of Contracts, UCC, CISG and
UNIDROIT Principles
The United States Supreme Court has held that a promisor’s statement that he would not perform unless a certain
event occurred where it was reasonably certain that the event would not occur was “very far from being a positive,
unconditional, and unequivocal declaration of fixed purpose not to perform … in any event or at any time.” Dingley
v. Oler, 117 U.S. 490, 6 S. Ct. 850, 29 L. Ed. 984 (1886). Largely as a result of this case and similar earlier cases
where courts may have been somewhat wary of the doctrine of anticipatory repudiation, it became commonplace to
find statements that the doctrine would not apply absent a definite and unequivocal manifestation by the repudiator
that it will not perform when the time arrives for performance.
The Uniform Commercial Code (UCC) suggests a less stringent test in contracts for the sale of goods. UCC § 2-
610, cmt. 2, states that an anticipatory repudiation can result from action that “reasonably indicates a rejection of
the continuing obligation.” It further suggests that “a statement of intention not to perform except on conditions
which go beyond the contract” is an anticipatory repudiation.
The Restatement (Second) of Contracts “follows the Code in disapproving Dingley v. Oler.” Restatement (Second)
of Contracts § 2 0 Reporter’s Note, explaining cmt. b.
The test formulated by the Restatement (Second) states:
In order to constitute a repudiation, a party’s language must be sufficiently positive to be reasonably interpreted
to mean that a party will not or cannot perform.
Restatement (Second) of Contracts § 2 0 cmt. b (emphasis supplied).
Notwithstanding these relaxations, it is common to find a court stating that a repudiation “must be a distinct and
absolute refusal to perform” (Best Payphones, Inc. v. Manhattan Telecomms. Corp. (In re Best Payphones, Inc.),
432 B.R. 46 (S.D.N.Y. 2010) (citing Dingley v. Oler)), or similar language that the repudiation must be “definite,
unequivocal and absolute.” See Roger Edwards, LLC v. Fiddes & Sons, Ltd., 387 F.3d 90, 95 (1st Cir. 2004) (Maine
law); Crosspoint Seven v. Mfrs. Life Ins. Co., 2005 U.S. App. LEXIS 16815 (7th Cir. Aug. 10, 2005) (Indiana law).
The analysis may be sharpened by focusing on whether a promisor has renounced a duty to perform. The conduct
of a party may clearly manifest an anticipatory repudiation. See Gupton v. Son-Lan Dev. Co., 205 N.C. App. 133,
695 S.E.2d 763 (2010). In order for a cause of action for anticipatory breach to lie, “there must be a definite and
final communication of the intention to forego performance.” By contrast, a “[m]ere expression of difficulty in
tendering the required performance, for example, is not tantamount to a renunciation of the contract.” Pielet Bros.
Contr. v All City Glass’n Mirro-1964UA, LLC, 2015 NY Slip Op 31045(U) (NY Sup. Ct. 2015).
It should make no difference that the promisor believed that its duty had been discharged or excused or that the
contract was never valid. If a party, either willfully or by mistake, states that it will not perform unless the other party
performs a duty that the first party has no right to demand, the first party has committed an anticipatory repudiation.
Merely stating an incorrect interpretation of a contract is not a repudiation; but refusing to perform at all unless that
interpretation is followed constitutes a repudiation. Menotti v. Metro. Life Ins. Co., 2009 U.S. Dist. LEXIS 33403
Page 2 of 2
(N.D. Ill. Apr. 20, 2009). he e two contracting parties differ as to the interpretation of a contract or as to its legal
effects, an offer to perform in accordance with his own interpretation made by one of the parties is not in itself an
anticipatory e ch. Panther Brands v. Indy Racing League, 2015 U.S. Dist. LEXIS 38127 (2015). Wells Fargo
Bank, N.A. v. Superstition Commerce Bank, 2015 Ariz. App. Unpub. LEXIS 861 (Ariz. App. 2015) (same). In Kodak
Graphic Communs. Can. Co. v. E. I. du Pont de Nemours & Co., 2016 U.S. App. LEXIS 1764 (2d Cir. N.Y. Feb. 3,
2016), Kodak’s refusal to deliver machines by an agreed delivery date was not a clear manifestation of an intent not
to perform. Kodak was equivocal as to the final delivery date, and the jury determined the delivery date was not a
material term of the contract. Further, Kodak expressed a contrary view of its contractual obligations—namely, that
it was required only to make commercially reasonable efforts to meet the schedule, and that it would continue to do
so. The court cited the Corbin treatise for this proposition: “Where the two contracting parties differ as to the
interpretation of the contract or as to its legal effects, an offer to perform in accordance with his own interpretation
made by one of the parties is not in itself an anticipatory breach.”
The filing of a declaratory judgment action has been held to not constitute a repudiation: “… this Court has required
more than the mere assertion of a challenge to the validity of an agreement to demonstrate [an anticipatory]
e i tio . [ tici to y repudiation or breach requires an ‘absolute and unequivocal refusal to perform or a
distinct and positive statement of an inability to do so. The filing of declaratory judgment action merely contesting
the validity or scope of an agreement, as opposed to an actual repudiation, does not entail an unequivocal refusal
to perform. Harrison v. Cabot Oil & Gas Corp., 110 A.3d 178 (Pa. 2015). But see Princes Point LLC v Muss Dev.
L.L.C., 2016 N.Y. App. Div. LEXIS 775, 2016 NY Slip Op 00783 (N.Y. App. Div. 1st Dep’t Feb. 4, 2016) where the
court held that, in contrast to an action for a declaratory judgment that seeks to define the parties’ rights and
obligations, “an action seeking rescission of a contract is markedly different.” Here, “[p]laintiff did not simply seek to
define its rights under the parties’ agreement; it sought to nullify the agreement e ti e y. Plaintiff anticipatorily
breached that contract by commencing this ctio .
The United Nations Convention on Contracts for the International Sale of Goods (CISG) (which governs contracts
for the sale of goods between commercial parties with their principal places of business in different CISG countries)
allows a contract to be avoided where it is “clear” that a party will commit a fundamental breach defined in Article 25
as a breach that will substantially deprive the other party of what he expects to receive under the contract (Article
72(1)). UNIDROIT Principles include a section captioned “Anticipatory Non-Performance” which is virtually identical
to the CISG anticipatory breach section (where it is “clear” that there will be fundamental non-performance, the
innocent party may terminate the contract—Art. 7.3.3).
Practice Resources:
• Corbin § .1 (no breach unless repudiation is definite and unequivocal); § .1
(repudiation under the Restatement (Second) of Contracts, Uniform Commercial Code,
CISG and UNIDROIT Principles); § .1 (expressions of doubt as to ability to perform).

End of Document

REPUDIATION
§ 54.03 Repudiation by Making Performance Impossible

When a promisor conducts himself in such a fashion as to make performance “impossible,” it constitutes a
repudiation. On May 1, if Ames contracts to sell her house to Barnes by July 1 but sells it to Carr on June 1, Barnes
may treat the sale to Carr as an anticipatory repudiation by Ames. While it is not literally impossible for Ames to
repurchase the house from Carr and sell it to Barnes on July 1, there is a clear manifestation by Ames that she has
no intention of performing her contract with Barnes.
Practice Resource:
• Corbin § .2 (repudiation by making performance impossible).

End of Document

REPUDIATION
§ 54.04 Repudiation of a Lease by the Tenant

Some jurisdictions refuse to recognize an anticipatory repudiation of the duty of a tenant to pay further rent. They
sometimes seek to justify such holdings on the footing that the duty to pay rent is simply a money debt that cannot
be accelerated by anticipatory repudiation. See Miller v. Benton, 55 Conn. 529, 13 A. 678 (1887). Other
jurisdictions, however, recognize anticipatory repudiation of the duty to pay rent. See Stableford v. Schulingkamp,
67 So. 2d 306 (Miss. 1953).
Practice Resource:
• Corbin § .2 (repudiation of lease by the tenant)

End of Document

REPUDIATION
§ 54.05 Defective Tender Made Prior to the Time for Performance

If a defective tender of performance is made prior to the time for performance, a court may find no anticipatory
repudiation if time remains for an effective tender to be made. In contracts for the sale of goods, a defective tender
prior to the time for performance may be rejected by the purchaser, but the seller retains the right to cure that
tender if the cure can be effected no later than the time for performance. UCC § 2- 0 .
A statement constituting a repudiation of the contract must be communicated to the other party to be effective. A
repudiation may also occur by conduct, such as conduct by a promisor that makes a later performance impossible.
Practice Resource:
• Corbin § .12 (repudiation of a contract specifying no definite time for performance).

End of Document

REPUDIATION
§ 54.06 Expressions of Doubt as to Ability to Perform

In the construction of a home, the purchaser sought assurances that the home would be completed by the contract
date of January 15. The defendant responded that his best estimate placed the completion date about 30 days
behind schedule. Even assuming that the time for performance was “of the essence,” the court noted that a
statement of doubt concerning one’s ability to perform on time must meet the required standard of an unequivocal
statement that one would not perform one’s promise. The defendant’s statement was not an anticipatory
repudiation. Brasby v. Morris, 2007 Del. Super. LEXIS 73 (Mar. 29, 2007).
A statement of inability to perform, however, may justify the promisee in understanding it as a definite repudiation.
The buyer of a business had an option to cancel if the seller could not induce a party to accept service on stated
terms within a stated time. The buyer was held to be justified in cancelling the contract when the seller informed him
prior to the time for performance that he could not get the party to assent and that the deal was off. Miller & Sons
Bakery Co. v. Selikowitz, 8 N.J. Super. 118, 73 A.2d 607 (1950).
Practice Resource:
• Corbin § .1 (expressions of doubt as to ability to perform).

End of Document

REPUDIATION
§ 54.0 Effects of Repudiation

A repudiation by one party terminates the duty of the other and provides that party with the privilege of treating its
duty as discharged. To operate as a discharge, the repudiation must be a renunciation of the entire performance or
to such a material part of it that it goes to the essence and effects a total rather than partial breach. See GN Hello
Direct, Inc. v. Plantronics, Inc., 2004 Cal. App. Unpub. LEXIS 7416 (Aug. 10, 2004). It may, however, be necessary
to distinguish the repudiator’s primary contractual duty from its duty to compensate the aggrieved party. Where, for
example, a seller repudiated a contract to sell goods, his primary contractual duty was discharged, activating his
remedial duty to pay damages, but he was legally privileged to sell the goods to others. See Hong Hoon v. Lum
Wai, 26 Haw. 546 (1922).
A repudiation negates any requirement of tender of performance by an aggrieved party. Knott v. Revolution
Software, Inc., 181 Ohio App. 3d 519, 2009-Ohio-1191, 909 N.E.2d 702. Where a vendor of real property conveys it
to a third person, the buyer need not tender the price before bringing suit. When a buyer cancels a sale of goods
before shipment, the seller need not tender the goods to bring an action for damages. Where a contract requires
written notice of termination as a condition to the other party’s treating a delay in performance as a total breach, the
repudiation of the contract eliminates that condition. See Stonehenge Land Co. v. Beazer Homes Invs., LLC, 177
Ohio App. 3d 7, 2008-Ohio-148, 893 N.E.2d 855. If a party will not perform, the aggrieved party is excused from
futile acts such as satisfying conditions precedent. Hellenic Imperial Airways S.A. v. Gulf Air Co., 2016 N.Y. Misc.
LEXIS 149, 2016 NY Slip Op 30083(U) (N.Y. Sup. Ct. Jan. 13, 2016).
Practice Resources:
• Corbin § .1 (when repudiation discharges the duty of the other party); § .1
(repudiation may terminate the repudiator’s own primary contractual duty); § .1
(repudiation or other total breach makes further tender of performance unnecessary).

End of Document

REPUDIATION
§ 54.0 The Rule of Avoidable Consequences Becomes Applicable Once a

Repudiation Has Been Communicated—UCC Complications
Upon notice of repudiation, the aggrieved party’s duties are discharged and the express conditions excused.
Moreover, the aggrieved party becomes subject to the mitigation rule—the rule of avoidable consequences. Under
the rule, the aggrieved party must not proceed with its own performance if it would cause greater damages to the
repudiating party. Thus, not only is the aggrieved obligee not bound to perform, if it does perform, it will not collect
damages for the additional injury suffered by it as a result of performing.
Upon an anticipatory repudiation, the UCC allows an aggrieved party to treat the contract as breached and pursue
remedies or to await performance for a reasonable time. If he awaits performance beyond a reasonable time, he
may not recover damages that he could have avoided. (UCC § 2- 10 . In isolation, the section suggest that an
aggrieved party could not allow damages to accumulate by awaiting performance where it was abundantly clear
that performance would not occur. Thus, where a farmer promises a future crop to a buyer but months before the
crop is to be harvested the buyer is aware that the farmer has not planted the crop, the buyer should not recover
damages that were avoidable by the purchase of a substitute futures contract for that commodity. See Oloffson v.
Coomer, 11 Ill. App. 3d 918, 296 N.E.2d 871 (1973). The problem, however, is exacerbated by the language in
other UCC sections.
Section 2-713 is one of the buyer’s remedies in a contract for the sale of goods that allows the buyer to recover the
difference between the contract price and market price “at the time the buyer learned of the breach.” Where there is
an anticipatory repudiation, has the buyer “learned of the breach” at the time of the repudiation? There are two
statutory arguments opposed to that interpretation. The first is the aforementioned section allowing a buyer to await
performance for a commercially reasonable time. If a seller retracted the repudiation prior to the time for
performance or even at the time for performance before the buyer treated the repudiation as final, no “breach”
would be recognized. Where a reasonable time awaiting performance expires prior to the time for performance,
does the repudiation become a “breach” at that moment? In addition to these issues, § 2- 2 (created to provide
certain guidance for courts) adds to the dilemma by stating that the time the buyer “learned of the breach” will be
the time the buyer learned of an anticipatory repudiation, but only if the case comes to trial before the time for
performance. That statutory language would clearly appear to preclude treating the time of the repudiation as the
time the buyer learned of the breach in any situation where the case comes to trial only after the time for
performance which, in an era of crowded dockets, is quite likely.
While the judicial reaction to this dilemma is not uniform, the current wisdom appears in the opinion of the Fourth
Circuit in Hess Energy, Inc. v. Lightning Oil Co., 338 F.3d 357 (4th Cir. 2003) where the court recognizes the UCC
drafters deliberate effort to distinguish “repudiation” and “breach.” The case before the court came to trial after the
date of performance of the contract. At least in that situation, the court concluded that the better reading of the
statutory language is to treat the date of performance of the contract as the time to measure the difference between
the contract and market prices for the buyer’s recovery of damages.
Practice Resource:
• Corbin § .2 (repudiation makes avoidable consequences rule applicable at once).
Page 2 of 2

End of Document

REPUDIATION
§ 54.0 The Non-Repudiating Party Must Retain the Ability to Perform

Although the other party has repudiated the contract, the plaintiff must retain the ability to perform. Where the
plaintiff was extremely late in completing a promised performance, the court cited Restatement (Second) of
Contracts § 2 1 as authority for an important qualification of the general rule that a repudiation discharges the
other party who may then seek damages: even where it can be shown that a defendant committed an anticipatory
repudiation, the duty of a party to pay damages for a total breach by repudiation is discharged if it can be shown
that there would have been a total failure by the plaintiff to perform its promise. Hifn, Inc. v. Intel Corp., 2007 Del.
Ch. LEXIS 58 (May 2, 2007). Mid-Missouri Spray Serv. v. South Delta Aviation, Inc., 2015 U.S. Dist. LEXIS 79793
(E.D. Ark. 2015) (“Even if South Delta repudiated the option by refusing to consummate the sale, Mid-Missouri
cannot recover unless it was ready, willing, and able financially to perform its obligation of paying the $500,000 in
cash for the airplane at closing.”)
In Pesa v. Yoma Dev. Group, Inc., 18 N.Y.3d 527, 942 N.Y.S.2d 1, 965 N.E.2d 228 (2012), the court considered
whether a buyer suing for damages must show that it was ready, willing, and able to close the sale of real property,
i.e., absent the seller’s repudiation, the transaction could and would have been closed. Noting that the intermediate
appellate court had held that no such showing was necessary in this case or similar cases, while two other
intermediate appellate courts had held that such a showing is necessary, the court cited the Corbin treatise in
concluding that the holdings in the later two appellate division courts was the correct one. The court viewed the rule
requiring readiness, willingness, and ability to perform as making “common sense.” It is axiomatic that damages not
caused by a breach are unrecoverable. Thus, where the transaction would have failed and damages would have
been suffered even if no breach occurred, such damages were not caused by the breach. The buyers’ evidence in
this case was not conclusive on the question of their ability to make the purchases. The court held that their motion
for summary judgment should have been denied.
Practice Resource:
• Corbin § .20 (ability to perform remains a condition even though actual tender of
performance is eliminated).

End of Document

REPUDIATION
§ 54.10 Restitution as a Remedy

If the plaintiff has paid money or performed valuable services prior to the repudiation, the plaintiff may immediately
seek the remedy of restitution to prevent unjust enrichment on the same conditions as any other total breach of
contract. 360Networks Corp. v. Geltzer (In re Asia Global Crossing, Ltd.), 404 B.R. 335 (S.D.N.Y. 2009). The notion
that such a remedy is predicated upon a supposed “rescission” of the contract is no more valid here than it would
be where such an alternative remedy is pursued in the case of any breach of the contract.
Confusion between the meaning of “rescission” and “repudiation” is illustrated by the English case of Heyman v.
Darwins, [1942] A. C. 356. The court rejected the unsupported notion that a repudiation must be accepted by the
non-repudiating party, which then constitutes a “rescission” of the contract. The Heyman court, however, did not
quite arrive at a complete explanation. In a later U.S. case, the court cited Corbin on Contracts in holding that a
contract does not cease to exist upon repudiation but, in effect, becomes voidable by the non-repudiating party.
Mulvaney Mech., Inc. v. Sheet Metal Workers Int’l Ass’n, Local 38, 351 F.3d 43 (2d Cir. 2003). Turner Indus. Group,
LLC v. Int’l Union, Local 450, 2015 U.S. Dist. LEXIS 50380 (S.D. Tex. 2015) (upon repudiation, a contract does not
cease to exist but becomes voidable).
Practice Resources:
• Corbin § .21 (restitution as a remedy for anticipatory repudiation); § .2 (relation
between repudiation and rescission).

End of Document

REPUDIATION
§ 54.11 Power and Effect of Retracting a Repudiation
[1] There Is No Requirement That an Obligee “Accept” an Anticipatory Repudiation

It is not uncommon to find a statement to the effect that an anticipatory repudiation is not a breach of contract
until it is “accepted” by the obligee. There is no need for an obligee to “accept” an anticipatory repudiation. If the
obligee simply ignores the repudiation, the repudiator has the power to nullify the repudiation so long as the
obligee has not materially changed its position in reliance on the repudiation or indicated that it is treating the
repudiation as a breach by a simple notice of retraction to that effect or by bringing an action for breach. See
Truman L. Flatt & Sons Co. v. Schupf, 271 Ill. App. 3d 983, 649 N.E.2d 990, 208 Ill. Dec. 630 (1995);
Restatement (Second) of Contracts § 2 UCC § 2- 11. A retraction nullifies the effects of a repudiation. Mobil
Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604, 621, 120 S. Ct. 2423, 147 L. Ed. 2d
528 (2000).
A retraction of a repudiation may be by words or conduct (Restatement (Second) § 2 cmt. b), but the
retraction must be unambiguous. Where the plaintiff had an exclusive marketing contract with the defendants
which the plaintiff clearly repudiated, its continuing performance under the contract was not unambiguous
evidence of retraction since it could continue performance with the defendant while conducting business with
other parties. Midwest Ag Enters. v. Poet Invs., Inc., 2010 U.S. Dist. LEXIS 56655 (D.S.D. June 9, 2010).
An initial decision to reject an anticipatory repudiation is not an irrevocable election not to treat it as a breach. In
Winter-Wolff Int’l, Inc. v. Alcan Packaging Food & Tobacco, Inc., 872 F. Supp. 2d 215 (E.D.N.Y. 2012), the
court quoted § 20 cmt. a, of the Restatement (Second) of Contracts: “An anticipatory repudiation continues in
effect until affirmatively retracted by the repudiator.”
[2] An Obligee May Provide a Specific Time for Retraction—“Locus ponitentiae”

Upon receiving notice of a repudiation, an obligee may choose to provide a specific time for retraction by the
repudiator, a “locus poenitentiae.” If the retraction does not occur within that period, the repudiation is
immediately treated as a present breach.
In one case, a plaintiff provided the defendant with a three-day locus poenitentiae. The defendant failed to
retract by the end of the three days, but attempted to retract later, claiming that the plaintiff had not yet relied on
the repudiation. The court held that the repudiation became a breach at the end of the three days, regardless of
the absence of any reliance, since reliance is not required to treat a repudiation as a breach. A simple
notification is sufficient, and the notification here clearly stated exactly when the repudiation would be treated as
a breach. United States v. Seacoast Gas Co., 204 F.2d 709 (5th Cir. 1953).
Even if an obligee has informed the obligor that it has a certain time for retraction, the obligee is not bound to
await the end of the period before treating the repudiation as a breach. There is no binding promise by the
obligee to await the end of the period. The obligee may change its mind before the end of the period and simply
notify the repudiator that it is treating the repudiation as a present breach, or file an action, or, without notifying
the repudiator, materially change its position in reliance of the repudiation. This presents no unfairness to the
other party who, after all, is a repudiator who has provided no indication of retraction at the point that the
aggrieved party changes its mind.
Practice Resources:
• Corbin § .22 (power of retracting a repudiation effect of retraction); § .2
Page 2 of 2
(theory that repudiation is no breach until accepted by the other party).

End of Document

REPUDIATION
§ 54.12 Prospective Failure of Performance
[1] Demand for Adequate Assurances That Performance Will Occur

We have noted that a repudiation generally requires a definite and unequivocal manifestation of intention not to
perform. Doubtful or equivocal statements by a party or conduct concerning a willingness or ability to perform
will not amount to a repudiation that would allow the non-repudiating party to treat the contract as breached. A
buyer’s failure to make an installment payment on time, or reliable information that a seller is experiencing
manufacturing or other difficulties, will not be sufficient to constitute a repudiation, but they may create
reasonable grounds for insecurity in the obligee. If the oblige treats such manifestations as a repudiation and
announces its own discharge of duty, the obligee will have become the repudiator.
To address these issues, the UCC and Restatement (Second) of Contracts recognize the need to provide a
contracting party with “a continuing sense of reliance and security that the promised performance will be
forthcoming when due.” Restatement (Second) of Contracts § 2 1 cmt. a, quoting UCC § 2- 0 cmt. 1, as
quoted in Danzig v. AEC Corp., 224 F.3d 1333 (Fed. Cir. 2000). An obligee who has such reasonable grounds
for insecurity is permitted to suspend its performance of the contract and demand reasonable assurances from
the obligor within a reasonable time not exceeding 30 days that performance will occur in accordance with the
contract. Absent such assurances, the obligee may treat the contract as having been repudiated and can
regard its own duty as discharged. UCC § 2- 0 . Restatement (Second) of Contracts § 2 1 2 essentially
replicates this view although it requires the assurances to be provided within a reasonable time without any
maximum limitation.
An obligee needs more than subjective concerns about the future performance of the obligor to demand
assurances. The obligee must have reasonable grounds for insecurity. Moreover, the grounds must not have
existed prior to the formation of the contract since the obligee will be viewed as having assumed the risks of
doubtful performance of which it was aware when entering the contract.
[2] Whether an Obligee Has Sufficient Grounds for Insecurity Is a Question of Fact
Whether an obligee has sufficient grounds for insecurity is a question of fact. Whether reasonable grounds for
insecurity exist is measured by commercial rather than legal standards by viewing the basis for any alleged
insecurity under all of the surrounding circumstances, particularly course of dealing and trade usage. Conduct
of a party in other transactions and reliable information concerning such conduct may give rise to reasonable
grounds for insecurity. Repeated delinquencies in performance may create a cumulative effect that allows for a
demand for adequate assurances. Brisbin v. Superior Valve Co., 398 F.3d 279, 286 (3d Cir. 2004). If one of the
parties in a long term contract decides to sell the business to another, a demand for adequate assurance may
be justified to alleviate reasonable grounds for insecurity that the contract will continue to be performed in a
satisfactory fashion by the assignee. See, e.g., Koch Materials Co. v. Shore Slurry Seal, Inc., 205 F. Sup. 2d
324 (D.N.J. 2002). A demand for adequate assurance must be made in good faith. A demand for a
performance beyond the terms of the contract coupled with a clear manifestation that the contract will not be
performed if the demands are not met would constitute an anticipatory repudiation by the party making the
demand. Chamberlin v. Puckett Constr., 277 Mont. 198, 921 P.2d 1237 (1996). The demand must focus on
assuring the promised performance rather than adding contractual duties that were not part of the original
bargain.
It is impossible to list all of the circumstances that may give rise to reasonable insecurity, but a basic test may
be stated: if, after the contract is formed, the obligee becomes aware of substantial risks of nonperformance by
Page 2 of 2
the obligor that would lead a reasonable obligee to believe that the promised performance will not occur when
due, there are reasonable grounds for insecurity.
UCC § 2- 0 1 requires a demand for adequate assurances to be made in writing, but there is recognition that
an oral demand may be sufficient when there is a clear understanding of such a demand between the parties.
See Scott v. Crown, 765 P.2d 1043 (Colo. Ct. App. 1983). Restatement (Second) of Contracts § 2 1 cmt. d,
allows for an oral demand if time is of particular importance.
Even though supported by the Restatement (Second) of Contracts, the extension of the UCC innovation of
demanding adequate assurances for other contracts may encounter limitations in the courts which are typically
not susceptible to anticipation of all security features. In one case, the court certified a question to the New York
Court of Appeals as to whether the Restatement (Second) generalization of UCC § 2- 0 was applicable in
New York. The court replied that a demand for adequate assurances beyond sale-of-goods contracts would be
limited in application to long-term commercial contracts. Norcon Power Partners, L.P. v. Niagara Mohawk
Power Corp., 163 F.3d 153 (2d Cir. 1998).
[3] A Contract for the Sale of Goods Recognizes Insolvency as a Basis for Demanding Adequate
Assurances
Common law courts generally did not recognize a demand for adequate assurances based upon reasonable
grounds for insecurity. They did so, however, with respect to insolvency. UCC § 1-201 2 and Restatement
(Second) of Contracts § 2 2 2 define insolvency broadly as ceasing to pay debts in the ordinary course of
business, or inability to pay debts as they mature, or “insolvency” within the meaning of the federal bankruptcy
law.
Insolvency is not a repudiation because it is not a voluntary act. Moreover, it may not even provide sufficient
grounds for demanding assurances as in the case when the obligation is one of personal service, for which
performance is not affected by insolvency. A contract for the sale of goods, however, recognizes insolvency as
a basis for demanding adequate assurances. UCC § 2- 02 1 also requires cash payment for all unpaid goods
delivered prior to the insolvency, and UCC § 2- 0 permits the seller to stop delivery. Restatement (Second) of
Contracts § 2 2 1 follows the common law approach in permitting the obligor to make payment, tender
payment, or provide reasonable security to assure performance. If the insolvency allows a demand for
adequate assurances, the obligee may suspend performance and await performance for a reasonable time.
[4] Bankruptcy Is Operative as a Breach of Contract

The United States Supreme Court has held that adjudged bankruptcy is operative as a breach of contract.
Central Trust Co. v. Chicago Auditorium Ass’n, 240 U.S. 581, 36 S. Ct. 412, 60 L. Ed. 811 (1916). It apparently
did so to assure that unmatured and unliquidated claims are provable in bankruptcy proceedings.
While the repudiation of almost any kind of contract will be recognized as a breach, bankruptcy may not affect
certain kinds of contract in any respect. If there is a money debt, it is almost certain that bankruptcy will prevent
the obligation from being performed, but it would not have such an effect on the rendition of personal services.
Moreover, a trustee in bankruptcy may elect to perform a certain contract despite of bankruptcy.
Practice Resource:
• Corbin § .2 (bankruptcy as an anticipatory breach of contract).

End of Document

REPUDIATION
§ 54.13 A Partial Breach Coupled with an Anticipatory Repudiation Will

Constitute a Total Breach
Many repudiation cases confront breaches that are only in part anticipatory. They often involve a failure to perform
a duty when the time for performance has arrived (a present breach) with an anticipatory repudiation of the
remaining duties under the contract. The combination of a partial breach and an anticipatory repudiation will
constitute a total breach for which the plaintiff may recover damages not only for the existing breach but for the
future nonperformance by the defendant. In such a case, a plaintiff may bring only one action, and if it fails to make
proof of any part of its injury in pressing to judgment, its right to compensation will be barred.
In a contract for the sale of goods to be delivered in installments, a seller’s failure to deliver a presently due
installment that conforms to the contract would not discharge the duty of the buyer unless that installment
substantially impaired the value of the whole contract. UCC § 2- 12 . When such a failure is combined with an
anticipatory repudiation of the remaining installments, however, there would be a total breach of the whole contract.
The present breach of an implied promise may be the forerunner of an anticipatory repudiation of the remainder of
the contract. Thus, when there is a breach of the implied duty of cooperation or its correlative requirement that one
party must not interfere with performance by another, a breach of that duty may occur when performance is
originally due. If followed by a repudiation of the remainder of the contract, a court would be clearly justified in
finding a total breach of the contract.
Practice Resource:
• Corbin § .2 (repudiation that is partly anticipatory—damages for future injury).

End of Document

REPUDIATION
§ 54.14 Time and Place That a Repudiation Becomes a Breach
[1] Determining When the Statute of Limitations Starts to Run

Earlier in this chapter, we rejected the notion that a repudiation had to be “accepted.” With the exception of one
situation involving contracts for the sale of goods, discussed later in this section, the obligee may simply await
the time for performance before treating the repudiation as a breach.
The repudiator, however, can nullify the repudiation by retracting at any time prior to the obligee’s notification
that it is being treated as a breach, including filing a cause of action, or reliance by the obligee absent any
notification to the repudiator. Another alternative is to provide the repudiator with a locus poenitentiate, to allow
it to retract the repudiation within a certain time.
It is important to determine the time at which the obligee treated the repudiation as a breach. Where an action
would be time-barred if the statute of limitations began to run from the time of repudiation rather than from the
time of the breach, since the repudiation is not a breach, the statute does not begin to run until the repudiation
is treated as a breach. Thus, the limitations period starts to run at the earlier of: (1) the completion of the work;
(2) the termination of the contract under its own terms; or (3) the anticipatory repudiation of the contract by one
party and the “adoption” of the repudiation by the other party. Ali v. Flessner Enters., 2015 Tex. App. LEXIS
10170 (Tex. App. Corpus Christi Oct. 1, 2015). In Szymanski v. Sacchetta, 2012 U.S. Dist. LEXIS 9315 (E.D.
Pa. Jan. 25, 2012), two anticipatory repudiations of a contract occurred long before the date for performance of
the contract. The court noted the general rule that the innocent party may await performance or to treat the
repudiation as an immediate breach. If the latter choice is made, the breach has occurred and the statute of
limitations begins to run from that moment. If, however, the non-breaching party awaits performance, the
statute begins to run at the time performance is due. A repudiation is not a breach until the innocent party treats
it as a breach. In Allied Erecting & Dismantling Co. v. United States Steel Corporation, 2015 U.S. Dist. LEXIS
129251 (N.D. Oh. 2015), Allied repudiated its contractual duties by letter dated May 1, 2012, but the non-
breaching party, US Steel, continued to seek assurances of Allied’s performance and did not finally elect to
treat Allied’s actions as a repudiation of its contractual obligations until August 14, 2012. The latter date is when
the breach occurred. The court cited the Corbin treatise for the proposition that a promisor’s renunciation of a
contractual duty prior to the time fixed in the contract for performance constitutes a repudiation. However,
“[s]uch a repudiation ripens into a breach prior to the time for performance only if the promisee ‘elects to treat it
as s ch.
Beyond the logic of this view, the opposite view would allow a repudiator to shorten the statute of limitations by
a wrongful act. Several courts have repeated Professor Corbin’s admonition:
The plaintiff should not be penalized for leaving to the defendant an opportunity to retract his wrongful
repudiation; and he would be so penalized if the statutory period of limitation is held to begin to run against
him immediately.
See, e.g., Romano v. Rockwell Internat., Inc., 14 Cal. 4th 479, 489, 59 Cal. Rptr. 2d 20, 926 P.2d 1114, 1120
(1996).
If it is appropriate to ignore the repudiation, the statute would begin to run as of the time for performance. See
Pfeifer v. Phoenix Ins. Co., 189 Md. App. 675, 985 A.2d 581 (2010).
[2] Sales of Goods Under the UCC

Although an aggrieved party may typically choose to ignore an anticipatory repudiation and await the time for
performance to treat it as a present breach, the concept of avoidable consequences must be kept in mind. In
Page 2 of 3
contracts for the sale of goods, UCC § 2- 10 allows the aggrieved party to await performance only for a
“commercially reasonable time.”
A farmer contracted to supply an entire crop of beans from a future October harvest but committed an
anticipatory repudiation in May. The buyer waited until September to contract for a substitute purchase
(“cover”), when the market price had risen. The court denied the cover remedy measured by the difference
between the contract and substitute purchase prices and relegated the buyer to the difference between the
contract price and an earlier and lower market price representing the end of the “commercially reasonable time”
at which the buyer should have covered. Trinidad Bean & Elevator Co. v. Frosh, 1 Neb. App. 281, 494 N.W.2d
347 (1992). If the buyer chooses not to “cover” by making a substitute purchase, damages are measured as the
difference between the contract price and market price at the time the buyer “learned of the breach.” UCC § 2-
713. The determination of when the buyer “learned of the breach” where the breach emanates from an
anticipatory repudiation is complicated under the UCC. The complications are pursued in Chapter 57, § .1
below. In QK Healthcare, Inc. v. InSource, Inc., 108 A.D.3d 56, 965 N.Y.S.2d 133 (2013), QK purchased
several thousand units of a drug from the defendants which QK sought to return pursuant to return policies
under the contract. The defendant refused to accept the return in 2005. QK commenced an action for breach of
contract in 2010. The defendant raised the UCC Statute of Limitations in § 2- 2 that requires an action to be
commenced within four years after the cause of action has accrued. A cause of action accrues when the breach
occurs, regardless of the aggrieved party’s lack of knowledge of the breach. The defendant claimed that the
breach occurred upon the refusal to accept the return in 2005. Noting that § 2- 10 allows a party to await
performance for a reasonable time after the repudiation, QK could have waited for such a period. No “breach”
would have occurred until that period expired. The defendant failed to establish that a commercially reasonable
time had expired more than four years prior to the commencement of this action.
The “repair doctrine” may toll the statute of limitations in certain instances. The repair doctrine provides: “[T]he
limitations period on breach of contract and breach of warranty claims is tolled from the time a seller undertakes
efforts to repair the defective goods until the time it abandons those efforts where: (1) the seller either expressly
or impliedly promises or represents that such repairs will remedy such defect; and (2) the buyer reasonably
relies upon such promise or representation and, as a result, does not institute legal action against the seller.”
Thomas v. Cummins Engine Co., 2015 U.S. Dist. LEXIS 19195 (D. Colo. Feb. 18, 2015).
[3] Place Where Repudiation Becomes Operative

When two parties are in the same jurisdiction, no issue concerning the place of the repudiation will normally
arise. When the parties are in different jurisdictions there may be a difference in their respective statutes of
limitations that could allow or eliminate a claim for damages. While, historically, local statutes of limitations
governed, under “borrowing statutes,” the statute of limitations of the jurisdiction where the cause of action
accrued could be borrowed.
When a cause of action on a directors and officers liability insurance policy would be barred under the New
York statute of limitations but not under the Kentucky statute of limitations, a federal court of appeals predicted
that the Kentucky Supreme Court would determine the applicable statute of limitations by looking to where the
cause of action accrued. The insurer had committed an anticipatory repudiation by denying coverage before it
had any obligation to make payments under the policy. Citing Corbin on Contracts, the court acknowledged that
the question of where an anticipatory repudiation occurs had not been clearly settled. In accordance with
Corbin and the admittedly “sparse” case law authority, the court concluded that when an anticipatory
repudiation is contained in a letter, the repudiation has occurred where the letter was posted. Here, it was
posted in New York. Under the Kentucky borrowing statute, the New York statute of limitations applied, barring
the action. Combs v. Int’l Ins. Co., 354 F.3d 568 (6th Cir. 2004).
Practice Resources:
• Corbin § . 0 (place and time that a repudiation that becomes operative as a
breach); § . 1 (time when statute of limitations begins to run).

Page 3 of 3
End of Document

REPUDIATION
§ 54.15 Repudiation of Unilateral Contracts
[1] Generally, No Action Will Lie for the Anticipatory Repudiation of a Unilateral Obligation to Pay
Money
It is important to recall that one of the often stated reasons for the creation of the doctrine of anticipatory
repudiation was to relieve the aggrieved party from maintaining a state of readiness to perform when the time
for performance arrived, notwithstanding an earlier unambiguous indication by the obligor to renounce the
contract. To avoid that injustice, the obligee was permitted to treat the anticipatory repudiation as a present
breach. In a unilateral contract or bilateral contract that has become “unilateral” in the sense that it has been
fully performed on one side, the “readiness” justification for the doctrine of anticipatory repudiation disappears.
Where a debt was to be repaid in monthly installments of $1,207.03 with a final balloon payment of $80,526.09,
the debtor repudiated the debt and the plaintiff claimed a total breach making the full amount of the debt
payable. The court, however, held that the doctrine of anticipatory repudiation has no application to unilateral
contracts. Particularly in cases where the remaining duty is simply one to pay money, the court noted that,
requiring the repudiator to pay the entire amount in advance of the time it was due would constitute a bonus to
the promisee. The court relegated the plaintiff to actions for monthly installments that had become due. Thomas
v. Ocean Tech., Inc., 2009 U.S. Dist. LEXIS 45049 (E.D.N.C. May 29, 2009). See Unito Piazza Enters. Co. Ltd.
v. PacWind, Inc., 2014 U.S. Dist. LEXIS 162798 (C.D. Cal. Nov. 20, 2014) (citing the Corbin treatise, the court
held that in the absence of an acceleration clause, a contract made unilateral by one party’s complete
performance rendered the doctrine of anticipatory breach inapt).
The “readiness” justification is only one and, in large measure, the weakest rationale for the doctrine of
anticipatory repudiation. A more important rationale for the doctrine is the fact that an anticipatory repudiation
causes immediate injury in that it necessarily becomes less valuable as an assignable chose in action when it is
attended by the obligor’s repudiation in advance of the time for performance. Nonetheless, “readiness” is the
basis for the generally accepted holding that no action will lie for the anticipatory repudiation of an unconditional
unilateral obligation to pay money or perform some other act. See, e.g., Parker v. Moitzfield, 733 F. Supp. 1023,
1025 (E.D. Va. 1990).
[2] Promise by an Insurance Company to Make Disability Payments

In light of the general holding that a mere obligation to pay money will not trigger an action based on
anticipatory repudiation, one type of case that causes consternation is the promise by an insurance company to
make disability payments to the insured as long as disability continues. If the company decides that the
condition of disability no longer exists in the insured, it ceases payments. The insured then brings an action
claiming continued disability and seeking not only overdue payments that were not made (present breaches),
but all future installment payments. If continued disability is shown, the insurer will claim that it is only liable for
the present payments, not future payments, since the doctrine of anticipatory repudiation does not apply to
unilateral obligations such as that of the insurer. See Greguhn v. Mutual of Omaha Ins. Co., 461 P.2d 285 (Utah
1969). The insured, however, will complain that he or she should not be burdened with the necessity of suing
for payments whenever the insurer determines that the insured is no longer disabled as defined in the contract.
The insured may also claim that the insurer’s obligation is not unilateral since the insured has an obligation to
submit to future medical examinations to ascertain continued disability.
It is important to remember that these cases involve both present breaches (the failure to pay due installments)
and anticipatory repudiations of future installments, which suggest a total breach. The essential challenge,
Page 2 of 2
however, is the calculation of future damages. The solutions include limiting the recovery to payments already
due together with a decree that future payments be made when due.
In a leading case, a court was not satisfied to limit recovery to payments already due, but it was also not
convinced that a calculated lump sum payment for future installments was appropriate. It chose a “middle
ground” by granting a judgment for all payments already due and for all future payments when they became
due. Caporali v. Washington Nat’l Ins. Co., 102 Wis. 2d 669, 682, 307 N.W.2d 218, 223 (1981).
If an insurer’s refusal to make payments is in bad faith, the insurer can be liable for a lump sum payment.
DeChant v. Monarch Life Ins. Co., 204 Wis. 2d 137, 554 N.W.2d 225 (Ct. App. 1996). Another fruitful possibility
is a declaratory judgment action, which also avoids the danger that a claimed repudiation is not viewed as such
by the court.
Practice Resources:
• Corbin § . (repudiation of unilateral money contract); § .10 (repudiation of
unilateral insurance contracts); § .11 (repudiation of insurance contracts
requiring payment in installments).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 55 PURPOSE AND EXTENT OF DAMAGES—
CAUSATION, COMPENSATION, AND VALUE
CHAPTER 55 PURPOSE AND EXTENT OF DAMAGES—CAUSATION,

COMPENSATION, AND VALUE
the subject matter.

End of Document
§ 55.01 Judicial Remedies for the Enforcement of Contracts

There can be no right without a correlative duty, and the breach of a duty in any legal system demands a remedy.
The variety of judicial remedies may be traditionally classified as:
(1) damages;
(2) restitution; and
(3) specific performance or injunction.
“Damages” in contract law constitute a money substitute designed as equivalent to the performance that the
aggrieved party should have received from the breaching promisor. “Restitution” is found in the return of a specific
thing, the restoration of a former legal position, or the payment in money of the value of a benefit conferred.
“Specific performance” seeks to compel the performance promised as nearly as possible. The “mandatory
injunction” has the same purpose, and the “preventive injunction” precludes a promisor from a performance in
violation of the contract.
Any discussion of remedies, however, should be attended by a reminder of how the parties may fashion their own.
A court quotes § .1 of the Corbin treatise: “Parties to a contract can, to a very considerable extent, determine the
remedies that shall be available for its enforcement. This is applicable, to some extent, even with respect to judicial
eme ies. [T]he parties can, by provision in the contract itself, create legal privileges and powers, the exercise of
which may prevent a breach or harm by one party or redress a wrong that has already been done.” NCMIC Fin.
Corp. v. Brican Am., Inc., 2010 U.S. Dist. LEXIS 11246, at *6 (S.D. Fla. Feb. 9, 2010).
Practice Resource:
• Corbin § .1 (judicial remedies for the enforcement of contracts).

End of Document
§ 55.02 The Declaratory Judgment as a Remedy

A declaratory judgment is a judicial decree that does not fit within the traditional remedies classification because it
does not order or command a party to do anything. Rather, it is designed to declare the existing legal relations, if
any, between the parties. While long known to courts of equity, it has proven very useful in allowing parties to
discern their legal rights and duties, often preventing a breach or further breach of duty. It is now possible to
combine the judicial determination of the parties’ rights and duties with an enforcing remedy, either compensatory
or preventive.
Practice Resource:
• Corbin § .2 (the declaratory judgment as a remedy).

End of Document
§ 55.03 Contract Remedies Attempt to Place an Aggrieved Party in as Good a

Position as Performance Would Have—The Expectation Interest
The traditional purpose of contract remedies is often described as placing the aggrieved party in the position he or
she would have been in had the contract been performed. E. Greenwich Sch. Comm. v. E. Greenwich Educ. Ass’n,
2015 R.I. Super. LEXIS 136 (R.I. Super. Ct. 2015) (citing the Corbin treatise). Uniform Commercial Code (UCC)
§ 1- 0 (formerly § 1-10 and the Second Restatement of Contracts § 1 confirm this purpose, and the
proposition has been replicated in countless cases. It looks to the future by effecting the aggrieved party’s
reasonable expectations that were induced by the defendant’s promise. The expectation interest, however, is not
the only interest that may be protected; Restatement (Second) of Contracts § addresses reliance interest,
and § c addresses restitution interest.
Where the defendant failed to install a workable computer and telephone system, the plaintiff was entitled to the
reasonable amount it paid to a second company to fix the system the defendant failed to complete, thus fulfilling the
plaintiff’s expectation interest by placing it in the position it would have occupied had the defendant performed. In re
Integrated Tech. Solutions, Inc., 417 B.R. 643 (Bankr. D.N.M. 2009).
In Ruggers, Inc. v. United States Rugby Football Union, Ltd., 843 F. Supp. 2d 139 (D. Mass. 2012), the plaintiff
supplied “rugby kits” consisting of uniforms and other products to national rugby teams under a contract with the
defendant. The plaintiff claimed the right to identify itself as the exclusive supplier of such kits to the defendant’s
national rugby teams. In this action, the plaintiff claimed reliance damages of $700,000, the wholesale cost to the
plaintiff of the material supplied to the teams. Though recognizing that, generally, the plaintiff’s damages for breach
of contract are measured by the expectation interest to place the injured party in the position he or she would have
been in had the contract been performed (Restatement (Second) of Contracts § cmt. a), the court recognized
that an alternative measure of recovery protects the reliance interest. Reliance damages place the injured party in
the position he would have been in had he never entered the contract (Restatement (Second) of Contracts § .
The court concluded that if a jury determined that the defendant breached the contract, sufficient facts in the record
existed to permit the plaintiff to recover reliance damages, but the plaintiff’s recovery of reliance damages would be
reduced by evidence of benefits conferred on the plaintiff by the defendant.
When a plaintiff’s property was severely damaged by fire, the restoration costs were $244,609.74. The insurer,
however, refused to pay those costs under a policy with a limitation of $499,070. Because restoration did not occur,
the property was not protected by the elements and suffered further damage raising the total loss to $595,000,
$96,430 in excess of the policy limit. The court held that the refusal to pay the original $244,609.74 was a
foreseeable cause of the additional losses (consequential damages) and awarded the plaintiff the entire $595,000.
Had the insurer paid the original restoration costs, the plaintiff’s expectation under the insurance contract would
have been satisfied. Green v. Allstate Ins. Co., 2014 U.S. Dist. LEXIS 10615 (D. Alaska Jan. 2, 2014).
Practice Resource:
• Corbin § . (goal of putting the injured party in as good a position as performance
would have).

Page 2 of 2
End of Document
§ 55.04 Remedies of Damages and Restitution Distinguished

The term “damages” may be used broadly to include any lawsuit in which a sum of money is sought as the remedy.
Damages may be awarded to place the plaintiff in the position that he or she would have been in had the contract
been performed—the expectation interest. Damages also may be awarded in the amount of the value of a benefit
already conferred to avoid the unjust enrichment of the defendant—the restitution interest. Restitution places the
aggrieved party in status quo ante—the position that party was in before the contract was made. 360Networks
Corp. v. Geltzer (In re Asia Global Crossing, Ltd.), 404 B.R. 335 (S.D.N.Y. 2009).
Ames promises to pay $10,000 to Barnes to paint Ames’s house and Barnes does not perform that duty. To place
Ames in the position she would have occupied had Barnes performed, it will be necessary to discover a substitute
painter, who may reasonably charge $12,000. Ames has not expended any amount, nor has she conferred any
benefit on Barnes, but her expectation was to have her house painted professionally for $10,000 and she is placed
in that position by allowing her to recover $2,000 from Barnes, which protects Ames’s expectation interest. If Ames
had paid Barnes $1,000 in advance, she could certainly recover that amount from Barnes who would be unjustly
enriched if he were allowed to retain it. Ames, however, would not be limited to the restitution interest of $1,000; she
would be entitled to the expectation interest of the $2,000 difference between the contract price and the higher cost
of the substitute painter. Ames would then have the house painted at a net price of $10,000, the price she expected
to pay when the contract with Barnes was formed.
Practice Resources:
• Corbin § . (debt and damages compared); § . (remedies of damages and
restitution distinguished).

End of Document
§ 55.05 “Injury” Denotes That a Party Has Been Placed in a Worse Position
than the Party Would Have Been in Absent the Breach
The term “injury” is often used to denote that a plaintiff has been placed in a worse position by the other party’s
breach than the plaintiff would have occupied absent the breach. “Injury” includes an award for “losses caused and
gains prevented by the defendant’s breach, in excess of savings made possible.” First Restatement of Contracts
§ 2 . The same principle is found in the Restatement (Second) of Contracts § . It may consist of a subtraction
from existing wealth or of a disappointment in not receiving the expectation that was induced by the other party’s
promise. Quoting the Corbin treatise, a court recognized that the rules of contract damages are very flexible since
they must be applied to an infinite number of situations which are variable and uncertain. United States ex rel. Belt
Con Constr., Inc. v. Metric Constr. Co., 2007 U.S. Dist. LEXIS 34560 (D.N.M. Mar. 1, 2007).
Practice Resources:
• Corbin § .11 (compensatory damages); § .12 (what constitutes “injury”?).

End of Document
§ 55.06 Issues of Causation
[1] “Proximate” Causation

Damages are recoverable for breach of contract only if they were actually caused by the breach. TMC and the
United States agreed that TMC would accept a payment of $1,437,194.58 to settle a dispute regarding supply
contracts. The agreement recited the parties’ understanding that not all funding necessary to meet the
Government’s payment was presently available for such purposes. The government was supposed to use its
“best efforts” to obtain the funding to meet the payment obligation. It did not obtain the funding to pay the
obligation and filed a motion for summary judgment, claiming that TMC could not prove that it would have
received the money owed to it but for the alleged breach of the government’s “best-efforts” obligation. Giving
TMC all reasonable inferences from the evidence it proffered, the court concluded that the government could
have sought the required funding in ways it did not do, and thus, it could have obtained additional funds to pay
TMC. Citing Corbin, the court noted that it was TMC’s ultimate burden to prove causation of damages;
specifically, that “a defendant is not responsible at law unless accumulated experience justifies the opinion that
the defendant’s action materially increased the risk of the injury that occurred.” TMC met that burden, and
alleged specific facts that, but-for the government’s breach of its best efforts obligation, it could have secured
additional funding. Marquardt Co. v. United States, 101 Fed. Cl. 265 (2011).
For some cases, there is no such causation. Bergmann breach a noncompetition agreement he signed with his
former employer BTS by soliciting business from a particular company that did not lead to any business. Citing
the Corbin treatise, the court explained that in an “action for breach of contract ‘a causal relation [must] be
shown to exist between the defendant’s conduct and the harm for which damages are so ht. BTS, USA, Inc.
v. Exec. Perspectives, LLC, 2014 Conn. Super. LEXIS 2644 (Conn. Super. Ct. Oct. 16, 2014). Numerous cases
refused damages on the basis that the damages were too remote from the breach. They often declare that the
injury was not “proximately caused” by the breach. A hypothetical illustration is recounted in an old English
case, British Coumbia Saw-Mill Co. v. Nettleship, L.R. 3 C.P. 499 (1868). The hypothetical posits that a
bridegroom was on his way to be married to an heiress when his horse lost a shoe. The bridegroom took the
horse to a blacksmith who performed so unskillfully that the horse was lamed and this precluded the rider from
arriving on time. The lady married another man and the blacksmith was held for the loss of the marriage.
The absurdity of such a result is not based on the remoteness of the loss. Rather, it is absurd to hold the
blacksmith liable for results that were unforeseeable at the time the contract was formed. The phrase
“proximate cause” has little value and has caused much confusion in both contract and tort law. It invariably
involves the question of foreseeability, which is a limitation on contract damages.
[2] Foreseeability of Injury

Other terms used to describe the injury for which damages may be sought include “direct,” “indirect,”
“immediate,” or “consequential.” They have proven to offer no better understanding of which damages may be
sought than suggested by “proximate” and “remote.” All of these words suggest that damages must be limited.
Otherwise a failure of a fire engine may be said to have caused an entire city to be destroyed by fire for which
the manufacturer of the engine must pay.
The limitation on recoverable damages is not susceptible to a simple litmus test in the form of a word or phrase.
Again, the limit is best understood as a foreseeability test. Unless a defendant could have foreseen the injury at
the time the contract was formed, the defendant’s breach will not be viewed as the proximate cause of the
injury in the sense that its action or inaction will be viewed as making it responsible for the injury. It may be
Page 2 of 2
preferable to pursue a simple common sense test to hold a person liable for an injury only if it is the “natural
result” of that person’s conduct.
[3] Defendant’s Breach as a “Substantial Factor” in Causing the Injury

A loss may be caused by other factors as well as the defendant’s breach of contract or tort. In the law of torts, if
the other factors contribute to the loss, the defendants are regarded as joint tortfeasors and each is liable for
the whole loss. In contract law, if others whose actions contributed to the loss are not joint obligors, they are not
joined with the defendant who has breached the contract. Generally, the plaintiff need not show the
proportionate share of the loss caused by the defendant who breached. The plaintiff must show, however, that
the defendant’s breach was a “substantial factor” in causing the injury.
A plaintiff was a beneficiary and trustee of another beneficiary of a life insurance policy issued by the
defendant. The plaintiff’s lawyer created a fraudulent trust document that named the lawyer’s brother as trustee.
He induced the insurer to issue a check to the fraudulent trust which the brother endorsed and shared the
proceeds with his brother. The brothers were convicted and the plaintiff sued the defendant for issuing the
check to the fraudulent trust. Noting that a contract action requires the plaintiff to prove that the breach was a
substantial factor causing the loss that would have not have occurred without the breach, the court found the
issuance of the check to the fraudulent trust did not cause the loss. The lawyer and brother had placed
themselves in a position to steal the proceeds, regardless of the party to whom the check was made payable.
Since the lawyer had concealed the insurance policy from the probate court and named his brother as trustee,
he was in a position to carry out the criminal scheme even if the check had been made payable to the correct
trust. Jakobiec v. Merrill Lynch Life Ins. Co., 711 F.3d 217 (1st Cir. 2013).
Practice Resources:
• Corbin § . (“proximate” causation—the effect of varying degrees of
remoteness); § . (descriptive terms—direct and indirect, immediate, natural,
consequential); § . (where the injury is the result of multiple causes).

End of Document
§ 55.0 Nominal Damages

Negligence without damages precludes the finding of a tort. Where, however, a breach of contract causes no
damages or the amount of damages cannot be proven with reasonable certainty, it remains a breach of contract,
and the court will award nominal damages, typically six cents or one dollar. See S. Home Care Servs. v. Visiting
Nurse Servs., 2015 U.S. Dist. LEXIS 96496, 97 Fed. R. Evid. Serv. (Callaghan) 1653 (D. Conn. July 22, 2015);
Sprint Nextel Corp. v. Middle Man, Inc., 2015 U.S. Dist. LEXIS 8839 (D. Kan. Jan. 26, 2015). See also Restatement
(Second) of Contracts § . The award of nominal damages may, however, include court costs, although such
costs will not include attorneys’ fees. See LabWare, Inc. v. Thermo Labsystems, Inc., 2005 U.S. Dist. LEXIS 12993
(E.D. Pa. June 28, 2005).
Nominal damages are not based on the nature and extent of the injury or loss to the aggrieved party. They are
available where a legal injury has been suffered, but there is no substantial loss or injury to be compensated.
Versata Software, Inc. v. Internet Brands, Inc., 2012 U.S. Dist. LEXIS 105585 (E.D. Tex. July 30, 2012). They are
an official statement that a contract has been breached. While the amount awarded is typically not established by
statute or judicial decision, the tradition of awarding six cents or one dollar manifests the nature of nominal
damages as a trifling amount. Calling an award “nominal” would be misleading if it were based on the actual injury
or loss A larger award not based on the nature and extent of the loss would constitute a new class of damages for
which there is no foundation. Thus, where a trial court awarded $25,000 in nominal damages, the court of appeals
reversed in holding that nominal damages are limited to minimal amounts. James Roberson & Penhall Co. v. C.P.
Allen Constr. Co., 50 So. 3d 471 (Ala. Civ. App. 2010).
Unless a significant right is involved, a court will not reverse and remand a case for a new trial if such a trial would
result in only nominal damages. See AttorneyFirst, LLC v. Ascension Entm’t, Inc., 2007 U.S. App. LEXIS 22455 (4th
Cir. Sept. 20, 2007) (quoting Restatement (Second) of Contracts § cmt. b). A lawsuit may result in nominal
damages upon the plaintiff’s failure to prove damages with reasonable certainty, but even if the plaintiff was likely to
recover only nominal damages, the action may still be brought to establish a precedent that could govern
subsequent relationships. In such a case a declaratory judgment may be highly preferable.
Practice Resource:
• Corbin § .10 (nominal damages).

End of Document
§ 55.0 The Concept of Value
[1] The Value of a Performance Is the Amount of Money That Can Be Obtained or Must Be Given to
Effect a Bargain
The “value” of a promised performance is the amount of money that can be obtained or must be given to effect
a bargain. The amount varies with the parties involved as well as the circumstances under which the bargain is
made. There may or may not be an established market price for the product. When there is no discernible
market value, the value is the price at which the owner is willing to sell and buyer is willing to purchase.
The defendant breached an option contract under which the plaintiff was entitled to stock valued at $353,000 in
2007 as determined by the trial court. Without explanation, however, the trial court ordered specific
performance which would provide the stock which, by the time of the award in 2009, was worth far less. On
appeal, the defendant argued that the shares in a closely held corporation cannot be valued because they are
not publicly traded. The court of appeals disagreed and ordered a money judgment noting that the valuation of
such “unsellable” shares commonly occurs through analysis of the financial status, management and
background of the corporation. CIMA Capital Partners, LLC v. PH Cellular, Inc., 69 So. 3d 293 (Fla. Dist. Ct.
App. 2010).
In contracts for the sale of goods, the UCC allows a seller to resell goods that the buyer has wrongfully rejected
and to obtain the difference between the contract price and lower resale price. Whether the resale is public or
private, it must be made in good faith at a commercially reasonable price. Public resales must occur at a usual
place or market for such goods. If the goods threaten to decline speedily in value, the seller may, in good faith,
depart from these limitations on the resale remedy for the benefit of the buyer, notwithstanding the buyer’s
breach. UCC § 2- 0 . If the seller fails to meet the requirements of the resale remedy, the seller is relegated to
the general remedy of the difference between the contract and market prices of the goods at the time and place
for tender. UCC § 2- 0 1 . If such a remedy is inadequate, as in the case of a volume seller or intermediary,
the seller may recover the profit it expected to make on the contract. UCC § 2- 0 1 .
[2] Effect of Shifting Values Caused by Inflation and Currency Fluctuations

If Ames successfully sues Barnes for $100,000, she is entitled to that sum plus a legal rate of interest from the
maturity of the debt. The amount is not increased by proof that the purchasing power of the dollar has
depreciated. The dollar value is determined as of the time performance was due and the contract was broken.
The judgment of American courts is typically in American dollars. Value is determined in dollars even when the
commodity involved is the foreign currency of another country.
In one case, the plaintiff sought to recover the difference between the contract and market prices of an aircraft
as of the day the defendant repudiated the contract. The plaintiff agreed that the price was stated in U.S.
dollars, but claimed currency conversion damages on the footing that it was foreseeable to the defendant that
the plaintiff would have converted the dollars to Euros. Citing Corbin on Contracts, the court held that judgment
will be in U.S. dollars when a breach of contract for U.S. dollars occurs. Where a foreign currency is involved,
conversion to dollars is required. Austrian Airlines Oesterreichische Lufverkehrs AG v. UT Fin. Corp., 2005 U.S.
Dist. LEXIS 7283 (S.D.N.Y. Apr. 28, 2005).
Currency fluctuations have led to disputes over the proper time for valuation. In the case law, two competing
views can be seen: the “breach day” and the “judgment day” times for measurement. About half the jurisdictions
have enacted the Uniform Money Foreign Claims Act, which regards the “conversion date” as the day before a
foreign money claim is paid or set-off. The “day” refers to the time period of the place of the payor. The
Page 2 of 2
exchange rate prevailing at or near the close of business on the banking day before the day payment is made
will be well known at the time of payment.
Practice Resources:
• Corbin § .1 (what is meant by “value”?); § .1 (the effect of shifting values
caused by inflation and currency fluctuations).

End of Document
§ 55.0 Theory of “Efficient Breaches”

When a party breaches a contract and is still better off after paying compensation to the aggrieved party, the result
is said to be pareto superior; the phrase means that, as a unit, the parties are better off because of the breach and
neither party is worse off. Thus, the breach is “efficient.” The leading exponent of the “efficient breach” theory,
indeed the “guru” of the Law and Economics School, is Judge Posner of the United States Court of Appeals for the
Seventh Circuit, who has not only provided a series of masterful opinions writing for that court, but has made
significant contributions to a wide spectrum of critical issues.
To paraphrase Judge Posner, assume that Ames has agreed to sell 100,000 electronic units at $1 per unit to
Barnes, to be delivered at the rate of 10,000 per month. Prior to the third installment to Barnes, Carr seeks an
immediate shipment of 10,000 units at $1.50 per unit, at a value of $15,000 rather than $10,000. Ames agrees to
deliver the shipment to Carr, thereby delaying the shipment to Barnes, who can prove damages of $2,500 because
of that delay. Ames pays Barnes $2,500 in damages so that Barnes is no worse off, and Ames is $2,500 to the
good. Thus, it can be argued that the theory of efficient breach is favored by courts.
The assertion that the law favors efficient breaches is, however, undermined by the fact that Carr may be said to
have committed a tort by interfering with the contract between Ames and Barnes. Thus, the current law cannot be
said to “favor” efficient breaches. Moreover, the theory of efficient breach does not include transaction costs, such
as the costs of litigation and negotiation, nor does it recognize the overriding fact that contract damages do not
compensate fully for breaches. There may also be other losses not subject to proof with reasonable certainty. In
addition, it may be important for contracts to be performed rather than breached for non-economic reasons. A given
efficient breach may be desirable, but a flat rule that efficient breaches should be favored appears to be overly
simplistic.
Practice Resource:
• Corbin § .1 (should “efficient breaches” be encouraged?).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 56 FORESEEABILITY—ANTICIPATED PROFITS—

DEGREES OF UNCERTAINTY
CHAPTER 56 FORESEEABILITY—ANTICIPATED PROFITS—DEGREES OF

UNCERTAINTY
the subject matter.

End of Document

§ 56.01 Causation and Foreseeability in the Law of Remedies
[1] The Test of Causation is Foreseeability

A party who breaches a contract is not liable for the breach unless it is the cause of a loss suffered by the
aggrieved party. The concept of “cause” suggests a uniformity of sequence. An experience of touching a hot
stove that caused injury will induce an avoidance of that cause to prevent a recurrence of the same or similar
injurious effect. Our experience allows us to foresee the future and to predict consequences, though not with
certainty. The only test of “causation,” therefore, is foreseeability, based on uniformity of sequence in our
experience. Although the test is imperfect because foreseeability is limited and can be mistaken, determining
whether particular conduct foreseeably made an injury more likely to occur has proven to be a workable test.
[2] Damages Are Recoverable Only for Injuries that the Defendant Had Reason to Foresee
Prior to 1854, the determination of damages for breach of contract was left essentially to juries without
direction. There were almost no rules. In 1854, however, the Court of Exchequer decided the case of Hadley v.
Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854), which provided much needed rules to limit the unfettered
discretion of juries.
In Hadley, the plaintiffs operated a grist mill that was shut down because of a broken shaft. The defendants
agreed to transport the broken shaft to an engineering company as a model for the manufacture of a new shaft.
The defendants inexcusably delayed the shipment causing the mill to remain closed for a longer period than it
would have been closed without the defendants’ delay. A jury verdict included an award for lost profits for the
extended closed period. On appeal, the trial court’s judgment based on the verdict was reversed. The court
held that damages are recoverable only for those injuries that the defendant had reason to foresee as a
probable result of the breach at the time the contract was made.
A later case elaborated on the Hadley principle. Victoria Laundry (Windsor) Ltd. v. Newman Industries, [1949] 2
K.B. 528, 537. What is foreseeable at the time the contract was made depends upon the knowledge possessed
by the defendant. There are two types of possible knowledge. The first is imputed knowledge that any
reasonable person is assumed to know under the circumstances without any communication from the other
party. There is also actual knowledge. If special circumstances have been communicated to the defendant at
the time the contract is made, and the defendant has actual knowledge of such circumstances, that enlarges
the realm of what is foreseeable, and exposes the defendant to liability for the plaintiff’s losses in light of those
known circumstances.
There was considerable consternation in the report of Hadley v. Baxendale because the reporter’s note stated
that the plaintiff’s servant told the defendant’s clerk that the mill had been shut down. If true, this would have
enlarged the defendants’ liability because they would have possessed actual knowledge of the special
circumstances. The opinion of the court, however, was not affected by the reporter’s error. It emphasized that
the defendant was not made aware that the mill was shut down. The only circumstances communicated to the
defendants were that the broken shaft had to be transported. To the court, it was “obvious that, in the great
multitude of cases of millers sending off broken shafts,” the mill would not be shut down. To extend the
defendants’ liability to pay for such lost profits, the special circumstance that this mill was shut down awaiting
the return of the repaired shaft had to be communicated to the defendants. Since it was not communicated, the
loss of profits caused by the delay in transporting the shaft was not foreseeable and, therefore, not recoverable.
[3] The Foreseeability Concept

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The requirement that the promisor have reason to know of special circumstances at the time of contracting was
based on the idea that, with awareness of greater risks, the promisor could either decline the risk or seek
greater compensation for its performance. Whether such a logical assumption crosses the minds of most
promisors may be doubted.
Some English cases after Hadley suggested that mere reason to know of special circumstances would not be
sufficient to enlarge the promisor’s liability. They suggested the addition of some manifestation of agreement to
such enlarged risks, at least an implied agreement. See, e.g., British Columbia Saw-Mill v. Nettleship, L. R., 3
C. P. 499, 500 (1868). Justice Holmes was of this mind. Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S.
540, 23 S. Ct. 754, 47 L. Ed. 1171 (1903). His suggested “tacit agreement” test addition to the Hadley principle,
however, failed to attract any significant following. Arkansas is in the extreme minority of courts and applies the
test only with respect to consequential damages. Saber Solutions, Inc. v. Protech Solutions, Inc., 2009 U.S.
Dist. LEXIS 88705 (D.N.J. Sept. 25, 2009). The qualification was also abandoned in England.
The “tacit agreement” test has been expressly repudiated by the Uniform Commercial Code (UCC). UCC § 2-
715, cmt. 2. It has been rejected as well by the Restatement (Second) of Contracts, which adopts the Hadley
principle. Restatement (Second) of Contracts § 1 cmt. a, and Reporter’s Notes. Recognizing confusion in the
precedent concerning the “tacit agreement” test, the New Mexico Supreme Court rejected it, stating that its
previous emphasis on the test based on the Globe Refining opinion of Mr. Justice Holmes was “confusing and
antiquated.” Sunnyland Farms v. Cent. N.M. Elec. Coop., Inc., 2013-NMSC-017, ___ N.M. ___, 301 P.3d 387.
The UCC reflects the Hadley principle by allowing the recovery of consequential damages. These include:
any loss resulting from general or particular requirements and needs of which the seller at the time of
contracting had reason to know and which could not reasonably be prevented by cover or otherwise.
UCC § 2- 1 2 (emphasis supplied).
After rejecting the “tacit agreement” test, The Restatement (Second) states:
Although the older rule at common law which made the seller liable for all consequential damages of which
he had “reason to know” in advance is followed, the liberality of that rule is modified by refusing to permit
recovery unless the buyer could not reasonably have prevented the loss by cover or otherwise.
UCC § 2- 1 2 cmt. 2.
The drafting intention, therefore, was to expressly adopt the basic Hadley rule with respect to consequential
damages, while emphasizing the mitigation principle that such damages are not recoverable if they could have
been prevented by reasonable efforts by the aggrieved party. There is no express UCC statement of the
foreseeability concept with respect to damages other than consequential damages. As to those other damages,
since the Hadley principle has not been expressly displaced by any UCC section, it would continue under the
Code. UCC § 1-10 (formerly § 1-10 .
[4] Actual Foresight Is Not Required

The principle that makes recoverable only those damages that the promisor had reason to foresee at the time
of contracting does not require that the promisor contemplated the particular injury or loss resulting from the
breach or that the promisor either expressly or impliedly promised to pay for it. A defendant learned that it had
installed cable between walls to be sealed in apartment buildings that did not meet necessary standards. It
failed to report this defect for several months. The subsequently sealed walls had to be unsealed and repaired,
resulting in delays and added expenses. The plaintiff sought recovery for lost rent. The defendant argued that
those were unforeseeable losses. The court cited Corbin on Contracts in support of its holding that only reason
to foresee, not actual foresight, is required. Under all of the circumstances, if the defendant had reasons to
foresee such losses, they are recoverable. Civic Ctr. Drive Apts. Ltd. P’ship. v. Southwestern Bell Video Servs.,
295 F. Supp. 2d 1091 (N.D. Cal. 2003). The Meyer Group, Ltd. v. The United States, 2015 U.S. Claims LEXIS
534 (Fed. Cl. 2015) (same).
Practice Resources:
• Corbin § .1 (causation and foreseeability in the law of remedies); § .2
(damages are recoverable only for injury that there was reason to foresee);
§ . (reason to foresee—common law and UCC compared); § . (reason to
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foresee does not require actual foresight); § . (contemplation of injury does

not require promise to pay). Corbin on Contracts Desk Edition.

End of Document

§ 56.02 Categories of Damages
[1] General or Direct Damages

When damages are said to flow naturally from the common experiences of ordinary persons, they are
recoverable without any special communication from the defendant. They are the ordinary damages that a
reasonable person would expect to occur because they measure the value of the very performance promised.
If, for example, a seller breaches a contract by failing to deliver a product, the buyer will ordinarily seek to
purchase a similar product from another supplier. If the price of a reasonable substitute product is higher that
the contract price, the buyer is entitled to the difference between the contract price and the higher “cover” price.
These are often called “general” or “direct” damages, and they represent what is often called the “first rule” of
Hadley v. Baxendale, since any reasonable person should appreciate such damages that arise in the ordinary
course of everyday commercial experiences. In Jab Energy Solutions v. Superior, 2016 U.S. App. LEXIS 3549
(5th Cir. La. Feb. 26, 2016), the court cited the Corbin treatise to hold that the damages representing the costs
of hiring a tug to replace an unseaworthy and inadequate vessel are direct, not consequential. “They stem from
the direct, immediate and foreseeable consequence of the [vessel] being unable to perform the voyage.” They
are “damages that are recoverable … for injuries that are the natural result of the breach” or “[l]osses that an
ordinary person would expect to follow the breach.”
[2] Special or Consequential Damages

Special damages do not flow according to common understanding as the natural and probable consequences
of the breach. They are recoverable, however, if they are within the contemplation of the parties by reason of
special circumstances known to the parties at the time the contract is made. Max-Plank-Gesellschaft Zur
Forderung Der Wissenschaften E.V. v. Whitehead Inst. for Biomedical Research, 2010 U.S. Dist. LEXIS 74834,
at *8 n.2 (D. Mass. July 26, 2010). If at the time of contracting the buyer had informed the seller of the need for
a product to keep its factory running, the communication of these special circumstances outside the ordinary
course of things would activate what is often called the “second rule” of the Hadley principle. Such a
communication enlarges the scope of foreseeability and makes the defendant liable for “special” damages.
They are special only because their recovery requires the breaching promisor to have had additional
information at the time of contracting that an ordinary, reasonable supplier of the product would not have.
Telling a supplier that failure to deliver the product on time would close the factory would allow a reasonable
party to understand that the factory’s profits would cease during the period of shut-down.
Special damages are often called “consequential” damages. For example, it is common to see lost profits called
consequential damages. When a retailer loses profits because its wholesaler failed to deliver goods under a
contract, however, the wholesaler needs no special knowledge to foresee that the retailer will lose profits. Lost
profit damages are not always consequential damages. They may be the natural and proximate result of the
breach of contract. Saber Solutions, Inc. v. Protech Solutions, Inc., 2009 U.S. Dist. LEXIS 88705 (D.N.J. Sept.
25, 2009). The wholesaler would not have “reason to foresee” that its failure would necessarily cause the
retailer to lose a customer permanently. A carrier that fails to transport movie films may foresee some lost
profits, but not the closing of the theater. A supplier of defective raw materials should naturally foresee that a
buyer who uses these materials to fabricate other products will not be able to produce those products, and may
have to close that particular production line.
The term “consequential damages” is not used with precision. A contractor agreed to perform work for a city.
The city breached the contract, causing the contractor’s equipment to remain idle for seven months. The city
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resisted the contractor’s claim for damages based on the cost of the idle equipment on the footing that this was
a claim for “consequential” damages, which had been expressly excluded under the contract. The court,
however, found that when a contractor had dedicated equipment to a particular project and, without its fault, the
project was delayed for seven months, damages for such idle equipment flow naturally from the other party’s
breach. The damages, therefore, constituted “general” damages, which were recoverable under the contract.
City of Milford v. Coppola Constr. Co., 93 Conn. App. 704, 891 A.2d 31 (2006).
In DaimlerChrysler Motors Co., LLC v. Manuel, 362 S.W.3d 160 (Tex. App. 2012), the agreement between the
parties did not define “actual damages” or “consequential damages.” The court presumed that the parties
intended their ordinary meanings, which it proceeded to describe. “Actual damages” include both “direct” and
“consequential” damages. “Direct” (“general”) damages compensate a plaintiff for damages conclusively
presumed to have been foreseen by the defendant as a usual and necessary consequence of the defendant’s
act. One measure of “direct” damages is the protection of the expectation interest by providing the aggrieved
party with the “benefit of the bargain.” “Consequential” damages (sometimes called “special” damages) must be
reasonably foreseeable, but damages may be “direct” in one context but “consequential” in another context.
Thus, lost profit that the parties contemplated as the probable result of a breach are more properly seen as
direct rather than consequential damages. The court noted the statement in the Corbin treatise suggesting the
difficulty in establishing a workable distinction between general and special damages, since the appropriate
distinction varies with the context of the contract.
Where the parties contract excludes consequential damages, the issue is often whether the damages are
general (direct) and, therefore, recoverable, or special (consequential) and not recoverable. Where contractors
performing underground utility work piled soil on retaining walls that blocked drains that allowed water
accumulation requiring the replacement of the walls, the court held that the damages were “direct” and not
consequential because the water damage was not an indirect result of the defendants’ conduct. Assurance Co.
of Am. v. Premium Constr. Group, Inc., 2012 U.S. Dist. LEXIS 53139 (W.D. Wash. Apr. 16, 2012).
Practice Resources:
• Corbin § . (general and special damages—direct and consequential
damages); § . (foreseeability of specific injury and the exact amount not
required); § . (illustrations of reason to foresee injury).

End of Document

§ 56.03 Extraordinary Damages
[1] A Breaching Party May Be Liable for Special Damages When It Knows of Special Circumstances
When the scope of foreseeability is enlarged because the defendant was clearly warned of special
circumstances or because its own information or education gave it reason to foresee such circumstances, the
defendant could be liable for extensive special damages beyond general damages.
In one instance, a defendant was paid $1,900 to perform an environmental study of property to which the
plaintiff intended to relocate its business. The study showed no environmental problems. Over six months later,
environmental hazards were discovered on the property. The plaintiff chose another location but claimed losses
in engineering costs, site-plan consulting, legal fees, geotechnical investigations, and design work that could
have been avoided had the environmental study revealed the hazards. The defendant’s knowledge, education,
and background certainly made it aware of the effects of a failure to detect the hazard. In addition to the $1,900,
the plaintiff claimed $211,625 for expenses it incurred in anticipation of the move and another $486,000 in lost
profits. The court denied the defendant’s motion in limine to exclude damages other than the $1,900 because,
“A reasonable jury is likely to conclude that the parties contemplated substantially more than that as reasonably
foreseeable damages flowing from a breach.” Me. Rubber Int’l v. Envtl. Mgmt. Group, 324 F. Supp. 2d 29, 31
(D. Me. 2004).
Under the terms of a contract, a bank was to supply a used car dealer with lists of delinquent financing
accounts. The dealer warned the bank that it would be responsible for the dealer’s lost profits if the bank
breached the contract. The bank’s subsequent failure to provide the list led to the closing of the dealer’s
business. The dealer’s lost profits to the date of trial were recoverable as consequential damages. Bank of Am.,
N.A. v. C.D. Smith Motor Co., 353 Ark. 228, 106 S.W.3d 425 (2003).
A manufacturer purchased from defendant industrial chains to use in its manufacturing facility but the chains
subsequently failed, putting plaintiff’s manufacturing equipment out of commission for about two weeks. Plaintiff
claimed that due to the breach, it had to purchase a product used in its production from other sources to meet
its orders, which increased the cost of producing the final products. The court held that if plaintiff could prove
causation, there was evidence the damages would qualify as consequential damages. Defendant “had reason
to know, at the time of contracting, of [plaintiff’s] ‘general or particular requirements and needs,’ and how a
breach could cause consequential damages in light of those needs.” Pinova, Inc. v. Quality Mill Serv., 2015
U.S. Dist. LEXIS 117849, 87 U.C.C. Rep. Serv. 2d (Callaghan) 637 (S.D. Ga. 2015).
It is not enough merely to tell the defendant at the time of contracting that a breach will cause extensive injury.
The defendant must have reason to know the circumstances that will make such an extensive injury probable
so as to have the opportunity of judging the degree of that probability.
[2] Extraordinary Resale Profits and Losses

When a manufacturer or distributor sells goods to a reselling buyer, the original seller certainly has reason to
know that a failure to deliver the goods will cause its buyer to lose profits. Absent knowledge of special
circumstances, the breaching seller will have reason to know of only normal profits, consisting of the difference
between the contract price and the market resale price.
If a buyer could have procured the goods from another supplier without effect on their resale, the buyer’s
damages would be limited to the difference between the contract price and any higher “cover” price paid for the
substitute goods. UCC § 2- 12. If the buyer can prove that it lost resale opportunities, it could also recover
“consequential” damages. The concept of consequential damages incorporates the foreseeability requirement
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by limiting such damages to “any loss resulting from general or particular requirements and needs of which the
seller at the time of contracting had reason to know.” Moreover, it adds the further limitation that such damages
may “not reasonably be prevented by cover or otherwise.” UCC § 2- 1 2 . The use of the terms “general or
particular requirements and needs” suggests that the term “consequential damages” under the UCC is not
limited to situations requiring special knowledge. Thus, in any sale to a buyer who resells goods, the breaching
seller generally is aware of the probability of normal lost profits.
A seller of raisins failed to deliver 610 tons of raisins of a total contract requiring 1,800 tons because of
disastrous rainfall. The buyer claimed the difference between the contract and market price to the extent it was
able to “cover” the loss, and lost profits on tonnage that it was unable to cover. The defendant claimed that the
extraordinary damages were unforeseeable because of the extraordinary increase in the market price of raisins.
The court found that disastrous weather conditions from time to time were foreseeable in this situation, and that
the risk of extraordinary market prices is assumed by the seller. Foreseeability of the extent of the injury was
not required. Sun-Maid Raisin Growers v. Victor Packing Co., 146 Cal. App. 3d 787, 194 Cal. Rptr. 612 (1983).
[3] Extraordinary Losses Caused by Delay of Carrier

The leading case of Hadley v. Baxendale, discussed above, provides the classic illustration of a carrier’s delay.
In Hadley, delay in the transport of a broken shaft caused a flour mill to be closed for an additional period,
resulting in the plaintiff’s lost profits. The court found that the carrier would not have been aware of the closing
of the mill absent special knowledge to that effect, and that, therefore, no special damages for the delay were
recoverable.
The typical carrier usually has little opportunity to know the facts surrounding the transaction. Thus, to hold a
carrier liable for extraordinary damages, clear evidence that the carrier was informed of the special
circumstances giving rise to such damages for delay is usually required. The risks of carrier liability have been
reduced to minimal levels through limitation of liability clauses in carrier contracts that are validated by
legislation. UCC § - 0 .
If extraordinary damages are caused by a buyer’s unusual methods of using or consuming the goods, the seller
is not liable for the damages outside the scope of the seller’s contemplation. Thus, if a carrier is unaware of
special needs for a quick delivery, the carrier could not be liable for damages caused by the delay that were not
contemplated. See Starmakers Pub. Corp. v. Acme Fast Freight, Inc., 646 F. Supp. 780 (S.D.N.Y. 1986).
The telegraph company used to be the common intermediary for the expeditious means of written
communication. The telegraph company performed a public service and knew that the messages it transmitted
could be important in relation to business and other transactions. But it was seldom in a position to foresee the
extent of an injury in the event the message was not delivered or was delivered inaccurately. Like the carriers of
goods, the liability of the carrier of messages was circumscribed by limitations of liability provisions sanctioned
by state and federal statutes.
[4] Unconscionably Excessive Damages

Earlier we explored an attempted limitation on the recovery of foreseeable damages that would require
evidence that the defendant had manifested at least a tacit agreement to assume the risk of liability for the
foreseeable damages. We noted that the “tacit agreement” test has been expressly repudiated by numerous
courts. Restatement (Second) of Contracts § 1 cmt. a, provides that “the party in breach need not have
made a ‘tacit agreement’ to be liable for the loss.” The UCC is in accord. UCC § 2- 1 cmt. 2.
Nonetheless, the Restatement (Second) suggests a limitation of foreseeable damages:
A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing
recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so
requires in order to avoid disproportionate compensation.
Restatement (Second) of Contracts § 1 .
The explanation is found in comment f, which suggests that it is not always in the interest of justice that a party
be required to pay for all of the foreseeable loss that it has caused. The principal illustration is a situation where
there is gross disproportion in the foreseeable loss and the compensation received by the breaching party. The
relatively small price is evidence that there was no intention to cover a risk of huge liability. Other factors would
include the informality of the dealing and the absence of a formal contract delineating all details that would
Page 3 of 3
typically occur in a non-commercial setting. A limitation to reliance damages that would preclude expected
profits could be appropriate in such situations. The explanation recognizes that courts have been known to
impose such limits covertly by finding certain losses unforeseeable or not sufficiently certain to be recoverable.
This rationale was pursued in a case where the defendant’s inspection of a fire prevention system failed to
meet the requirements of the contract, and a fire occurred. The defendant was paid less than $6,000 for the
inspection. The court reversed a $35 million judgment against the defendant on several grounds including its
determination that the parties could not have intended to cover the risk of such enormous liability in exchange
for such a small fee. Royal Indem. Co. v. Factory Mut. Ins. Co., 786 N.W.2d 839 (Iowa 2010). In another case
following § 1 a seller breached a contract to sell land at a price of $1.3 million. The buyers expected to
earn a profit of $260,000 from the transaction. They sued for $575,000, the difference between the contract
price and market price of the land. Although the “usual rule” would have allowed the recovery of the greater
sum, the court noted that the usual rule is not a rigid rule. In holding that the buyers were entitled to the lesser
sum, which protected their expectation interest, the court relied in part on the limitation of avoiding
disproportionate compensation since, otherwise, the plaintiffs would have been placed in a better position than
they would have occupied had the contract been performed. Foster v. Bartolomeo, 31 Mass. App. Ct. 592, 596,
581 N.E.2d 1033, 1035 (1991).
The Restatement (Second) position is not unanimously followed. Courts have been reluctant to announce that
they are pursuing limitations on the recovery of foreseeable damages as suggested by the standards in § 1.
Where foreseeable damages of $6,820,000 amounted to 2,750 times the purchase price, the court focused on
the “permissive language” of § 1 that leaves damages limitations in the sound discretion of the trial court.
The court of appeals found no abuse of discretion by the trial court since the damages were direct and not
consequential. Where the risks were or should have been anticipated, courts will generally not interfere simply
because the damages are disproportionate to the contract price. M.M. Silta, Inc. v. Cleveland Cliffs, Inc., 572
F.3d 532 (8th Cir. 2009). Another court upheld a damage award of $14 million where the compensation was
$600,000 notwithstanding the court’s recognition of the gross disproportion. The court declined to apply
§ 1 noting that the transaction was in a commercial setting and the written evidence of the contract
indicated that it was not an informal transaction. Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479,
610 A.2d 364 (1992).
In a contract for the sale of goods, the UCC would normally allow a buyer to choose the “cover” remedy or a
remedy granting the difference between the contract and market prices of goods. That remedy would not be
available however, to allow a buyer to pursue a windfall. For example, a seller breaches a contract to supply
goods at a price of $20,000 and the buyer chooses the “cover” remedy by purchasing a substitute product for
$21,000, which would allow damages of $1,000. UCC § 2- 12. If the normal market price at the time the buyer
learned of the breach was $24,000, the buyer may wish to sue for that measure to recover $4,000. UCC § 2-
713. Since, however, the buyer has already “covered,” that remedy would not be available because it would
place the buyer in a better position that it would have been in had the contract been performed.
Practice Resources:
• Corbin § . (damages for extraordinary harm due to special circumstances);
§ .10 (extraordinary resale profits and losses); § .11 (extraordinary losses
caused by the delay of a carrier); § .12 (extraordinary injuries due to unusual
methods of use and consumption); § .1 (contracts for delivery of messages);
§ .1 (unconscionably excessive damages).

End of Document

§ 56.04 Actions Brought Under Either a Contract or Tort Theory

A tort claim lies for breach of duty imposed as a matter of social policy; contract claims lie only for breaches of duty
created by the mutual assent of the parties to the contract. Plaintiffs claimed defendant improperly installed spray
foam insulation in plaintiffs’ commercial building. The court explained: “… the gravamen of the cause of action
alleging negligence is that the work performed under the contract was performed in a less than skillful and
workmanlike manner. Such a cause of action sounds in breach of contract, not e i e ce . Mack-Cali Realty,
L.P. v Everfoam Insulation Sys., Inc., 2015 NY Slip Op 04615 (2015). One has the right against any other party to
be free of tortious act that cause injury. Bishop v. GNC Franchising LLC, 403 F. Supp. 2d 411 (W.D. Pa. 2005). A
contract right allows an action only against the other parties to a contract. In contract, damages are limited to those
that the defendant had reason to foresee at the time of contracting; in tort, a defendant may be held liable for
injuries it had no reason to foresee when the tortious conduct occurred. See Carolina Indus. Prods. v. Learjet, Inc.,
189 F. Supp. 2d 1147, 1183 (D. Kan. 2001).
Where plaintiff claimed breach of the parties’ independent contractor agreement by “false reporting” of sales
information, the court held the claim did not allege a violation of a legal duty separate and distinct from the
contractual obligation. The defendant’s duty to plaintiff arose from the parties’ contract. While there was a split of
authority as to whether the economic loss theory extends to contracts other than for the sale of goods, under
Michigan law, claims that arise out of a duty created by contract are contract claims. Mid Am. Solutions, LLC v.
Merch. Solutions Int’l, Inc., 2016 U.S. Dist. LEXIS 2129 (W.D. Mich. 2016).
When an action may be brought under a contract theory or under a tort theory, the plaintiff should be permitted to
sue in either theory. The UCC allows a recovery for personal injury as well as property damage for breach of
warranty. UCC § 2- 1 . Where an allegedly defective product causes personal injury, a plaintiff may choose to sue
in a tort action. Restatement (Second) of Torts § 02 . There is no bar, however, to bringing the action under the
UCC, although there may be limitations on the breach of warranty action. (For a discussion, see Chapter 43 above.)
Practice Resource:
• Corbin § .1 (foreseeability and causation: contracts and torts compared).

End of Document

§ 56.05 Reasonable Certainty Is Required in Proof of Damages
[1] Test for Reasonableness Depends on the Specific Circumstances

In addition to the requirement that damages must be foreseeable, cases are legion that state that damages for
breach of contract must also be proved with “reasonable certainty.” A “reasonable” test allows for considerable
variation, but, as in the application of the “reasonable person” test, the test must be accepted since our law has
developed no better test. Although courts have traditionally required more certainty in the proof of contract
damages than tort damages, innumerable cases state that mathematical precision is not necessary to prove
contract damages. Malasky v. Dirt Motor Sports, Inc., 2008 U.S. Dist. LEXIS 40111 (D. Colo. May 16, 2008).
A reasonable basis is required for measuring losses as well as gains prevented. A television broadcast
meteorologist claimed that his agent breached his contract by failing to inform him of opportunities that would
have paid him more in a larger television market. The court held that the broadcaster’s evidence of lost
opportunity damages was insufficient since it only speculated that he could have obtained one of those
positions. LaPlante v. Estano, 2007 U.S. Dist. LEXIS 31703 (D. Conn. Apr. 19, 2007).
There must be sufficient certainty to establish the contract itself, but even if that has been established,
damages for breach of the contract may not be sufficiently certain. A defendant promised the plaintiff hotel a
listing in the yellow pages. The listing was made under “banquet rooms” instead of “hotels.” The court found
sufficient evidence of a formed contract, but insufficient evidence of alleged damages in the amount of
$500,000. Midland Hotel Corp. v. Reuben H. Donnelley Corp., 118 Ill. 2d 306, 515 N.E.2d 61, 113 Ill. Dec. 252
(1987).
The case law suggests that courts will be more lenient in discovering reasonable certainty when the breach of
contract is “willful.” Moreover, when a court is convinced of substantial pecuniary harm, an injured party
typically will not be denied a remedy for such foreseeable damages simply because the amount in dollars is
incapable of proof. For example, a defendant breached its promise to furnish free lifetime use of country club
facilities. Recovery was allowed for the discounted value of the lifetime membership notwithstanding the
absence of proof that the plaintiffs would reside in the area for a lifetime or maintain other requirements of the
agreement for a lifetime. Martin v. Town & Country Development, Inc., 230 Cal. App. 2d 422, 41 Cal. Rptr. 47
(1964).
[2] Guidelines to Assist in Determining Reasonable Certainty
[0a] Overview
Despite the lack of a satisfactory definition of what is meant by reasonable certainty, courts have developed
guidelines to assist in their determination of reasonable certainty in various types of contracts. These are
explored in the following sections.
[a] Proving Lost Profits

When a breach of contract has caused losses or prevented gains to an established business and such
damages are foreseeable, innumerable cases state that only reasonable certainty is necessary to prove
such damages. For many years, it was assumed that the reasonable certainty standard could not be met
with respect to a new business, which has no prior history of costs and profits that can be used to establish
losses. This per se “new business rule” is now followed in only a handful of jurisdictions. Courts have
recognized “reasonable certainty” as a standard rather than a “rule” since the application of a rigid new
Page 2 of 4
business rule is necessarily “vague and arbitrary.” MindGames, Inc. v. Western Publ’g Co., 218 F.3d 652,
657 (7th Cir. 2000). The so-called new-business rule “is merely an application of the doctrine that ‘[i]n order
to be entitled to a verdict, or a judgment, for damages for breach of contract, the plaintiff must lay a basis
for a reasonable estimate of the extent of his harm, measured in mo ey. Elite Int’l Enter. v. Norwall
Group, 2015 U.S. App. LEXIS 17726, 2015 FED App. 0683N (6th Cir.) (6th Cir. Mich. 2015).
The Restatement (Second) of Contracts recognizes that proof of lost profits in a new business will be more
difficult, but the difficulty lies in meeting the standard of reasonable certainty. It is possible to meet that
standard through “expert testimony, economic and financial data, market surveys and analyses, business
records of similar enterprises, and the like.” Restatement (Second) of Contracts § 2 cmt. b.
One court noted that expert testimony is not necessary in new business cases and that mathematical
precision is not required. Evidence of comparable businesses may be sufficient, but only if the other
businesses sell the same product in the same location. The products were not sufficiently similar in this
case to meet the reasonably certain standard. TAS Distrib. Co. v. Cummins Engine Co., 491 F.3d 625 (7th
Cir. 2007).
[b] Pecuniary Gains and Losses Must be Proved with Reasonable Certainty
Pecuniary gains are additions to wealth, while pecuniary losses are subtractions from wealth. Either type of
damage must be proved with reasonable certainty.
A university breached its contract with a professor, causing the dismantling of his major research effort and
its funding. He recovered a jury verdict of $5 million. On appeal, the university argued that the professor
had suffered no economic harm since his salary and benefits had continued. An expert valued the cost of
rebuilding the research program at $2.9 million. The court recognized that the $5 million jury verdict was
based not only on the cost of rebuilding the project, but on the professor’s lost opportunities. The court
found that the cost of placing him in the same position he would have occupied had those opportunities not
been lost had not been shown with sufficient certainty. The verdict was reduced to $2.9 million. Ferrer v.
Trs. of the Univ. of Pa., 573 Pa. 310, 825 A.2d 591 (2002).
[c] Speculative and Uncertain Profits

If a breach of contract prevents profits from being earned, it is essential to understand the meaning of
“profits.” A profit is the net pecuniary gain from a transaction. It is calculated by the value of the full
performance promised by the other party diminished by the cost of the plaintiff’s own performance that it
promised to render in exchange. It is, therefore, necessary to place a value on the two promised
performances.
When the contract is for the exchange of a commodity with a fixed market price for an agreed sum of
money, the valuation is simple. Absent well-established market prices, however, the valuation is more
complex, involving various costs such as labor and materials. The complexity increases when claims to
hypothetical “profits” are not based on the simple difference in market values of commodities, but on what
profit might have been made on subsequent transactions had the defendant performed as agreed.
In one case, a publisher sued an author for breaching his contract to write three books and for breaching
his duty to give the publisher a right of first refusal on a fourth book, which the author wrote and delivered to
another publisher. The publisher claimed damages in the form of lost profits of $930,738 based on experts’
analyses for the three unwritten books. The court cited Corbin on Contracts and quoted precedent stating
that to recover such expectation damages “there must be a ‘stable foundation for a reasonable estimate’ of
the anticipated profits.” It found that the experts’ conclusions were based on hypothetical evidence and
sales trends. None of the books were even written, much less sold. The evidence of the plot for the
proposed series of romance novels was ephemeral. The publisher failed to meet the reasonable certainty
standard. As to the fourth book, however, it was written and published elsewhere. The actual profits could
be produced for the trier of fact along with other information. Thus, there was a stable foundation for a
reasonable estimate of the estimated profits the publisher would have earned on that book. Dorchester
Publ. Co. v. Lanier, 2007 U.S. Dist. LEXIS 23103 (S.D.N.Y. Mar. 19, 2007).
In another case, IWS, a wireless telephone service provider, hired Transverse, a telecommunications billing
software development company, to develop customized billing software, but the business relationship
Page 3 of 4
“unraveled,” and Transverse sued and recovered for IWS’s breach. The lost profits subsequently awarded
were premised on the assumption the agreement would continue for five additional two-year periods past
its initial term—a total of twelve years. On appeal, the court cited IWS’s dissatisfaction with Transverse’s
contract performance and concluded the assumption that the contract would continue for twelve years was
speculative and unwarranted. Transverse, L.L.C. v. Iowa Wireless Servs., L.L.C., 2015 U.S. App. LEXIS
9981(5th Cir. 2015).
[d] Damages for Profits Prevented

When a breach of contract prevents the continuation of an established business, the past history of the
business is frequently held to provide a sufficiently certain basis for a verdict awarding damages for profits
prevented. De Vries v. Starr, 393 F.2d 9, 20 (10th Cir. 1967). This may not be the case if the business is
subject to great fluctuation in volume, production costs, or the value of the product. If the business is new,
there is a much greater challenge in estimating future profits with sufficient certainty.
A film distributor breached its contract to supply a popular film to the plaintiff’s three theaters. The court
held that damages were proved with sufficient certainty with respect to two established and profitable
theaters, but not to the third, which was a new theater. Eastern Federal Corp. v. Avco-Embassy Pictures,
Inc., 326 F. Supp. 1280 (N.D. Ga. 1971), modified, 331 F. Supp. 1253 (N.D. Ga. 1971).
[e] Lessee’s Repudiation of Long-Term Lease

A lessee abandoned a lease of property after 30 years of a 99-year lease. The court awarded damages of
the promised annual rental for only 10 years instead of the almost 70 years remaining on the lease.
Hawkinson v. Johnston, 122 F.2d 724 (8th Cir. 1941). The justification was that the farther the future is
projected, the less convincing the hypothetical prediction evidence becomes. Here, the time limit was
probably the maximum amount for which convincing opinion evidence could be presented.
[f] Uncertainty in Contracts of Agency, Franchise, or Distributorship

An action for breach of contract by a traditional agent or franchisee or operator of a distributorship selling
goods on commission requires reasonable certainty in proving damages like any other contract. Though the
actual amount of future earnings is impossible to prove, the amount of sales made by a plaintiff for a
sufficient period prior to the breach will constitute a sufficient basis on which to base a reasonable estimate
of future earnings. Barnett v. Caldwell Furniture Co., 277 Ill. 286, 115 N.E. 389 (1917). As an alternative
remedy, the agent could recover reliance damages or, in an appropriate case, restitution damages could be
available for benefits conferred by the agent.
[g] Expected Profits from Oil Wells

The measure of damages for breach of contract is the same for oil and gas leases as it is for other
contracts. Clough v. Williams Prod. RMT Co., 179 P.3d 32, 42 (Colo. Ct. App. 2007). The profits prevented
from the failure to sink an oil well or drill a gas well are not necessarily too uncertain to be recovered.
Expert testimony may succeed in proving the probable production and cost, allowing the plaintiff to recover
the amount of royalties it would have received had the well been drilled. See Stinnett v. Damson Oil Corp.,
813 F.2d 1394 (9th Cir. 1987). If lost profits are too speculative, the plaintiff can claim the increased value
of the royalty interest retained.
[3] Reconcilability of Precedents

It is facile to suggest that cases allowing and cases denying profits are irreconcilable. Such precedent must
always be viewed with careful attention to the character of the evidence presented. Although the cases cover a
wide spectrum of different types of contracts, the principle of reasonable certainty is applied effectively in the
overwhelming majority of cases. Even when a court determines that the evidence presented is not sufficiently
certain to place the plaintiff in the position it would have been in had the contract been performed, there may be
alternative measures of damages that are recoverable. These will be explored in the next chapter.
Page 4 of 4
Practice Resources:
• Corbin § .1 (degree of certainty required in proof of damages); § .1
(reasonable certainty in proving lost profits and the “new business” rule); § .1
(proof of losses as well as profits may be too uncertain); § .1 (speculative
and uncertain profits); § .20 (estimation of future profits where continuance of
going concern is prevented); § .21 (valuation in case of lessee’s repudiation of
long-term lease of a going concern); § .22 (elements of uncertainty respecting
an agent’s future commissions or profits); § .2 (expected profits from oil wells
never sunk); § .2 (inapplicability of precedents due to variability of
circumstances).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 57 ALTERNATIVE MEASURES—

EXPENDITURES— AVOIDABLE CONSEQUENCES— INTEREST— ANTICIPATORY REPUDIATION
CHAPTER 57 ALTERNATIVE MEASURES— EXPENDITURES— AVOIDABLE

CONSEQUENCES— INTEREST— ANTICIPATORY REPUDIATION
the subject matter.

End of Document

§ 5 .01 Alternatives to Lost Profits as Measures of Damages

When the defendant’s breach prevents the plaintiff from earning profits but the profits cannot be proved with
reasonable certainty, the aggrieved party deserves something more than nominal damages. Unrecoverable lost
profit damages caused by preventing the plaintiff’s use and operation of property may be measured by the rental
value of the property or by the interest on the reasonable value of the property as an investment. While such value
must still be proved with reasonable certainty, there is no insuperable obstacle to such measurement even if the
property has never been leased. This rule has resulted in judgments for the rental value of land, houses, vessels, or
factories where the plaintiff has been deprived of its use by the defendant’s delay in completion, failure to repair
properly, delay in the delivery of machinery, or delivery of machinery that did not function properly. See
Restatement (Second) of Contracts § 1 . There are, however, concerns that only the net value of the loss
should be compensated. Where an accident precluded the continued rental of a car, the court noted that operating
costs, depreciation and other expenses would have occurred even if the accident had not happened and the vehicle
had been rented to a third party. PurCo Fleet Servs. v. Koenig, 240 P.3d 435 (Colo. Ct. App. 2010).
Practice Resource:
• Corbin § .1 (alternative measure where the profits prevented are too uncertain).

End of Document

§ 5 .02 Damages Measured by the Value of the Conditional Contract Right

A contract to pay for a new house is constructively conditioned on the building of the house. Where Ames contracts
to construct a house for Barnes and Barnes repudiates the contract before any construction has begun, to recover
the profit she would have earned, Ames will have to prove with reasonable certainty that she would have built the
house, thereby satisfying the constructive condition to Ames’s duty.
If the contract is aleatory, such as contest in which the winner will receive $100,000, if Ames’s opportunity to win the
prize is precluded by Barnes’s breach of contract, Ames will not be able to prove with reasonable certainty that she
would have won the contest. What Ames may be able to prove with reasonable certainty, however, is the
reasonable value of her right of opportunity or “chance” to have won the contest under the contract. See
Restatement (Second) of Contracts § . See also Wachtel v. National Alfalfa Journal Co., 176 N.W. 801 (Iowa
1921).
Where a defendant secured a bridge loan of $40 million necessary for its business, but failed to secure the plaintiff’s
consent to such new security as required under a contract with the plaintiff, the plaintiff sought $78 million in
damages, almost double the amount of the bridge loan, for breach of its right to consent. The court noted that
“consent rights” are designed to protect the holder of the right against harm from a new transaction adverse to its
interests. The bridge law at issue would provide significant benefits to the plaintiff, but, the court noted, there was
breach of the plaintiff’s right to consent. The court concluded that consent fees of existing lenders constituted an
appropriate benchmark for damages in this case in the amount of $300,000. Fletcher Int’l, Ltd. v. Ion Geophysical
Corp., 2013 Del. Ch. LEXIS 295 (Dec. 4, 2013).
Practice Resource:
• Corbin § .2 (damages measured by the value of the contract right).

End of Document

§ 5 .03 A Party May Recover Expenses Incurred in Reliance on a Contract

In Dunkin’ Donuts Franchising LLC v. Sai Food & Hospitality, LLC, 2013 U.S. Dist. LEXIS 98912 (E.D. Mo. July 16,
2013), franchisees sought damages based on their investment minus the current value of the store and profits. The
court quoted the Corbin treatise suggesting either a recovery of lost profits protecting the expectation interest, or a
recovery of the reliance interest measured by actual expenditures. In no case, however, should the plaintiff recover
a windfall.
An aggrieved party may not be able to prove damages with sufficient certainty that would protect its expectation
interest by placing the party in the position it would have been in had the contract been performed. Often, though,
the party will be able to prove with reasonable certainty expenses incurred in preparation or in part performance in
reliance on the contract. Damages measuring such expenditures are recoverable to protect the party’s reliance
interest. Restatement (Second) of Contracts §§ and 349. St. Lawrence Factory Stores v. Ogdensburg Bridge
& Port Auth., 13 N.Y.3d 204, 918 N.E.2d 124 (2009).
Where a defendant breached a contract to produce a motion picture, it was impossible to prove with any level of
certainty the profits that the plaintiff might have earned had the film been made. Nonetheless, the plaintiff was
entitled to recover reliance damages for amounts it had contracted to pay to a director and screenwriter chosen by
the defendant, whether or not the film was produced. CBS, Inc. v. Merrick, 716 F.2d 1292 (9th Cir. 1983).
In one well-known case, the manufacturer of a new type of furnace leased convention center space at a trade show.
It informed a carrier that all of the parts of the furnace had to be delivered to the show’s location by a certain date to
display its operation to potential investors that could support production and marketing of the product. Failure to
deliver a key component precluded any display of the product in operation. The profits that the plaintiff might have
eventually earned from such an operating display were totally speculative. Since, however, the carrier had been
apprised of the purpose and importance of timely delivery, the court held that the plaintiff’s expenses incurred in
reliance were foreseeable. The expenses included the cost of leasing exhibit space and the amounts reasonably
expended to have its employees available at the exhibit to demonstrate the operation of the furnace to prospective
investors. Security Store & Mfg. Co. v. American R. E. Co., 51 S.W.2d 572 (Mo. Ct. App. 1932).
Like expectation damages, reliance damages are subject to the traditional foreseeability limitation as described in
Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854). They are also subject to the usual mitigation limitation
precluding recovery if the damages could reasonably have been avoided. See Wartzman v. Hightower Productions,
Ltd., 53 Md. App. 656, 456 A.2d 82 (1983).
One important qualification of reliance recovery subjects the recovery to a deduction of any loss the defendant can
prove the plaintiff would have sustained had the contract been performed. L. Albert & Son v. Armstrong Rubber Co.,
178 F.2d 182 (2d Cir. 1949); see also Amber Res. Co. v. United States, 73 Fed. Cl. 738 (2006). Restatement
(Second) of Contracts § cmt. a, suggests that reliance damages exceeding the contract price are, therefore,
not recoverable since full performance would evidence a losing contract. That suggestion, however, ignores
reliance expenditures that could have been recouped had the contract been performed.
For instance, in Security Stove, the contract price for the transportation of the furnace was $147, but the court
allowed reliance damages in the amount of $1,000. The furnace contract with the carrier was designed to provide
the plaintiff with an opportunity to display the new furnace to entice purchasers, as the carrier had been informed.
That opportunity was destroyed when the carrier failed to deliver the operative part in time for the exhibit. Thus, it
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was just as impossible for the carrier to prove that the plaintiff would have suffered a loss as it was for the plaintiff to
prove that it would have made a profit.
Practice Resource:
• Corbin § . (recovery of expenditures in preparation and part performance—protection
of reliance interest).

End of Document

§ 5 .04 A Party May Recover the Value of Property Transferred and Services
Rendered
A plaintiff may have done more than expend money in reliance on the contract. In the course of performing or
preparing for performance, a party may have transferred or consumed property or performed work and labor of
value. That party should recover the reasonable value of the time lost in preparing to perform the contract.
When the part performance directly benefits the defendant, the plaintiff has another alternative mode of recovery.
The defendant is unjustly enriched by the value of the benefit conferred by the plaintiff and the plaintiff may recover
that value in an action for restitution. The restitution interest is explored in subsequent chapters.
Practice Resource:
• Corbin § . (recovery of value of property transferred and services rendered).

End of Document

§ 5 .05 Types of Expenditures That Are Recoverable
[1] Expenditures That Exceed the Value of the Promised Performance

When a plaintiff has entered into what turns out to be a losing contract, such as a builder underbidding a
construction project, if the owner breaches, the builder may have a reliance interest in expenditures of time,
money, and materials already made that exceeds the contract price. To allow the builder to recover more than
the contract price would violate the underlying principle that contract remedies should not place a party in a
better position than that which the party would have occupied had the contract been performed. Thus, whatever
the defendant can prove the plaintiff would have lost on the contract had it been performed will be deducted
from the reliance recovery.
If a plaintiff seeks not to recover for its expenditures, but rather to recover its restitution interest measured by
the reasonable value of the benefit conferred on the defendant, the plaintiff has abandoned any claim under the
contract or any of its terms and is seeking a remedy based solely on the value conferred on the defendant. The
plaintiff is not subject to a reduction in that recovery by any amount of loss the defendant can prove the plaintiff
would have sustained had the contract been performed since the plaintiff’s action is not based on the contract.
The contract price, therefore, is not a limitation on the plaintiff’s recovery.
[2] Expenses Incurred During Preliminary Negotiations

Expenses incurred to induce a contract are not recoverable as part of the expectation interest. They are neither
caused by the breach of contract, nor are they in any part a measure of the defendant’s performance. Such
preliminary expenditures are expected to be reimbursed out of the profits emanating from the contract. Upon
the defendant’s breach, if the value of its performance cannot be determined, the plaintiff’s preliminary
expenditures may be considered in awarding damages, unless it can be shown that no “net profits” to the
plaintiff would have resulted from the performance of the contract.
More recent cases have recognized that parties who have yet to make a final contract may, nonetheless, have
agreed to carry on negotiations in good faith. For example, negotiations in anticipation of the acquisition of a
company may require considerable expenditures, often requiring the expertise of investment bankers and
others to continue due diligence in pursuit of a final contract. If it can be shown that a party to such a
preliminary agreement has objected to certain terms without good reason, made excessive demands, or
otherwise operated in bad faith, foreseeable reliance damages would be recoverable. See Copeland v. Baskin
Robbins U.S.A., 96 Cal. App. 4th 1251, 117 Cal. Rptr. 2d 875 (2002), (holding that damages in such a case
should be limited to reliance damages). See also Venture Assocs. Corp. v. Zenith Data Sys. Corp., 96 F.3d
275, 278–279 (7th Cir. 1996), (recognizing the theoretical but probably impracticable possibility of an
expectation interest recovery). A recovery or reliance damages in such a case may also be based on a
promissory estoppel theory. See Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69 (2d Cir. 1989).
[3] Incidental Reliance

In the Security Stove case, the delayed delivery of a furnace ruined a manufacturer’s opportunity to display its
product to potential investors. The defendant could not be held liable for speculative profits that might have
followed a successful exhibit. The expenditures of the rental fee of convention center space, the railway fares of
an officer and employee of the manufacturer, the value of time spent, and hotel expenses were all in reliance of
the contract with the carrier. They were not, however, expended in part performance of the contract with the
carrier. They may be called “incidental reliance” expenditures. These expenditures include advertising and
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other promotional efforts. The plaintiff’s hope for eventual reimbursement of these expenses was dashed by the
defendant-carrier’s breach. The court’s judgment that the defendant had reason to foresee even such incidental
reliance is sustainable under these facts.
[4] Double Recovery Is Not Permitted

Recovery of the expectation interest should normally preclude any double recovery. When an owner breaches
a building contract and the builder recovers the contract price minus any costs the builder has been relieved
from incurring because of the owner’s breach, the formula provides the builder with the reimbursement for the
expenditures incurred plus the profit expected on the entire contract. This is the builder’s expectation interest. If
the builder’s reliance expenditures were added to this recovery, it would obviously constitute a double recovery
of expenditures, placing the builder in a better position than it would have been in had the contract been
performed. A party is not entitled to such a windfall recovery. If a plaintiff is awarded the full value of the
promised performance, it will not be allowed to recover any expenditure that constituted part of the cost of its
performance that was a constructive condition to earning the other party’s full performance.
Statements that a party may not recover “profits” plus the expenditures necessary to earn that profit are
misleading. It is important to use the term “profits” accurately. When the builder recovers the contract price
minus the cost of completion, it is recovering both the expenditures for the work done and the profit on the
entire project. When Ames agrees to mine ore for Barnes at a price of $50 per ton, the $50 is not all “profit.” If
Barnes breaches the contract after Ames completes the mining of 1000 tons, Ames will recover $50,000—the
performance promised by Barnes. The $50,000 includes the cost of any expenditure for labor, tools, or
materials Ames incurred to mine the ore. Those expenditures are deducted from the $50,000 total recovery,
and whatever amount is left after the deduction constitutes the profit Ames earned on the contract.
[5] Litigation Expenses Resulting from Breach of Contract

A plaintiff who prevails in an action for breach of contract must still defray its own attorneys’ fee under what is
called the “American” rule. See Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Co., 313 F.3d 385 (7th
Cir. 2002). The parties may agree that attorneys’ fees will be paid by the breaching party and there are various
statutory exceptions to the rule.
It is important to note that the “American” rule applies to attorneys’ fees in the lawsuit in which recovery is
sought. When a defendant’s breach causes a plaintiff to incur litigation expenses in a lawsuit with a third party,
several courts apply the “collateral litigation” exception. This allows the plaintiff to recover such expenses from
the defendant. Restatement (Second) of Contracts § 1 cmt. c, is in accord. The exception is discussed
Grupo Condumex, S.A. de C.V. v. SPX Corp., 2006 U.S. App. LEXIS 23217 (6th Cir. Sept. 7, 2006) where the
court noted that Delaware had not yet recognized the exception, but even if it did, the exception requires that
the expenses to be incurred must be separate from litigation with the breaching party, which was not the case
here.
The common situation to which the collateral litigation exception applies occurs when a seller provides a
warranty to a buyer with reason to know that the buyer will provide a similar warranty in the resale of the
product. For example, the Ames Corporation sells “steam coal” to the Barnes Company, which, as Ames has
reason to know, Barnes will resell as “steam coal” to its customer. If the warranty is breached and Barnes is
sued by one or more of its customers, its seller is “answerable over.” The Uniform Commercial Code (UCC)
includes a “vouching in” process when the buyer chooses to notify Ames that it may come in and defend. Ames
will then be bound in any action by Barnes by any determination of fact common to the two litigations unless
Ames, “after seasonable receipt of the [written] notice” enters the litigation and defends. UCC § 2- 0 .
[6] Damages Are Reduced if the Breach Causes a Saving of Expenses

If the defendant’s breach of the contract will relieve the plaintiff from expenses of its own performance which it
would have had to expend had the contract not been breached, the plaintiff’s recovery must reflect a deduction
of these expenditures. As one court suggests:
[A plaintiff] cannot have the same benefit of the contract it would have had, if it had been fully performed,
and at the same time avoid the expense to which, according to the terms of the contract, it would have
been subjected by performance.
Page 3 of 3
Magnolia Metal Co. v. Gale, 189 Mass. 124, 132–133, 75 N.E. 219, 220 (1905).
The UCC codifies this view by deducting “expenses saved” from the damages resulting from the defendant’s
breach. See, e.g., UCC § 2- 12 2 (“cover” remedy) and § 2- 1 1 (contract price/market price differential). A
defendant’s breach, however, does not always reduce the plaintiff’s expenditures. As one court held, where
there was no reasonable opportunity for the plaintiff to reduce overhead costs as a result of the defendant’s
breach, the defendant was entitled to no reduction in the award of damages made against him. Springs Window
Fashions Div., Inc. v. Blind Maker, Inc., 184 S.W.3d 840, 888 (Tex. App. 2006).
Practice Resources:
• Corbin § . (expenditures in excess of the value of the promised
performance); § . (expenses during preliminary negotiation); § .
(expenditures in reliance on the contract but not in part performance thereof—
incidental reliance); § . (recovery of expenditures and the value of the
promised performance); § . (expenses of litigation caused by breach of
contract); § .10 (if a breach causes a saving of expense to the plaintiff,
damages are reduced).

End of Document

§ 5 .06 Damages Are Not Recoverable for Avoidable Consequences
[1] The Mitigation Principle

The focus of contract remedies is not the “guilt” of the breaching party. Punitive damages for breach of contract
alone are not awarded. The focus of contract remedies is on compensating the aggrieved party by placing that
party in the position it would have occupied had the contract been performed—the expectation interest. The
aggrieved party is not entitled to be placed in a better position than it would have been in had the contract been
performed.
Thus, there are limitations on recoverable contract damages. Earlier, we explored the fundamental limitation set
forth in the landmark case of Hadley v. Baxendale that requires contract damages to be foreseeable at the time
the contract is made. Another pervasive limitation on contract damages is based on the view that an aggrieved
party may not sit idly by and allow damages to accumulate. The wronged party may not recover damages that
could have been avoided without undue risk, burden, or humiliation. Graham Constr. Servs. v. Hammer & Steel
Inc., 755 F.3d 611 (8th Cir. 2014). Such damages are not caused by the breach. See W.N. McMurry Constr.
Co. v. Cmty. First Ins., Inc., 2007 WY 96, 160 P.3d 71. This limitation is often called the “mitigation principle” or
the doctrine of “avoidable consequences.”
There are sporadic references in the literature to the “duty to mitigate damages.” Such a characterization is
inaccurate. If a defendant breaches a $10,000 per month one-year contract of employment by wrongfully
discharging the plaintiff after only two months, the plaintiff has no duty to accept an offer to work for another
employer in a similar position in the same locale at $10,000 per month for the remainder of the 12 months. The
plaintiff may stay at home and watch television. The damages of $100,000, the contract price for the remaining
10 months, will be reduced by $100,000, however.
[2] Burden of Proving That Losses Were Avoidable Is on the Breaching Party
Regardless of the type of contract, the burden of proving that losses could have been avoided by reasonable
effort is on the party who breached the contract. See Emmco Ins. Co. v. Wallenius Caribbean Line, S.A., 492
F.2d 508, 514 (5th Cir. 1974). Thus, an employer has the obligation of proving that the employee could have
found suitable substitute employment. An employee may reject employment at a lesser rank or character, or a
significantly reduced salary, or at a location unreasonably distant from the original employment location, or a
position necessitating a residence apart from the employee’s spouse. If, however, the employee chooses to
take a position of a different type or character, the earnings from that position will reduce the employee’s
damages against the breaching employer, assuming the employee could not reasonably maintain both the
original and new employment simultaneously.
Pinefield alleged that Port City’s failure to conduct a comprehensive inspection of Pinefield’s airplane resulted in
an emergency landing and damage to the plane. The plaintiff sought damages for the costs of repair and pilot
salaries. It kept its two pilots on payroll for the seven months it took to repair the plane to avoid the risk of
paying $50,000 to certify two new pilots. The court cited the Restatement (Second) of Contracts § 0 which
states the usual rule that damages are not recoverable for the loss that the injured party could have avoided
without undue risk, burden or humiliation, but an “insured party is not precluded from recovery … to the extent
he has made reasonable but unsuccessful efforts to avoid loss.” Citing Corbin, the court noted that “the doctrine
of avoidable consequences merely requires reasonable efforts to mitigate damages.” The defendant had to
prove that the plaintiff failed to mitigate its damages. Absent such proof, the court found that the plaintiff acted
Page 2 of 3
reasonably in repairing the plane and in retaining two pilots while the plane was being repaired. Pinefield
Consulting, Inc. v. Port City Air, Inc., 2011 N.H. Super. LEXIS 52 (Nov. 16, 2011).
[3] Mitigation in a Contract for the Sale of Goods

If a factory is shut down because a major piece of equipment proves to be un-merchantable and cannot be
repaired for 90 days, the owners of the factory will sue for all of the profits that could have been earned during
the closed period. If a substitute piece of equipment could have been leased and used without undue difficulty
to keep the factory operating during that period, the damages will be the lost profits for the number of days it
took to replace the equipment with the leased equipment plus the rental cost until the original equipment could
be repaired. The UCC allows buyers to recover consequential damage only if they could not have been
avoided. UCC § 2- 1 2 states that damages are recoverable “which could not have been prevented by
cover or otherwise.”
[4] Mitigation in Leases of Real Property

Leases of real property were an historical exception to the common law mitigation principle. The landlord was
permitted to sue for the rent without making any effort to secure a substitute tenant on the footing that the
landlord had conveyed real property to the tenant (a leasehold) and had, thereby, performed the agreed
exchange. This ancient rule was consistent with the concept that covenants were independent in both property
and contract.
The modern view recognizes that a lease is more appropriately treated as a contract rather than a conveyance.
Thus, almost all courts reject the old view and refuse to allow a landlord to recover damages that could have
been avoided by leasing the premises to a substitute tenant. But see Van Mol v. Beasley, 2016 La. App. LEXIS
168, 15-869 (La.App. 3 Cir. 02/03/16); (La.App. 3 Cir. Feb. 3, 2016), where the court recognized the rule that
avoidable consequences of a breach are not recoverable, but it explained that the lease that was breached
gave the lessor, “the right to declare the remaining installments immediately due … or … declare this lease
terminated.” The court held that lessor chose not to terminate and take possession but to take the remaining
amount of the rent due under the lease term. The lessor claimed she cleaned the property and kept it available
in case tenant wanted to use it through the remainder of the lease term.
[5] An Aggrieved Party Must Stop Performing When Notified of the Breach
The mitigation principle has two prongs. In accordance with the previous illustrations, when an aggrieved party
can take positive steps, such as other employment or leasing equipment without great difficulty, risk, or
humiliation to reduce the damages, the failure to take such steps will preclude the recovery of damages beyond
the level of loss that would have occurred had such positive efforts been made. A plaintiff’s damages are
subject to the mitigation principle when the aggrieved party has reason to know that the performance expected
from the other party will not be forthcoming. Health Professionals & Allied Employees, Local 5091 v. Bergen
Reg’l Med. Ctr., L.P., 2010 U.S. Dist. LEXIS 1460 (D.N.J. Jan. 8, 2010) (quoting Restatement (Second) of
Contracts § 0 cmt. b).
The negative prong of the mitigation principle precludes the recovery of damages by an aggrieved party that
could have been avoided had the aggrieved party stopped performing. Thus, if a buyer breaches a contract by
cancelling an order for goods, the seller cannot recover the cost of shipment and delivery after being informed
of the buyer’s countermand. When the builder of a bridge continued to build it after being notified by the county
that it would not make any further payments for the bridge, the court held that no damages incurred after the
repudiation of the contract could be recovered. Rockingham County v. Luten Bridge Co., 35 F.2d 301 (4th Cir.
1929).
[6] Reasonableness of Mitigation Efforts-Cure

The determination of “reasonable” efforts to avoid damages has been litigated in numerous cases. The
determinations are fact sensitive like any other inquiry into whether conduct is reasonable. See Old Stone Corp.
v. United States, 450 F.3d 1360 (Fed. Cir. 2006). It is certainly not necessary to assume unreasonable risk or
unreasonable expense in an effort to mitigate damages. If the aggrieved party lacks the financial ability to avoid
the damages, the mitigation principle will not apply. Where a town brought an action against the defendants for
Page 3 of 3
an alleged defected design and construction of a bridge, the defendant claimed that the town failed to pursue
an opportunity for state funds that would have mitigated the damages. The court recognized the mitigation
principle in holding that the defendant had the burden to attempt to prove that the town failed to avoid damages
by foregoing the opportunity to recover funds from the state. Citing the Corbin treatise, the court emphasized
that the question is whether the town acted reasonably, not perfectly, in not pursuing that opportunity. Town of
Bow v. Provan & Lorber, Inc., 2014 N. H. Super. LEXIS 2 (Feb. 14, 2014).
Under the UCC, a seller has a right to “cure” nonconformities in the goods if the buyer has rejected the goods
and time remains for performance under the contract. Questions may arise, however, as to whether the “cure”
is adequate. Must a buyer of a new automobile or television set that has nonconformities accept the same
“repaired” item, or is the buyer entitled to a new item as a replacement? If the buyer can demonstrate a “shaken
faith” in the repaired product, there is some authority allowing for the insistence on a new product as the only
adequate cure. See Zabriskie Chevrolet, Inc. v. Smith, 99 N.J. Super. 441, 240 A.2d 195 (1968) and Asciolla v.
Manter Oldsmobile-Pontiac, 117 N.H. 85, 370 A.2d 270 (1977) (both holding that the buyer was entitled to a
new automobile); Wilson v. Scampoli, 228 A.2d 848 (D.C. 1967) (holding that the buyer was not entitled to a
new television set since the original set required only reasonable adjustments).
[7] Recovery of Expenses in Unsuccessful Mitigation Effort

It is important to note that when an aggrieved party expends money in a reasonable attempt to mitigate
damages, such expenses may be recovered even where the reasonable attempt to avoid such losses proves to
be unsuccessful. Restatement (Second) of Contracts § 0 2 and cmt. b.
[8] No Mitigation Required When Breaching Party Has Not Definitely Repudiated
Marcellus agreed to rent 200 railcars owned by R.M. Railcars but, between February 2013 and May 2014,
Marcellus failed to take possession of and make payment for 84 of the railcars. R.M. then terminated the
parties’ agreement and filed suit. In considering R.M.’s damages, the court noted that R.M. did not attempt to
mitigate damages from February 2013 to May 2014 by re-letting the 84 cars. The court cited the Corbin treatise
for this proposition: “It is not necessary for the plaintiff to take steps to avoid losses, even though the defendant
has actually committed a breach, so long as the breaching party has not definitely repudiated the contract and
continues to assure the plaintiff that performance will take place.” In the instant case, Marcellus had not
repudiated the parties’ agreement “—it continued to use and pay (most of the fees) for 116 of the 200 railcars.”
The court explained that because Marcellus performed “a large part of its obligations under the contract,
defendant gave plaintiff at least some assurance that it would honor the contract and cure the breach.” In
addition, R.M. could not re-let the 84 unused railcars without first terminating the parties’ agreement (because
Marcellus could have later demanded those railcars). Accordingly, R.M. had no duty to mitigate its damages for
the 84 railcars that Marcellus failed to pay for from February 2013 to May 2014. R.M. Railcars LLC v. Marcellus
Energy Servs., LLC, 2015 U.S. Dist. LEXIS 96491 (N.D. N.Y. 2015).
Practice Resource:
• Corbin § .11 (damages are not recoverable for avoidable consequences).

End of Document

§ 5 .0 Use of Defective Goods

When defective goods are used by a plaintiff with knowledge that they are defective, the plaintiff will not recover
damages emanating from such defects. When a baker used flour that he knew to be defective and he could foresee
the defects in bread made with that flour, the supplier of the flour was not liable for the loss of the baker’s customers
due to the inferior quality of the bread. Saxony Mills v. Huck, 208 S.W. 868 (Mo. Ct. App. 1919).
Practice Resource:
• Corbin § .12 (use of defective goods with knowledge of defect).

End of Document

§ 5 .0 Non-Exclusive Contracts and Lost Volume Sellers
[1] Non-Exclusive Contracts

Earlier in this chapter, we explored the application of the mitigation (avoidable consequences) principle to
employment contracts. When an employer breaches an employment contract and the employee finds substitute
employment, the employee’s damages for the breach will be reduced by the earnings from the new
employment. This obvious application of the mitigation principle is predicated on the assumption that the
employee is able to pursue the new employment only because the original contract was breached. If the Barnes
Corporation breaches its non-exclusive contract with Ames, an engineer, who also provides engineering
consultations for others without breaching her contract with Barnes, Ames’s damages against Barnes will not
be reduced by the consultation fees that Ames would have earned had Barnes not breached the contract. See
Hubbard v. Phil’s BBQ of Point Loma, Inc., 2013 U.S. Dist. LEXIS 63112 (S.D. Cal. May 1, 2013). If, however,
Ames’s contract with Barnes required her services to be performed exclusively for Barnes, Ames’s earnings
from such services after Barnes’s breach could not have been earned absent the breach.
If a contract with a plumber to perform a major project is repudiated and the plumber obtains another contract
requiring its efforts for the same period, whether the earnings on the substituted contract will be deducted from
the plumber’s damages will depend entirely upon whether the plumber could and would have performed both
projects, or whether it was enabled to perform the second project only because of the breach.
In a contract for the sale of a famous painting, the seller has only that painting to sell. If the buyer repudiates
the contract and the painting is sold to another at the same or higher price, the seller is entitled to be placed in
the position it would have been in had the contract been performed. To assure that the seller will not be placed
in a better position, the seller would be entitled to nominal damages from the difference in the original and
resale prices.
The situation changes dramatically, however, when the seller has a virtually inexhaustible supply of the product.
A retail seller of automobiles, refrigerators, or other goods will sell as many products as the consuming public
will buy in any given period. If a buyer breaches a contract to purchase such a product and it is resold to the
next buyer, the basic remedies of the seller under the UCC will be inadequate.
In a standard price product, the resale will bring the same price as the price under the breached contract since
the measure of damage is the difference between the resale price and the contract price resulting in zero
damages. UCC § 2- 0 1 . The seller may resort to another UCC remedy that provides damages measured by
the difference between the contract price and the market price at the time and place for the tender of the goods.
UCC § 2- 0 1 .
[2] Lost Volume Sellers

Again, however, that measure will yield no damages in such a standard price item. The seller is a “lost volume”
seller. Beyond the retail seller of consumer goods, brokers at various levels of distribution are also lost volume
sellers. They earn their profit or commission from the sales they make and they are not limited in the number of
products that can be made available for sale at any given time. It is important to consider what such a seller has
lost when a buyer breaches a contract.
The lost volume seller has the normal overhead expenses of any seller in operating a business. The overhead
is paid from sales made throughout a given period. The fewer the sales, the greater the overhead allocation to
each sale. If a contract with such a seller is breached, it also loses its profit on that sale. The profit and
overhead allocation made on the next sale of the same product should not be deducted in mitigation of
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damages because the second sale would have been made anyway. The second sale was not made possible
by the breach. The UCC recognizes this reality where “the measure of damages [in the other UCC seller’s
remedies are ] inadequate to put the seller in as good a position as performance would have done.” UCC § 2-
708(2). The measure of damages for such a lost volume seller “is the profit (including reasonable overhead)
which the seller would have made from full performance by the buyer, together with any incidental expenses
. UCC § 2- 0 2 .
Restatement (Second) of Contracts § cmt. f, recognizes the lost volume concept for any type of contract:
If the injured party could and would have entered into the subsequent contract, even if the [first] contract
had not been broken, and could have had the benefit of both, he can be said to have “lost volume” and the
subsequent transaction is not a substitute for the broken contract.
See also Restatement (Second) of Contracts § 0 cmt. d.
The lost volume doctrine has been recognized by courts throughout the country. The Pennsylvania Superior
Court, however has “declined the invitation” to adopt the theory on the footing that it “erodes the duty to
mitigate” and “would encourage the non-breaching party to do nothing to minimize damages.” Northeastern
Vending Co. v. P.D.O., Inc., 414 Pa. Super. 200, 205–206, 606 A.2d 936, 938 (1992). Rezro, Inc. v. Lanfranco,
2016 Pa. Super. Unpub. LEXIS 441 (2016). Pennsylvania’s rule was first noted by Unit Vending Corp. v. Tobin
Enterprises, 194 Pa. Super. 470, 168 A.2d 750, 1961 Pa. Super. LEXIS 739 (Pa. Super. Ct. 1961), a case that
has been criticized by courts in other jurisdictions that have adopted the lost volume doctrine. See Collins
Entm’t Corp. v. Coats & Coats Rental Amusement, 368 S.C. 410, 629 S.E.2d 635 (2006) (rejecting the
Pennsylvania analysis that the doctrine would provide a windfall for the seller). Collins noted: “It appears
Pennsylvania is the only jurisdiction which rejects the concept of the lost volume seller.”
Whether a party could have entered into a subsequent contract even if the first contract had not been broken is
a question of fact. Vinmar Overseas, LED v. E-Biofuels, LLC, 2009 U.S. Dist. LEXIS 110036 (S.D. Tex. Nov.
25, 2009) (quoting Restatement (Second) of Contracts ‘347, cmt. f). The seller has the burden of proving “lost
volume” status. Over $6.5 million was deducted from Penncro’s recovery against Sprint where Sprint had
shown that Penncro had avoided the loss as a result of Sprint’s breach. The court held that Penncro was then
entitled to show that the reduction was not appropriate because it could have performed other contracts along
with the Sprint contract. Penncro failed to make that showing and the mitigation deduction was, therefore,
appropriate. Penncro Assocs. v. Sprint Spectrum L.P., 2006 U.S. Dist. LEXIS 48571 (D. Kan. July 17, 2006).
Practice Resource:
• Corbin § .1 (non-exclusive contracts—an apparent exception to the doctrine
of avoidable consequences; lost volume).

End of Document

§ 5 .0 An Aggrieved Party Is Not Required to Run the Risk of Increasing

Damages
An aggrieved party is not required to run the risk of increasing damages caused by the defendant’s breach, nor is it
necessary stop performing upon the defendant’s repudiation if the plaintiff has a duty to others to proceed with
performance. A plaintiff is not required to exercise a reserved power of termination under the contract, even though
it later appears as a matter of hindsight that the exercise of that power would have decreased the damages. The
plaintiff is not required to make mitigation decisions based on omniscience. Mitigation is not necessary if it would
cause humiliation, the continuation of an undesirable personal relationship, or if the plaintiff lacks the finances to
take steps toward mitigation.
A plumber repudiated its promise to perform as a subcontractor, and the builder hired another plumber at a higher
cost and sought damages for the difference. The plumber claimed that the builder should have withdrawn from the
entire project since he would have then only forfeited the amount he deposited with the owner, which would have
been less than the damage he sustained from the plumber’s repudiation. The court held that this alternative would
require the builder to breach business ethics and to earn a reputation as unreliable. It held that the mitigation
principle does not require a party to disregard its own interests. Frederick Raff Co. v. Murphy, 110 Conn. 234, 243,
147 A. 709, 712 (1929).
Practice Resource:
• Corbin § .1 (not necessary to incur the risk of losses in money or reputation).

End of Document

§ 5 .10 A Party Is Not Required to Mitigate Damages by Entering into

Another Contract With the Repudiating Party
If a party repudiates a contract and then offers a substitute contract that would mitigate damages under the first
contract it breached, in the words of Judge Cardozo, the aggrieved party should not be required to “experiment
again” with the repudiator. Canadian Industrial Alcohol Co. v. Dunbar Molasses Co., 258 N.Y. 194, 201, 179 N.E.
383, 385 (1932). IBH agreed to purchase the Henkel Corporation for $127,000,000 but later refused to complete the
transaction. Henkel sold the business to another for $112,000,000. IBH argued that Henkel was required to
renegotiate the contract with IBH who could have agreed to pay more than $112,000,000, thereby mitigating
damages. The court quoted the Corbin treatise: “Courts have generally held that it is not necessary for the plaintiff
to make another contract with the defendant who has repudiated, even though he offers terms that would result in
avoiding loss.” Henkel Corp. v. Innovative Brands Holdings, LLC, 2013 Del. Ch. LEXIS 30 (Jan. 31, 2013). Some
courts, however, have held otherwise where no personal humiliation or great inconvenience is involved in making
the new contract. If a seller refused to deliver the goods on credit as required under the contract but offered to
deliver the goods at a fair cash price, if the buyer can obtain the money without great cost or inconvenience, a court
may deem such mitigation necessary in computing damages.
An aggrieved party is generally not required to accede to the demands of the breaching party by accepting different
terms while surrendering remedial rights under the breached contract, but special circumstances may call for an
exception to this rule. Where the demand by the breaching party is not substantial, acceding to the demand would
not constitute an accord and satisfaction, a similar performance from another party is not readily available, and the
relationship between the parties was not severely strained, a court may find it unreasonable for the aggrieved party
to reject an offer for a new agreement. In DeRosier v. Util. Sys. of Am., 780 N.W.2d 1 (Minn. Ct. App. 2010), the
court recognized that such special circumstances could provide an exception, but in the case before it, it held that
these circumstances were not present. Finding all of these factors would, indeed, be rare. Even when the aggrieved
party has little choice but to continue the contract with the breaching party, it is not required to enter into a
rescission, compromise, or accord and satisfaction. It is possible for a party to proceed with a contract while
reserving its rights against the defendant. UCC § 1- 0 (formerly § 1-20 permits a party to explicitly reserve its
rights by such words as “without prejudice,” “under protest,” or the like while assenting to the demands of the other
party. This reservation, however, does not apply to an accord and satisfaction.
Practice Resource:
• Corbin § .1 (avoidance of injury by accepting a less advantageous contract with the
repudiator).

End of Document

§ 5 .11 Losses Incurred in Efforts to Avoid the Results of the Breach

The mitigation principle is an incentive for aggrieved parties to make reasonable efforts to avoid losses since the
aggrieved party will not recover for avoidable losses. In pursuit of such efforts, the aggrieved party may incur
additional losses that must be borne by the party whose breach induced efforts to avoid damages. Mitigation
expenses are recoverable even when the effort to avoid losses failed and increased the damages beyond those
that would have been recoverable without mitigation.
The method used to avoid losses must be “reasonable” under the circumstances; that is, it must be a method that is
reasonably expected to succeed in avoiding losses. An expensive mitigation effort disproportionate to the extent
and character of the harm that might be prevented would constitute an unreasonable risk and preclude recovery for
such expenditures if the mitigation was otherwise unsuccessful.
Practice Resource:
• Corbin § .1 (losses incurred in efforts to avoid the results of defendant’s breach).

End of Document

§ 5 .12 Recovery of Interest as Damages
[1] Interest Payable as Compensation for the Use of Money Lent or for Credit Given
Although it was once regarded by the canon law and common law as sinful and criminal, parties may expressly
agree on the payment of a particular level of interest so long as it does not violate existing usury laws. When a
contract is breached, there is an issue of whether the plaintiff may recover prejudgement interest. If
prejudgment interest is not permitted, the aggrieved party is not fully compensated because the defendant had
the use of the money or money’s worth since the moment the cause of action accrued.
The agreement may provide for the payment of interest before the maturity of the obligation. In that case,
interest is not payable as damages for breach of a contractual duty; rather, it is payable as compensation for
the use of money lent or for credit given. Even when the contract expressly or by reasonable implication
provides for interest at a specified rate after maturity of the obligation, the interest may still be regarded as
compensation for the use of money or credit extended. In any event, no interest other than in accordance with
the contract will be awarded as damages.
When the contract specifies an interest rate prior to maturity, but is silent on the rate after default, courts
typically apply the legal rate of interest rather than the contractual rate from the time of default. When the
contract rate of interest prior to maturity is greater, such holdings appear unjust in allowing the debtor a lower
rate of interest than the rate agreed to by the injured party. In such a case, the preferable rule would allow the
contract rate to continue after default.
If there is an express or reasonably implied promise to pay interest, nonperformance by the defendant is a
failure to pay the principal debt as well as the interest. The interest is collectible for the same reason that the
principal debt is collectible. It is part of the debtor’s primary obligation to pay; it is the very performance required
by the duty.
[2] Interest Allowed on Liquidated Debt

When the parties have not made any provision for interest payments in their contract, all courts allow recovery
of simple interest at the statutory rate from the date of breach of a promise to pay a liquidated debt. Thus,
simple interest at the statutory rate is recoverable for non-payment of a liquidated debt from the date of the
breach if the parties have not themselves provided otherwise by contract. Where a contract stated that New
York law would apply, a federal district court in Pennsylvania held that the statutory rate of interest in
Pennsylvania was procedural rather than substantive. The court, therefore, applied Pennsylvania law at 6
percent interest rather than New York law at 9 percent. The court of appeals, however, found that in contract
actions for a liquidated sum, a Pennsylvania statute provided a compensatory right rather than a procedural
rule designed to promote settlements. Thus, pursuant to Restatement (Second) of Contracts § 1 as
adopted in Pennsylvania, prejudgment interest is recoverable as a matter of substantive right starting from the
time performance was due. Since the right was substantive rather than procedural, the contract provision
requiring the application of New York law applied with an interest rate of 9 percent. Travelers Cas. & Sur. Co. v.
Ins. Co. of N. Am., 609 F.3d 143 (3d Cir. 2009).
A “liquidated debt” includes not only an undisputed sum of money, but the duty to render a performance with a
fixed or ascertainable monetary value; the interest is due from the time for performance. Restatement (Second)
of Contracts § 1 . In situations where monetary value is not ascertainable, interest “may be allowed as
justice requires on the amount that would have been just compensation had it been paid when performance
was due.” Restatement (Second) of Contracts § 2 . In Universal Drilling Co., LLC v. R & R Rig Serv., LLC,
Page 2 of 4
2012 WY 31, 271 P.3d 987, the court noted the Corbin analysis that the retention of money owed to another
should be subject to interest charges to compensate the successful claimant for the lost value of the money and
to prevent the unjust enrichment of the party retaining it. The court recognized prejudgment interest as a proper
element of a damage award where the claim is “liquidated,” i.e., the claim is readily computable by basic
calculation. A dispute over what is owed, by itself, does not preclude a determination that the amount is
liquidated. The character of the claim rather than the defense will determine whether the claim is liquidated. The
instant court concluded that the district court presumably held that prejudgment interest was not awardable
because of the difficulty in determining the ultimate amount of damages owed. One party however, had
conceded that $97,500 was due. The court held that the other party was entitled to prejudgment interest on that
amount.
One plaintiff claimed that payments owed on surety bonds should include prejudgment interest because the
debts were liquidated. The defendant argued that even though the bonds stated a fixed sum, they were
conditioned on the court finding the defendant liable. The court was unpersuaded since even a liquidated
damages clause is conditioned on the liability of the defendant. Unlike an unliquidated claim, the bonds
represented a fixed and certain claim. The court awarded prejudgment interest. G.D. Deal Holdings v.
Cincinnati Ins. Co., 2007 U.S. Dist. LEXIS 82477 (W.D. Ky. Nov. 5, 2007).
Another court explained that the term “liquidated damages” as used in the Restatement (Second) for which
interest is always recoverable would include any unpaid fixed contract price. Damages for this particular breach
required the addition of interest payments. In this case, the plaintiff had also recovered engineering fees that
had not been reduced to certainty prior to trial. Since these damages were “unliquidated,” prejudgment interest
on them was within the discretion of the court, which concluded that it would not award interest on these
damages. Under Kentucky law, the court also had the discretion to fix an interest rate up to the statutorily
prescribed rate. Based on the equities of the case, the court concluded that the damages for interest should be
based on the average prime rate rather than the statutorily prescribed rate. The court also rejected the plaintiff’s
claim that the interest should be compounded rather than simple interest. Prosoft Automation, Inc. v. Logan
Aluminum, Inc., 2006 U.S. Dist. LEXIS 25596 (W.D. Ky. Apr. 28, 2006).
Generally, compound interest on a debt may be collectible when the parties have contractually agreed to such
interest, but it is not otherwise recoverable. Exceptions include coupon bonds, typically negotiable instruments,
where the apparent compounding of interest occurs only once, and cases where the parties expressly agree,
after performance is due, to make the interest part of the principal sum.
Sometimes, interest is appropriate for delay in paying after judgment. In 1986, an arbitrator determined that the
United States Postal Service underpaid life insurance benefits to employees’ beneficiaries. Rather than
promptly paying, the Postal Service delayed, and it was twenty-two years after the decision was made before
McKinney received benefits for her deceased father. She brought suit on behalf of a class of beneficiaries who
suffered similar delays, seeking interest on the underpaid amounts. The court denied the Postal Service’s
motion for summary judgment, determining that the lengthy delay in payment constituted a separate breach of
the collective bargaining agreement under which the payments were owed. Citing Corbin, the court explained
that “[d]elay in payment inherently causes damage by depriving the plaintiff of the use of funds during the
delay.” The Postal Service was obligated to pay within a reasonable time after the arbitration award and that
“interest here is simply the damages owed for the Postal Service’s breach-by-delay, and the paid beneficiaries
can recover interest so long as an award of interest is not inconsistent with the [collective bargaining
agreement] and arbitral award.” The motion for summary judgment was denied. McKinney v. United States
Postal Serv., 75 F. Supp. 3d 266, 2014 U.S. Dist. LEXIS 167856 (D.D.C. 2014).
[3] Interest on Unliquidated Claims

There are two different views on the recovery of prejudgment interest in instances where the amount payable
has not been liquidated by the parties and is not capable of determination by mathematical computation. Courts
that deny such recovery proceed on the footing that a defendant could not have determined the amount
payable; thus, the defendant could not make a valid tender to avoid the loss.
This view focuses on time after breach, at which point the defendant does not know how much money to tender
to cure the breach. The critical time is not after the breach, however; the focus should be on the time of the
breach where the loss to the plaintiff could have been avoided by the defendant’s performance of the contract.
Thus, the view followed by many other courts is that the value of the defendant’s performance to the plaintiff as
Page 3 of 4
later determined by a jury is a value to which the plaintiff was entitled from the moment of breach when the
cause of action accrued. These courts hold that damages from that moment should include interest if the
plaintiff is to be fully compensated.
When full performance by the plaintiff would have resulted in the creation of a liquidated debt in the defendant,
but full performance has been prevented by the defendant’s breach, interest should be allowed as computed by
an amount of the anticipated debt upon full performance, diminished by an amount of reasonable savings
caused by the defendant’s breach. The fact that the amount of savings is unliquidated, making the balance
payable unliquidated, should not deprive the plaintiff of interest on the balance.
If the plaintiff’s entire claim is for quantum meruit or valebat instead of an agreed sum and the damages are not
ascertainable by mathematical computation, market prices, or other aids, interest is frequently not recoverable.
On the other hand, attorneys do recover interest on quantum meruit claims from the date of demand.
[4] Interest Allowed in Discretion of the Court

We have seen that, when an action is brought for damages and the sum is unliquidated, whether interest will be
added to such damages is in the discretion of the court. Restatement (Second) of Contracts § 2 . In a given
jurisdiction, the case law may be so clear that courts allow or refuse interest damages when a sum is
unliquidated that the determination can no longer be accurately called a matter of judicial “discretion.”
Discretion involves an absence of uniform precedent. The Restatement (Second) suggests that “discretion”
must consider all of the surrounding circumstances including “any deficiencies in the performance of the injured
party and any unreasonableness in demands made by him.” Restatement (Second) of Contracts § 2 cmt.
d.
In New York State, interest is mandatory except in an action that is equitable in nature; in equitable actions, the
court has discretion to determine interest and set the rate and date from which it is computed. N.Y. C.P.L.R.
§ 001 . If, for example, a constructive trust is ordered to assure that profits are disgorged, it may be
inequitable to add interest on the disgorged amount, which would be necessary in New York, absent the statute
allowing judicial discretion in such equitable matters.
[5] Interest Affected by Benefits Received by Defendant

If a plaintiff claims damages, the base on which interest is computed is the value of the promised performance,
plus additional special damages, less the plaintiff’s savings. If this is not liquidated or readily computable, many
courts have refused interest. If the plaintiff has already performed to the benefit of the defendant and is already
entitled to an amount, albeit unliquidated, the fact that the defendant could not make an exact tender may not
be sufficient to prevent the allowance of interest from the date of breach on the sum that is finally determined to
be due.
If the defendant’s breach provides the plaintiff with an alternative remedy of restitution, and if the plaintiff’s
performance was a money payment or was readily computable in value, the defendant may be charged with
interest on the debt so due from date of the plaintiff’s demand; the demand operates as an election of the
restitution remedy. The principal debt is a sum regarded as within the possession of the defendant, which has
been wrongfully withheld.
Practice Resources:
• Corbin § .1 (when interest is recoverable as damages); § .1 (interest
allowed on liquidated claims); § .1 (compound interest usually not allowed);
§ .20 (unliquidated claims); § .21 (liquidated debt prevented by defendant’s
breach); § .22 (interest allowed in the discretion of the court); § .2 (effect of
an unliquidated counterclaim of the defendant); § .2 (interest as affected by
benefits received by defendant).

Page 4 of 4
End of Document

§ 5 .13 Measure of Damages for Anticipatory Breach
[1] Options Under the UCC

When a seller repudiates a contract for the sale of goods, UCC § 2- 1 1 allows recovery of damages
measured by the difference between the contract and market prices at the time the buyer learned of the breach.
If the buyer learns of the repudiation at or after the time for performance, the rule does not appear radical since
it would provide the same result as the pre-Code rule of measuring the difference in contract and market prices
at the time of performance. When a seller repudiates before the time for performance, however, several issues
arise. When a seller commits an anticipatory repudiation, UCC § 2- 10 provides options for the buyer, including
allowing the buyer to await the seller’s performance for a commercially reasonable time or to immediately resort
to any remedy for breach.
If the buyer chooses to await performance for a commercially reasonable time, the anticipatory repudiation is
not a breach because the seller may withdraw the repudiation at any time prior to the buyer’s reliance on the
repudiation or the buyer’s indication that it is treating it as a breach. UCC § 2- 11. If an anticipatory repudiation
is not in fact a “breach,” the formula that would measure the difference between contract and market price at
the time the buyer learned of the breach cannot be applied until the buyer decides to treat the anticipatory
repudiation as a breach or the buyer ignores the repudiation and the breach becomes a present breach when
the time for performance arrives.
The logic of this analysis is complicated by another UCC section stating that, if an action based on anticipatory
repudiation comes to trial before the time for performance, any damages based on market price “shall be
determined according to the price of such goods prevailing at the time when the aggrieved party [buyer or
seller] learned of the repudiation.” UCC § 2- 2 1 (emphasis supplied). The unlikely scenario of such a case
coming to trial before the time for performance suggests the following sequence: the seller commits an
anticipatory repudiation, the buyer treats it as a breach and sues. The case comes to trial before the time for
performance and the damages are, therefore, measured by the difference between the contract price and
market price at the time the buyer learned of the repudiation. If, however, the case does not get to trial before
the time for performance under the contract, the measure reverts to the buyer’s remedy section, which
measures the difference at the time the buyer learned of the breach. UCC § 2- 1 1 .
[2] Time of Occurrence of Breach

A related issue is the determination of when the “breach” occurred. Since an aggrieved party may treat the
anticipatory repudiation as a breach immediately or at some later time, the breach would seem to “occur” when
the buyer treats it as such. Again, however, the analysis is not that simple. UCC § 2- 10 does not permit a
buyer to await performance longer than a “commercially reasonable time.”
Frosh agreed in April to sell a crop of navy beans to Trinidad Bean & Elevator Co. to be delivered the following
October. In May, Frosh committed an anticipatory repudiation. By September, the market price of beans had
doubled. It was at that time that Trinidad decided to “cover” by purchasing beans from other sources. The issue
was whether the date the buyer “learned of the breach” was the date of performance (mid-October delivery) or
the date of repudiation (May). The court recognized cases that applied the date of repudiation while other cases
insisted on the date of performance as the date the buyer learned of the breach. Like a number of other courts,
this court chose the date of repudiation since, in a rising market, a buyer could deliberately await the time of
performance with the hope of recovering even greater damages. Trinidad Bean & Elevator Co. v. Frosh, 1 Neb.
App. 281, 494 N.W.2d 347 (1992).
Page 2 of 2
In another case, a court held that the date of performance was the time the buyer learned of the breach. It
rejected the date of repudiation since the repudiation section of the UCC allows the buyer to await performance
for a commercially reasonable time, which could not occur if the date of repudiation was chosen as the date the
buyer learned of the breach. The court was also influenced by the fact that the UCC restricted the use of the
date of repudiation to cases coming to trial before the contract date of performance. Hess Energy, Inc. v.
Lightning Oil Co., 338 F.3d 357 (4th Cir. 2003). See § .0 supra, for additional analysis.
[3] Remedy of “Hypothetical Cover”

There is a third and highly preferable view. The most popular remedy for the buyer is the “cover” remedy. This
remedy allows the buyer to make a reasonable substitute purchase of the same or very similar goods when the
seller fails to deliver or delivers nonconforming goods and does not cure the nonconformities. UCC § 2- 12.
What had been a principal buyer’s damage remedy prior to the UCC became an alternate remedy—allowing
the difference between the contract price and the market price “at the time the buyer learned of the breach.”
UCC § 2- 1 . This remedy is sometimes called “hypothetical cover” since, by establishing the measurement
when the buyer “learned of the breach,” the damages are measured when the buyer would typically cover if it
chose to make the substitute purchase. In response to an anticipatory repudiation, however, a commercially
reasonable buyer would not necessarily await the time of performance to “cover.” In a rising market, if the buyer
were purchasing the goods for its own use absent any concern over contract damages, the question is, when
would such a buyer cover? The answer suggests the “commercially reasonable time” after an anticipatory
repudiation when a buyer ought to cover.
If the time between the anticipatory repudiation and contract time of performance is short, absent a volatile
market, the buyer would normally be able to await performance until it was due under the contract. If the time
span is very long, market conditions may suggest an earlier time to cover. A “commercially reasonable time”
after the anticipatory repudiation, however, may be neither the date of repudiation nor the contract performance
date. Rather, it would be the time that a reasonable buyer, under all of the surrounding circumstances, would
have made the new purchase for its own business. This is the best indicator of the date to measure the buyer’s
damages. Under this view, the buyer would be deemed to have “learned of the breach” following an anticipatory
repudiation within a commercially reasonable time after it learned of the repudiation.
Practice Resource:
• Corbin § .2 (measure of damages for anticipatory breach).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 58 LIQUIDATED DAMAGES AND PENALTIES
CHAPTER 58 LIQUIDATED DAMAGES AND PENALTIES
§ .01 i i te Damages and Penalties
[1]Attempts to Determine in Advance the Remedies Available in the Event of Breach
[2]Statutory Penalties
[3]Actions on a Penal Bond
[4]Penalties in Ordinary Contracts
§ .02 i ity and Elements of Liquidated Damages Clauses
§ .0 o o tio ity of Liquidated Damages Clause to Actual Damages Incurred
[1]Requirement That a Pre-Estimate of Damages Be “Genuine”
[2]Enforcement of Damages Clause Where No Actual Damages Have Occurred
§ .0 i i tio of Damages That Are Uncertain or Difficult to Estimate
[1]Courts Have Traditionally Required that Potential Damages Be Uncertain to Uphold a Liquidated
Damages Clause
[2]Necessity of Proof Beyond a Valid Liquidated Damages Clause as to the Amount of Injury
[3]Application of the Doctrine of Avoidable Consequences
[4]Attorneys’ Fees
§ .0 e Operation of a Provision Liquidating Damages
§ .0 e ties for Failure to Pay a Sum of Money
§ .0 o isio s Making an Identical Amount Payable Regardless of the Kind of Breach or Extent of Injury
§ .0 o isio for an Amount that Varies Inversely to the Extent of Harm
§ .0 o isio s for Limitation of a Contractor’s Risk Are Usually Valid
§ .10 ice of Property or Service Distinguished from Penalty or Damages
§ .11 i i tio of Damages Distinguished from Alternative Contract
§ .12 i i te Damages and Specific Performance
§ .1 i i te Damages for Breach of a Promise Not to Compete in Business
§ .1 i i te Damages for Delay in Performance

Page 2 of 2
§ .1 o ey Deposits to Secure Performance

End of Document
CHAPTER 58 LIQUIDATED DAMAGES AND PENALTIES
the subject matter.

End of Document
§ 5 .01 Liquidated Damages and Penalties
[1] Attempts to Determine in Advance the Remedies Available in the Event of Breach
The difficulty and expense of determining damages resulting from a breach of contract led parties to attempt to
agree upon judicial remedies in advance of any breach. Historically, bonds with a penalty have been one device
for giving assurance that a certain performance would be rendered. Contractual provisions prescribing
remedies in the event of a breach were further efforts to determine the form and extent of judicial remedies for
breach of contract.
Unbridled freedom of contract would allow the enforcement of an agreement that a party will not only be liable
for the reasonably foreseeable loss caused by a breach, but would also allow the enforcement of in terrorem
clauses, which are not designed to compensate the injured party. They are penalty clauses designed to deter
breaches through fear of the punishment that would ensue from a breach. The historic rule in equity, however,
precluded enforcement of penalty clauses. Courts of law later adopted the equitable rule designed to prevent
overreaching and to grant relief from unconscionable bargains. Modern courts have assiduously continued the
rule precluding enforcement of contractual penalties based on the traditional equitable doctrine of
unconscionability.
[2] Statutory Penalties

Notwithstanding the embedded policy against the enforcement of penalties and forfeitures, a legislative
determination of public policy may preempt that policy. Thus, statutory penalties of forfeiture will be enforced,
such as the forfeiture of a deposit by a general contractor who fails to execute a written contract after making a
bid on a public construction project. Statutes awarding treble damages for contracts in restraint of trade or the
wrongful breach of an employment contract will also be enforced.
[3] Actions on a Penal Bond

English legal history discloses a very early method of securing the enforcement of promises, before the writ of
assumpsit, called the penal bond. The penal bond made the obligor liable to pay the penalty announced in the
bond if the condition in the bond did not occur. The “condition” may have been to construct a building, deliver
goods, forbear opening a business, or any other action or inaction the other party sought. If the condition
occurred, the obligation to pay the penal sum in the bond was “void.”
The modern penal bond creates no immediate duty of payment. The bond’s prescribed performance is, in form,
a condition subsequent to the primary obligation of the bond, In substance, however, its nonperformance is a
condition precedent to any action for damages. Many modern decisions place the burden of proving
nonperformance on the obligee.
Restatement (Second) of Contracts § 2 would enforce the amount of the penalty only to the extent of the
loss caused by the non-occurrence of the condition. Penal bonds, however, may be statutorily prescribed not to
indemnify against a loss measurable in money, but rather to deter conduct gravely injurious to the public. Thus,
a penal bond may be given to a governmental unit to secure the appearance for trial of an accused who has
been admitted to bail. Here, if the condition is not met, the obligee can obtain judgment for the amount of the
penalty because justice and public policy require the enforcement of the forfeiture. If the obligee were required
to show an actual pecuniary loss in this context, the humane practice of admission to bail would be undermined
and discontinued. Thus, in every case, the purpose of the bond must be examined to determine the appropriate
extent of the remedy where the condition has not occurred.
Page 2 of 2
[4] Penalties in Ordinary Contracts

Early American refusals to enforce penalty clauses were based on the unconscionability principle. During the
late nineteenth and early twentieth centuries, the “classical” period of contract theory saw the development of
rules to determine the enforceability of agreed damages clauses. Such rules included the rule requiring that
actual damages to be difficult to ascertain at the time the contract was formed, and the rule that evaluated the
amount set forth in the clause exclusively in terms of the harm anticipated at the time of formation, as
contrasted with actual harm. The rule that damages must be difficult to ascertain has been characterized as a
“mysterious” requirement. XCO Int’l, Inc. v. Pac. Sci. Co., 369 F.3d 998 (7th Cir. 2004). And the rule limiting the
comparison of the amount in the clause with only anticipated rather than actual harm has been changed, as will
be seen below. As the succeeding sections will demonstrate, the paradigm may be returning to a more
principled “unconscionability” approach that is also evidenced in civil law systems.
Practice Resources:
• Corbin § .1 (liquidated damages and penalties); § .2 (statutory penalties); § . (measure of
recovery in actions on a penal bond); § . (penalties in ordinary contracts).

End of Document
§ 5 .02 Validity and Elements of Liquidated Damages Clauses
Courts typically list three factors to determine whether a clause constitutes an invalid penalty or an enforceable
liquidated damages clause. They are:
(1) the intention of the parties;
(2) whether the damages are uncertain or difficult to quantify; and
(3) whether the agreed term is a reasonable forecast of probable damages.
Restatement (Second) of Contracts § 1 provides the current “neoclassical” statement of the necessary
elements:
Damages for breach by either party may be liquidated in the agreement but only at an amount that is
reasonable in the light of anticipated or actual loss caused by the breach and the difficulties of proof of loss. A
term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.
It is not remarkable that virtually identical language is contained in the forerunner section of the Uniform
Commercial Code (UCC). UCC § 2- 1 1 . In determining the validity of a term fixing damages, the Restatement
(Second) expressly rejects any reliance on the intention to the parties. Restatement (Second) of Contracts §
cmt. c. Nor does the UCC mention the intention of the parties. It makes no difference whether the parties
characterized the term as “liquidated damages” or as a “penalty.” Under the Restatement (Second) or the UCC, if
the parties actually intended a penalty and the clause meets the requirements of a valid clause, it will be
enforceable. If they intended a valid clause but it fails to meet the requirements, it will not be enforced.
There is case law in agreement with this view. Kysor Indus. Corp. v. Margaux, Inc., 674 A.2d 889, 897 (Del. Super.
1996). There is even more case law stating that the parties’ characterization of their clause is not significant. See,
e.g., Priebe & Sons, Inc. v. United States, 332 U.S. 407, 68 S. Ct. 123, 92 L. Ed. 32 (1947). Nonetheless, it is not
difficult to discover an opinion stating, “Ordinarily, the intention of the parties will control as to whether a provision in
a contract is for a penalty or for liquidated damages.” PYCA Indus., Inc. v. Harrison County Waste Water Mgmt.
Dist., 177 F.3d 351, 367 (5th Cir. 1999) (quoting an earlier Mississippi case).
Discovering the intention of the parties is a matter of interpretation. It would be rare for parties to clearly express
their desire to “penalize” a contract breaker. Valid liquidated damages provisions may certainly share a purpose
with penalty clauses to deter breaches and still be enforceable. It is likely that such a purpose was intended by the
parties along with the purpose of providing certainty of remedy.
A clause that grants a party a power of termination upon the payment of a certain sum is still an attempt to liquidate
damages and may or may not be a penalty that is unenforceable. See, e.g., Allegheny Energy, Inc. v. DQE, Inc.,
171 F.3d 153 (3d Cir. 1999). Parties sometimes attempt to conceal a penalty provision by providing alternatives
such as a fixed rental with a discount of 50 percent for payments made before the fifteenth of the month. One court
penetrated this flimsy deception in finding the true rental was the discounted price and the remainder was a penalty
for failure to pay by the fifteenth of the month. Goodyear Shoe-Mach. Co. v. Selz, Schwab & Co., 157 Ill. 186, 41
N.E. 625 (1894). An acceleration clause in a lease may be held to be a penalty. A provision in a car rental
agreement for the payment of a $150 speeding fee when the driver exceeds 79 miles per hour for two minutes or
more is clearly a penalty. Am. Car Rental, Inc. v. Comm’r of Consumer Prot., 273 Conn. 296, 869 A.2d 1198 (2005).
Page 2 of 2
Agreed damages clauses deal with remedial rights. If a condition precedent to a primary right is not met, however,
the correlative duty is not activated. In one instance, an insurance agent’s right to a commission on renewal
premiums was expressly conditioned on his forbearance to assign any of these rights. The court held that the agent
forfeited his rights to the commissions. The court carefully considered the importance of the condition and
concluded that it was designed for the quite legitimate purpose of retaining insureds who might easily switch to
other companies. Thus, it was an important condition to the right of the agent to continue to receive renewal
commissions and justified the forfeiture. Insley v. State Mut. Life Assurance Co., 334 Pa. 368, 5 A.2d 544 (1939). It
is possible, however, for such a condition precedent to a primary right to be camouflage for a penalty clause.
Practice Resource:
• Corbin § . (validity of agreement not wholly dependent upon the intention or expression of the
parties).

End of Document
§ 5 .03 Proportionality of Liquidated Damages Clause to Actual Damages

Incurred
[1] Requirement That a Pre-Estimate of Damages Be “Genuine”

The classical view holds that a valid liquidated damages clause must be an honest or “genuine” and reasonable
estimate by the parties of the extent of the injury in the event of a breach. One court views this classical
requirement as the sole test. Wallace Real Estate Inv. v. Groves, 72 Wash. App. 759, 868 P.2d 149 (1994). But
otherwise, it is no longer the sole test anywhere. It has been modified by the UCC and that modification has
been replicated in the Restatement (Second) of Contracts. It is important to understand the original requirement
in relation to another classic requirement of a valid liquidated damages clause.
The validity of a liquidated damages clause was conditioned on the difficulty of ascertaining provable damages,
presumably on the footing that where actual damages were ascertainable, there was no need for a liquidated
damages clause. Since such clauses would occur only where anticipated damages were necessarily uncertain
and, perhaps, could never be proved with reasonable certainty, there was a focus on the honesty and
reasonableness of the amount set forth in the clause. Such honest estimates, however, could not be anything
more than educated guesses.
The court in Dobson Bay Club II DD, LLC v. La Sonrisa De Siena, LLC, 2016 Ariz. App. LEXIS 19 (Ariz. Ct.
App. Jan. 28, 2016) held that the imposition of an additional 5% fixed late-fee on a balloon payment for a
conventional, fixed-interest rate loan “is strictly punitive in nature.” The court cited the Corbin treatise to hold
that it is proper to compare anticipated and actual losses. Here, the actual losses were “easily quantified to a
degree of near certainty.” There was no evidence that the late fee sought as liquidated damages reasonably
approximated the anticipated losses and the difficulty of proving loss was not great. [ e ess of the
sophistication of the parties, the mere act of agreeing to a liquidated damages clause does not mean the clause
is necessarily enforceable as a matter of law.”
A settlement agreement provided that a late payment entitled the non-breaching party to confess judgment in
the amount of $100,000, plus the entirety of the then unpaid balance and attorneys’ fees and costs for the filing
of the Judgment Note. The penalty was couched as a discount for timely performance. The court concluded
that “actual damages arising from an untimely payment typically can be easily measured in terms of the
prevailing interest rate,” and “the anticipated or actual loss caused by the breach” does not approximate the
actual loss that has resulted from the breach. The court held the discount was a disguised penalty. Leaman v.
Wolfe, 2015 U.S. App. LEXIS 17505 (3d Cir. 2015).
[2] Enforcement of Damages Clause Where No Actual Damages Have Occurred

When a trial results in a finding of actual losses grossly disproportionate to the otherwise honest and
reasonable forecast of such damages, the question is whether such evidence should have any effect on the
enforcement of the good faith estimate. The question becomes particularly significant when a contract contains
an otherwise valid liquidated damages clause, but the proceeding to enforce the clause demonstrates that no
actual harm to the plaintiff has occurred.
In one case, the plaintiffs agreed to purchase the defendant’s real property for $355,000. The contract included
a clause requiring a 5 percent deposit that the seller would retain as liquidated damages. When the plaintiffs
breached the contract, they claimed they were entitled to a return of their $17,750 down payment since two
weeks after their repudiation, the defendant sold the property to another buyer for $360,000, thereby sustaining
no actual harm. The trial court granted the defendant’s motion for summary judgment. The court of appeals,
Page 2 of 2
however, reversed on the footing that allowing the defendant to retain the deposit without suffering actual loss
constituted a penalty rather than compensation for loss. The state supreme court disagreed. It held that the
parties had negotiated a fair and reasonable remedy in the event of breach. The court viewed such a “first look”
approach as resolving disputes efficiently by making it unnecessary for a trial and other costly litigation to
determine actual damages. It criticized the “second look” theory of the court of appeals as undermining the
peace of mind and certainty of result, which increases the potential for litigation by inviting an inquiry into
evidence of actual damages. Kelly v. Marx, 428 Mass. 877, 705 N.E.2d 1114 (1999). In Carrothers Constr. Co.
v. City of S. Hutchinson, 288 Kan. 743, 207 P.3d 231 (2009), the court clarified Kansas law by adopting a
“prospective analysis as the sole basis for evaluating a liquidated damages provision in a contract.” The court
rejected the “second look” view as undermining the very purpose of the agreement.
The “second look” view, however, is espoused in Restatement (Second) of Contracts § 1 which, following
UCC § 2- 1 1 states that the amount in the liquidated damages clause must be reasonable “in the light of the
anticipated or actual harm caused by the breach.” A number of courts have adopted this view.
The “second look” approach is illustrated in Equitable Lumber Corp. v. IPA Land Development Corp., 38 N.Y.2d
516, 344 N.E.2d 391 (1976). In that case, the contract provided for Equitable to recover attorneys’ fees of 30
percent. The trial court found such fees to be unreasonable as a matter of hindsight and granted Equitable only
11 percent in fees. The court of appeals reversed and remanded the case for the trial court to determine
whether the fees could be justified as reasonable at the time the contract was made. If the amount in the clause
was either a reasonable forecast at the time the contract was made or, even if such a forecast was
unreasonable, the amount turned out to be reasonable in relation to actual losses, the clause would be
enforceable.
It is important to note that the “second look” iteration allows a clause to be enforced for damages that were
clearly intended to be a penalty at the time of contract formation and would be deemed unforeseeable if there
were no agreed damages provision. Professor and later Chief Judge Ellen Peters was the first to provide this
insight with respect to the UCC long before the Restatement (Second) replicated the UCC position. She wrote:
It is true that the Code is unusually generous in its appraisal of the amount set by the contracting parties.
Even if this amount was entirely unreasonable, as of the time of contract, it can apparently be recovered so
long as it turns out, purely as a matter of accident, to approximate the harm actually caused by the buyer’s
breach.
E. Peters, Remedies for Breach of Contract Relating to the Sale of Goods Under the Uniform Commercial
Code: A Roadmap for Article Two, 73 Yale L.J. 199, 278 (1963).
Even in jurisdictions that follow the “second look” approach, the liquidated damages would not be an
unenforceable penalty if they were unreasonable in light of actual damages so long as they were reasonable in
light of anticipated harm. Wahlcometroflex, Inc. v. Westar Energy, Inc., 773 F.3d 223, 2014 U.S. App. LEXIS
22581, 85 U.C.C. Rep. Serv. 2d (Callaghan) 312 (10th Cir. Kan. 2014).
Practice Resources:
• Corbin § . (the changing requirement that the provision must be a genuine pre-estimate of
injury); § .11 (amount agreed upon grossly disproportionate to actual injury); § .12
(forfeitures as liquidation of damages or penalties).

End of Document
§ 5 .04 Liquidation of Damages That Are Uncertain or Difficult to Estimate
[1] Courts Have Traditionally Required that Potential Damages Be Uncertain to Uphold a Liquidated
Damages Clause
Innumerable cases recite the traditional prerequisite to the enforcement of a liquidated damages clause that
damages must be uncertain. The Restatement (Second) of Contracts includes “difficulties of proof of loss” as a
“factor” to be considered in relation to “the anticipated or actual loss caused by the breach.” The Restatement
suggests what amounts to a sliding scale approach:
The greater the difficulty either of proving that loss has occurred or of establishing its amount … the easier
it is to show that the amount fixed is e so e. A determination whether the amount fixed is a penalty
turns on a combination of these two factors. If the difficulty of proof of loss is great, considerable latitude is
allowed in the approximation of anticipated or actual harm. If … the difficulty of proof of loss is slight, less
latitude is allowed in that approximation.
Restatement (Second) of Contracts § cmt. b.
Replicating the test of the UCC, the Restatement (Second) addresses the difficulty of proof with respect to
“anticipated or actual harm.” The difficulty of proof, however, may be so great and the evidence so uncertain
that a court would not have allowed the question to go to a jury absent a liquidated damages clause. Such a
case is precisely the kind of case where the clause demonstrates its greatest utility.
In finding that a stipulated damage provision was enforceable, the court in Bowles Sub Parcel A, LLC v. CW
Capital Asset Mgmt. LLC, 2015 U.S. App. LEXIS 11302 (8th Cir. 2015) credited statements in promissory notes
that the stipulated damages constituted an enforceable liquidated damages provision. “In the Notes, the parties
agreed ‘that it would be extremely difficult or impracticable to determine Lender’s actual damages resulting from
any late payment or default, and such late charges and default interest are reasonable estimates of those
damages and do not constitute a penalty.’ The bankruptcy court found that both parties to the Notes ‘are
sophisticated businesses knowledgeable about commercial lending ctices. .
[2] Necessity of Proof Beyond a Valid Liquidated Damages Clause as to the Amount of Injury
If the parties have agreed upon a valid liquidated damages clause, should not such a clause make other proof
as to the amount of injury unnecessary? If a plaintiff proves that the contract has been breached and sues for
liquidated damages, it is generally held that the defendant has the burden of proving that the liquidated
damages provision is not valid. If the defendant fails to sustain that burden, the issue is whether the plaintiff
must also establish the fact of actual harm as a condition to the enforcement of the liquidated damages clause.
The Patches enrolled their daughter in the Barrie School. The school required payment of a full year’s tuition
absent written notice of cancellation by a certain date. The court viewed this as a valid liquidated damages
clause in terms of anticipated loss. The Patches’ notice was 44 days late. In response to the action by the
school to recover the amount in the clause, the Patches claimed that the school had suffered no actual loss.
The court reported testimony of a school official noting that the actual damages would be very difficult to
estimate since the school budget is determined on the basis of a certain enrollment that governs the setting of
tuition levels. It “would be next to impossible to assign an exact amount as to the impact of losing one child for
the school year.” The court held that, in Maryland, except in contracts for the sale of goods governed by the
UCC, courts consider only anticipated and not actual harm. Therefore proof beyond a valid liquidated damages
clause as to the amount of injury is unnecessary. Barrie Sch. v. Patch, 401 Md. 497, 933 A.2d 382 (2007).
Page 2 of 3
As seen in Barrie School, Maryland had not adopted the Restatement (Second) replication of the UCC
formulation for other contracts. How would a court respond to this argument in a jurisdiction that has embraced
the new formulation for all contracts?
In a Missouri case, Valentine’s entered into a 15-year lease of space in Ngo’s shopping center to operate a
restaurant. The lease included an exclusivity clause under which Ngo promised to pay $100,000 to Valentine’s
if Ngo leased space in the center to another restaurant serving the same type of food. The $100,000 was an
estimate of the cost of improvements Valentine’s needed to make in order to open the restaurant. Ngo
breached the covenant, and the trial court held that the clause was enforceable. On appeal, Ngo claimed that
the plaintiff failed to prove actual harm. The court recognized that, to recover liquidated damages, some proof
that actual harm has occurred is required. Although the $100,000 was not “directly related” to an actual loss of
profits sustained by Valentine as a result of the competition from the other restaurant, the court emphasized the
difficulty of proving lost profits in this context. The opinion then presents a Restatement (Second) analysis:
Where the difficulty of the proof of loss is great, the court allows significant latitude in setting the amount of
anticipated damages. We find sufficient, competent evidence that Respondent was harmed with the
$100,000 anticipated initial improvement cost, the additional $140,000 in improvements, and the
approximate $239,200 rent to the date of the t i . Keeping in mind that the more difficult it is at the time
of contract to determine the actual damages due to a breach, we find less weight is given to the factor that
requires the amount of liquidated damages to be a reasonable forecast of the harm caused by the breach.
Valentine’s, Inc. v. Ngo, 251 S.W.3d 352 (Mo. Ct. App. 2008).
[3] Application of the Doctrine of Avoidable Consequences

Another issue involving actual loss in agreed damages cases is whether the doctrine of avoidable
consequences applies. In the Barrie School case, the parents argued that the school had a duty to mitigate
damages in the face of the liquidated damages clause. The court explained the fundamental difference
between liquidation and mitigation of damages. Mitigation is involved in the determination of actual damages
recoverable for a breach while liquidated damages clauses are the remedy the parties themselves have
determined to be proper in the event of a breach.
The court quoted from an opinion by Judge Posner:
[M]itigation of damages is a doctrine of the law of court-assessed damages, while the point of a liquidated
damages clause is to substitute party assessment; and that point is blunted, and the certainty that
liquidated-damages clauses are designed to give the process of assessing damages impaired, if a
defendant can force the plaintiff to take less than the damages specified in the clause, on the ground that
the plaintiff could have avoided some of them.
Barrie Sch. v. Patch, 401 Md. 497, 933 A.2d 382 (2007), quoting from Lake River Corp. v. Carborundum Co.,
769 F.2d 1284, 1291 (7th Cir. 1985).
[4] Attorneys’ Fees

In the United States, the successful party in a lawsuit is not entitled to reimbursement for attorneys’ fees unless
there is an agreement to that effect which takes on the character of a liquidated damages clause. The majority
of jurisdictions uphold such agreements, but because attorneys are officers of the court, they are subject to
judicial review for reasonableness. Such a clause should state that the parties have agreed upon
reimbursement for attorneys’ fees. Merely requiring reimbursement for “any lost, cost or expense,” will be held
not to include such fees.
Practice Resources:
• Corbin § . (advance liquidation of damages that are uncertain and difficult to estimate); § .
(additional agreed damages: attorneys’ fees); § .10 (is other proof as to the amount of injury
unnecessary if the clause is a valid liquidation?).
Page 3 of 3

End of Document
§ 5 .05 Legal Operation of a Provision Liquidating Damages
A valid liquidated damages clause is enforced according to its terms like any other contract provision. Its effect,
however, is different. It makes certain the amount of damages in the remedy and this supersedes the usual function
of a court and jury in estimating injury to arrive at a damage assessment. If the injury is greater or less than the sum
fixed in the clause, the clause is still enforceable according to its terms. The clause, however, does not preclude
cancellation of the contract and the possible recovery of restitution damages.
If a court concludes that a liquidated damages clause is a penalty, the clause is unenforceable, but the contract is
not unenforceable. If actual damages can be proven with reasonable certainty, the plaintiff may recover such
damages. Often, however, the damages will not be sufficiently certain to afford a remedy since it was the
prospective uncertainty of damages that probably inspired the parties to include an agreed damages provision in
the contract.
Practice Resource:
• Corbin § . (legal operation of a provision liquidating damages).

End of Document
§ 5 .06 Penalties for Failure to Pay a Sum of Money
When a contract requires a greater sum of money to be paid on default than a smaller sum otherwise owed and the
differential is not the interest value on the smaller sum, the general rule is that such a provision is unenforceable as
a penalty. A clause stating that if a $355,000 note was not paid at maturity, the principal obligation would increase
by $125,000 was an unenforceable penalty. Quaker Oats Co. v. Reilly, 274 A.D.2d 565, 711 N.Y.S.2d 498 (2000).
In WIS-Bay City, LLC v. Bay City Partners. LLC, 2009 U.S. Dist. LEXIS 49806 (N.D. Ohio June 12, 2009), a clause
labeled “late payment penalty” was not a “penalty” simply because the clause was so named. While recognizing the
general rule, the court did not deem a clause requiring a payment exceeding the interest on a monetary obligation
as a penalty per se since less defined damages may be suffered including opportunity costs. A $4 million late
penalty on a $9 million loan, however, was “severe” and did not constitute a fair estimate of contemplated damages.
After wife claimed husband breached spousal support obligations, the parties entered into an agreed judgment
entry that required husband to pay wife a late fee of $500 per week for any failure to pay her 42 percent of any
bonus payments that he received within 10 days of receipt. The court explained that the spousal support owed to
wife was $78,757.56. However, husband was imposed a penalty of $108,700. The court concluded that the late fee
was “punitive” to husband and that it also amounted to a windfall for wife. Avakian v. Avakian, 2015-Ohio-2299,
2015 Ohio App. LEXIS 2224 (2015).
An installment contract providing for the acceleration of all unpaid installments in case of any default will normally
be enforced according to its terms. But if the deferred payments were not interest-bearing, the obligor would face
paying a greater sum that the present value of the deferred debt. The difference between the present value and the
face value could be great enough to make the provision unenforceable as a penalty.
Practice Resource:
• Corbin § .1 (penalties for failure to pay a sum of money).

End of Document
§ 5 .0 Provisions Making an Identical Amount Payable Regardless of the

Kind of Breach or Extent of Injury
When a provision makes liquidated damages payable upon any default under a contract where the obligor has
various duties ranging from trivial to highly significant, it is patently clear that the clause is not the product of the
parties’ fair and reasonable forecast of the probable damages from each of the possible breaches. With respect to
breaches of insignificant or trivial duties, such a “blunderbuss” clause would be unenforceable as a penalty. Courts
have nonetheless discovered major qualifications to permit enforcement.
An appellate court, relying on precedent, held that such a provision will be struck down as a penalty even if the
breach that actually occurred was a breach of a major duty for which the liquidated damages amount would not be
disproportionate. On appeal, however, the state supreme court decided to “update its jurisprudence in light of the
near unanimous trend” by adopting a presumption against construing such clauses as penalties where the contract
is between sophisticated parties. The court proceeded to modify its precedent, holding that sophisticated parties to
a contract containing a liquidated damages clause applicable to breaches of multiple covenants of varying
importance may be presumed to have intended the clause to apply only to breaches of material duties for which the
clause may be properly enforced. The contract here was a lease providing for acceleration of lease payments if the
lessee defaulted on the payment of the security deposit, rent, taxes or any substantial invoice for goods or services.
The court focused on the breach before it—the failure to pay rent—which it deemed “significant.” The clause was
enforceable. Cummings Props., LLC v. Nat’l Communs. Corp., 449 Mass. 490, 869 N.E.2d 617 (2007).
The court’s conclusion is in keeping with the generally accepted view that where the amount specified is a
reasonable forecast of the injury caused by the breach, which has actually occurred, the clause is enforceable even
though it would be an unenforceable penalty if it were applied to other breaches of the same contract.
When the contract requires the performance of only one duty and the question is whether the clause applies to a
partial rather than total breach of that duty, if the agreed amount is reasonable in light of the actual loss, the clause
will be enforced even though the breach is only “partial.” In one case, the court applied “judicial interpretive surgery”
to a $100,000 indemnity obligation that literally applied to any breach. The court held that the most reasonable of
the contracting party’s intentions would be to construe the indemnity obligation as varying with the extent of the
loss. Here, a 35 percent loss required the enforcement of 35 percent of the indemnity. Jordache Enterprise, Inc. v.
Global Union Bank, 688 F. Supp. 939 (S.D.N.Y. 1988).
Practice Resource:
• Corbin § .1 (identical amount made payable without regard to kind of breach or extent of injury).

End of Document
§ 5 .0 Provision for an Amount that Varies Inversely to the Extent of Harm
Liquidated damages provisions that vary inversely with the extent of non-performance are unenforceable penalties.
If a contract states that an employee is to be paid at the end of certain period and also states that the employee
forfeits the entire payment if he or she leaves without just cause prior to the end of the period, that provision will be
unenforceable as a penalty. The longer the employee works under such an arrangement, the greater the damages.
Such an agreement could hardly be viewed as a reasonable effort to estimate damages in the event of a breach.
Practice Resource:
• Corbin § .1 (provision for an amount that varies inversely to the extent of the harm).

End of Document
§ 5 .0 Provisions for Limitation of a Contractor’s Risk Are Usually Valid
An agreed damages clause that fixes an amount that is unreasonably low may be deemed unconscionable.
Restatement (Second) of Contracts § cmt. d. If such a clause is unreasonably high, it is deemed to be a
penalty and it is unenforceable as a violation of public policy. Public policy, however, does not preclude limiting a
party’s liability, even for its own negligence, though not for gross negligence or intentional injury.
Boeing Company contended that an exculpatory clause in a contract limited its liability to the amount in the clause.
The court explained that New York courts view limitation of liability clauses as the parties’ agreement on the
allocation of the risk of economic loss where the contemplated transaction is not executed. Citing Corbin on
Contracts, the court added that parties may later regret such a risk allocation, but courts let parties to an agreement
lie in the bed they made. When a contract provides that damages for breach shall not be recoverable beyond a
certain sum, the risk of loss beyond that sum has been assumed by the promisee. Deutsche Lufthansa AG v.
Boeing Co., 2007 U.S. Dist. LEXIS 9519 (S.D.N.Y. Feb. 2, 2007).
Section 2-719 of the UCC allows parties to agree upon contract remedies including the return of the purchase price
as a maximum limit on damages. Courts generally uphold such provisions though the remedy may appear only as a
standardized term in the seller’s boilerplate. Where, however, a manufacturer of doors purchased aluminum
“lineals” from the defendant which the defendant knew would be difficult and expensive to repair and replace, the
court noted that, under the circumstances, the remedy limiting damages to a maximum of the purchase price may
not qualify as a minimum adequate remedy which is a basic requirement under § 2- 1 . Marvin Lumber & Cedar
Co. v. Sapa Extrusions, 2013 U.S. Dist. LEXIS 108699 (D. Minn. Aug. 2, 2013).
Where YouTube deleted plaintiff’s video channel, the court held plaintiff was not entitled to damages because
YouTube’s Terms of Service provided: “IN NO EVENT SHALL YOUTUBE, ITS OFFICERS, DIRECTORS,
EMPLOYEES OR AGENTS, BE LIABLE TO YOU FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL,
PUNITIVE, OR CONSEQUENTIAL DAMAGES T . The court held that limitations of liability
clauses “are appropriate when one party is offering a service for free to the public.” Lewis v. Youtube, 2015 Cal.
App. Unpub. LEXIS 9395 (Cal. App. 6th Dist. Dec. 28, 2015).
[ icit contractual provisions allocating the risk of consequential damages to one party or another maximizes
parties’ freedom of contract and allows them to better achieve predictability in their business relations.” Upholding
exclusions of consequential damages provisions—even when such bargains look like “raw deals” in hindsight—is
one aspect of freedom of contract, which is “no small part of the liberty of the citizen.” Further, such contractual
provisions “serve to further predictability in business relations” and allow some to procure goods and services they
otherwise could not afford. Severn Peanut Co. v. Indus. Fumigant Co., 807 F.3d 88, 2015 U.S. App. LEXIS 20880
(4th Cir. N.C. 2015).
A full discussion of limitation of liability clauses and their exceptions is explored in Chapter 85 below.
Practice Resource:
• Corbin § .1 (provisions for limitation of a contractor’s risk are usually valid).

Page 2 of 2
End of Document
§ 5 .10 Price of Property or Service Distinguished from Penalty or Damages
Absent government regulation of prices, or duress, undue influence, or unconscionability, a court will enforce a
contract at whatever price the parties have agreed upon. Even an exorbitant price will not be called a penalty.
Similarly, the dollar value the parties place on an item will be recognized as the agreed-upon value. Indeed, courts
should not inquire into matters of value or price absent evidence of interference with a normal bargaining process.
A private yacht was hired for hazardous service during wartime. The contract placed a value of $75,000 on the
yacht, which the hirer promised to pay if it were not returned. In an action for this amount, the court would not hear
evidence that the value of the yacht was smaller. Sun Printing & Pub. Ass’n v. Moore, 183 U.S. 642, 22 S. Ct. 240,
46 L. Ed. 366 (1902).
Practice Resource:
• Corbin § .1 (agreed price of property or service distinguished from penalty or damages).

End of Document
§ 5 .11 Liquidation of Damages Distinguished from Alternative Contract
A liquidated damages clause does not make a contract one for alternative performances. In an alternative
performances contract, the obligor is free to choose between alternative performance options; performance of either
one will discharge the obligor’s entire liability. A contract with a liquidated damages clause, however, requires the
obligor to perform the promised performance and provides an agreed remedy in the form of such a clause for his
failure to do so.
When Freddie Mac decided to switch the servicing of some 46,000 mortgage loans by the R&G bank to the Doral
Bank, the contract stated that Freddie would pay Doral for 24 months of service if Freddie transferred the servicing
again in less than 24 months. Shortly after the contract was signed, Freddie was served with a restraining order
preventing the transfer from the R&G bank. A settlement agreement with R&G resulted in a continuation of service
by R&G Doral brought an action against Freddie for the servicing fee which the district court concluded was a
penalty that was unenforceable. On appeal, Doral claimed the contract was one for alternative performances rather
than a liquidated damages clause. The court held that the agreement involved an attempted liquidated damages
clause rather than alternative performances because an alternative performances contract looks to a continuation of
the relationship between the parties while a liquidated damages provision provides for an agreed result following
from nonperformance. The clause allowing 24 months of servicing fees would not be activated until Freddie
terminated the agreement by transferring the service function. Doral Bank PR v. Fed. Home Loan Mortg. Corp.,
2012 U.S. App. LEXIS 7239 (4th Cir. Apr. 10, 2012).
The United States Court of Appeals for the Ninth Circuit certified the following question to the Washington Supreme
Court: Does an early termination fee in a fixed price telecommunications contract constitute an alternative
performance or a liquidated damages provision? The subscribers to the service could choose either a monthly fee
arrangement or a fixed price contract with a discounted monthly fee that could be terminated before the end of the
term by paying an early termination fee (ETF). The plaintiffs claimed the ETF was a liquidated damages clause. The
Washington court quoted the Corbin treatise in recognizing that a real choice exists where either option might prove
more desirable and the promisor is free to choose either one. The ETF was significantly less than the remaining
payments for the majority of the contract. Even where the ETF was greater, it was not so vastly unequal as to
constitute a liquidated damages clause. Minnick v. Clearwire US LLC, 174 Wash. 2d 443, 275 P.3d 1127 (2012).
A practice known as “take-or-pay” contracts raises these issues. (For a discussion of “take or pay” clauses, see
Chapter 59 below.) Under such a device, a buyer enters into a multi-year contract agreeing to take a minimum
supply of a product each year and to pay for that minimum whether or not it actually accepts the minimum quantity
during the period. If the contract provides that the buyer may later take the balance of the product it should have
taken during an earlier period, the contract typically will be viewed as one involving alternative performances rather
than as a single performance with an agreed damages clause that could constitute a penalty.
A buyer agreed to purchase a minimum of 80,000 tons of anhydrous ammonia each year of a multi-year contract
under which failure to purchase the minimum quantity would not relieve the buyer of paying the full purchase price.
The buyer failed to take the minimum quantity in two separate years, and the seller sued for the balance of the full
purchase price for both years for a total of more than $1.5 million. The buyer argued that the requirement of paying
the full purchase price even though the full minimum quantities were not taken constituted an unenforceable penalty
rather than liquidated damages. The seller claimed that it was an alternative performance contract that permitted
the buyer to perform its bargain either by taking the entire minimum quantity and paying for it, or by paying the full
purchase price for a lesser quantity.
Page 2 of 2
The court found that this take-or-pay contract did not qualify as an alternative contract, largely because there was
no provision to allow the buyer an opportunity make up any annual shortfalls. If the buyer could perform by taking
the full minimum quantity or less than that quantity that could be made up in a subsequent year of the contract, the
contract could be seen as providing a genuine choice. Absent this feature, the buyer had to take the minimum
quantity and pay the full price or take less than the full quantity and still pay the full price without the right to receive
the balance of annual shortfalls.
Interpreting the clause as either a valid liquidated damages clause or a penalty, the court noted that, to anticipate
that the seller would be damaged to the extent of the full contract price for any shortfall, the parties would have had
to anticipate that the market for anhydrous ammonia would disappear entirely, which was not a reasonable forecast
of damages. Thus, it held that the provision was an unenforceable penalty. Superfos Invs. v. Firstmiss Fertilizer,
821 F. Supp. 432 (S.D. Miss. 1993).
Practice Resource:
• Corbin § .1 (liquidation of damages distinguished from alternative contract).

End of Document
§ 5 .12 Liquidated Damages and Specific Performance
The parties to a contract may include a valid liquidated damages clause that clearly manifests their intention to have
it operate as the sole and exclusive remedy in the event of breach, which would bar the remedy of specific
performance. Absent such an agreement, however, the presence of a valid liquidated damages clause does not
preclude equitable relief. See Edge Group Waiccs LLC v. Sapir Group LLC, 705 F. Supp. 2d 304 (S.D.N.Y. 2010).
In an agreement to merge two energy companies, the defendant argued that a merger termination fee not to
exceed $50 million in the event the defendant accepted another offer reflected the parties’ understanding that the
plaintiff’s loss of the opportunity to merge would be adequately compensated through the payment of money. The
court disagreed:
Pennsylvania law forecloses the argument that this provision of its own force precludes specific performance.
As the Pennsylvania Supreme Court has stated, the presence of a liquidated damages provision in a contract
“will not restrict the remedy thereto [i.e., to liquidated damages] or bar specific performance unless the
language of the part of the agreement in question, or of the entire agreement … shows a contrary intent.”
Allegheny Energy, Inc. v. DQE, Inc., 171 F.3d 153, 165 (3d Cir. 1999), quoting Roth v. Hartl, 365 Pa. 428, 75 A.2d
583, 586 (1950).
An aggrieved party may not recover liquidated damages for a total breach while simultaneously enjoying a decree
for specific performance, but a specific performance decree may attach a remedy for damages with respect to
delays in performance or other incidental matters that the decree does not otherwise adequately redress.
Practice Resource:
• Corbin § .1 (liquidated damages and specific performance).

End of Document
§ 5 .13 Liquidated Damages for Breach of a Promise Not to Compete in

Business
Agreements not to compete are legal and enforceable if the promisee has a legitimate interest to protect and the
restraints on competition are otherwise reasonable in time and geography. Since damages caused by a breach of
these agreements are particularly difficult to estimate, they invite the inclusion of liquidated damages provisions.
International purchased two vessels from Delta under a contract stating the vessel would be limited to “in-house”
use and would not be used to compete with Delta. International could only charter the vessels to third parties with
Delta’s consent. The contract included a liquidated damages clause of $250,000 for each violation, an amount
greatly reduced from the original demand of $4 million for each violation. Delta alleged 39 charters of the vessels
without its consent and sought damages totaling $9 million. The district court found 27 violations. On appeal, the
court considered whether the amount in the clause for each violation was so large as to constitute a penalty. Expert
testimony indicated that a single charter could generate substantial revenue even beyond $250,000. International
failed to rebut Delta’s evidence concerning lost market share, future customers and future business. The court held
that the trial court was correct in finding that the amount in the clause was a reasonable forecast of damages.
The amount stated in such a provision may contemplate a continuing breach over a period of years. If the provision
provides a fixed amount for any breach, an amount that might be a reasonable estimate of damage for a violation
lasting several years is not a reasonable estimate of damages emanating from a violation of a few months. If a court
grants an injunction to prevent such a continuing violation, it should not also give judgment for the full amount
specified in the contract. See Karpinski v. Ingrasci, 28 N.Y.2d 45, 268 N.E.2d 751 (1971).
Practice Resource:
• Corbin § .20 (liquidation of damages for breach of a contract not to compete in business),

End of Document
§ 5 .14 Liquidated Damages for Delay in Performance
If a contract manifests the parties’ intention that time is of the essence, they may reasonably include a liquidated
damages provision for each day of delay in the completion of performance. Since the actual damages for such
delays are particularly difficult to estimate in advance, a court is more likely to accept such estimates on the same
principle that was emphasized early in this chapter: the greater the difficulty or proving loss or establishing its
amount, the easier it is to show the amount is reasonable.
Delay postpones the use of the new highway, the new school, or other projects that would benefit the promisee. It
can seldom be shown that no use would have been made had it been completed on time. If, however, the
defendant can demonstrate that the plaintiff had the use of another facility during the delay, it may be able to prove
that the plaintiff suffered little or no harm. Absent this kind of evidence the clause typically will be enforced, unless
the liquidated damage amount has no reasonable relation to the resulting injury. Public contracts may also include
evidence of typical per diem amounts payable for delays, which may provide the defendant with a basis for claiming
that a substantially higher amount constitutes a penalty.
It is not uncommon for a provision in a construction contract to include bonus payments for early completion of the
project as well as deductions of a like amount for delays. Instead of characterizing such provisions as liquidated
damages, they may be more aptly characterized as stating a sliding scale of the price to which the parties have
agreed by conditioning the price on the time of completion.
If the delay is caused by a subcontractor, that risk must be borne by the general contractor that chose the
subcontractor. The general contractor is liable under a valid liquidated damages provision for the delay though it
may seek recovery of such losses from the subcontractor that actually caused the delay.
If a defendant abandons the work, the question arises as to how long the per diem damages should continue. In
some cases, the time has been limited to the number of days the contractor would have consumed had it not
abandoned performance. Other courts have counted the number of days required for a substitute contractor to
complete performance. Other courts have held that the liquidated damages provision was not intended to apply
where the defendant abandoned the project, thereby leaving damages to be determined as if the provision was not
part of the contract.
Practice Resource:
• Corbin § .21 (liquidation of damages for delay in performance).

End of Document
§ 5 .15 Money Deposits to Secure Performance
Agreements often include a provision for the deposit of money or other property to secure performance. An English
case concluded that distinctions between valid liquidated damages provisions and unenforceable penalties should
not apply to deposits to be forfeited for a breach. Wallace v. Smith, 21 Ch. D. 243 (1882).
The common law solution, however, allows the retention of a deposit only to the extent that it compensates the
obligee for the injury caused by the promisor. Security deposits common in leases of real property are typically
governed by legislation that requires the deposit to be returned except to the extent the tenant has failed to pay the
rent or has damaged the premises.
If a deposit would constitute a valid liquidated damages provision as an executory promise, the entire amount is
payable. Similarly, a deposit may be deemed to be an unenforceable penalty. A penalty provision will not be
enforced simply because it is captioned “deposit.”
Statutes often require builders who bid on public construction projects to provide a deposit as security that the
builder will execute the project if it is chosen as the successful bidder. The statutes typically provide that the deposit
will be forfeited if the builder fails to execute the contract. Courts uphold such forfeitures because the legislature has
necessarily decided the issue of public policy concerning them.
Practice Resource:
• Corbin § .22 (money deposits to secure performance).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 59 DAMAGES FOR MENTAL SUFFERING—
PUNITIVE DAMAGES—LENDING MONEY—ALTERNATIVE CONTRACTS—CONTRACTS FOR THE
BENEFIT OF A THIRD PERSON
CHAPTER 59 DAMAGES FOR MENTAL SUFFERING—PUNITIVE DAMAGES—

LENDING MONEY—ALTERNATIVE CONTRACTS—CONTRACTS FOR THE
§ .01 m es for Mental Distress
§ .02 iti e Damages Are Not Recoverable for Breach of Contract
§ .0 m es for Breach of Contract to Lend Money
§ .0 m es for Breach of an Alternative Contract
[1]An Alternative Contract Allows a Promisor to Satisfy Its Entire Contractual Duty by Rendering One of
Two or More Alternative Performances
[2]Distinguishing a Liquidated Damages Provision from an Alternative Contract
[3]When Performance of One Alternative Becomes Impossible
[4]An Alternative Contract May Become a Single Contract
§ .0 T e-o - y Clauses
§ .0 e ch of Contract for the Benefit of a Third Person

End of Document
CHAPTER 59 DAMAGES FOR MENTAL SUFFERING—PUNITIVE DAMAGES—

LENDING MONEY—ALTERNATIVE CONTRACTS—CONTRACTS FOR THE
the subject matter.

End of Document
§ 5 .01 Damages for Mental Distress
As a general rule, no damages will be awarded for emotional harm or mental distress caused by a breach of
contract. While a breach of contract may cause emotional or mental distress to some foreseeable degree even if
the contract is of a commercial nature, courts have been very reluctant to allow such damages except in certain
kinds of cases. See Allstate Ins. Co. v. Breeden, 2007 U.S. Dist. LEXIS 93202 (D. Or. Dec. 17, 2007); Peterson v.
21st Century Centennial Ins. Co., 2015 Del. Super. LEXIS 335 (2015).
The public humiliation resulting from the mistreatment or expulsion of guests from hotels, passengers on public
carriers, or ticket holders in a place of entertainment or amusement are traditional exceptions to the general rule
that damages are not awarded for mental distress caused by a breach of contract. Breach of a promise to marry
may also give rise to emotional distress damages when the breach is accompanied by evidence of seduction. See,
e.g., Simons v. Busby, 21 N.E. 451 (Ind. 1889). Because such actions tended to attract the fortune hunter and
blackmailer, however, they have been abolished in many jurisdictions.
Another important exception is found in cases involving death. Any funeral director should be aware of the
emotional nature of contracts to bury a party’s close relative and the sensitivities that surround such contracts. As
one court suggests, “The tenderest feelings of the human heart center around the remains of the dead.” Lamm v.
Shingleton, 231 N.C. 10, 15, 55 S.E.2d 810, 813 (1949). See also Menorah Chapels at Millburn v. Needle, 386 N.J.
Super. 100, 899 A.2d 316 (2006). Similarly, some courts have allowed recovery of emotional distress damages
against telegraph companies for failure to make prompt or correct deliveries of messages involving death or burial.
Often the plaintiffs in such actions were the recipients of the telegrams but were not parties to the contract between
the sender and the telegraph company. Many courts refused to recognize actions by such third parties. See Sheely
v. MRI Radiology Network, P.A., 505 F.3d 1173, 1199 (11th Cir. 2007).
Beyond these traditional categories, damages for mental distress have been awarded in two kinds of cases: (a)
where mental suffering accompanies bodily harm; and (b) where mental distress was caused by intentional,
wanton, or reckless conduct. As to the first classification, some courts insist that the conduct must constitute a tort.
See, e.g., Deli v. University of Minnesota, 578 N.W.2d 779 (Minn. Ct. App. 1998). The Restatement (Second) of
Contracts notes that courts do not typically classify the type of wrong involved. Thus, it is not necessary to prove
that a tort was committed, but “the action may be nearly always regarded as one in tort.” Restatement (Second) of
Contracts § cmt. a. In Tompkins v. Eckerd, 2012 U.S. Dist. LEXIS 46718 (D.S.C. Apr. 3, 2012), the court
stated that South Carolina does not recognize the exceptions to the general rule found in § .
In Miller v. Evenflo Co., 2012 U.S. Dist. LEXIS 3950 (W.D. Pa. Jan. 12, 2012), the plaintiffs sought to recover for
emotional distress damages they suffered when a car seat sold by the defendant allegedly caused the plaintiff’s
child to suffer a skin rash. In Evans Landscaping, Inc. v. Stenger, ___ Ohio App. 3d ___, 2011-Ohio-6033, 969
N.E.2d 1264 (1st Dist.), the defendants claimed emotional damages in alleging they were not being able to use their
yard because the fish pond the plaintiff installed leaked causing scum to form. Neither court was persuaded that
such damages were recoverable in the absence of bodily harm or where the contract was of such a kind that
serious emotional disturbance was a likely result.
Where an employee manual stated that harassing, demeaning, intimidating, and offensive conduct would not be
tolerated, an employee who suffered depression and related mental injury from such conduct over a lengthy period
Page 2 of 2
was entitled to recover damages for mental anguish though such damages are not ordinarily recoverable for breach
of contract. Cabaness v. Thomas, 2010 UT 23, 232 P.3d 486. A breach of a contract to perform a Caesarean
section to avoid another stillbirth resulted in an award of emotional distress damages. Stewart v. Rudner, 349 Mich.
459, 84 N.W.2d 816 (1957). In another case, breach of a cosmetic surgery contract to beautify a nose resulted in an
award of damages. Sullivan v. O’Connor, 363 Mass. 579, 296 N.E.2d 183 (1973).
Willful, wanton, or insulting conduct, though not amounting to a tort, may be sufficient to allow damages for mental
suffering in a breach of contract action. Such damages will not be awarded for unjustified firing of an employee, but
when it is coupled with defamatory communications, emotional distress damages may be available. Cram Roofing
Co. v. Parker, 131 S.W.3d 84 (Tex. App. 2003). Emotional damages arising from racial or other forms of
discrimination are clearly foreseeable. There should be no question about their recovery in a contract action where
such conduct is proven.
Practice Resource:
• Corbin § .1 (damages for mental distress).

End of Document
§ 5 .02 Punitive Damages Are Not Recoverable for Breach of Contract
Unlike emotional distress damages that essentially share the purpose of other contract damages in compensating
the aggrieved party, the purpose of punitive (“exemplary”) damages is not compensatory. Like other forms of
punishment, the purpose of punitive damages is to deter similar conduct in the future. Though such damages are
very important in tort actions, they are not awarded in contract actions unless the breach involves an independent
malicious or wanton tort (mere negligence is insufficient) or where there is a malicious or wanton violation of a
fiduciary duty, even though it does not constitute an independent tort. Law and economics scholars argue that the
allowance of punitive damages for breach of contract would discourage otherwise wealth-enhancing efficient
breaches of contract. Richard A. Posner, Economic Analysis of the Law, 142 (5th ed. 1998).
In Ryan Marine Servs. v. Hudson Drydocks, Inc., 2011 U.S. Dist. LEXIS 144036 (W.D. La. Dec. 13, 2011), Ryan
had entered into a written time and materials contract with Hudson to repair and overhaul a vessel which was
owned by plaintiff Columbia and operated by Ryan. During the course of the repair work, the vessel caught fire, and
plaintiffs filed suit. Hudson asserted that plaintiffs could not recover punitive damages under the General Maritime
Law for fraudulent breach of contract. Citing Corbin, the court explained that punitive damages are granted to
punish malicious, willful, and wanton conduct. Although such awards are increasingly important in tort litigation,
punitive damages usually are not awarded in contract actions, no matter how egregious the breach. The court,
therefore, determined that punitive damages were not recoverable in breach of contract cases unless the conduct
constituting the breach was also a tort for which punitive damages were recoverable. Since the conduct that
allegedly constituted the breach in the present case did not constitute a tort for which punitive damages were
recoverable, the motion for partial summary judgment was granted.
The Restatement (Second) of Contracts § states the rule as limiting punitive damages to breaches of contract
where the breaching conduct is also a tort. Comment b to this section, however, states “The term ‘tort’ in the rule
stated in this Section is elastic, and the effect of the general expansion of tort liability to protect additional interests
is to make punitive damages somewhat more widely available for breach of contract as well. Some courts have
gone rather far in this direction.”
With respect to punitive damages for breach of contract by a fiduciary, Franz v. Calaco Dev. Corp., 352 Ill. App. 3d
1129, 818 N.E.2d 357, 288 Ill. Dec. 669 (2004), cites the Corbin treatise in stating that punitive damages are
available as a matter of law upon breach of a fiduciary duty. The trial court found that the defendant operated in
such a capacity, but the court did not award punitive damages. The court of appeals upheld the decision since the
decision whether to award punitive damages is a matter of discretion with the trial judge and will not be overturned
unless there is an abuse of discretion.
Any effort to draw a bright line between contract and tort law concepts in the classification of wrongs, however, is
futile. There is a zone of overlapping contract and tort concepts allowing judicial flexibility in choosing a rule
customarily found in either contract or tort. A mere failure to render service by a telephone company or a water
company will not give rise to punitive damages. In such a case or virtually any other case, it will be necessary for
the plaintiff to prove wanton or reckless conduct accompanying breach of contract, even if it fails to meet all of the
elements of a tort.
Page 2 of 2
Only a few courts have allowed punitive damages for a fraudulent breach of contract. A fraudulent breach by a
fiduciary, however, may lead to punitive damages. Real estate brokers guaranteed to either sell the owners’ home
by a certain date at the best obtainable price over $125,000, or to purchase it from the owners for $125,000. The
brokers violated the contract by withholding information that an offer was made at $150,000 while convincing the
owners to sell it to the brokers for $125,000. A jury verdict granted the owners $17,500 in compensatory damages
and $125,000 in punitive damages for fraudulent breach of fiduciary duties. On appeal, the court upheld the verdict
on the footing that, “a jury could reasonably conclude that only an award of substantial size would effectively deter
appellants from fraudulent activities in the future.” Phillips v. Lynch, 101 Nev. 311, 313, 704 P.2d 1083, 1084
(1985).
There is disagreement among courts as to whether the relationship between an insured and the insurer is a
fiduciary relationship. See White v. Unigard Mut. Ins. Co., 112 Idaho 94, 99, 730 P.2d 1014, 1019 (1986) (fiduciary)
and Fireman’s Fund Ins. Co. v. CTIA, 480 F. Supp. 2d 7, 14 (D.D.C. 2007) (no fiduciary relationship). But many
other courts hold that there is no fiduciary relationship where a breach by the insurer may give rise to punitive
damages. When an insurance company refuses in bad faith to settle a claim, some courts suggest that such bad
faith amounts to a tort. See White v. Unigard Mut. Ins. Co., 112 Idaho 94, 99, 730 P.2d 1014, 1019 (1986). Other
courts reject that characterization. Pillsbury Co. v. National Union Fire Ins. Co., 425 N.W.2d 244 (Minn. Ct. App.
1988). With or without the “tort” characterization, when an insurer knows that it has no reasonable basis for denying
the settlement of a claim or recklessly disregards its lack of reasonable basis for denial, the insurer has not only
breached the contract but operated in extreme bad faith, which may give rise to punitive damages.
Practice Resource:
• Corbin § .2 (punitive damages are not recoverable for breach of contract).

End of Document
§ 5 .03 Damages for Breach of Contract to Lend Money
A breach of contract to lend money generally follows the usual rule that allows foreseeable damages to be
awarded. Since money is available to borrowers, normal foreseeability would be the difference in a higher interest
rate required by a substitute lender. If, however, the lender knew or reasonably should have known that the
borrower would not be able to procure a substitute loan either at all or in time to pursue an opportunity that the
borrower had a right to pursue, the lender could be liable for additional foreseeable (“consequential”) damages.
Restatement (Second) of Contracts § 1 cmt. e.
Practice Resource:
• Corbin § . (damages for breach of contract to lend money).

End of Document
§ 5 .04 Damages for Breach of an Alternative Contract
[1] An Alternative Contract Allows a Promisor to Satisfy Its Entire Contractual Duty by Rendering One
of Two or More Alternative Performances
An alternative contract allows a promisor to satisfy and discharge its entire contractual duty by performing one
of two or more alternatives. Typically, the promisor has the right to elect the alternative it chooses to perform,
but the parties can agree that the election lies with the promisee. Unless the power of election is expressly
reserved in the contract for the promisee, however, the promisor has the power to elect an alternative as the
performance that will totally discharge its duty to the promisee.
When there is a breach without an election of alternatives, the damages will be computed on the basis of the
alternative that would have yielded the lesser damages, on the footing that the promisee was entitled to only
one of the alternatives and the promisor could have chosen the one that was least expensive to it. First
Restatement of Contracts § . If the promisor fails to make an election within the time allowed under the
contract, however, the power of election shifts to the promisee and damages will be computed on the basis of
the promisee’s choice of alternatives. Uniform Commercial Code (UCC) § 2- 11 mandates this result where
parties have a contract for the sale of goods of a certain product, but one of the parties has the right to elect
among an assortment of different sizes or qualities of the product and refuses to make such an election.
When the party with the power of election notifies the other party of the election, if the other party materially
changed its position in reliance on the notice of election, the contract is no longer an alternative contract. Only
the performance of the chosen alternative will discharge the promisor’s duty. A number of cases suggest that
merely giving such notice absent any change of position by the other party will constitute an irrevocable
election. If, however, the electing party notifies the other party of a withdrawal of that election before there was
any manifestation of assent to the first election or reliance upon it, a court may well find that the first election
was not irrevocable. The election may be manifested by conduct as well as by words.
If the parties have agreed that the power of election resides in the promisee, the promisee’s notice of election is
a condition precedent to the duty of the promisor to perform the elected alternative. Regardless of which party
has the power of election, one or both duties may be expressly conditioned on the occurrence of an event over
which neither party has any control.
[2] Distinguishing a Liquidated Damages Provision from an Alternative Contract

A plaintiff entered into a contract with a health club under which he agreed to pay $796.56 for 24 training
sessions. The contract also stated that the plaintiff could terminate the contract at any time by paying 50
percent of the remaining balance at the time of termination. The plaintiff chose to terminate but argued that the
requirement to pay half the balance was an unenforceable penalty clause. The court, however, viewed the
termination provision as an alternate performance since the contract provided the plaintiff with two real choice
of which he was aware at the time the contract was formed. The decision was his alone and once he made it by
paying the termination fee, he had no further obligations under the contract. Halpin v. Fitness Int’l, LLC, 2013
Conn. Super. LEXIS 2094 (Sept. 18, 2013).
A promise to deliver a specified automobile or pay the promisee $25,000 is an alternative contract though the
alternative is the payment of money. Absent an express agreement to the contrary, the promisor may elect to
Page 2 of 3
perform either alterative, the performance of which will discharge its entire duty to the promisee. If neither
alternative is performed, the promisee will collect damages for the least expensive alternative.
A promise to deliver a specified automobile with a clause making $25,000 payable upon the promisor’s breach
of that promise is not an alternative contract. The only performance promised is the delivery of the car. If the car
is not unique, the only remedy is damages, and if the clause is a valid liquidated damages clause, it will be
enforced; otherwise, the aggrieved party will sue for one of the buyer’s statutory remedies under the UCC.
A promise to pay $25,000 in wheat to be delivered to the promisee is not an alternative contract. It is a promise
to deliver $25,000 worth of wheat at market rates at the time of delivery. A promise to deliver $25,000 of wheat
or corn is an alternative contract, but paying $25,000 is not one of the alternatives. A contract to deliver 5,000
bushels of wheat is a non-alternative promise that will be valued at the market price for such wheat at the time
of performance.
[3] When Performance of One Alternative Becomes Impossible

A contract may permit a promisor to elect to perform one of two or more alternatives and after the contract is
formed, all but one of the alternatives becomes impossible or impracticable to perform. The promisor’s duty to
perform remains but the promisor no longer has any choice among alternatives. The promisor must either
perform the last remaining alternative or become liable in damages for the failure to perform. See Restatement
(Second) of Contracts § 2 1 cmt. f.
Curiously, it has been held in one case that, when the promisee has the power of election among alternative
performances under the contract and only one performance remains possible or practicable, the promisee is
not required to accept the sole remaining performance. Essex S. S. Co. v. Langbehn, 250 F. 98 (5th Cir. 1918).
The court concluded that since the contract did not expressly require the promisee to accept the lone remaining
performance if the alternatives in that contract were unavailable, his previously unqualified privilege of selecting
any of the alternatives was impugned. The same rationale, however, could attend the election by a promisor
who also did not assume the risk that it would be limited to the performance of only one alternative. The
promisor may not have made the contract if it had been required to perform that single alternative.
[4] An Alternative Contract May Become a Single Contract

An alternative contract under which one alternative must be performed by a certain time becomes a single
performance contract when the date for the other performance passes and that alternative was not performed.
A breach of the remaining performance and the damages emanating from such breach are treated as any other
breach of a single performance contract.
A single performance contract that gives the promisor the option of performing at an earlier time or a later time
is an alternative contract at the time it is made. If the earlier performance occurs, the duty is totally discharged;
if the earlier performance is not performed during the earlier time frame, the contract becomes a single
performance contract since only the single remaining duty to perform can be breached.
Practice Resources:
• Corbin § . (alternative contracts—measure of damages for breach); § . (effect of
impossibility of performance of one alternative); § . (contracts where one alternative is
payment of a sum of money); § . (contract with liquidated damages provision is not an
alternative contract); § . (contract to pay a sum of money in specified goods is not an
alternative contract): § . (alternative contract that becomes single before breach) § .11
(contract to pay in goods compared with contract to pay money with power to discharge in
goods); § .12 (cases where the power of election is in the promisee).

Page 3 of 3
End of Document
§ 5 .05 “Take-or-Pay” Clauses
In Chapter 58 above, we explored the differences between contracts for alterative performances and contracts for a
single performance with a liquidated damages clause that will be activated upon the promisor’s breach. That
discussion introduced the concept of the “take-and-pay” clause. At this point, further elaboration of take-and-pay
clauses is relevant.
Take-or-pay contracts originated as a result of the greater concentration on the growing needs of energy in a post-
modern world. Suppliers of energy products such as natural gas and oil cannot afford the capital investment
necessary to lay pipelines and create other necessary construction to supply such products to buyers who may not
wish to take certain quantities in a given period. Take-or-pay contracts are relatively long-term agreements that
require buyers to take a guaranteed annual minimum quantity of the product or to pay for such quantities when they
are not taken. If the buyer takes a lesser quantity in a given year, the contract typically allows the buyer to make up
that lost quantity by taking it in a later period along with the guaranteed minimum of that period. If the buyer never
makes up the lost quantity, it must still pay the contract price of the guaranteed minimum quantity.
Colorado Interstate Gas Co. (CIG) entered into a long-term contract to purchase natural gas from Chemco. The
contract provided that CIG would take a minimum quantity of gas or it would pay for that quantity if it failed to take
the stated quantity. On paying for gas not taken, CIG had the right to “make up” for that gas over the next five
years.
CIG breached the contract and the only issue was the determination of damages for breach.
The trial court instructed the jury that they should award as actual damages all take-or-pay payments due Chemco
under the terms of the agreement. The jury awarded Chemco more than $3 million in damages. The court of
appeals affirmed and, on appeal to the Supreme Court of Colorado, CIG argued that the lower court erred by failing
to instruct the jury that the proper measure of damages for this contract for the sale of goods should be the
difference between the contract price for the gas less the market price, plus incidental damages, less expenses
saved as required under UCC § 2- 0 1 .
The court explained that the parties had agreed otherwise, as they are allowed under the UCC. This was an
alternative performance contract. Once the take-or-pay alternative expires with the passage of time (the end of the
contract year), the damages are no longer measured by the value of that method of performance. The buyer is
liable for the price. It is as if the buyer has taken the entire quantity required under the contract for which it liable to
pay the price and has not paid it. The contract was an alternative contact at the inception of the contract year and
became a single performance contract to pay money after CIG failed to take the entire quantity. CIG became liable
for the remaining single performance—the payment of the price of that quantity. The court affirmed the decision
below. Colorado Interstate Gas Co. v. Chemco, Inc., 854 P.2d 1232 (Colo. 1993).
Where a contract for phosphoric acid (PA) stated a discounted price and the buyer’s “Annual Qty. Share %” of 50
percent at 12 million pounds, the buyer insisted upon the insertion of the phrase, “this is not a take or pay contract.”
The buyer claimed that it was not required to purchase any PA if the prices were unattractive. While it found no
precedent interpreting the phrase, “this is not a take or pay contract,” the court rejected the buyer’s claim that the
contract was illusory and held that, while the buyer was not required to purchase any specified minimum quantity
and 12 million pounds was only an estimate, the buyer was required to purchase 50 percent of its requirements of
Page 2 of 2
PA whether its requirements were 12 million pounds or some lesser amount. ICL Performance Prods., LP v.
Hawkins, Inc., 2012 U.S. Dist. LEXIS 57300 (E.D. Mo. Apr. 24, 2012).
Practice Resource:
• Corbin § .10 (take-or-pay clauses).

End of Document
§ 5 .06 Breach of Contract for the Benefit of a Third Person
Chapter 46 above explored the concept of third-party beneficiary contracts in detail. To conclude the present
chapter, we only need a reminder that a contract under which a third party is intended by the promisor and
promisee to be a beneficiary with a right to enforce the contract against the promisor may be enforced not only by
the third-party beneficiary, but by the promisee as well. While the beneficiary is the intended recipient of the benefits
of the contract, the promisee may also have a substantial injury if the promisor fails to discharge the promisee’s
earlier debt or other obligation to the third-party beneficiary. Even where the third party is a gift (donee) beneficiary,
it is possible for the promisee to pursue an action to ascertain that the donee beneficiary’s interest is protected.
Practice Resource:
• Corbin § .1 (damages for breach of contract for the benefit of a third person).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 60 DAMAGES: BUILDING AND EMPLOYMENT
CONTRACTS; SALE OF LAND AND SALE OF GOODS; CONTRACTS UNDER THE UCC
CHAPTER 60 DAMAGES: BUILDING AND EMPLOYMENT CONTRACTS;

SALE OF LAND AND SALE OF GOODS; CONTRACTS UNDER THE UCC
§ 0.01 m es Recoverable When a Builder Breaches a Contract
[1]An Owner Whose Building Contract Is Defectively Performed Is Entitled to Damages Measured by
the Cost of Remedying the Defect
[2]Immaterial Breach by the Builder
[3]Unreasonable Economic Waste Should Be Avoided
[4]If There Is a Structural Defect That Makes a Building Unsafe, the Measure of Damages Will Be the
Cost of Reconstruction
[5]The Measure of Damages for a Contractor’s Failure to Sink an Oil Or Gas Well Is the Cost of
Completion
[6]Delay in Completion of a Building
§ 0.02 m es for Breach by Owner
[1]Measure of Damages May Be Contract Price Minus Cost of Completion
[2]Measure of Damages May Be the Profit on the Entire Contract Plus the Cost of Work Actually
Performed
[3]Restitutionary Remedy
§ 0.0 eme ies for Breach of an Employment Contract
[1]Wrongful Discharge by Employer
[2]Breach by an Employee
§ 0.0 ye s Remedies Against Clients
[1]Retainer Agreements
[2]Fee Regulation
[a]A Lawyer Has the Burden of Persuasion on All Issues Concerning Fees
[b]Controls on Excessive Fees
[c]Discharge and Contingent Fee
[d]Referral Fees
Page 2 of 2
§ 0.0 e s e of Damages for Breaches of Contracts to Sell Land
[1]“English Rule” and “American Rule” Distinguished
[2]Breach by Purchaser
§ 0.0 ye s Remedies for Breach of a Contract for the Sale of Goods
[1]Buyer’s General Damages for Total Breach
[2]A Buyer May “Cover” by Purchasing Substitute Goods
[3]A Buyer May Seek to Recover the Difference Between the Contract Price and the Market Price
[4]Damages for Breach of Warranty, Other Nonconformity, or Fraud Where Goods Are Accepted
[5]Remedies in the Case of Fraud
[6]Consequential and Incidental Damages
[a]UCC Definition
[b]Limitations on Consequential Damages
[c]Incidental Damages
[7]Time to Bring Suit
§ 0.0 e e s Damages for Breach of a Contract for the Sale of Goods
[1]Seller’s General Damages
[2]Contracts to Manufacture Special Goods
[3]Consequential and Incidental Damages
[4]Seller’s Action for the Price

End of Document
CHAPTER 60 DAMAGES: BUILDING AND EMPLOYMENT CONTRACTS;

SALE OF LAND AND SALE OF GOODS; CONTRACTS UNDER THE UCC
the subject matter.

End of Document
§ 60.01 Damages Recoverable When a Builder Breaches a Contract
[1] An Owner Whose Building Contract Is Defectively Performed Is Entitled to Damages Measured by
the Cost of Remedying the Defect
A builder may breach a contract by repudiation before commencing performance or after it begins by defective
construction, or by delaying completion of the project. The owner’s reasonable expectation is to have the
building completed according to specifications on time and for the agreed upon contract price. Contract
damages are generally measured by fulfilling the aggrieved party’s expectation interest. Restatement (Second)
of Contracts § .
Suppose Ames agrees to build a house for Barnes at $100,000. Ames abandons the project after completing
only part of the work for which she was paid $50,000. Barnes contracts with Davis to complete the building at a
reasonable price of $80,000. Barnes may recover the cost of completion from Ames, but it must be reduced by
the amount of cost Barnes avoided ($50,000) under the contract that Ames breached. Apart from any other
provable damages, the essential remedy would allow Barnes to collect $30,000 in cost-of-completion damages
from Ames; this would place Barnes in the position that he should have been in—the house he expected to
have for a net price of $100,000—if Ames had not breached. An effective contract remedy for any breach by a
builder will place the aggrieved owner in that position by awarding damages for the reasonable cost of
reconstruction as well as damages for delays in the use of the new structure. Restatement (Second) of
Contracts § 2 . The cost of reconstruction should include not only the cost of the new construction, but
the cost of removing the defective work necessary to allow for reconstruction.
Where a subcontractor breached a contract to erect steel on new buildings, the contractor invoked a provision
of the contract allowing recovery for the actual costs and overhead for the work the general contractor paid to
complete. The trial court’s order, however, provided damages for the fair market value of the work and not the
actual costs incurred by the general contractor. On appeal, the court cited the Corbin treatise in stating that a
refusal and failure to complete the work usually allows the aggrieved party to get a judgment for damages
measured by the reasonable cost of reconstruction and completion. The trial court’s reference to fair market
value, therefore, was not incorrect. Traco Steel Erectors, Inc. v. Comtrol, Inc., 2009 UT 81, 222 P.3d 1164.
When computing “damages for the cost of completion of a building caused by a breach on the part of the
contractor, ‘[o]f course, as against the cost of completion the owner must deduct the part of the price that he
has not yet i . Cebula v. M. Rhoades Constr. Co., 2015 Mich. App. LEXIS 1810 (Mich. Ct. App. Sept. 29,
2015) (quoting the Corbin treatise).
[2] Immaterial Breach by the Builder

If the builder’s completed work reveals defects (breaches) that are not material, the builder has a right to the
contract price under the doctrine of substantial performance. Such a recovery, however, is subject to the
owner’s recoupment or counterclaim in damages for the costs of correcting the defects. (See the discussion in
Chapter 36 above). A failure to perform that is deemed to be immaterial remains a “breach” just as a delay in
the completion of the building would typically constitute an immaterial breach. Whether the breach is “total” or
“partial,” large or small, material or immaterial, damages for the breach should be measured in the same
fashion, that is, by the cost of completion (the cost of curing the defect) except where the cost of curing the
defects to allow completion would result in unreasonable economic waste.
Page 2 of 4
[3] Unreasonable Economic Waste Should Be Avoided

The classic example of the avoidance of unreasonable economic waste occurred in Jacob & Youngs, Inc. v.
Kent, 230 N.Y. 239, 129 N.E. 889 (1921). In that case, the specifications for a new house required pipe
throughout the structure to be of “Reading” manufacture. Neither the builder nor the architect noticed that the
pipe innocently used by a subcontractor was of “Cohoes” manufacturer since it was identical in terms of quality
and appearance as Reading pipe except for the brand name. The building was completed with Cohoes pipe
encased in the walls. To cure this later discovered “defect” would require the demolition of parts of the building
and a total reconstruction of the demolished walls. Since the value of the completed house was its expected
value, the court did not apply the usual measure of damages. Instead of the cost of replacement, it applied the
difference in value, which it recognized would constitute only nominal damages here.
In Nippo Corp./Int’l Bridge Corp. v. Amec Earth & Envtl., Inc., 2011 U.S. Dist. LEXIS 108273 (E.D. Pa. Sept. 21,
2011), AMEC was the prime contractor with the U.S. Government for runway work in Guam. It contracted with
the plaintiff (a joint venture) to complete the runway project, but the project was not completed on time. AMEC
insisted on strict compliance with material specifications in the contract, a “voids-in-mineral aggregate” (VMA)
specification. The plaintiff presented evidence that this specification was unnecessary in a tropical climate and
the Air Force would have accepted specifications that did not include such an imported aggregate. The plaintiff
claimed that compliance with such a specification would constitute economic waste. The court noted that
instead of the cost of completion, the doctrine of economic waste limits recovery to the value that would have
been added had the contract been performed. Typically, the question is whether the cost of repairs is
disproportionate to the value obtained by the repair and the breaching party bears the burden of demonstrating
that the loss in value is less than the cost of repair. The court denied AMEC’s motion for summary judgment
since there was a material issue of fact as to whether AMEC’s insistence on compliance with the specifications
would result in economic waste.
The use of the alternate “diminution in value” measure of damages is typically justified where the cost of
completion can be shown to be clearly disproportionate to the enhanced value that the owner would have
enjoyed had there been no breach—Restatement (Second) of Contracts § 2 (the “proportionality” rule).
Where a house was to be constructed on an island to an elevation of 8.5 feet, the completed house had an
elevation of only 7.5 feet. Though the buyer’s real estate expert opined that the lower elevation diminished the
value of the house by only $25,000, the buyers demanded that the house be torn down and replaced at a cost
of $930,000. The trial court awarded diminution in value damages and the court of appeals affirmed. Heine v.
Parent Constr., Inc., 4 So. 3d 790 (Fla. Dist. Ct. App. 2009).
The defendant’s performance under a remodeling contract was incomplete because of a failure to tuckpoint a
wall. The parties had estimated $6,000 of a total contract price of $24,000 for the tuckpointing. Expert
testimony, however, placed the tuckpointing cost at $36,740. The court recognized that the normal measure of
damages is the cost of completion, but that measure would not be applied where it is clearly disproportionate to
the result and would provide the plaintiff with a windfall recovery clearly disproportionate to the probable loss of
value to him. Bailey v. Keeton, 2012 Ill. App. Unpub. LEXIS 911 (Apr. 20, 2012). A court viewed a claim of
damages based on diminution in value that would exceed as award based on expectation damages as a
reversal of the rationale for awarding diminiution-in-value damages. Such an award would provide an
inappropriate windfall for the plaintiff. Universal Enter. Group, L.P. v. Duncan Petroleum Corp., 2013 Del. Ch.
LEXIS 162 (July 1, 2013).
Defendant contracted to perform maintenance and to “maintain all log books and records … in accordance with
the Federal Aviation Regulations.” But defendant failed to provide maintenance records and part tags. The cost
of repair to redo the maintenance work would be $171,363.37. The court rejected the argument that “cost of
repair” is the appropriate measure of damages in the instant case. “… the notion of replacing undisputedly good
parts with new parts for the sake of obtaining complete maintenance records exemplifies unreasonable
economic waste.” Less costly measures were available. BLB Aviation S.C., LLC v. Jet Linx Aviation, LLC, 2015
U.S. App. LEXIS 21541 (8th Cir. Neb. Dec. 14, 2015).
In what has become the most controversial case in this area, Willie and Lucille Peevyhouse leased their land to
a strip mining company that expressly agreed to restore the land to its original state after the operations were
completed. The defendant did not restore the land; the restoration would have cost an estimated $29,000. The
total value of the land, however, was only $5,000, and the difference in the value of the farm before and after
Page 3 of 4
the mining operation was only $300. Unlike the Reading pipe case, supra, restoration would involve no
destruction of the completed performance that might result in unreasonable economic waste. Nonetheless, the
court held that the proper measure of damages was the diminution value of $300. Peevyhouse v. Garland Coal
& Mining Co., 382 P.2d 109 (Okla. 1962). For an insightful analysis of this case in the context of the diminution
in value measure of recovery, see Judith L. Maute, Peevyhouse v. Garland Coal & Mining Co. Revisited: The
Ballad of Willie and Lucille, 89 Nw. U.L. Rev. 1341 (1995).
In another well-known case, a lessee of industrial property agreed to leave the property “at a uniform grade” at
the completion of a seven-year lease, but it failed to perform. The cost of completion was estimated at $60,000
while the diminished value of the property was estimated at $12,160. In holding that the plaintiff was entitled to
the cost of completion, the court relied heavily on the analysis in a case 68 years earlier, which stated:
A man may do what he will with his own … and if he chooses to erect a monument to his caprice or folly on
his premises, and employs and pays another to do it, it does not lie with a defendant who has been so
employed and paid for building it, to say that his own performance would not be beneficial to the plaintiff.
Groves v. John Wunder Co., 286 N.W. 235 (Minn. 1939), quoting Chamberlain v. Parker, 45 N.Y. 569 (1871).
It is not difficult to argue that the results in these cases should have been reversed. The Peevyhouses’
insistence on the restoration of their land required their surrender of a normal $3,000 payment at the signing of
the contract to gain the company’s express agreement to meet that desire. Judith L. Maute, Peevyhouse v.
Garland Coal & Mining Co. Revisited: The Ballad of Willie and Lucille, 89 Nw. U.L. Rev. 1341, 1363 n.56
(1995). While it may have been foolish to surrender that amount to effect a promise of restoration that would
enhance the value of the property by only $300, a man and woman are free to do what they will with their own.
Their willingness to surrender three-fifths of the value of their entire farm is clear evidence that they may not
have been willing to lease the property at all absent such assurance of complete restoration.
On the other hand, there was no evidence that the lessor of the industrial property in Groves was particularly
interested in the lease provision requiring a uniform grade at the conclusion of the lease. Indeed, after the
judgment was entered, the parties arrived at a settlement of $55,000, which the owner did not spend to have
the site graded to a uniform level. Rather, the owner eventually spent $6,000 in improvements that were not
substantial. The land was sold for $45,000, in a condition not substantially different from its condition at the end
of the lease. This narrative was reported in J. Dawson and W. Harvey, Cases on Contracts and Contract
Remedies, 28 (1959).
A much later case involved a similar breach of contract to complete grading on an industrial site. The defendant
claimed the trial court erred in rejecting his argument that the measure of damages should have been
diminution in value since, even without the grading, the property had been sold for $183,000, only $3,000 less
than its full fair market value. The court distinguished the Reading pipe case, which required the destruction of
completed work, while the case before it did not require the undoing of any performance that could result in
economic waste. It followed the earlier rationale suggested in Groves and was particularly emphatic in
replicating the quotation in that case from Chamberlain that a “man may do what he will with his own.” The
court held that, even if the defendant’s performance of proper grading would add little or nothing to the sale
value of the property, the defendant’s default was not excused since it did not lie with the defendant to say that
his own performance would not be beneficial to the plaintiff. The court also noted that the defendant was a
“wilful transgressor” who deliberately chose not to perform the promise. The judgment below granting cost of
completion damages was affirmed. American Standard, Inc. v. Schectman, 80 A.D.2d 318, 439 N.Y.S.2d 529
(1981).
[4] If There Is a Structural Defect That Makes a Building Unsafe, the Measure of Damages Will Be the
Cost of Reconstruction
If there is a structural defect in a completed building that makes the building unsafe, the measure of damages
will be the cost of reconstruction, even if it is higher than the initial cost of the project. Bellizzi v. Huntley
Estates, Inc., 3 N.Y.2d 112, 164 N.Y.S.2d 395, 143 N.E.2d 802 (1957). Where, however, a breach of contract
cannot be cured by a substitute contractor because no contractor other that the defendant is authorized to do
the work, a court may award damages measured by diminution in value. Consol. Edison Co. of N.Y., Inc. v.
United States, 67 Fed. Cl. 285 (2005). There, the Department of Energy failed to perform its promise to dispose
Page 4 of 4
of spent nuclear fuel. The plaintiff claimed diminution in the value of the property it sold because any bidder
would have to assume the risks of such disposal and the necessity of certain fee payments through the year
2020. The court held that the diminution in value measure was appropriate.
[5] The Measure of Damages for a Contractor’s Failure to Sink an Oil Or Gas Well Is the Cost of
Completion
Suppose a defendant breaches a contract to drill an exploratory oil well in exchange for $30,000 and there is
evidence that demonstrates to a practical certainty that there is no oil under the land. Drilling the well would
have been sheer economic waste. If we further assume that the cost of having another drill the well would be
$50,000, the plaintiff would argue that it is entitled to damages of $20,000. Only nominal damages should be
awarded, however, because the breach caused no injury. If, however, there was oil under the land and the
drilling was desired to obtain information, the plaintiff could recover the value of such information and that value
could be greater than the contract price of drilling the well.
[6] Delay in Completion of a Building

A delay in the completion of a building precludes the use of the building by the owner. In such a case, the
aggrieved party may be awarded a judgment in the amount of the rental value of the structure for the period of
the delay. An action for the rental value will not be affected by the fact that the owner had no intention of leasing
the property or whether tenants could have been found had the owner been willing to lease it. If the rental value
of the property is capable of estimation, that value can be recovered for the delay. If the aggrieved party can
show with reasonable certainty that an especially profitable use of the property would have occurred absent the
delay in completion, the recovery of damages exceeding normal rental values would depend upon whether the
special damages were foreseeable at the time the construction contract was made.
Practice Resources:
• Corbin § 0.1 (building contracts—measure of damages for breach by contractor—cost of
completion); § 0.2 (unreasonable economic waste to be avoided); § 0. (owner may be
entitled to cost of repairing defects even though no loss in values and even though owner uses
the structure); § 0. (contractor’s breach—damages for delay in completion); § 0. (oil
wells—structures on land not belonging to the promisee).

End of Document
§ 60.02 Damages for Breach by Owner
[1] Measure of Damages May Be Contract Price Minus Cost of Completion

When an owner breaches a contract with a builder after the builder has completed the building in precise
conformity with the contract specifications, the builder is entitled to the contract price; this places the builder in
the position it would have occupied had the owner performed the contract. If an owner breaches the contract
before the builder has completed performance, the builder is entitled to the contract price minus the builder’s
estimated cost of completion. The formula, contract price minus cost of completion, is found in most of these
cases.
Assume a contract price is a million dollars, and the owner breaches when the building is half completed at a
cost to the builder of $400,000. If the second half would have also cost the builder $400,000, the builder has
saved that amount in not having to complete the building. The measure of damages is the contract price of $1
million minus the $400,000 cost of completion; this provides the builder with a recovery of $600,000, composed
of its $400,000 cost to the point of breach and the profit of $200,000 it expected to earn on the entire contract.
The builder is not limited to half the profit since its reasonable expectation was to earn the profit on the entire
contract.
[2] Measure of Damages May Be the Profit on the Entire Contract Plus the Cost of Work Actually
Performed
A second formula is found in some cases of breach by an owner: the profit on the entire contract (contract price
less the builder’s cost of construction, both expended and to be expended) plus the cost of work actually
performed. See, e.g., Warner v. McLay, 92 Conn. 427, 103 A. 113 (1918). Using the illustrative numbers in the
example above, the formula would elicit the following: $1 million (contract price) minus $800,000 (cost to builder
expended and to be expended) plus $400,000 (the cost of work that has been actually performed at the time of
the breach). Since the second formula yields the same result as the first but is more complicated than the
simple contract price minus cost of completion formula, why use it? To this point, the illustration assumed that
the cost of completion ($400,000) could be shown with reasonable certainty. The cost of completion, however,
is necessarily an estimate because it has not been expended. If it cannot be shown with reasonable certainty,
the simple formula of contract price minus cost of completion cannot be used at all. While the second formula
also suffers from the absence of a sufficiently provable cost of completion, one of the elements it expressly
states is the reliance element, the “cost of work actually performed” ($400,000), which can be proved with
reasonable certainty.
When an owner breached a contract dealing with experimental underwater construction work, the cost of
completion could not be determined with reasonable certainty. The court, however, allowed recovery of the cost
of work actually performed to the time of the breach, which could be determined with sufficient certainty. The
court stated:
It does not lie, however, in the mouth of the party, who has voluntarily and wrongfully put an end to the
contract, to say that the party injured has not been damaged at least to the amount of what he has been
induced fairly and in good faith to lay out and expend (including his own services), after making allowance
for the materials on hand .
United States v. Behan, 110 U.S. 338, 345, 4 S. Ct. 81, 28 L. Ed. 168 (1884).
Page 2 of 2
A third formula has also received judicial approval: such proportion of the contract price as the cost of the work
done bears to the total cost of doing the job, plus, for the work remaining, the profit that would have been made
on it. McCormick, Damages § 1 (1935). Typically, application of this formula yields the same result as the
other two except where the contract is performed at a loss to the contractor. Under one suggested illustration,
the contract price is $10,000, the work already done has cost $5,000, and the cost of completion is $10,000.
Under formula 1, the builder would recover zero; formula 2 would allow a recovery of $5,000, and the third
formula would permit a recovery of $3,333.33. McCormick, Damages § 2 (1935).
[3] Restitutionary Remedy

When the defendant’s breach prevents a contractor from substantially performing the contract and recovering
the contract price, the contractor has an alternate remedy in restitution. A restitution remedy may allow for a
much greater recovery, particularly under a losing contract. (For a discussion of restitution, see Chapter 61
below.)
Practice Resource:
• Corbin § 0. (building contracts—damages in favor of contractor for breach by the owner).

End of Document
§ 60.03 Remedies for Breach of an Employment Contract
[1] Wrongful Discharge by Employer

An employer may breach a contract by repudiation or by wrongfully discharging an employee. If the employer
does not pay wages earned, the employee may choose to continue to perform and sue for back wages plus
interest. The employee’s essential claim for services rendered is the wage promised for such services plus
interest for delays in payment. Even where the employee is in breach, legislation typically allows recovery of
accrued wages. The valuation of lost fringe benefits has yet to be thoroughly vetted by courts, but
compensation for such benefits can be very important and should be recoverable.
If wages are uncertain in amount because they take the form of earned commissions or profit sharing, the
employee’s recovery is complicated by the requirement that damages must be reasonably certain. Such an
employee must, therefore, provide a suitable foundation to support a reasonable estimate of deprived earnings
caused by the employer’s breach. The difficulty or proving damages with reasonable certainty normally
precludes recovery of lost opportunity damages where an entertainer loses publicity or an opportunity to display
talents before a large audience that would provide for greater earnings in the future. See Joel E. Smith,
Recovery by Writer, Artists or Entertainer for Loss of Publicity or Reputation Resulting from Breach of Contract,
96 A.L.R.3d 437 (1979).
Discharged employees are not expected to remain idle. The doctrine of avoidable consequences (mitigation)
will allow a deduction from damages if the employer can prove that the employee could have found substitute
employment without undue risk, expense, humiliation, an unreasonable location change, or employment of a
different rank or character. (For a discussion of substitute employment, see Chapter 57 above.) If a discharged
employee takes employment that would not be required under a mitigation principle, the earnings from that
employment will be deducted from damages against the former employer if they could not have been earned
absent the employer’s breach.
If the discharged employee chooses to operate a business rather than take substitute employment for wages, it
has been held that the profits earned in such a new venture are deductible from damages under the breached
contract. That view suggests that a failed business effort might allow the discharged employee to recover all
back wages. One court held that a discharged employee was not entitled to full back pay when she chose to
assume the risks of a solo business without making a reasonable effort to obtain high-paying substitute
employment in her field. Hopkins v. Price Waterhouse, 737 F. Supp. 1202 (D.D.C. 1990). No consistent
answers are found in the case law as to whether damages should be reduced by amounts received by a
discharged employee under unemployment insurance or social security payments.
State and federal legislation have placed significant limitations on an employer’s privilege to discharge at-will
employees for reasons inconsistent with civil rights laws or other public policies. This has led to decisions
holding that an employer must continue to pay the employee until new employment is secured.
[2] Breach by an Employee

When an employee breaches a personal service contract to take a higher paying position elsewhere, the
employer is entitled to damages based on the cost of substituted service. The breaching employee is required
to pay damages measured by the difference between the market value of the services and the contracted
wages or salary. Evidence of the amount the employee will earn in the new employment is evidence of that
market value. The limitations on liability imposed by the concepts of foreseeability, mitigation, and reasonable
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certainty of damages are applied strictly to avoid consequential injury awards against employees. In St. Jude
Med., S.C., Inc. v. Biosense Webster, Inc., 2014 U.S. Dist. LEXIS 12901 (D. Minn. Feb. 3, 2014), the court cited
the Corbin treatise in recognizing the possibility of consequential damage awards against employees, but
cautioned that St. Jude had to meet its burden of proving that such damages were foreseeable by the
employee.
Practice Resources:
• Corbin § 0. (employee’s remedies for wrongful discharge by employer); § 0. (remedies of an
employer for breach by an employee).

End of Document
§ 60.04 Lawyer’s Remedies Against Clients
[1] Retainer Agreements

In light of the unique position that lawyers occupy in the legal system, retainer agreements with clients are
terminable-at-will for good, bad, or no reasons. If a lawyer is fired without cause, he or she may recover for
work and labor done under a quantum meruit theory, but the lawyer’s expectation interest is generally not
protected. Lawyers, however, may benefit from a quantum meruit recovery even where they breach a duty to
the client and even though the typical agent who breaches a fiduciary duty to a principal would not recover at
all. Unlike a client who may dismiss a lawyer at will, if a lawyer withdraws from representation of a client without
cause, the lawyer will receive no compensation and may be liable for malpractice or breach of contract.
Under their general supervision of lawyers, some courts have banned nonrefundable retainers as negatively
affecting a client’s decision to change counsel. A general (engagement) retainer that provides the client with the
right to call upon the lawyer during the engagement period will be enforced although it may also have some
effect on the client’s decision to discharge the lawyer. Even with general retainers courts will not enforce
automatic renewals of such agreements or liquidated damages clauses upon termination of the automatically
renewed term. See, e.g., AFLAC, Inc. v. Williams, 264 Ga. 351, 444 S.E.2d 314 (1994).
[2] Fee Regulation
[a] A Lawyer Has the Burden of Persuasion on All Issues Concerning Fees
If a lawyer fails to inform a client of the basis or rate upon which the fee will be charged, the lawyer will be
relegated to a quantum meruit recovery; this will typically suggest a fee at the lower range of what would
otherwise have been a negotiated fee. Restatement (Third) of the Law Governing Lawyers § cmt. b (ii).
A lawyer has the burden of persuasion on all issues concerning fees. Later modifications of fees will be
enforceable only if they are fair and reasonable to the client, who may feel compelled to remain with the
lawyer seeking a higher fee. It should be difficult for a lawyer to secure an enforceable modification of a fee
absent a showing a changed circumstances.
[b] Controls on Excessive Fees

Lawyers’ rules of professional conduct require their fees to be reasonable, and courts will scrutinize such
fees, particularly where they involve fees of opposing counsel that a party has contractually bound itself to
pay to the prevailing party. Some jurisdictions have adopted maximum fees for certain types of cases.
While the controls on such fees sound substantial, a client who objects to a lawyer’s fee will have to hire a
lawyer to represent the client. Bar association arbitration processes to resolve such disputes have not be
entirely successful. A handful of jurisdictions have made arbitration mandatory in such cases.
[c] Discharge and Contingent Fee

If a lawyer who has agreed to perform legal services for a contingent fee is discharged, the lawyer will be
entitled to a recovery for the reasonable value of his or her services in quantum meruit. Restitution actions
in quantum meruit, however, allow parties other than lawyers to recover amounts greater than the contract
price where the contract has not been substantially performed, the other party breaches, and the plaintiff’s
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“losing” contract performance confers a benefit on the breaching defendant greater than the contract price.
Since a client cannot “breach” a retainer contract and clients should not be limited in changing attorneys,
the combined fee of the discharged and substitute attorneys should not exceed what the client would have
paid under the contingent fee arrangement with the first attorney alone.
[d] Referral Fees

Finder’s fees and brokerage fees are common in American business, but fees paid by lawyers to non-
lawyers for steering clients to them are illegal and void. Similarly, lawyers may not split fees with non-
lawyers, who may attempt to influence the lawyer’s activities to maximize such fees.
Referrals by one lawyer to another lawyer are treated differently. When the referring lawyer performs no
services or even when both lawyers are jointly responsible and the referral fee exceeds a proportionate
share of the services, the fee will not be enforceable. If these defects do not exist and the client is fully
apprised of each lawyer’s participation and consents to it, the referral fee agreement will be enforced.
Partners in a firm are exempt from fee-splitting prohibitions. The rules against fee-splitting derive from
traditional prohibitions against marketing and advertising by lawyers that are designed to enhance the
“mystique” of professionalism.
Practice Resource:
• Corbin § 0. (lawyers’ remedies against clients).

End of Document
§ 60.05 Measure of Damages for Breaches of Contracts to Sell Land
[1] “English Rule” and “American Rule” Distinguished

In England, when a good faith seller of land failed to convey marketable title because of inadequate land
registries, the buyer could recover only the down payment in restitution and any expenses incurred in reliance
on the contract; this served to place the vendee in status quo ante instead of protecting the vendee’s
expectation interest. Land registries are now adequate, but the impact of the rule was felt in the United States
even though a great many states refused to follow the “English” rule. In these states, the “American” rule
treated contracts to convey land the same as other contracts, providing the vendee with lost expectation
damages measured by the value of the land when it should have been conveyed minus the contract price as
yet unpaid. Some American courts, however, continue to apply the English rule precluding an expectation
interest recovery in cases where the seller in good faith believed in the validity of the title that was only later
discovered to be defective.
[2] Breach by Purchaser

When a vendee breaches a contract for the sale of land, the measure of damages is the full contract price
minus the value of the land at the time of closing and minus any payment received. In one case, a purchaser
refused to buy at the contract price of $167,000. Months later, the property was resold for $155,000. The court
of appeals reversed the trial court’s judgment of $12,000 in damages because the market price was $167,000
at the time of closing, which allowed only nominal damages for the vendor. Tinkham v. Beasley, 2000 Tenn.
App. LEXIS 776 (Nov. 22, 2000).
Damages may include the costs of resale as consequential or incidental damages and other foreseeable
consequential damages. Penalty and forfeiture clauses that would provide a windfall for the seller are generally
unenforceable, as noted in Chapter 58 above.
Practice Resources:
• Corbin § 0.10 (measure of damages for a vendor’s breach of contract to sell land—the English
view); § 0.11 (breach of contract to convey land—the American view); § 0.12 (breach by
purchaser of executory contract to buy land—effect of provisions for forfeiture and liquidated
damages).

End of Document
§ 60.06 Buyer’s Remedies for Breach of a Contract for the Sale of Goods
[1] Buyer’s General Damages for Total Breach

Contracts for the sale of goods between United States buyers and sellers are governed by the Uniform
Commercial Code (UCC). The remedies of a buyer are listed in UCC § 2- 11
(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes
acceptance then with respect to any goods involved, and with respect to the whole if the breach goes
to the whole contract (Section 2-612), the buyer may cancel and whether or not he has done so may in
addition to recovering so much of the price as has been paid
(a) “cover” and have damages under the next section as to all the goods affected whether or not they
have been identified to the contract; or
(b) recover damages for non-delivery as provided in this Article (Section 2-713).
(2) Where the seller fails to deliver or repudiates the buyer may also
(a) if the goods have been identified recover them as provided in this Article (Section 2-502); or
(b) in a proper case obtain specific performance or replevy the goods as provided in this Article
(Section 2-716).
(3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his
possession or control for any payments made on their price and any expenses reasonably incurred in
their inspection, receipt, transportation, care and custody and may hold such goods and resell them in
like manner as an aggrieved seller (Section 2-706).
Liquidated damages have been previously considered and specific performance will be considered in a
subsequent chapter. Contracts for the sale of goods in international trade are governed by the United Nations
Convention on Contracts for the International Sale of Goods (“CISG” or the “Vienna” Convention), which
contains the following provision:
Damages for breach of contract by one party consist of a sum, equal to the loss, including loss of profit,
suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which
the other party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in
the light of the fact and matters of which he then knew or ought to have known, as a possible consequence
of the breach.
CISG Article 74.
[2] A Buyer May “Cover” by Purchasing Substitute Goods

One of the most important innovations in UCC Article 2 is the “cover” remedy found in UCC § 2- 12. Covering
allows a buyer to make a good faith purchase of goods without unreasonable delay in substitution for those that
were due from the breaching seller. Under § 2- 12 the measure of damages is the difference between the
contract price and cost of cover plus any incidental or consequential damages, but minus expenses saved as a
consequence of the seller’s breach. The pre-UCC conventional remedy was measured by the difference
between the market price and contract price of the goods. With some modifications, this remedy continues
under UCC § 2- 1 as an alternate to “cover.”
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The cover remedy allows a buyer to pursue actions that normal buyers would pursue upon notification that the
seller will not perform the contract. The buyer may have to find a substitute purchase of goods beyond its
normal sources of supply. The buyer may pay a higher price than the price available in a given market, or the
buyer may have to resort to purchasing goods that are reasonable substitutes but not identical to the goods
under the breached contract. A covering buyer need only operate in a commercially reasonable and good faith
manner. The buyer need not defend a price higher than the market price; the seller has the burden of showing
that the price the buyer paid was unreasonable. If it is reasonable to do so, a buyer may even manufacture the
substitute goods. The buyer is not required to cover, but if cover would avoid consequential damages, those
damages will not be recoverable. Moreover, if cover is available, replevin and specific performance are typically
not available.
[3] A Buyer May Seek to Recover the Difference Between the Contract Price and the Market Price
A buyer’s other principal damages remedy under Article 2 is the recovery of the difference between the contract
price and market price, but this remedy is available only to the extent that the buyer has not covered. UCC § 2-
713, cmt. 5. If the buyer has managed to make a cover purchase below the market price but then chooses to
sue for the difference between the contract and higher market prices, a court may limit damages to the
measure under the cover remedy.
The UCC follows the general remedial principle of placing the aggrieved party “in as good a position as if the
other party had fully performed,” but not in a better position. UCC § 1- 0 (formerly § 1-10 . In one case, a
buyer expected to resell goods it contracted to purchase at a profit of $500; the difference between the contract
and market prices would yield damages of $5,000. The court concluded that the buyer was entitled to its
expectation interest of $5,000. At first blush, this decision may suggest a windfall for the buyer. Limiting the
damages to $500, however, would have been a windfall for the breaching seller. Tongish v. Thomas, 251 Kan.
728, 840 P.2d 471 (1992).
The UCC effects a significant change in the traditional remedy. Instead of measuring the damages at the time
of performance, the damages are the difference between the contract and the market price at the time “the
buyer learned of the breach.” UCC § 2- 1 1 . In situations where the buyer is unaware of the breach, this
change postpones the measurement time until after the time for performance. As such, the change is not
controversial since it suggests a time for measurement when the buyer would normally cover. Indeed, the
phrase “hypothetical cover” is sometimes attributed to this change. Again, if the buyer fails to cover,
consequential damages that could have been avoided are not recoverable.
When a seller commits an anticipatory repudiation of the contract, the question becomes, when did the buyer
“learn of the breach”? This issue was explored in Chapter 57 above, where it was concluded that in cases of
anticipatory repudiation, the buyer should be said to have “learned of the breach” within a “commercially
reasonable time” after the anticipatory repudiation. UCC § 2- 10 .
[4] Damages for Breach of Warranty, Other Nonconformity, or Fraud Where Goods Are Accepted
In Chapter 33 above we explored the concepts of rejection, acceptance, revocation of acceptance, and notice
of breach under the UCC. If a buyer has not rejected nonconforming goods under UCC § 2- 01 or revoked
acceptance of them under UCC § 2- 0 the buyer has accepted such goods for purposes of UCC § 2- 0 .
Buyers normally must pay for “accepted” goods. UCC § 2- 0 . C&D purchased from Azdel 144 thermoplastic
composite sheets to manufacture aircraft sidewalls. When C&D, without testing the sheets for conformity with
the contract’s specifications, had the sheets molded into sidewalls, it acted in a manner inconsistent with
Azdel’s ownership and thereby accepted the sheets. Azdel was entitled to be paid the contract price. Hanwha
Azdel, Inc. v. C&D Zodiac, Inc., 2015 U.S. App. LEXIS 9602 (4th Cir. 2015). If a buyer has provided timely
notification of a seller’s breach of warranty with respect to nonconforming goods, the buyer has a cause of
action for breach of warranty of goods that the buyer has accepted and intends to retain instead of returning
them to the seller after rejecting them or revoking their acceptance. UCC § 2- 1 1 . The measure of damages
for such a breach of warranty is the traditional measure that places the aggrieved buyer in the position it should
have occupied had the contract been performed: “the difference at the time and place of acceptance between
Page 3 of 5
the value of the goods accepted and the value they would have had if they had been as warranted.” UCC § 2-
714(2).
In routine cases, the reasonable cost of repair will be strong evidence of the measure of damages, assuming
the repair will restore the goods to the value they should have under the contract. If the repair still leaves the
goods less valuable, damages will also include such diminution in value. If “special circumstances show
proximately caused damages of a different amount,” the breach of warranty remedy includes such damages.
UCC § 2- 1 2 . Where a “kit” of materials to be erected into a steel building was sold to the buyer, the final
product was not as warranted, and required the removal of insulation and the installation of new insulation. The
court relied upon the “special circumstances” language of § 2- 1 2 to add these damages to the recovery.
Cober v. Corle, 416 Pa. Super. 191, 610 A.2d 1036 (1992). UCC § 2- 1 permits a buyer to engage in self-help
by withholding damages for breach of warranty from the purchase price.
[5] Remedies in the Case of Fraud

When a seller has committed a material misrepresentation or fraud, the UCC provides the same remedies as it
provides for non-fraudulent breach. UCC § 2- 21. Thus, in an action for damages for such misrepresentation or
fraud, the damages would be the same as breach of warranty damages. This rule changed the earlier rule in
jurisdictions that allowed only the difference between the amount paid and the value actually received, as
contrasted with the breach of warranty measure of the difference between the value of goods received and the
value they would have had if they had been as warranted. Some courts have failed to notice that important
change. See, e.g., Cayuga Harvester, Inc. v. Allis-Chalmers Corp., 95 A.D.2d 5, 465 N.Y.S.2d 606 (1983).
[6] Consequential and Incidental Damages
[a] UCC Definition

If the Barnes Sugar Company fails to deliver sugar to the Ames Bakery, which operates in several states,
Ames would normally “cover” by purchasing sugar from another supplier and recovering the difference
between the cover and contract prices. If there is a sugar shortage and Ames cannot cover, or if Barnes’s
breach did not allow Ames sufficient time to cover, Ames may suffer consequential damages.
The UCC defines “consequential damage” as:
any loss resulting from general or particular requirements and needs of which the seller at the time of
contracting had reason to know and which could not reasonably be prevented by cover or otherwise.
UCC § 2- 1 2 .
Barnes would certainly have reason to know that Ames’s sales of bakery products to its vendees would be
affected, including the loss of profits for a given period. Barnes would not be charged with foreseeing a
permanent loss of such vendees, although there is a more recent strong trend in allowing damages for a
buyer’s loss of good-will in its business. When a seller provides goods for any manufacturing process or
equipment for such a process, it has reason to foresee that defective raw materials or equipment can
interrupt the buyer’s business and proximately cause the loss of the normal profits of that business.
A manufacturer purchased from defendant industrial chains to use in its manufacturing facility, but the
chains subsequently failed, putting plaintiff’s manufacturing equipment out of commission for about two
weeks. Plaintiff claimed that due to the breach, it had to purchase a product used in its production from
other sources to meet its orders, which increased the cost of producing the final products. The court held
that if plaintiff could prove causation, there was evidence the damages would qualify as consequential
damages. Defendant “had reason to know, at the time of contracting, of [plaintiff’s] ‘general or particular
requirements and needs,’ and how a breach could cause consequential damages in light of those needs.”
Pinova, Inc. v. Quality Mill Serv., 2015 U.S. Dist. LEXIS 117849, 87 U.C.C. Rep. Serv. 2d (Callaghan) 637
(S.D. Ga. 2015).
If a seller fails to supply a buyer with equipment and the buyer can lease substitute equipment, such a
rental is not “cover.” But unless the buyer prevents its loss of profits “otherwise,” such consequential
damages are not recoverable.
Page 4 of 5
[b] Limitations on Consequential Damages

The UCC permits parties to limit or exclude consequential damages unless such limitation or exclusion is
unconscionable. Limitation of consequential damages for injury to the person are prima facie
unconscionable. Limitation when the loss is commercial is not unconscionable. UCC § 2- 1 .
In Estate of Kriefall v. Sizzler United States Franchise, Inc., 2012 WI 70, 342 Wis. 2d 29, 816 N.W.2d 853,
149 people became ill and one died from eating meat in two Sizzler restaurants. Sizzler sued the supplier of
meat, Excel, under a contract containing a guaranty that Excel products would meet all FDA standards, but
Excel would not be liable for incidental or consequential damages. The court viewed the guaranty as an
express warranty (UCC § 2- 1 which excluded such damages from any breach of that warranty. The
court, however, also found no disclaimer of the implied warranty of merchantability (UCC § 2- 1 in the
contract which allowed Sizzler to recover any provable incidental and consequential damages resulting
from a breach of that warranty.
Limitations or exclusions of consequential damages are typically part of an agreement to limit the buyer’s
remedies to repair or replacement of defective goods or repayment of the price, which the UCC allows the
parties to treat as an exclusive remedy. UCC § 2- 1 1 and (b). Where such a substitute remedy fails of
its essential purpose, UCC § 2- 1 2 provides that “remedy may be had as provided in this Act.” See
Becker v. Cont’l Motors, Inc., 2015 U.S. Dist. LEXIS 36941 (N.D. Tex. 2015). When an exclusive
contractual remedy fails of its essential purpose, it only entitles the nonbreaching party to pursue the legal
remedies available under the UCC, not the equitable remedy of rescission. Enhance A Colour Corp. v.
Dainippon Screen Graphics (USA), LLC, 2015 U.S. Dist. LEXIS 14205 (N.D. Ill. Feb. 6, 2015).
This statutory language promoted controversy in the case law as to whether the failure of the substitute
remedy would not only allow the buyer’s normal UCC remedies to be pursued, but whether otherwise valid
exclusions of consequential damages would be eliminated. This issue was fully explored in Chapter 29
above, where we concluded that the majority of courts would retain the exclusion of consequential
damages.
[c] Incidental Damages

UCC § 2- 1 1 allows a buyer to recover incidental damages, which are expenses the buyer reasonably
incurs in the inspection, receipt, custody, and care of goods that it rightfully rejects, as well as reasonable
expenses in connection with effecting cover and expenses incident to delay or other breach. Before a buyer
has a right to reject goods, it must undertake the expense of inspecting the goods. It then has certain duties
with respect to rightfully rejected goods, which include the necessity of following the seller’s reasonable
instruction concerning such rejected goods and even reselling them for the seller’s account if they are
perishable or threaten to decline speedily in value. UCC § 2- 0 1 . When a buyer must cover as a result of
the seller’s breach, the buyer’s normal cost of purchasing goods may be augmented by the need for a quick
substitute purchase caused by the seller’s failure to perform.
[7] Time to Bring Suit

A cause of action for breach of contract or warranty has no “discovery” rule or doctrine, and UCC § 2- 2 ties a
breach of warranty in a sales transaction to the date “when tender of delivery is made,” except where the
warranty “explicitly extends to future performance of the goods,” in which case the cause of action “accrues
when the breach is or should have been discovered.”
Plaintiff contended that in 2002, defendants sold him five items which defendants represented as authentic
original Fabergé antiques but plaintiff discovered in 2012 that two of the items were not authentic Fabergé
items. He sued in 2012, but the court granted summary judgment for the defendant. The existence and the
accrual of a cause of action for breach of contract or warranty do not depend on a party’s knowledge of the
breach. Here, the four year statute of limitations on the causes of action for breaches of contract and warranty
expired in early September 2006. Butt v R.N. Joseph Fine Jewelry LLC, 2015 NY Slip Op 31445(U) (2015). See
Page 5 of 5
also, Singer v. Sunbeam Prods., 2015 U.S. Dist. LEXIS 97918 (N.D. Ill. 2015) (“discovery” rule or doctrine does
not apply to breaches of implied warranties).
But the result is different when the warranty extends to future performance. Where plaintiff purchased a
tombstone from defendant, and defendant provided plaintiff literature in connection with the sale stating that the
products it sells are guaranteed to “last forever” and that “the memorials that [defendant] sells are backed by a
perpetual warranty,” the warranty extended to future performance and a claim for breach accrued when “the
breach [was] or should have been discovered.” Hoctor v Polchinski Mems., Inc., 2015 NY Slip Op 25409
(2015).Where a warranty provided that windows would “be free of manufacturing defects in material
workmanship that significantly impair their proper operation and function for ten (10) years from the date of
sale,” the warranty explicitly extended to future performance for the period referenced in the warranty, and the
accrual of the statute of limitations was tolled until the breach was or should have been discovered by the
aggrieved party. Dilly v. Pella Corp., 2016 U.S. Dist. LEXIS 234 (D.S.C. Jan. 4, 2016).
A purported fraudulent concealment of the breach serves to toll the statute of limitations. But fraudulent
concealment means employment of artifice, planned to prevent inquiry or escape investigation, and mislead or
hinder the non-breaching party from acquiring information disclosing a right of action. The acts must be of an
affirmative character and fraudulent. Where there is no evidence that the breaching party knew it was furnishing
defective goods, or acted recklessly supplying them, the statute is not tolled. B&P Process Equip. & Sys., LLC
v. Applied Indus. Techs., 2016 U.S. Dist. LEXIS 911 ( E.D. Mich. Jan. 6, 2016).
Practice Resources:
• Corbin § 0.1 (contracts for the sale of goods—buyer’s remedies); § 0.1 (buyer’s general
damages for total breach); § 0.1 (buyer’s damages for breach of warranty, other
nonconformity, or fraud where goods have been accepted); § 0.1 (buyer’s consequential and
incidental damages for seller’s breach).

End of Document
§ 60.0 Seller’s Damages for Breach of a Contract for the Sale of Goods
[1] Seller’s General Damages

A seller’s remedies for breach are set out in UCC § 2- 0
Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on
or before delivery or repudiates with respect to a part or the whole, then with respect to any goods
directly affected and, if the breach is of the whole contract (Section 2-612), then also with respect to the
whole undelivered balance, the aggrieved seller may
(a) withhold delivery of such goods;
(b) stop delivery by any bailee as hereafter provided (Section 2-705);
(c) proceed under the next section respecting goods still unidentified to the contract;
(d) resell and recover damages as hereafter provided (Section 2-706);
(e) recover damages for non-acceptance (Section 2-708) or in a proper case the price (Section 2-709);
(f) cancel.
Article 61 of CISG provides the seller with a similar list of remedies for breach of contract for the international
sale of goods.
Two of the seller’s remedies are often viewed as the counterparts to the two buyer’s remedies for damages. If a
buyer repudiates or wrongfully rejects or revokes acceptances of goods, the seller will typically resell the goods.
The seller’s resale remedy under UCC § 2- 0 provides the seller with damages measured by the difference in
the contract and reasonable resale prices; it is often viewed as the counterpart to the buyer’s cover remedy
under UCC § 2- 12.
If the seller does not resell, under UCC § 2- 0 1 it may recover the damages for the buyer’s non-acceptance
of the goods measured by the difference between the contract price and the market price at the time and place
for tender. In E. Lynn Fertilizers, Inc. v. CHS, Inc., 2011 U.S. Dist. LEXIS 139243 (C.D. Ill. 2011), three plaintiff
refused to take delivery of anhydrous ammonia and sought a return of a down payment. The defendant claimed
the plaintiff breached the contract and sought damages under the § 2- 0 “resale” remedy of the UCC which
the court denied because the defendant failed to provide reasonable notification of an intent to resell. This
relegated the defendant to a remedy under UCC § 2- 0 (the difference between the market price at the time
and place for tender and the unpaid contract price). The evidence the defendant presented to establish the
market price was a report (“Green Markets”) created by querying dealers and distributors in the relevant local
area. The court found the Green Markets report to be a sound basis for determining the market price of
anhydrous ammonia. The ship dates in the contract were from April 1, 2009 through May 30, 2009. The
defendant used the last date (May 30) as the time for tender. The court acknowledged that the nature of
delivery allowing a two-month window made it difficult to establish a single tender delivery date to calculate
damages, but the plaintiff failed to offer an alternative estimate. The court held that it was reasonable for the
defendant to use the last day of the period (May 30) as the time for tender.
The seller’s UCC § 2- 0 1 remedy can be seen as the counterpart to the buyer’s remedy under UCC § 2- 1
for the difference between contract and market prices where the buyer does not cover. This very nice
Page 2 of 3
symmetry, however, is undermined when either of these seller’s damages proves inadequate because they fail
to compensate a seller who would have made a second sale absent the breach.
With respect to automobiles or any other standard price item, sellers have many more than one such item for
sale. If Ames is an auto dealer and Barnes repudiates a contract to purchase a new car at $30,000, Ames will
resell the car to the next buyer. If the sale is made to Davis at the same price, the resale remedy produces a
zero recovery of contract price minus market price. Barnes’s breach did not allow Ames to make the sale to
Davis; Ames would have made that sale regardless of Barnes’s breach. Thus, Ames is a “lost volume” seller
who has suffered the loss of the profit that she should have earned from the sale to Barnes. The UCC allows
that recovery for any such seller, whether it is the seller of typical standard-priced autos, refrigerators or the
like, or whether the seller is a broker, wholesaler or “jobber” or other middleman who never sees the product
but is a seller who arranges for the delivery of the product to the buyer from the manufacturer. Whenever the
seller has a virtually unlimited supply of the goods, the measure of damages will be the profit (including
reasonable overhead) that the seller would have made from full performance plus any incidental damages.
UCC § 2- 0 2 .
[2] Contracts to Manufacture Special Goods

When the buyer repudiates a contract for goods to be manufactured and they are unfinished at the time of
repudiation, a seller may exercise reasonable commercial judgment for the purpose of avoiding further losses
by ceasing production or by completing the manufacture and identifying the goods to the breached contract in
order to resell them and limit damages. UCC § 2- 0 2 . If that decision, although reasonable when made,
results in a completed product that cannot be sold, the buyer will be required to pay the contract price for the
completed product. UCC § 2- 0 1 .
[3] Consequential and Incidental Damages

A seller’s UCC remedies allow for recovery of incidental damages. Incidental damages for a seller include
expenses or charges incurred in stopping delivery of goods to a repudiating buyer, or in the transportation,
custody, and care of the goods after the buyer’s breach, or other necessary expenses incurred by the breach.
The UCC expressly precludes the recovery of consequential damages for sellers. Section 1-305(a) (formerly 1-
106) states that consequential damages may not be recovered except as expressly provided, and the seller’s
remedies, unlike the buyer’s remedies, do not expressly provide for the recovery of such damages. This is
consistent with pre-Code law where a buyer’s failure to pay the price of goods allowed only the recovery of the
price together with any interest for the period of delay in payment, but no consequential damages.
[4] Seller’s Action for the Price

A seller has an action for the price if the goods are accepted. UCC § 2- 0 1 . Goods are not accepted if
they are rejected, even if the rejection is wrongful. If a seller has shipped conforming goods that are lost or
damaged within a commercially reasonable time after the risk of their loss has passed to the buyer, the seller
has a cause of action for the price of such goods. For example, if a seller ships the goods under the normal
F.O.B. “shipment” contract, where the risk of loss has passed to the buyer upon the seller’s delivery of the
goods to an independent carrier at the seller’s plant, and the goods are destroyed when the carrier’s truck is
involved in an accident, the seller may sue for their price. UCC § 2- 0 1 .
As noted, when there is a contract to manufacture special goods, upon the buyer’s repudiation, the seller may
exercise reasonable commercial judgment in completing the manufacture and identifying the completed goods
to the contract. If such goods cannot be resold or the circumstances indicate that such an effort would fail, the
seller may recover the price.
CISG provides the contract price remedy—a form of specific performance for the seller—unless an inconsistent
remedy has been pursued. CISG Article 62
Practice Resources:
Page 3 of 3
• Corbin § 0.1 (seller’s general damages); § 0.1 (seller’s general damages following resale);
§ 0.1 (seller’s consequential and incidental damages); § 0.20 (seller’s action for the price);
§ 0.21 (contracts to manufacture special goods).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 61 GENERAL REQUIREMENTS FOR OBTAINING
RESTITUTION
CHAPTER 61 GENERAL REQUIREMENTS FOR OBTAINING RESTITUTION
§ 1.01 isti ishi the Expectation, Reliance, and Restitution Interests
§ 1.02The Remedy of Restitution Can Not Properly Be Described as Either “Legal” or “Equitable” in Nature
§ 1.0 estit tio Is Not Limited to Quasi-Contract Cases
§ 1.0 estit tio Is Available Only When a Breach Is “Total”
§ 1.0 sse tio of a Right to Restitution Is Not Acceptance of an Offer of Rescission
§ 1.0 esto i Value to the Injured Party
§ 1.0 estit tio Is Not Available in the Case of Full Performance
§ 1.0 e s e of Recovery in Restitution Actions
§ 1.0 esto tio of Value to a Defendant Who Has Rendered Part Performance as a Condition to
Plaintiff’s Right to Restitution
§ 1.10 estit tio for Breach of Contract for the Benefit of a Third Person
§ 1.11 estit tio for Repudiation by an Insurer
§ 1.12 e ch of Warranty as Ground for Restitution
§ 1.1 eci ic Restitution of Property
§ 1.1 estit tio of Former Contract Rights

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RESTITUTION
CHAPTER 61 GENERAL REQUIREMENTS FOR OBTAINING RESTITUTION
the subject matter.

End of Document
RESTITUTION
§ 61.01 Distinguishing the Expectation, Reliance, and Restitution Interests
The expectation interest is designed to place the aggrieved party in the position that party would have been in had
the contract been performed. The expectation interest may be met by an award of damages, which is a substitute
for the actual performance. Or the remedy of specific performance may be ordered, requiring the defendant to
perform what was promised. The purpose of contract law is often described as fulfilling reasonable expectations
created by promises.
The reliance interest does not seek to protect expectations. It is designed to place the aggrieved party in the
position that party would have been in had the contract not been made, by reimbursing the party for losses caused
by the breach of contract on which the party relied. The reliance interest focuses on the restoration of the plaintiff’s
“minus” quantity.
The restitution interest does not seek to protect expectations. Like the reliance interest, it seeks to restore the
aggrieved party to status quo ante. Instead of reimbursing the aggrieved party for losses caused by the breach,
however, the measure of recovery is the value of the benefit conferred on the defendant at the plaintiff’s expense.
Restitution recovery requires the defendant’s “plus” quantity—its benefit—to be taken from the defendant and
restored to the plaintiff as if no contract had been made.
The expectation interest is considered to be the normal remedy in fulfilling the reasonable expectations of the
promisee. See Fishkin v. Susquehanna Ptnrs, G.P., 2009 U.S. App. LEXIS 16626, at *6–*12 (3d Cir. July 27, 2009).
The restitution interest, however, presents the greatest claim for relief among the three interests. The expectation
interest may be protected where the aggrieved party has neither conferred a benefit on the defendant nor relied on
the breached promise. The reliance interest compensates a party for loss when no benefit has been conferred on
the defendant. The restitution interest includes not only a loss to the aggrieved plaintiff, but a gain—a benefit—to
the defendant at the expense of the plaintiff.
Practice Resource:
• Corbin § 1.1 (introduction to restitution for breach of contract).

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RESTITUTION
§ 61.02 The Remedy of Restitution Can Not Properly Be Described as Either

“Legal” or “Equitable” in Nature
At common law, the assumpsit form of action was used to obtain restitution through one of the common counts,
though a special count may have been used to allow the particular facts to be set forth. If the plaintiff had delivered
money, a count of “money had and received” would be used. If the plaintiff had delivered goods, the count would be
“goods sold and delivered” or quantum valebat. For work and labor done, the count might be captioned quantum
meruit.
When relief at law was inadequate, relief was available in equity where specific restitution of property could be
ordered. Though often described as “equitable” in nature by both early judges and chancellors, the restitutionary
relief granted in a particular case will depend upon the nature of the relief. Specific restitution or a constructive trust
will be order in a modern court sitting as a court in equity. If the relief is in the form of damages, however, it will be
granted in a court of law.
Practice Resource:
• Corbin § 1.1 (introduction to restitution for breach of contract).

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RESTITUTION
§ 61.03 Restitution Is Not Limited to Quasi-Contract Cases
In this chapter, we discuss damages for breach of contract. It is important to distinguish actions for damages
measured by the benefit conferred on the defendant where there is no contract. The remedy of restitution has often
been described as “quasi-contractual,” as if restitution were a species of quasi contract; the correct statement is the
other way around. Quasi contracts (“implied-in-law”) are designed to prevent unjust enrichment where, for example,
a benefit was conferred by mistake, or a contract has been avoided, or the contractual duty has been excused.
Restitution is not limited to quasi contract cases. It is available for breach of an express contract in a court of law.
Oceana Sensor, Inc. v. Fulton County, 2009 U.S. Dist. LEXIS 122271 (N.D. Ga. Apr. 8, 2009).
Practice Resource:
• Corbin § 1. (restitution when used as a remedy for breach is not “quasi-contract”).

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RESTITUTION
§ 61.04 Restitution Is Available Only When a Breach Is “Total”
To allow restitution for a breach of contract, the breach must be “total.” Restatement (Second) of Contracts § .
See Ocean Communs., Inc. v. Bubeck, 956 So. 2d 1222 (Fla. Dist. Ct. App. 2007). It must discharge the aggrieved
party from any further duty to perform. In Miller v. Butler, 2014 U.S. Dist. LEXIS 18815 (D.N.J. Feb. 14, 2014), the
court cited the Corbin treatise in holding that where the breach goes to the essence of the contract, an appropriate
measure of damages is restitution of any benefit the aggrieved party has conferred upon the other party. When the
breach occurs by a repudiation of the contract, the aggrieved party may claim damages measured by the lost
expectation interest in not receiving what was promised, or by the restitution alternative of recovering such value
that may already have been conferred upon the repudiator. When the breach is by non-performance of the contract,
the restitution alternative will not be available if the breach is not such as to discharge the aggrieved party from
further performance under the contract.
Practice Resource:
• Corbin § 1.2 (restitution is available only when the breach is of vital importance, described as “total” or
“material”).

End of Document
RESTITUTION
§ 61.05 Assertion of a Right to Restitution Is Not Acceptance of an Offer of

Rescission
When a breach is total, the plaintiffs may allege that the contract has been “rescinded,” as if rescission is necessary
to sue for restitution damages. The term “rescission” should be relegated to parties surrendering their respective
rights under an executory bilateral contract with the intention of discharging their correlative duties. When a party
breaches a contract, an alleged “rescission” is nothing more than the aggrieved party’s assertion that the other
party has committed a vital breach that operates to discharge the plaintiff from any further duty under the contract.
In effect, the plaintiff has “cancelled” the contract because of the other party’s uncured material breach, which
discharged the plaintiff from any further duty. It is not an acceptance of an offer to rescind. The breaching party
made no offer and no offer is necessary to allow the aggrieved party to treat its duty under the contract as
discharged and seek damages to protect its restitution interest. See the discussion in 360Networks Corp. v. Geltzer
(In re Asia Global Crossing, Ltd.), 404 B.R. 335, 342 (S.D.N.Y. 2009).
Practice Resource:
• Corbin § 1. (assertion of a right to restitution is not acceptance of an offer of “recession”).

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RESTITUTION
§ 61.06 Restoring Value to the Injured Party
To restore an injured party to status quo ante, the benefit received by the defendant should be returned to the
injured plaintiff. The simplest case is the payment of money by the aggrieved party under a contract that is later
breached to such an extent that the plaintiff is discharged. Recovery of such “money had and received” is the
classic restitution remedy. If the defendant has received specific land or goods, the property can be returned.
Typically, however, the restitution remedy will be measured in money. The plaintiff may have partly performed
services—work and labor done—for the defendant before the defendant committed a vital breach. There is nothing
specific to be returned. In such cases, the plaintiff can get a judgment for the reasonable value of the services
performed.
Practice Resources:
• Corbin § 1. (restitution requires the return to the injured party of value that the wrongdoer has
received); § 1. (restitution of money payments received by the contract breaker); § 1. (restitution
of the value of goods sold or of work and labor done).

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RESTITUTION
§ 61.0 Restitution Is Not Available in the Case of Full Performance
There is an important exception to the availability of the alternate restitution measure of recovery. Where a plaintiff
has fully performed the contract or any divisible portion thereof, for which a definite sum of money is the agreed
exchange, restitution is not an alternative remedy. Thus, if Ames completes the construction of a building for Barnes
at an agreed price of $1 million that Barnes refuses to pay, Ames will be limited to the recovery of the contract price,
which fully protects her expectation interest even if the market value of the completed building is worth over $1
million. As stated by the California Supreme Court:
The remedy of restitution in money is not available to one who has fully performed his part of the contract, if the
only part of the agreed exchange for such performance that has not been rendered by the defendant is a sum
of money constituting a liquidated debt; but full performance does not make restitution unavailable if any part of
the consideration due from the defendant is something other than liquidated debt.
Chodos v. W. Publ. Co., 292 F.3d 992, 1001 (9th Cir. 2002), quoting from the opinion in Oliver v. Campbell, 43
Cal. 2d 298, 306, 273 P.2d 15, 20 (1954).
Thus, if Barnes had agreed to pay Ames $800,000 for the building plus a tract of land with no designated monetary
value, Ames could bring an action for work and labor done. See Restatement (Second) of Contracts § cmt. b,
and illus. 7.
The Restatement (Second) of Contracts explains that, when a plaintiff sues for the full price alone, as where Ames
sues for the $1 million, justice does not require that the plaintiff has a right to a restitution measure of damages,
which would burden a court to measure the benefit conferred on Barnes in spite of the fact that the parties
themselves had already stated their intended measure of that benefit. When the agreed exchange involves
something other than the payment of a definite sum of money, however, the court would still have to determine the
value of Barnes’s agreed exchange if Ames sued only for contract damages. Restatement (Second) of Contracts
§ cmt. b. The justification for the exception, however, is largely historical since the common law allowed two
actions for a plaintiff who had completely performed: an action for debt and for damages for the delay in paying the
debt. The plaintiff who had yet to render the full quid pro quo, however, had no action in debt and was deemed to
require the alternative remedy of restitution.
Practice Resources:
• Corbin § 1. (restitution is limited by the contract price or rate); § 1. (restitution is not available for a
performance if it has created a debt by performance of a divisible portion).

End of Document
RESTITUTION
§ 61.0 Measure of Recovery in Restitution Actions
The term “damages” is sometimes used to include both the monetary amount of the performance that was promised
and the monetary amount of the performance received by the defendant. It is important to distinguish an action for
the amount promised, which is a contract debt, and is always called “damages.” An action for the amount received
by the defendant, however, is a non-contract measure and is often called “restitution” rather than “damages,”
although the recovery will be a monetary sum.
As previously explained, when a plaintiff’s performance has been completed so substantially that the plaintiff is now
owed a liquidated debt as the only remaining performance required of the defendant, the plaintiff will be entitled to
“damages” measured by and limited by the contract price or contract rate. Apart from that exception, however, the
plaintiff may choose a recovery in restitution; this requires a determination of the value received by the defendant
and is not limited by the contract price or contract rate. It is important to note that this is the case in instances where
the defendant is a wrongdoer; the defendant has breached the contract. As the next chapter will demonstrate, a
breaching plaintiff may seek restitution, but such a wrongdoer’s recovery will be limited by the contract price or
contract rate.
When a defendant has breached a contract and the plaintiff is seeking restitution, the reasonable value of the
benefit conferred on the defendant can be measured in two different ways: (a) what it would have cost the
defendant to obtain that benefit from someone in the position of the plaintiff; or (b) the extent to which the
defendant’s wealth or property has been increased in value. Restatement (Second) of Contracts § 1. Young v.
Young, 164 Wn.2d 477, 487, 191 P.3d 1258, 1263–64 (2008).
The first measure (the cost to obtain the benefit from another) is the preferred measure because it is typically the
more generous measure and is justified where the defendant has breached the contract. Notwithstanding a
plaintiff’s performance, there may be no enhancement of the value of the defendant’s property or wealth if the
defendant chooses to waste the plaintiff’s effort. When an architect submits plans for a new building and the owner
chooses not to construct the building, or when a contractor has partly performed a contract when the owner
repudiates the agreement and chooses not to continue the project, there is no “benefit” in the sense of property or
wealth enhancement to the defendant. Nonetheless, the defendant has received the “benefit” of the work and labor
of the architect and contractor and should be liable for its value.
It may be that the value of the plaintiff’s work results in a grossly disproportionate additional value that would be a
more generous measure of recovery; even so, a court will still use the prevailing measure of the cost to obtain the
benefit from another. If a surgeon’s services in performing a surgical procedure have a value of $3,000, and the
procedure saves the life of a young chief executive officer with a projected life span of another 35 years, the
addition to the patient’s wealth would be estimated in millions of dollars. The recovery, however, would be limited to
$3,000.
Practice Resources:
• Corbin § 1.10 (measure of recovery in restitution actions); § 1.12 (effect of contract price or rate on
the measure of damages).
Page 2 of 2

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RESTITUTION
§ 61.0 Restoration of Value to a Defendant Who Has Rendered Part

Performance as a Condition to Plaintiff’s Right to Restitution
The concept of the restitution interest as placing an aggrieved party in the position that party would have occupied
had no contract had been made suggests an unraveling of the contract to allow the return to status quo ante. If,
therefore, the plaintiff has received money or property in part performance of the plaintiff’s obligation under the
contract, it is not surprising that the plaintiff must return it to the defendant. Restitution should not place a plaintiff in
a better position than the plaintiff was in before the contract was formed.
The characterization of restoration to the defendant often induces the notion of “rescission” of the contract. While
common law courts required an actual tender to effect restoration to the defendant, no modern court should refuse
to decree restitution on the sole ground that the plaintiff offered to return the property in specie rather than making
an actual tender of the property.
A number of cases continue to suggest that restoration or an offer to restore any value to the defendant is a
condition precedent to the rescission of the contract. Wallenta v. Moscowitz, 81 Conn. App. 213, 229, 839 A.2d 641,
654 (2004) (citing cases). Under modern procedures, there should be no such requirement since a court has the
power to assure restoration in any relief it grants. Restatement (Second) Contracts § cmt. b. Whether or not
“rescission” is mentioned, all courts agree that restitution against the defendant will not be effected unless the
plaintiff in some fashion returns what has been received through the defendant’s part performance of the contract.
If a plaintiff has taken possession of land before becoming aware of a defect that would allow restitution of the price
paid, there are cases suggesting that the plaintiff’s substantial use and occupation of the land precludes
reconveyance and restitution of the purchase price because complete restoration is impossible. Such cases should
be disapproved. Absent the retention of the land for more than reasonable time after the plaintiff had knowledge of
the defendant’s default, restitution should not be denied and there is ample authority to this effect. A deduction from
the plaintiff’s payment in the form of the rental value of the property during the plaintiff’s possession and use is
appropriate.
Restoration is not required if the property received by the plaintiff was worthless when received or has been lost or
destroyed by the defendant or has become worthless as a result of defects that the defendant warranted against.
Restoration in specie is not required if the goods have been resold or consumed as expected and their value can be
credited to the defendant’s account, or in cases where a money payment was made to the plaintiff and the amount
of the payment can be credited to the defendant’s account. Restatement (Second) Contracts § 2.
Practice Resources:
• Corbin § 1.1 (restoration of any part performance received as a condition of the plaintiff’s right to
restitution); § 1.1 (restitution is not denied because plaintiff has had use of land—its value is
deducted); § 1.1 (actual tender of specific property as a condition of restitution).

Page 2 of 2
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RESTITUTION
§ 61.10 Restitution for Breach of Contract for the Benefit of a Third Person
If Barnes pays Ames $30,000 for Ames’s promise to benefit Davis, who is later unwilling to pursue her third-party
beneficiary rights against Ames, Barnes may recover his $30,000 payment in a restitution action from Ames. The
right of a promisee such as Barnes to recover his payment to the promisor should be conditioned on the
extinguishment of any duty in the promisor to the third-party beneficiary to avoid double liability. If Davis voluntarily
discharged her beneficiary right against Ames or settled her claim against Ames through accord and satisfaction,
there would be no right of restitution in Barnes. If Davis simply renounced her rights against Ames with no donative
intent, Barnes could recover the $30,000 payment in restitution. Prior to the assent or reliance or filing an action by
the third-party beneficiary, the promisor and promisee could rescind the contract and any payment made by the
promisee would be recoverable in restitution.
Practice Resource:
• Corbin § 1.1 (restitution for breach of contract for the benefit of a third person).

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RESTITUTION
§ 61.11 Restitution for Repudiation by an Insurer
When an insurance company repudiates a policy, the insured is entitled to restitution of the premiums paid. While
the general rule requires a plaintiff seeking restitution to restore any value received, the majority of courts hold that
there should be no deduction from the recovery of all premiums. These holdings, however, are often predicated on
the assumption that the insured has received nothing from the insurer prior to the repudiation. Such a view ignores
the aleatory nature of insurance contracts. The condition of destruction of the premises under a casualty insurance
policy may never occur, but the insured has enjoyed protection during the period of its coverage. A life insurance
policy provides “protection” prior to its repudiation.
There are contrary views in the case law that require restoration of the insurer for the value of the protection
received. For example, in one case the court rejected a beneficiary’s contention that the carrier was required to
return all of the premiums he had paid plus interest under a life insurance policy on his elderly parents that was
induced by the fraud of the insurer’s agent. The court explained:
Although this is indeed apparently the majority rule … we think it is erroneously in conflict with the principle that
the parties to a rescinded agreement are required, insofar as possible, to restore the status quo … by crediting
each other with “the value of what he has received in the transaction.” … Refunding all the premiums overlooks
the economic reality that [the beneficiary] did receive meaningful “value” during the contract’s existence in the
million dollar risk to the company and the million dollar return he would have claimed if his parents had died
during that time.
Perlman v. Prudential Ins. Co. of Am., 686 So. 2d 1378 (Fla. Dist. Ct. App. 1997).
Practice Resource:
• Corbin § 1.1 (restitution against a repudiating insurance company.

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RESTITUTION
§ 61.12 Breach of Warranty as Ground for Restitution
Prior to the Uniform Commercial Code (UCC), the question of whether a buyer could recover the price already paid
for goods required a determination of whether a breach of warranty constituted a breach that could be viewed as
“total” rather than merely “partial.” The issue of restitution of the price paid under the UCC has been addressed in
the opening paragraph of the section listing the buyer’s remedies for breach. UCC § 2- 11.
When a seller of goods repudiates the contract or a buyer rightfully rejects or revokes acceptance of the goods and
there is no possibility of cure by the seller, the seller’s breach allows the buyer to “cancel” the contract.
“Cancellation” occurs when either the buyer or seller “puts an end to the contract for breach.” UCC § 2-10 .
Formal cancellation to recover monies already paid, however, is not essential. “[T]he buyer may cancel and whether
or not he has done so may in addition to recovering so much of the price as he has paid” pursue the other available
remedies under the Code. UCC § 2- 11 1 .
Practice Resource:
• Corbin § 1.11 (breach of warranty of goods sold as ground for restitution of the price paid).

End of Document
RESTITUTION
§ 61.13 Specific Restitution of Property
Equity has always manifested the power to order the return of specific property as restitution to a plaintiff. In
general, the remedy is available in the same kinds of cases where recovery of the value of property would be
available except that the flexible equity decree may order the restoration of value received from the defendant,
thereby eliminating the necessity of the plaintiff tendering what has been received as a condition to obtaining
restitution. The relief sought differs from specific performance, where a plaintiff is seeking the promised
performance; in specific restitution the plaintiff is seeking the return of property. If money provides an adequate
remedy, specific restitution will not be decreed.
Frequent cases arise under a contract in which an owner transfers land in exchange for a promise of personal care.
When such a promise is breached, the owner can obtain a decree of cancellation of the deed of conveyance and
restoration of ownership and possession of the land.
Specific restitution is certainly available in cases other than land. Courts do not grant the remedy of specific
restitution simply because a chattel is unique, however; since the plaintiff had previously agreed to sell it for a price,
the chattel is not priceless. In such a case, money may constitute an adequate remedy.
Practice Resource:
• Corbin § 1.1 (specific restitution).

End of Document
RESTITUTION
§ 61.14 Restitution of Former Contract Rights
When a plaintiff has entered into a substitute contract that released the defendant from an obligation under the prior
contract, it has been generally held that the plaintiff will not be able to have rights under the original contract
restored when the substituted contract is repudiated or otherwise vitally breached. The plaintiff will be relegated to
an action for breach of the substituted contract.
The cases do not reflect any appeal to a court of equity on a claim that the remedy under the substituted contract
would not be adequate, as where the first contract included the security of a lien or mortgage while the second
contract does not. There is no reason why a court could not grant a restitution remedy by restoring the plaintiff to his
or her original legal position under the first contract. Indeed, there are instances of such restoration in the case law.
Wilson v. Wilson, 261 N.C. 40, 134 S.E.2d 240 (1964) (allowing a wife to “rescind” a separate maintenance
agreement that the husband breached and restoring her to her status quo ante legal position permitting her to seek
alimony as if no separation agreement existed).
Practice Resource:
• Corbin § 1.1 (restitution of former contract rights as a remedy for breach of a substituted contract).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 62 RESTITUTION IN FAVOR OF A PLAINTIFF IN
DEFAULT
CHAPTER 62 RESTITUTION IN FAVOR OF A PLAINTIFF IN DEFAULT
§ 2.01 Party in Default May Have a Right of Restitution
§ 2.02 e s e of Recovery by a Plaintiff in Substantial Default
§ 2.0 estit tio in Favor of a Defaulting Building Contractor
§ 2.0 estit tio in Favor of a Defaulting Employee
§ 2.0 eco e y by a Seller of Non-Conforming Goods
§ 2.0 i ht of Restitution Created by Rescission
[1]Restitution for a Defaulting Purchaser of Land or Goods
[2]Liquidated Damages
[3]Restitution in Cases of the Conditional Sale of Goods

End of Document
DEFAULT
CHAPTER 62 RESTITUTION IN FAVOR OF A PLAINTIFF IN DEFAULT
the subject matter.

End of Document
DEFAULT
§ 62.01 A Party in Default May Have a Right of Restitution
If a plaintiff commits a material breach of a contract which it has partially performed, the notion that it may
nonetheless recover for the value of the benefit conferred by the part performance was once viewed as a
“monstrous absurdity.” Stark v. Parker, 19 Mass. 267, 275 (1824). That harsh reaction has changed in light of
judicial attitudes toward forfeitures and penalties. If a party repudiates a contract without performing any part of it, it
will be required to compensate the aggrieved party, but it will not be subject to penalties and forfeitures. To allow
the same recovery against another party who completed a valuable portion of a contract before breaching it without
any reduction in that recovery for the valuable benefit conferred constitutes a penalty or forfeiture against the
contract breaker.
A buyer made a $100,000 prepayment under an agreement to harvest timber from the seller’s land. The buyer then
sought an extension of the contract. The seller refused and the buyer sued. The court found that the buyer had
breached the terms of the contract. The buyer sought a return of the advance payment of $100,000. The court
found that the seller had sustained damages of $30,000 and awarded the buyer $70,000 in restitution. On appeal,
the court characterized the general rule as granting restitution to the party in breach for any benefits conferred on
the other party to the extent that such benefits are in excess of the loss caused by the breach. Timberland Consol.
P’ship v. Andrews Land & Timber, Inc., 818 So. 2d 609 (Fla. Dist. Ct. App. 2002). The court cited the Restatement
(Second) of Contracts § 1.
The First Restatement of Contracts excluded restitution for defaulting plaintiffs whose breach was “willful.” First
Restatement of Contracts § 1 . The “more enlightened” Restatement (Second of Contracts) does not use the
term “willful.” See Lancellotti v. Thomas, 341 Pa. Super. 1, 7, 491 A.2d 117, 120 (1985). It does, however, suggest
that a party who “intentionally” furnishes services or constructs a building that is materially different from what was
promised is acting officiously and should have no restitution recovery. Restatement (Second) of Contracts §
cmt. b. The “more liberal” Restatement (Second) version expressly adopts the “policy” underlying the protection of a
defaulting buyer as set forth in Uniform Commercial Code (UCC) § 2- 1 2 .
If the contract states that the performance is to be retained in the event of a breach, such a clause will prevent
restitution of the value of part performance to the extent that it meets the criteria for a valid liquidated damages
clause. Restatement (Second) of Contracts § 2 and cmt. c. The value of the part performance must be
reasonable in light of anticipated harm or actual loss caused by the breach.
Practice Resources:
• Corbin § 2.1 (one who is in default may have a right of restitution); § 2.2 (when the plaintiff’s breach is
“willful”).

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DEFAULT
§ 62.02 Measure of Recovery by a Plaintiff in Substantial Default
A party that has committed a substantial breach of contract which it has partially performed may not bring an action
against the aggrieved party who has committed no breach. Absent an action on the contract, a defaulting plaintiff
must claim restitution on the footing that the non-breaching defendant will be unjustly enriched at the plaintiff’s
expense. At the same time, the non-breaching party is entitled to be compensated for any damages it has suffered.
Moreover, although the defaulting plaintiff is not suing on the contract it breached but is seeking to recover the
reasonable value of the benefits conferred on the non-breaching defendant, the innocent defendant should not be
liable for restitution in excess of the contract price or a ratable portion of the price.
The defaulting plaintiff is entitled to the value conferred on the defendant, not the value it promised. The “value”
conferred is not the contract price value, although courts do allow the contract price as evidence such value. The
maximum recovery for the defaulting plaintiff will be the contract price or that portion of the contract price relevant to
the plaintiff’s partial performance minus whatever damages the defendant can prove were caused by the plaintiff’s
breach. See United Coastal Indus. v. Clearheart Constr. Co., 71 Conn. App. 506, 514, 802 A.2d 901, 906 (2002),
(relying on Restatement (Second) of Contracts § . The burden of proving the value of the part performance and
the amount by which that value exceeds the defendant’s injury resulting from the breach is on the plaintiff.
Practice Resource:
• Corbin § 2. (measure of recovery by a plaintiff in substantial default).

End of Document
DEFAULT
§ 62.03 Restitution in Favor of a Defaulting Building Contractor
There are a large number of cases allowing a defaulting building contractor to recover restitution in a quantum
meruit action when the benefit conferred on the owner was greater than the injury caused by the plaintiff’s breach.
Courts sometimes condition such recovery on a showing that the breach was not willful or deliberate. In Eker Bros.
v. Rehders, 2011-NMCA-092, 150 N.M. 542, 263 P.3d 319, the subcontractor partially performed but did not
complete the contract. The district court found damages to the general contractor in the amount of $42,448.20
without offsetting the amount owed the subcontractor because the subcontractors were said to be “barred by its
willful, material and anticipatory breach” though the court had rejected allegations that the subcontractor’s behavior
was egregious. Rather, the district court based its decision on the footing that it was sitting as a court of equity
because it was asked to provide restitution to the subcontractor. The appellate court noted that contract breakers
are not outlaws and many courts have adopted the principle in § allowing recovery of the value of benefits
conferred in excess of damages. Refusing to offset such damages measured by the benefit conferred would allow a
windfall to the non-breaching party and constitute a forfeiture to the subcontractor. Absent any justification for such
a forfeiture, the district court erred as a matter of law to deny such relief.
Where the defendant used and was in fact benefited by the defaulting plaintiff’s performance, courts may suggest
that the defendant “accepted” the plaintiff’s defective performance. “Appellants’ acceptance of work already
performed, contemplated as compensable under the contract, without payment is, at a minimum, morally wrong,
and therefore the district court did not err by allowing respondent to recover under a theory of unjust enrichment.”
Robert Davis Constr., Inc. v. Althoen, 2014 Minn. App. Unpub. LEXIS 1035 (Minn. Ct. App. Sept. 22, 2014). The
term “acceptance,” however, is susceptible to different meanings.
“Acceptance” may mean that the defendant is accepting the defective performance as complete performance. In
that case, there is no breach by the plaintiff. “Acceptance” may mean that the defendant has waived the
constructive conditions of the contract requiring performance in accordance with the terms of the contract, but with
no intention of surrendering its claim for damages. The plaintiff would then sue on the contract and be subject to the
defendant’s counterclaim.
Another meaning of “acceptance” is often the correct interpretation. The defendant “accepts” the result in making
the best of a bad situation and the defaulting plaintiff would seek restitution of the value of the excess benefit,
limited by the contract price or ratable portion of the price. The mere fact that the defendant is in possession of the
defective structure does not show that the defendant has accepted it, used it, or is benefited by it.
Practice Resources:
• Corbin § 2. (restitution in favor of a defaulting building contractor); § 2. (effect of “acceptance” of
the defective structure).

End of Document
DEFAULT
§ 62.04 Restitution in Favor of a Defaulting Employee
One well-known case concerned an employee who abandoned employment in breaching his contract and sought
recovery for the benefit conferred upon the employer. This evoked a highly negative reaction from the Supreme
Court of Massachusetts. Stark v. Parker, 19 Mass. 267 (1824).
A decade later, the New Hampshire Supreme Court presented a different view in another famous case. Under a
contract to work for one year at a total wage of $120 to be paid at the end of the year, the plaintiff worked for nine
and a half months before breaching the contract. He brought an action in quasi contract for the value of his
services. The court permitted a recovery on the logical footing that, the longer the plaintiff performed, the more he
lost. Unless the court granted a recovery, the court would be countenancing a forfeiture, which the law abhors.
Britton v. Turner, 6 N.H. 481 (1834). Not only has that logic prevailed since the decision, it has been extended to
myriad other types of contracts.
As in other restitution recoveries by a defaulting plaintiff, the employee is limited to the recovery of value that
exceeds the employer’s injury and, in any event, the plaintiff is limited to a pro rata recovery. Thus, in Britton, since
the rate was $10 per month, the maximum recovery would be $95, which the jury awarded. The defendant was
entitled to show damages resulting from the plaintiff’s breach to reduce the plaintiff’s recovery, but none were
shown.
Practice Resource:
• Corbin § 2. (restitution in favor of a defaulting employee).

End of Document
DEFAULT
§ 62.05 Recovery by a Seller of Non-Conforming Goods
When a seller has delivered nonconforming goods to a buyer, the buyer has a right to reject such goods for any
defect in the goods or their tender. If the goods have been accepted (as defined in UCC § 2- 0 the buyer may
revoke acceptance if the nonconformity substantially impairs the value of the goods to the buyer and either the
seller has assured a cure that has not occurred or the nonconformity was not reasonably discoverable. UCC § 2-
608.
If the buyer fails to reject or revoke acceptance of nonconforming goods, it has accepted them and must pay for
them at the contract price. UCC § 2- 0 . If the buyer has properly notified the seller of the breach, it may recover
the difference between the value of the goods promised and the value of goods received in an action for breach of
warranty. UCC § 2- 1 .
Practice Resource:
• Corbin § 2. (restitution by defaulting buyer or seller of goods).

End of Document
DEFAULT
§ 62.06 Right of Restitution Created by Rescission
[1] Restitution for a Defaulting Purchaser of Land or Goods

To avoid a supposed rule that a defaulting plaintiff has no right to restitution, courts sometimes discover a
“rescission” of the contract that will allow restitution. A genuine rescission is a contract of discharge by which
parties to an executory contract mutually surrender their existing rights under the contract. If the rescission
contract does not provide for previously rendered performances, there is a right to restitution for benefits
previously conferred. A contract is not “rescinded” simply because it is breached.
If a buyer repudiates a contract for the sale of land, the vendor may continue readiness to perform, retaining a
remedial right to specific performance that would preclude restitution. A “rescission” by the vendor constitutes
an assertion of a privilege to which it was already entitled upon a substantial breach by the vendee. It
extinguishes the purchaser’s interest in the land and thereby precludes the vendor’s right to specific
performance or any unpaid installments of the price. The vendor continues to have the remedial right to
damages; the buyer may have a right to restitution of payments made, but only to the extent that the buyer can
prove the payments already made exceed the vendor’s injury. The buyer’s recovery is not an action on the
contract it breached; it is an action to recover an amount constituting the unjust enrichment of the vendor.
When a buyer agrees to make installment payments on a contract for the sale of land, the deposits are paid as
a matter of security, which the seller should not retain in excess of any injury caused by the buyer’s breach. The
current analysis of restitution for defaulting purchasers of land is well illustrated by the case of Kutzin v. Pirnie,
124 N.J. 500, 591 A.2d 932 (1991).
In Kutzin, defaulting buyers of land sought to recover a $36,000 down payment under a contract that contained
no liquidated damages or other clause stating the parties’ intention concerning the down payment. The court
reported the common law rule denying such recovery when the seller is not in default; as long as a vendor of
land continues to assert a right to specific performance (the contract price) and remains ready and willing to
convey the land as agreed, the defaulting buyer has no right to restitution of any part of the price paid since the
vendor could still compel the buyer to pay the full purchase price. The rule is predicated on the axiom that no
party should profit from that party’s own wrong. Since New Jersey followed the general rule, the appellate
division held that the plaintiffs could not secure restitution of the deposit. That holding was reversed by the
Supreme Court of New Jersey.
The court noted the growing recognition of the injustice of such holdings that result in total forfeitures of part
payments. The court observed that Professor Corbin “led the movement favoring departure from the strict
common-law rule.” Arthur Corbin, The Right of a Defaulting Vendee to the Restitution of Installments Paid, 49
Yale L.J. 1013 (1931). It relied upon the Corbin analysis and its pervasive influence on the Restatement
(Second) of Contracts. The court quoted an illustration from Restatement (Second) of Contracts § illus. 1,
in which a buyer of land was allowed to recover its down payment less damages proven by the aggrieved
owner. Noting further the Corbin observation that few courts currently follow the common law approach, the
New Jersey court proceeded to overrule precedent following that approach, and expressly adopted the “modern
approach set forth in section 374(1) of the Restatement (Second) of Contracts.” Kutzin v. Pirnie, 124 N.J. 500,
591 A.2d 932 (1991).
[2] Liquidated Damages

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If a contract contains a provision for retaining a deposit, regardless of the words used by the parties to describe
such a clause, it should be analyzed like any other agreed damages clause to determine whether it is an honest
and reasonable forecast of anticipated or actual harm. When the amount involved is a comparatively small sum
paid as earnest money or a first installment, it should usually be upheld as not disproportionate to an actual
injury that would be difficult to prove.
[3] Restitution in Cases of the Conditional Sale of Goods

Prior to the UCC, a buyer of goods on the installment plan had a right of restitution for payments made in
excess of the seller’s injury. The UCC now addresses restitution of payments made by a defaulting buyer of
goods where the seller justifiably withholds delivery of the goods because of the buyer’s breach. If the contract
contains a liquidated damages clause, the buyer is entitled to restitution of any amount by which the sum of its
payments exceeds the amount to which the seller is entitled under a valid clause. In the absence of such a
clause, the buyer is entitled to restitution to the extent the amount of its payments exceed 20 percent of the
value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.
UCC § 2- 1 2 .
As a general observation, cases denying restitution may be justified on the following grounds: (1) the innocent
defendant remains willing and able to perform and retains the right to specific performance against the buyer-
plaintiff; (2) the defaulting plaintiff has not shown that the injury caused by his breach is less than the
installments received by the defendant; and (3) an express provision that allows money to be retained by the
defendant constitutes a valid liquidated damages provision rather than a penalty or forfeiture. If none of these
justifications exist, restitution for amounts paid beyond the injury to the defendant should be permitted.
Practice Resources:
• Corbin § 2. (restitution of installments in favor of a defaulting purchaser of land); § 2.
(purchaser has no right of restitution while vendor still has right to specific performance);
§ 2.10 (rescission of a contract and its effect in creating a right of rescission); § 2.11
(purchaser has no right of restitution unless payments exceed vendor’s injury); § 2.12
(forfeiture provision distinguished from a genuine liquidation of damages).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 63 ADEQUACY OF REMEDIES OTHER THAN
SPECIFIC PERFORMANCE
CHAPTER 63 ADEQUACY OF REMEDIES OTHER THAN SPECIFIC

PERFORMANCE
§ .01 i i ity of Specific Performance as a Remedy for Breach
[1]The Remedy of Specific Performance Is Granted in the “Sound Discretion” of the Court
[2]A Decree May Be Affirmative or Negative
[3]Specific Performance as a Supplementary Remedy
[4]A Contract Must Be Enforceable
[5]Specific Performance as a Means to Prevent Future Breaches
[6]Adequacy of Money Damages
§ .02 o t ct for the Sale of Land
[1]A Purchaser’s Remedy in Damages Is Generally Never Regarded as Sufficiently Adequate to

Preclude Specific Enforcement
[2]Sale of Standing Timber
[3]Seller’s Specific Performance Remedy
§ .0 o t cts for the Sale of Goods
[1]Specific Performance May Be Available Under the “Proper Circumstances”
[2]Remedy of Replevin
[3]Specific Performance in Favor of the Seller of Goods
§ .0 o t cts Requiring Performance in Installments
§ .0 e of Corporate Shares
§ .0 o t cts of Indemnity and Insurance
§ .0 o t cts to Lend Money
§ .0 o t cts for the Benefit of a Third Person
§ .0 o t cts by a Trustee
§ .10 he Insolvency Makes Money Damages Inadequate
§ .11 i i ity of Replevin Under the UCC

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§ .12 i i ity of Self-Help Remedies
§ .1 eci ic Performance of the Entire Contract May Be Available Even When Damages Would Be an
Adequate Remedy as to Part of the Contract

End of Document
CHAPTER 63 ADEQUACY OF REMEDIES OTHER THAN SPECIFIC

PERFORMANCE
the subject matter.

End of Document
§ 63.01 Availability of Specific Performance as a Remedy for Breach
[1] The Remedy of Specific Performance Is Granted in the “Sound Discretion” of the Court
The remedy of specific performance is almost always stated to be granted only in the “sound discretion” of the
court. It is not, however, “a discretion in the sense that it may be granted or denied at the will or pleasure of the
judge.” Kjeldgaard v. Carlberg, 168 Neb. 662, 672, 97 N.W.2d 233, 239 (1959). It is granted as a matter of right
and it is predicated upon sound principles. An inferior court may commit error in awarding or refusing to award
specific performance.
There are scores of cases stating that where a full remedy is available to the plaintiff through the payment of
money damages, the remedy of specific performance will not be granted. Among the factors to be considered in
deciding whether damages are adequate are the level of difficulty and the uncertainty in determining them.
These and other factors will be discussed in this chapter.
An equitable decree should be molded to fit the purposes of the contract. A plaintiff seeking an equitable
remedy must do equity. Thus, a decree may be directed against the plaintiff as well as the defendant. It may be
conditioned on the plaintiff’s rendering of performance. A decree of specific performance for the sale of land or
the sale of a chattel will be conditioned on the buyer’s payment of the purchase price.
If the exact performance for which a plaintiff contracted would be impossible to perform, the court may decree a
reasonable substitute performance to fulfill the plaintiff’s expectations that is not identical with that due under
the contract. Hall Alpine Prop., LLC v. Ashburner, 2015 Ariz. App. Unpub. LEXIS 498 (2015). At times, exact
performance is possible, but enforcement may require an excessive degree of judicial supervision; in such
cases, the court may modify the performance in a way that will still provide the substantial benefit the plaintiff
desired.
Where an agreement required a party to transfer the dishnet.com domain name to Dish Network, the court cited
the Corbin treatise to hold that the considerations for granting specific performance had been met. “It is
fundamental that to enable the court to decree specific performance, the terms of the contract must be clear,
definite, certain, and com ete. . Relevant considerations may include: (1) whether money damages can be
calculated with a reasonable degree of certainty; (2) whether money damages can be collected once awarded;
(3) whether the contract involves a unique subject matter; or (4) whether full relief would require multiple suits
for damages.” The court concluded the agreement identified “the precise acts to be done by” defendant, and
noted that “those terms are clear, definite, certain, and complete.” The court opined that an award of specific
performance was the only way to make Dish Network whole, and that money damages would not suffice. Digital
Satellite Connections, LLC v. Dish Network Corp., 2015 U.S. Dist. LEXIS 127675 (D. Colo. Sept. 22, 2015).
[2] A Decree May Be Affirmative or Negative

Specific performance orders a promisor to perform the duty created by his or her promise. Disobedience of
such an order places the promisor in contempt and can result in imprisonment. If the act involves unique skill,
artistry, or other special qualities, a court may encounter insuperable obstacles in ordering performance. An
opera singer will not be made to sing, but he or she can be precluded from singing elsewhere in breach of the
contract. Such relief is typically labeled an injunction. Contracts expressly requiring forbearance, as where an
employee agrees to a covenant not to compete, may also be called injunctions, but they are decrees for
specific performance of the very act (albeit a negative act) that constitutes the duty of the promisor under the
contract. See Dorrance T. Kelly, D.D.S., P.C. v. Camillo, 2006 Conn. Super. LEXIS 2776 (Sept. 13, 2006).
Page 2 of 3
[3] Specific Performance as a Supplementary Remedy

The Court of Chancery granted specific performance only when the remedy at law was inadequate. That
tradition continues in that specific performance will not be decreed unless the remedy of damages proves
inadequate. In other legal systems, such as the “civil” system on the European continent, the remedy of specific
performance is not supplementary; it is viewed as an available remedy like other remedies. The Uniform
Commercial Code (UCC) liberalized the use of the specific performance remedy to make it available where
goods are “unique,” and under certain other circumstances, such as where the buyer has difficulty in utilizing
the “cover” remedy. UCC § 2- 1 1 .
[4] A Contract Must Be Enforceable

A court will not decree specific performance unless there is a valid contract. It is not, however, necessary to
show that an action for damages would be successful beyond nominal damages. Indeed, one of the chief
reasons a remedy at law would be inadequate is the inability to prove damages with reasonable certainty.
When a seller of land breaches an oral contract that the buyer has partly performed, a court may be unwilling to
grant damages, but may be willing to decree specific performance to avoid a gross injustice.
[5] Specific Performance as a Means to Prevent Future Breaches

An anticipatory repudiation may be treated as a breach, giving rise to an action for damages. Such a
repudiation may also provide a basis for a decree of specific performance if the other requirements for a
specific performance remedy are met. There are also situations where a threatened breach would provide a
basis for specific performance in the form of an injunction, especially where it is entered to assure the
enforcement of mere forbearance.
[6] Adequacy of Money Damages

It is often suggested that the remedy of specific performance is granted where the subject matter is unique.
“Uniqueness,” however, is not the ultimate test. When courts focus on the unique nature of the subject matter,
“a court is really saying that it cannot obtain, at reasonable cost, enough information about substitutes to permit
to calculate an award of money damages without imposing an unacceptably high risk of under compensation on
the injured promisee.” Edge Group Waiccs LLC v. Sapir Group LLC, 705 F. Supp. 2d 304 (S.D.N.Y. 2010)
(quoting Anthony T. Kronman, Specific Performance, 45 U. Chi. L. Rev. 351, 362 (1978)).
The Restatement (Second) of Contracts § 0 suggests the most important factors to be considered in
determining whether damages are inadequate to allow specific performance to be granted are the following:
• the difficulty and uncertainty in determining the amount of damages to be awarded for the defendant’s
breach;
• the difficulty and uncertainty in collecting provable damages;
• the insufficiency of damages to obtain the promised performance or a sufficient substitution elsewhere
(inability to cover); and
• the fact that the injury may be recurring and just compensation would require multiple actions.
Seeking payment of a money debt clearly allows the plaintiff to be fully satisfied in an action for damages.
Specific performance would not be available. Difficulty in estimating the market value of an injury, however,
may be highly problematic. There may be no market price. With heirlooms and other items of sentimental value,
the pretium affectionis may make them essentially “priceless.” The injury caused by a breach of contract is
often more complex and costly than indicated by the mere exchange of value of the subject matter. The breach
may induce a work stoppage that is highly disruptive and affects the plaintiff’s business in a way that is difficult
to measure. Injury of the goodwill of a business is difficult to measure with reasonable certainty.
When a virtually identical or reasonable substitute performance may be readily purchased by the aggrieved
party, no suit for specific performance will lie. There may be no reasonable substitute for certain subject matter,
Page 3 of 3
for example, in the case of shares of stock or rights to a patent or copyright. Specific performance for contracts
for the sale of land will always allow specific performance because land is unique. The services of a party with
quite ordinary skills can be replaced by substitutes, but the contrary is true of an artist or a person with high
level skills. For a court to refuse to decree a specific performance remedy, the damages remedy must clearly
appear to be feasible and available to the plaintiff under all of the surrounding circumstances.
Finally, it should be noted that modern courts often grant specific performance with little or no expressed
statement that they have carefully inquired into the availability of adequate damages that would preclude the
specific performance remedy. Perhaps the issue was not raised by the defendant. Or the issue may have been
previously determined and is no longer open. There is, however, a strong suspicion that courts are not nearly
as concerned with meeting a condition of inadequacy at law before granting the remedy of specific
performance. In short, some courts may be treating specific performance as approaching a primary rather than
supplementary remedy.
Practice Resources:
• Corbin § .1 (is specific performance a discretionary remedy?); § .2 (discretionary form of the
decree—character of the performance commanded); § . (affirmative and negative decrees
compared); § . (development of specific performance as a supplementary remedy); § .
(requirement that the contract is legally enforceable); § . (specific performance as a means
of preventing a breach in the future); § . (factors to be considered in determining adequacy
of money damages).

End of Document
§ 63.02 Contract for the Sale of Land
[1] A Purchaser’s Remedy in Damages Is Generally Never Regarded as Sufficiently Adequate to

Preclude Specific Enforcement
The history of real property in Anglo-American Law places “land” in a highly favored status. Contracts for the
sale of land must be in writing and deeds must be duly registered to assure proper recording of the ownership
of this subject matter of peculiar value.
Since land is necessarily unique, an oft-quoted rule suggests that there is no room for judicial discretion as to
whether to grant specific performance to a buyer. As one case has noted, a trial court’s discretion in granting
the remedy is not totally abnegated; the court must determine whether the contract is valid and that the claim
for deed is just, fair, and reasonable. Anderson v. Onsager, 155 Wis. 2d 504, 455 N.W.2d 885 (1990).
Moreover, a court may deny specific performance where it is shown that the buyer was interested in the land
only for speculative purposes; nonetheless, a vendee’s contract to sell to a purchaser should allow the vendee
to secure specific performance. Indeed, a purchaser from the vendee can compel specific performance by the
vendor. In such a case, the decree would assure the payment of the contract price to the vendor.
Specific performance will be granted for an interest in land less than a fee simple interest, such as a leasehold
or right of way. Specific performance will be granted in a contract to devise land by will and an agreement to
divide an interest in land in specific portions among distributees of an estate may also be specifically enforced.
A contract to sell a condominium raised the issue of whether one condominium with the same layout as others
is not unique, thereby relegating the buyer to damages rather than specific performance. The court held that the
issue was resolved in this case because of the “upgrades” in the contract and the buyers had been living in the
condo for two years. Schwinder v. Austin Bank, 348 Ill. App. 3d 461, 809 N.E.2d 180, 284 Ill. Dec. 58 (2004). If
the condominium were exactly the same as the others and there was no particular location of the to-be-
constructed condominium within the total building under this contract, presumably the unique location
requirement could be met by providing any standard condominium in the building. See Centex Homes Corp. v.
Boag, 128 N.J. Super. 385, 393, 320 A.2d 194, 198 (1974).
[2] Sale of Standing Timber

Prior to the UCC, whether the sale of standing timber was specifically enforceable raised issues of whether
such a sale is a contract for the sale of land or the sale of goods. UCC § 2-10 2 added “timber to be cut” to
the list of “growing crops or other things attached to realty and capable of severance without material harm” that
constitute “goods” instead of land. Thus, a contract for the sale of timber as goods would not be specifically
enforceable absent a determination that the timber was unique or otherwise would be particularly difficult to
purchase elsewhere.
[3] Seller’s Specific Performance Remedy

Since a seller’s full expectation in a contract for the sale of land is the payment of the contract price, where the
land has been conveyed and nothing remains for the seller to do, the common law action at debt would lie for
the price; this would obviate any need for specific performance. A modern court may find no need for an
equitable remedy where the plaintiff is seeking the contract price. If the plaintiff is seeking more than the price
because the contract also requires the buyer to deliver bonds and a mortgage to secure deferred payments, the
remedy of specific performance will lie. Trachtenburg v. Sibarco Stations, Inc., 477 Pa. 517, 384 A.2d 1209
Page 2 of 2
(1978). When there is no hope of funding from a substitute source, a contract to make a mortgage loan is
specifically enforceable. First Nat’l State Bank v. Commonwealth Federal Sav. & Loan Asso., 455 F. Supp. 464
(D.N.J. 1978). A contract to execute a mortgage on land or to provide security for money lent or goods
purchased will also be specifically enforced.
If the land has not been conveyed when the buyer breaches, an action for damages may appear to provide a
complete remedy. Land values, however, are somewhat speculative. The difference between the contract and
market prices may suggest only nominal damages and courts may be persuaded that the damages remedy is
inadequate. Some courts may add that the seller should be able to specifically enforce the contract since a
buyer could do so upon the seller’s breach, an application of the doctrine of “mutuality of remedy,” though that
doctrine has been largely discredited as we will see in Chapter 65, below. See Restatement (Second) of
Contracts § 0 cmt. e. It is not uncommon for courts to grant the remedy of specific performance to vendors of
real property with little or no concern as to whether a remedy at law would be inadequate. See, e.g., Ash Park,
LLC v. Alexander & Bishop, Ltd., 2010 WI 44, 324 Wis. 2d 703, 783 N.W.2d 294; Humphries v. Ables, 789
N.E.2d 1025 (Ind. Ct. App. 2003).
Practice Resources:
• Corbin § . (contracts for an interest in land or a business; purchaser’s remedy); § .10 (right
of a vendor of land or landlord to specific performance by the purchaser); § .12 (contracts for
the sale of standing timber); § .1 (contracts to give security).

End of Document
§ 63.03 Contracts for the Sale of Goods
[1] Specific Performance May Be Available Under the “Proper Circumstances”

When a seller breaches a contract for the sale of goods and the buyer can procure substitute goods (i.e., the
buyer can “cover”), the remedy for specific performance will not lie because there is an adequate remedy at
law. The fact that the cover purchase will be more expensive does not make the remedy at law inadequate,
since the damages remedy is predicated on a difference between the contract price and a higher cover price
under UCC § 2- 12. See Exelon Generation Co., LLC v. General Atomics Techs. Corp., 559 F. Supp. 2d 892
(N.D. Ill. 2008). A buyer claimed that it could not afford to pay a seller’s unjustified higher prices for a product
that could not be obtained elsewhere and sought a preliminary injunction for irreparable harm. The court held
that the seller failed to prove that it could not afford to pay the higher prices. Eberspaecher N. Am., Inc. v. Van
Rob, Inc., 544 F. Supp. 2d 592 (E.D. Mich. 2008).
Breaches of contracts to sell unique goods such as heirlooms or the work of artists constitute an obvious basis
for specific performance since cover is impossible. The UCC, however, expands the availability of specific
performance beyond unique goods to situations in which goods, albeit not unique per se, are unavailable at all,
or only available with considerable inconvenience, expense, and delay. Thus, specific performance is made
available in “other proper circumstances.” UCC § 2- 1 1 .
Goods that normally would not be unique can become unique in effect because of scarcity, but the UCC’s
“more liberal attitude” to granting the remedy is not limited to those situations. Instead of focusing exclusively on
the goods to determine their uniqueness, the expansion of the remedy to “other proper circumstances” requires
a consideration of the “total situation which characterizes the contract.” UCC § 2- 1 1 cmt. 2. For example,
when a seller is insolvent, even if a reasonable substitute product could be obtained by the buyer at a higher
price, the inability to recover the difference in cost from the insolvent seller would render a damages remedy
illusory. In such a situation, a court should grant specific performance. Software Customizer v. Bullet Jet
Charter (In re Bullet Jet Charter), 177 B.R. 593 (Bankr. N.D. Ill. 1995). Courts may employ the UCC’s “inability
to cover” rationale in analogous situations by granting specific performance for the sale of a business or
franchise, entities that typically are unique and not available from any other source. Triple-A Baseball Club
Associates v. Northeastern Baseball, Inc., 832 F.2d 214 (1st Cir. 1987).
[2] Remedy of Replevin

The UCC also provides the buyer with the remedy of replevin of goods. Under UCC § 2- 02 1 a buyer who
has paid all or a part of the price of unshipped goods that have been “identified to the contract” may recover the
goods by paying any remaining unpaid part of the price, but only if the seller became insolvent within 10 days
after receipt of the first installment payment. These requirements make the utility of this remedy suspect.
Failure of any of these conditions will relegate the buyer to the replevin remedy under UCC § 2- 1 for
identified goods where cover is unavailing or a showing that the goods have been shipped under reservation
and satisfaction of a security interest has been made or tendered.
[3] Specific Performance in Favor of the Seller of Goods

Just as it is possible for a seller of land to obtain specific performance in a given case, it is possible that a
seller’s damages remedy for a buyer’s breach of a contract for goods may be inadequate. In an early case, a
buyer was to pay part of the price of a stock of goods in cash and to grant a security interest to secure payment
Page 2 of 2
of the balance. The court granted specific performance when the buyer was selling off the stock of goods and
had no other property subject to levy or execution, thereby making damages essentially uncollectible. The court
held that there was no adequate remedy at law. Rothholz v. Schwartz, 46 N. J. Eq. 477, 19 A. 312 (1890).
Practice Resource:
• Corbin § .11 (the sale of goods).

End of Document
§ 63.04 Contracts Requiring Performance in Installments
Contracts for the delivery of goods or payment of money are not deemed specifically enforceable simply because
they are to be performed in installments. If repeated damages actions have become necessary, a court may find
that specific performance is warranted. This is particularly true in cases involving separation or alimony agreements
between former spouses. See, e.g., Fleming v. Fleming, 34 Mass. App. Ct. 913, 608 N.E.2d 1064 (1993). Specific
performance may be particularly appropriate in cases involving promises by an insurance company to pay disability
benefits, not because the payments are in installments, but because the length of the disability may be uncertain.
Practice Resource:
• Corbin § . (factors to be considered in determining the adequacy of money damages as a remedy).

End of Document
§ 63.05 Sale of Corporate Shares
When corporate shares are available on a publicly traded exchange, a damages remedy for breach of a contract to
sell such shares is adequate. If the shares are not otherwise readily available, however, specific performance will
be decreed. To the extent that a contract for the sale of a majority of the shares or a controlling interest in corporate
shares is not obtainable in the market, the contract is specifically enforceable. Specific performance may also be
decreed in the case of an agreement between shareholders in a closely held corporation concerning the acquisition
of the shares of a deceased shareholder or a merger agreement. C&S/Sovran Corp. v. First Fed. Sav. Bank, 266
Ga. 104, 463 S.E.2d 892 (1995).
Practice Resource:
• Corbin § . (contracts for an interest in land or a business).

End of Document
§ 63.06 Contracts of Indemnity and Insurance
A contract to indemnify another by saving that party harmless with respect to an obligation can generally be
specifically enforced. While the indemnitee would have an action for damages, reimbursement in the form of
damages is not an adequate remedy since it forces the indemnitee to raise the money necessary to pay the debt.
This may require the indemnitee to sell property at a sacrifice price or to incur bankruptcy. Reimbursement does not
save that party harmless.
If the promise is merely to reimburse the aggrieved party for payments that party had to make, specific performance
may be excused since a remedy in damages appears adequate. The distinction made between a contract to
indemnify against liability and a contract to indemnify against loss is examined in Gaines v. MacArthur, 254 So. 2d
8, 10 (Fla. Dist. Ct. App. 1971). MacArthur breached its agreement to indemnify Gaines, who was sued in 1963 and
paid the judgment in 1966. Gaines sued MacArthur in 1970. The trial court gave judgment for MacArthur on the
basis of a five-year statute of limitations. The appellate court, however, interpreted the indemnity clause as one
against loss rather than against liability, and concluded that the five-year statute did not begin to run until Gaines
paid the judgment in 1966. The 1970 action, therefore, was within the five-year statute of limitations.
If an insurer wrongfully refuses to perform its promise to defend a claim against the insured, it has been held that
the insured’s damages remedy, including counsel fees, is adequate. This precludes a specific performance remedy.
Vanderveen v. Erie Indem. Co., 417 Pa. 607, 208 A.2d 837 (1965). Where an excess liability carrier wrongfully
denied coverage but had no contractual duty to defend, the insured could not collect counsel fees. King Aluminum
Corp. v. William Hyndman III Ins. Agency, Inc., 370 F. Supp. 621 (E.D. Pa. 1970).
A number of cases have held that a promise by an insurer to execute an insurance policy will be specifically
enforced either before or after the loss is incurred. While a remedy in damages is available, it is not considered
adequate. If a loss has not yet occurred, an insurance policy will facilitate collection. If a loss has occurred, the loss
is not readily estimable.
Practice Resources:
• Corbin § .1 (contracts of indemnity); § .1 (contracts of an insurer).

End of Document
§ 63.0 Contracts to Lend Money
Absent exceptional circumstances involving a material change in position by the promisee, breach of a promise to
lend money will not be specifically enforced. On the other hand, a promise to give a security by executing a
mortgage on land, granting a security interest in goods or intangibles, or providing a bond as security for future rent
will be specifically enforced.
Practice Resources:
• Corbin § .1 (contracts to lend money); § .1 (contracts to give security).

End of Document
§ 63.0 Contracts for the Benefit of a Third Person
If two parties have made a contract for the benefit of a third person, the promisee may have no economic interest in
the promisor’s performance when the third party is a donee beneficiary. In such a case, the promisee may seek
specific performance of the contract for the benefit of the third party. See Restatement (Second) of Contracts § 0
cmt. b; see also Hawkins v. Gilbo, 663 A.2d 9 (Me. 1995).
Practice Resource:
• Corbin § .1 (contracts for the benefit of a third person).

End of Document
§ 63.0 Contracts by a Trustee
When a party holds property in trust for a beneficiary, a decree compelling the party to perform its duties as a
trustee requires no showing that a remedy at law for damages would be inadequate. The trust concept emanates
from courts of equity. The duties of a trustee, therefore, were and still remain subject to enforcement as equitable
remedies without regard to common law remedies.
Practice Resource:
• Corbin § .1 (contracts by a trustee).

End of Document
§ 63.10 When Insolvency Makes Money Damages Inadequate
Insolvency is a factor in determining whether to grant specific performance, but it should not be sufficient by itself to
grant that remedy. Cases holding that insolvency alone is sufficient almost always demonstrate additional reasons
for granting specific performance. It can be said that courts denying specific performance of an insolvent promisor
on the ground that a remedy in damages is adequate are ignoring reality, and yet these courts also may be properly
concerned about granting a plaintiff creditor a preference over other creditors of the promisor. A court should never
grant specific performance that would allow for a preference otherwise voidable under a bankruptcy or other statute,
but insolvency should not preclude specific performance where it will not result in a preferential transfer.
Practice Resource:
• Corbin § .1 (insolvency as a fact making the remedy in money damages inadequate).

End of Document
§ 63.11 Availability of Replevin Under the UCC
An aggrieved party is not limited to a choice between equitable relief and money damages in protecting an
expectation or restitution interest. The common law featured remedies such as replevin, which compelled
performance when certain conditions were met. The UCC includes a replevin remedy, but its utility is doubtful.
The first replevin possibility is particularly narrow. Under UCC § 2- 02 1 a buyer who has paid part or all of the
price of “identified” goods (as that term is defined in UCC § 2- 02 1 may tender any unpaid portion of the price
and recover the goods from the seller if the seller becomes insolvent within 10 days of receipt of the buyer’s first
installment payment.
The second possibility for a buyer’s right of replevin, set out in UCC § 2- 1 is broader, but it is also conditioned on
the “identification” of the goods. The buyer must demonstrate an inability to “cover” or show that any effort to cover
through a substitute purchase is unavailing. Section 2-716 makes specific performance readily available where
goods are unique or “in other proper circumstances,” and the inability to cover is strong evidence of such
circumstances. UCC § 2- 1 cmt. 2. Because the replevin remedy is limited to situations in which a seller becomes
insolvent within 10 days after receipt of the first payment, if the buyer can prove that it is unable to effect cover, the
UCC remedy of specific performance should be available.
Practice Resource:
• Corbin § .20 (adequacy of common law or statutory remedies other than compensation in money).

End of Document
§ 63.12 Availability of Self-Help Remedies
When a party is entitled to pursue a self-help remedy by the terms of the contract or otherwise, the availability of
such a remedy should seldom be sufficient to deprive that party of specific performance if that remedy would
otherwise be available. Thus, UCC § 2- 1 allows a buyer to deduct from the contract price damages resulting from
breach of that contract upon notification to the seller. That remedy, however, should not preclude the buyer from
choosing instead specific performance that would be otherwise available.
Practice Resource:
• Corbin § .22 (adequacy of remedies in the nature of self-help).

End of Document
§ 63.13 Specific Performance of the Entire Contract May Be Available Even

When Damages Would Be an Adequate Remedy as to Part of the Contract
If damages would constitute an adequate remedy of part of a promised performance but would be inadequate for
another part, a court may properly decree specific performance of the entire contract. See City of Marshall v.
Knowles, 125 Ill. App. 3d 726, 466 N.E.2d 653 (4th Dist. 1984); Restatement (Second) of Contracts § 2 . If the
contract can be partially performed but performance of the remainder has become impossible or prohibitively
difficult, the court may grant specific performance as to one part and damages for the remainder of the contract.
Restatement (Second) of Contracts § .
In several early English cases, the Court of Chancery held that it might retain the plaintiff’s bill for relief for the
purpose of assessing damages even though it refused to grant specific performance. Lord Carins’ Act extended this
concept in England, and American courts then adopted it. When specific performance is denied because it would
result in disproportionate hardship or other reasons, the court may still grant damages. Moreover, a denial of
specific performance does not preclude, by way of res judicata, an action for money damages. Shaffer v. Shaffer,
2006 Ohio App. LEXIS 1857 (Apr. 24, 2006).
Practice Resources:
• Corbin § .21 (specific performance of the entire contract when damages would be an adequate
remedy as to a part); § .2 (part performance specifically compelled with compensation for
deficiency or defect); § .2 (damages in lieu of specific performance).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 64 REASONS FOR DENYING SPECIFIC
ENFORCEMENT
CHAPTER 64 REASONS FOR DENYING SPECIFIC ENFORCEMENT
§ .01 i ess Hardship, and Changed Circumstances as Reasons for Denying Specific Performance
[1]When a Plaintiff Seeks Equitable Relief, a Court Considers Factors That Are Disregarded in Actions
at Law for Damages
[2]A Contract That Is Fair and Reasonable When Made Generally Will Be Specifically Enforced
§ .02 o t cts Induced by Mistake
§ .0 is e ese t tio s of Material Facts and Fraudulent Conduct
[1]Innocent Misrepresentations of Material Facts May Preclude Specific Performance
[2]Equitable Relief Will Be Denied When the Party Seeking It Has Unclean Hands
[3]Interests of Third Parties
§ .0 ect of Impossibility and Illegality
§ .0 ec ee May Be Refused Because of the Difficulty of Enforcement
§ .0 o t cts for Construction Work
§ .0 eci ic Enforcement of Arbitration Agreements
§ .0 eci ic Performance Will Not Be Decreed Unless the Terms of the Contract Are Sufficiently
Definite
§ .0 eci ic Performance Will Not Be Decreed if the Promisor’s Duty Is Subject to a Condition That Has
Not Been Fulfilled
§ .10 i o Breaches Should Not Preclude Specific Performance
§ .11 i e to Perform on Time Will Preclude Specific Performance When “Time Is of the Essence”

End of Document
ENFORCEMENT
CHAPTER 64 REASONS FOR DENYING SPECIFIC ENFORCEMENT
the subject matter.

End of Document
ENFORCEMENT
§ 64.01 Unfairness, Hardship, and Changed Circumstances as Reasons for

Denying Specific Performance
[1] When a Plaintiff Seeks Equitable Relief, a Court Considers Factors That Are Disregarded in Actions
at Law for Damages
When a plaintiff seeks equitable relief, a court considers factors that are disregarded in actions at law for
damages. The relief sought may be denied because it creates unreasonable hardship or loss to the party in
breach. The contract may have been induced by mistake, or by facts that fall short of sufficient proof of
misrepresentation, fraud, unconscionability, commercial impracticability, or frustration of purpose, but which
nonetheless suggest elements of these doctrines. Equitable relief may also be denied when the facts reveal a
grossly inadequate exchange or other unfair terms. See Restatement (Second) of Contracts § .
A well-known case, McKinnon v. Benedict, 38 Wis. 2d 607, 157 N.W.2d 665 (1968), illustrates how a court may
deal with these elements. The Benedicts purchased an 80-acre tract of property operated as a resort known as
Bent’s Camp. The tract was surrounded by 1,170 acres owned by McKinnon. McKinnon, a lawyer and
investment counselor, resided on this property only during the summer months. He agreed to lend the
Benedicts $5,000, interest free, to assist in the purchase in exchange for their promise not to cut any trees
between the two properties or construct any improvements to the property beyond the existing buildings for a
period of 25 years. McKinnon also promised to resolve a problem with a long-term tenant of one of the buildings
on the property and to “try to generate business” for the Benedicts’ venture. McKinnon required a mortgage on
other Benedict property to secure the loan.
The loan was repaid at the end of seven months. The court placed the value of that loan at $145. McKinnon’s
single effort to resolve the long-term lease problem failed and his promise to try to generate business resulted
in one group using the camp for less than a week. When the Benedicts faced financial pressures that induced
them to pursue improvements on the land and the cutting of trees beyond the restrictions in their agreement,
McKinnon sought an injunction, which the court granted.
On appeal, the court reversed the decision below. Reviewing Corbin on Contracts and the First Restatement of
Contracts § the court found the agreement to be “harsh” in stripping the Benedicts of their use of the
property for 25 years; this was a major hardship on their ability to earn a living in operating the camp. The
consideration the Benedicts received for this deprivation was grossly inadequate. The court found no
dishonesty on the part of McKinnon, but recognized the wide disparity in business experience between the
parties and the probability that the Benedicts overvalued the promises by McKinnon to assist them in their
business. The court stated that it had no “hesitancy” under these circumstances “in denying the plaintiffs the
equitable remedy of injunction.” McKinnon v. Benedict, 38 Wis. 2d 607, 623, 157 N.W.2d 665, 672 (1968).
Mere inadequacy of consideration unaccompanied by hardship, mistake, or sharp practices, however, will not
be sufficient to preclude specific performance. Substantial reliance by a promisee will also constitute a proper
basis for specific performance. Bilateral contracts formed upon the exercise of an option holder’s irrevocable
power of acceptance will also be subject to the remedy of specific performance. There is also limited authority
for holding a promise that is validated only by a moral obligation to be specifically enforceable.
[2] A Contract That Is Fair and Reasonable When Made Generally Will Be Specifically Enforced
Generally, a contract that is fair and reasonable when made will be specifically enforced even though it requires
less of one party because of subsequent events over which it had no control. Thus, under a contract to transfer
Page 2 of 2
land in exchange for a promise to support the former owner for life, the early death of the former owner will
substantially reduce the duties of the obligor. Nonetheless, specific performance will be decreed.
Requests for equitable relief, however, may be affected by subsequent events. Where, for example, a contract
restricted the use of property to single-family dwellings, a court held that a landowner’s use of the property for
commercial purposes would not have a detrimental effect on adjoining property since the property had been
rezoned as part of a commercial district. The court affirmed the landowner’s judgment to quiet title, declaring
the restriction to be no longer valid. Wolff v. Fallon, 44 Cal. 2d 695, 284 P.2d 802 (1955).
Practice Resources:
• Corbin § .1 (hardship—the effect of facts subsequent to the contract); § .2 (effect of changes
in the neighborhood upon building restriction covenants); § . (harsh, oppressive, and
unconscionable contracts); § . (inadequacy of consideration as ground for refusing specific
performance).

End of Document
ENFORCEMENT
§ 64.02 Contracts Induced by Mistake
Only a material mistake that leads to hardship or manifest unfairness will be sufficient to preclude specific
performance. See Double AA Corp. v. Newland & Co., 273 Mont. 486, 905 P.2d 138 (1995). Moreover, clear and
convincing evidence of the mistake and its effect is necessary, a quality of evidence that would meet the burden of
proof for the equitable remedy of reformation.
Practice Resource:
• Corbin § . (contracts induced by mistake on the defendant’s part).

End of Document
ENFORCEMENT
§ 64.03 Misrepresentations of Material Facts and Fraudulent Conduct
[1] Innocent Misrepresentations of Material Facts May Preclude Specific Performance

Innocent misrepresentations of material facts may preclude specific performance. The “material” requirement
manifests the necessity for demonstrating the usual requirement of hardship or unfair burden that will be cast
on the innocent party if specific performance had been granted. A party’s mere nondisclosure of facts that make
the contract particularly desirable for that party, however, will not constitute a basis for refusing specific
performance.
Delay in seeking specific performance may weaken a party’s pursuit of specific performance when there has
been a material change of position by the other party. Delay often brings the loss of evidence, the unavailability
of witnesses and documents, and the failure of memory.
[2] Equitable Relief Will Be Denied When the Party Seeking It Has Unclean Hands
If an innocent misrepresentation can preclude the remedy of specific performance, a fortiori, fraudulent
misrepresentations will do so. Moreover, innumerable cases hold that equitable relief will be denied where the
party seeking it comes to the court with “unclean hands.” The parties to a dispute entered into a settlement
agreement, memorialized in handwriting. The agreement provided for monetary payments and for defendants
to execute and deliver a secured promissory note and trust deed. The settlement agreement required that the
plaintiff receive a $75,000 payment, and upon receipt of such payment, she was to transfer her shares in
certain holdings; she did not transfer her shares and the defendant did not sign certain final settlement
documents. The court rejected her plea for the equitable remedy of specific performance because she did not
have clean hands. Vetter v. Keate, 2011 U.S. Dist. LEXIS 127306 (D. Utah Nov. 2, 2011). Many cases,
however, still require a showing of harm to the defendant for a court to refuse the remedy to a plaintiff who has
made a false representation. As suggested by one court, “The clean hands doctrine should not be applied
unless the party asserting the doctrine has been seriously harmed and the wrong complained of cannot be
corrected without the application of the doctrine.” Mustang Amusements, Inc. v. Sinclair, 2009 Tex. App. LEXIS
8338 (Oct. 28, 2009).
[3] Interests of Third Parties

There is dissent from this view and it certainly would not be applicable if the party making the false
representation had a fiduciary duty to the defendant or if the representation might cause harm to the public or a
third party. If changed conditions require an increase in the rates to provide a public service, for example,
specific performance of the contract at lower rates may negatively impact the public service.
Specific performance that requires the breach of a contract with an innocent third party may be refused. Where
a party has contracted with two equally innocent purchasers for the supply of special materials, priority in time
will be a factor in allowing specific performance to the earlier purchaser, but other factors may result in specific
performance for the later purchaser. Again, all of the equities, hardships, and fairness will be considered by a
court sitting as a court of equity.
Practice Resources:
Page 2 of 2
• Corbin § . (contracts induced by mistake or misunderstanding); § . (misrepresentation and

nondisclosure); § . (interests of the public and of third persons to be considered).

End of Document
ENFORCEMENT
§ 64.04 Effect of Impossibility and Illegality
If supervening events after the formation of a contract make its performance impossible or sufficiently impracticable,
the performance may be excused and thus discharged. No action for damages or specific performance would lie
under such circumstances. When the promisor is not excused, there is certainly liability in damages, but specific
performance will not be ordered to do the impossible. Nor will a court issue a decree compelling a performance that
would be illegal or tortious.
Mere pecuniary inability to perform is not a sufficient basis to refuse specific performance. If Ames agrees to convey
Blueacre to Barnes but Ames cannot perform because she does not own Blueacre and was unable to buy it from
Carr who owns it, a court will not order Ames to sell to Barnes that which she does not have and cannot acquire. If,
however, Ames has a contract to purchase Blueacre from Carr, Barnes can get specific performance as against
both Ames and Carr for the enforcement of both contracts.
Practice Resource:
• Corbin § .10 (effect of impossibility and illegality).

End of Document
ENFORCEMENT
§ 64.05 Decree May Be Refused Because of the Difficulty of Enforcement
As suggested in the Restatement (Second) of Contracts § a contract will not be specifically enforced if the
burdens of enforcement and supervision imposed by the court are disproportionate to the advantages to be gained
from enforcement and to the harm to be suffered from denying such a remedy. Factors to be considered include the
length of the judicial supervision, but that factor should not be deemed as conclusive.
One of the more perceptive opinions addressing the balance between the costs and benefits of damages versus
equitable relief is found in Walgreen Co. v. Sara Creek Property Co., 966 F.2d 273 (7th Cir. 1992). In Walgreen,
the trial court issued a permanent injunction against a shopping mall for violating the exclusivity clause in its
agreement with Walgreen to forbear leasing space in the mall to any other pharmacy during the term of Walgreen’s
lease. The mall claimed the trial court failed to show that the damages remedy was inadequate.
On appeal, the court recognized that the benefits of substituting an injunction for damages are twofold. First, it shifts
the burden of determining the cost of the defendant’s conduct from the court to the parties. If Walgreen’s damages
are smaller than the gain to the mall in allowing the second pharmacy to lease space, there must be a price for
dissolving the injunction that will be efficient in that both parties will be better off. Second, under the free market
system, prices and costs are more accurately determined by the market rather than the government. There are,
however, costs to such equitable relief since an injunction requires continuing judicial supervision, and this is costly.
The costs and benefits of the damages remedy mirror the costs and benefits of injunctions.
Although the damages remedy avoids the necessity of continuing supervision, its drawbacks include diminished
accuracy in the determination of value as well as the cost of preparing and presenting evidence of damages and the
costs of the court’s time in evaluating that evidence. A judge must weigh these costs and benefits with the
understanding that, if they are even, the injunction should be withheld. The lease had 10 years to run, which would
require Walgreen to project its revenues and costs and then project the impact of those figures of the other
pharmacy’s competition before discounting that impact to present value. Such an effort is fraught with uncertainty.
The court held that the judge did not exceed the bounds of reasonable judgment in concluding that the costs of the
damages would exceed the costs of an injunction. See also, Grabel v Diamond On Duane Condominium, 2015 NY
Slip Op 30913(U) (2015), where the court dismissed a claim for specific performance that would have required the
court to oversee indefinite obligations involved in the supervision of a construction project.
Practice Resource:
• Corbin § .11 (when decree is refused because of difficulty of enforcement).

End of Document
ENFORCEMENT
§ 64.06 Contracts for Construction Work
It is often suggested that specific performance of a contract to erect or remodel a building or to perform other
construction work requires excessive supervision and therefore presents many difficulties. These cases suggest
that such costly supervision is unnecessary because an award of damages will permit an aggrieved party to pursue
its own construction. There is no question that the innumerable details involved in such a performance can be
complex and difficult to supervise. Other courts, however, manifest agreement with the view found in Corbin on
Contracts that statements concerning the difficulty and complexity of the supervision may be exaggerated. See
O’Neil v. Lipinski, 173 Mont. 332, 567 P.2d 909 (1977).
There is an increasing readiness on the part of courts to enforce contracts requiring skilled supervision, particularly
where service to the public is involved. It is not uncommon for courts to order specific enforcement of contracts to
construct bridges, to repair and maintain public buildings, to furnish water and light to a municipality, or to provide
other public services.
Practice Resource:
• Corbin § .12 (contracts for construction work and for rendering public service).

End of Document
ENFORCEMENT
§ 64.0 Specific Enforcement of Arbitration Agreements
The suspicion of arbitration agreements ousting courts of their jurisdiction became a distant memory during the
twentieth century. The United States Supreme Court’s liberal interpretations of the Federal Arbitration Act of 1925,
which itself was designed to avoid public policy obstacles to arbitration, largely preempted state law in strongly
encouraging the enforcement of arbitration agreements. There is no current dispute over the enforceability of
arbitration clauses as such, but a spate of cases in the late twentieth and early twenty-first century deal with
situations in which an employee or consumer or other party claims that the absence of a fair bargaining process as
well as certain terms of the arbitration agreement made such agreements unconscionable. (For a discussion of
unconscionability, see Chapter 29 above.)
The typical case involves a plaintiff bringing an action in court that the defendant would move to dismiss and ask
the court to compel arbitration. If the arbitration agreement is otherwise valid and conscionable, the court will
enforce the arbitration agreement. Arbitration is the premier alternate dispute resolution process and is currently
applied to a vast array of situations. (For a discussion of arbitration clauses and their enforcement, see Chapter 83
below.)
Practice Resource:
• Corbin § .1 (definiteness and certainty of terms).

End of Document
ENFORCEMENT
§ 64.0 Specific Performance Will Not Be Decreed Unless the Terms of the
Contract Are Sufficiently Definite
The terms of a contract must be sufficiently certain to allow a court to provide an appropriate remedy. Statements
suggesting that a higher standard of certainty is necessary for the remedy of specific performance are belied by the
case law.
In one case, a contract for the sale of real property stated that it would be turned over at closing in “broom clean”
condition. Another provision stated that it was being sold “as is.” The trial court refused to grant specific
performance to the purchaser because the terms of the contract were not sufficiently certain. On appeal, the court,
relying on the Corbin analysis, determined that specific performance should seldom require greater certainty in the
terms of the contract than an action at law would require. Quoting Corbin, the court stated, “[a]pparent difficulties of
enforcement that arise out of uncertainties in expression often disappear in the light of courageous common sense
and reasonable implications of fact.” It proceeded to reconcile “as is” as relating to the structural condition of the
building while “broom clean” connoted that there would be no dirt or debris inside the structure at the time of
closing. The case was remanded to allow the grant of specific performance. Marioni v. 94 Broadway, Inc., 374 N.J.
Super. 588, 599, 866 A.2d 208, 215 n.4 (2005).
If parties have sufficiently defined their bargain but have not expressed an essential term, courts will imply a
reasonable term in suits for specific performance as well as actions at law. See Restatement (Second) of Contracts
§ 20 and Osswald v. Osswald, 287 Wis. 2d 133, 703 N.W.2d 383, 2005 WI App 193.
Practice Resource:
• Corbin § .1 (definiteness and certainty of terms of agreement).

End of Document
ENFORCEMENT
§ 64.0 Specific Performance Will Not Be Decreed if the Promisor’s Duty Is

Subject to a Condition That Has Not Been Fulfilled
The duty of a promisor may be subject to a condition that must occur to activate the otherwise existing duty. Since
the duty is not activated until the conditioning event occurs, specific performance will not be decreed if the condition
has not occurred. The condition may be expressed, implied-in-fact, or it may be a condition that has been
constructed to fill a necessary gap, as in questions such as the proper order of performance in a given contract.
(Chapter 30 above explores conditions of legal duty and questions of interpretation and judicial construction to
determine whether a condition existed and whether it was fulfilled.)
One of the differences between law and equity in the treatment of conditions at law is the common law requirement
that a plaintiff was required to tender its own performance when seeking damages. Courts of equity required no
such tender because its decree of specific performance was itself made conditional on the plaintiff’s rendering a
return performance. As successors of both common law courts and courts of chancery, modern courts can mold
their judgments and decrees with the freedom of the chancellor.
Practice Resource:
• Corbin § .1 (effect of breach by plaintiff—nonfulfillment of a condition precedent).

End of Document
ENFORCEMENT
§ 64.10 Minor Breaches Should Not Preclude Specific Performance
An immaterial (“partial” or “non-vital”) breach of contract should not deprive a plaintiff of the remedy of specific
performance. In such a case, a decree may be made conditional on the plaintiff compensating the defendant for
whatever injury was caused by the nonperformance. Thus, courts have frequently decreed specific performance for
a seller of land notwithstanding a small deficiency in the quantity of the land agreed to be conveyed or some
immaterial defect in otherwise marketable title. Where a lease afforded the lessee an option to buy and also
required him to pay real estate taxes, his innocent failure to pay the taxes was deemed a “technical” breach that did
not preclude specific performance. Cimina v. Bronich, 517 Pa. 378, 537 A.2d 1355 (1988).
Practice Resource:
• Corbin § .1 (specific enforcement in spite of minor breaches by the plaintiff).

End of Document
ENFORCEMENT
§ 64.11 Failure to Perform on Time Will Preclude Specific Performance When

“Time Is of the Essence”
There exists a notion that “time is of the essence” in the performance of contracts at common law but not in equity.
This notion never has been true. When it is said that time is of the essence at law, what is meant is that the failure
to perform on time is a breach of duty. But a mere delay without more is not the kind of breach that discharges the
other party’s duty. In contracts for the conveyance of land, neither the conveyance nor payment on the day
specified is a condition precedent to the duty. A party guilty of a slight delay may still get a decree for specific
performance.
Parties may include an express provision in their contract that time is of the essence. Additionally, a court may infer
that performance precisely on time is necessary under the facts of a given contract. Under such circumstances, a
failure to perform on time will preclude specific performance as a remedy unless the enforcement of such an
express provision would result in a heavy penalty or forfeiture. See Orion Invs., LLC v. McBride & Son Homes Land
Dev., Inc., 2008 U.S. Dist. LEXIS 47914 (W.D. Ky. June 20, 2008) (“Specific performance has also often been
decreed in disregard of express agreements for forfeiture for delay.”).
The exercise of an option within a specified time is almost always viewed as “of the essence,” both at law and in
equity. There is no forfeiture in such a case for the option holder who provided consideration in exchange for an
irrevocable power of acceptance for a specified time. Nonetheless, there are cases that hold that a lessee who has
made valuable improvements should not be deprived of an option to buy because of an innocent and slight delay
since such a decision would result in an unjust forfeiture.
Practice Resource:
• Corbin § .1 (when performance on time is “of the essence”).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 65 MUTUALITY OF REMEDY—NEGATIVE
CONTRACTS—LIQUIDATED DAMAGES
CHAPTER 65 MUTUALITY OF REMEDY—NEGATIVE CONTRACTS—

LIQUIDATED DAMAGES
§ .01 ect of Mutuality of Remedy on Decree of Specific Performance
[1]Idea That Remedies Need Not Be Identical
[2]Specific Performance May Be Available Even Though It Was Unavailable at the Time the Contract
Was Made
[3]Mutuality of Remedy Doctrine Prevents a Court from Compelling a Performance by a Defendant for
Which It May Fail to Receive the Agreed Exchange
[4]Specific Enforcement May Be Denied if a Substantial Part of the Agreed Exchange for the
Defendant’s Performance Has Not Been Assured
[5]Cases of Insufficient Security
§ .02 t ity Is Not Necessary in Cases of Enforcement by Injunction
§ .0 ti Performance by Plaintiff
§ .0 ec ees Conditional on Performance by the Plaintiff
§ .0 e om ces Subject to an Express Condition
§ .0 ect of the Statute of Frauds
§ .0 o ceme t of Cooperative Marketing Association Contracts Without Mutuality
§ .0 Vendor With Imperfect Title at the Time of Contract Formation May Be Awarded Specific
Performance if the Defects Are Cured
§ .0 eme ies Need Not Be Mutual If the Defendant Is Precluded From Specific Performance by Its
Own Fraud
§ .10 eci ic Enforcement of Option Contracts
§ .11 eci ic Performance in Favor of Trustees, Assignees, and Minors
[1]A Trustee in Bankruptcy Can Get Specific Performance of a Contract for Sale of Land Against a
Vendor
[2]An Assignee May Seek Specific Performance Against an Obligor on the Same Terms as the
Assignor
[3]Specific Enforcement in Favor of a Third-Party Beneficiary

Page 2 of 2
[4]Specific Enforcement Against a Party with a Power to Terminate
[5]Specific Performance Is Not Available for a Minor with the Power to Avoid the Contract
§ .12 o t cts for Rendering Personal Services
[1]A Contract for Personal Services Will Not Be Specifically Enforced
[2]Negative Promises to Forebear Certain Actions
§ .1 omises in Restraint of Trade and Competition
§ .1 est icti e Covenants as to the Use of Land
§ .1 eci ic Performance in Spite of a Provision for Liquidated Damages

End of Document
CHAPTER 65 MUTUALITY OF REMEDY—NEGATIVE CONTRACTS—

LIQUIDATED DAMAGES
the subject matter.

End of Document
§ 65.01 Effect of Mutuality of Remedy on Decree of Specific Performance
[1] Idea That Remedies Need Not Be Identical

Chapter 6 above began with a brief discussion of the inviting term, “mutual.” There we noted that “mutual
assent” is a phrase that pervades the entire agreement process since, in the most traditional or classic mold,
contract law seeks to ascertain the fulfillment of expectations predicated on the parties’ mutual assent. “Mutual”
suggests fairness, equality, and cooperation between the parties to the contract. We also noted that the so-
called doctrine of “mutuality of obligation” was misleading. It not only fails to add anything to the fundamental
concept of consideration as a necessary validation device, it may create needless confusion.
In this chapter, we are concerned with another use of the term “mutuality.” The paradigm “mutuality of remedy”
illustration is the contract for the sale of land, which provides a buyer a right to specific performance since land
is unique. A seller of land may have a proper right to a specific performance remedy where a damages remedy
would be inadequate. If damages would be adequate, however, allowing specific performance only because the
buyer would have enjoyed that remedy if the seller had breached is based on an unsound rule.
The “mutuality of remedy” notion is sometimes confused with the idea of equality of remedies. The respective
performances under a contract are not identical. Where Ames promises personal services in exchange for
Barnes’s promise of land, an injury caused by Ames’s breach is different from the injury caused by Barnes’s
breach and the respective remedies for such breaches should be different. In one case, a court noted that
“serious doubt exists” as to whether the doctrine of mutuality or remedy is viable in New Jersey so as to defeat
a claim for specific performance since it is not necessary to serve the ends of justice that parties have identical
remedies. American Asso. of University Professors, Bloomfield College Chapter v. Bloomfield College, 129 N.J.
Super. 249, 275, 322 A.2d 846, 859 (1974).
[2] Specific Performance May Be Available Even Though It Was Unavailable at the Time the Contract
Was Made
One of the common judicial modifications of the mutuality of remedy rule would allow a decree for specific
performance even though the remedy would not have been available at the time the contract was made.
Specific performance may be decreed, for example, where a plaintiff has agreed to sell property that it did not
own at the time the contract was formed but has since acquired, or where an agent makes a contract without
authority, which the principal later ratifies.
[3] Mutuality of Remedy Doctrine Prevents a Court from Compelling a Performance by a Defendant for
Which It May Fail to Receive the Agreed Exchange
A sensible underlying rationale for the mutuality of remedy concept is to ascertain that a defendant will not be
compelled to specifically perform a promise for which it may fail to receive the agreed exchange. Courts of
equity are loath to require a party to give something for nothing. The mutuality of remedy rule was designed to
avoid such injustice, but the application of the rule is capable of enabling a wrongdoing defendant to escape
from performance when there is no substantial danger that it will not receive the promised exchange. To avoid
that dilemma, the rule should be clarified to ascertain that a defendant should not be compelled to perform
unless it is reasonably secure with respect to the agreed exchange for the performance.
Page 2 of 2
[4] Specific Enforcement May Be Denied if a Substantial Part of the Agreed Exchange for the
Defendant’s Performance Has Not Been Assured
In lieu of the broken-down requirement of mutuality of remedy, the primary rule supported by the case law may
be stated as follows: A court may properly refuse specific enforcement if some substantial part of the agreed
exchange for the defendant’s performance has not been rendered and its performance is not sufficiently
assured to the satisfaction of the court. This rule provides a court with the necessary and desirable discretion to
assure the defendant’s receipt of the exchange while not allowing it to escape specific performance where the
plaintiff has no adequate remedy.
[5] Cases of Insufficient Security

When a defendant has promised to convey land to a plaintiff in exchange for the plaintiff’s promise to care for
the defendant for life, a court would have no difficulty in specifically enforcing the defendant’s promise to
convey land, but it would be prohibitively difficult to enforce the plaintiff’s promise to care for the defendant for
life or to provide adequate security for such a performance. Thus, the specific performance remedy for the land
is refused in such a case for the sound reason that adequate security cannot be provided to the defendant. If
personal services are promised and completely performed by the plaintiff, there would be no justification for
refusing to grant specific performance of the defendant’s promise to convey land.
Even when specific performance is available to a defendant, it may not provide adequate security. If it appears
that a plaintiff is unwilling to perform and even to suffer a contempt conviction, the fact that specific
performance is available against it is insufficient to justify a decree against the defendant. In such a case, the
court may be justified in requiring the plaintiff to provide additional security.
Practice Resources:
• Corbin § .1 (mutuality of remedy—two rules distinguished); § .2 (supposed rule that if specific
performance is available to one party, it is available to the other); § . (supposed rule that if
specific performance is not available to one party, it will not be granted to the other); § .
(purposes underlying the requirement of mutuality); § . (application of the maxim that
equality is equity); § . (security that the defendant will receive the agreed exchange for his
performance); § . (cases of insufficient security—personal service to be rendered); § .
(mutuality of remedy at the time of decree); § . (mutuality of remedy may not afford
sufficient security).

End of Document
§ 65.02 Mutuality Is Not Necessary in Cases of Enforcement by Injunction
An injunction to prevent a party from breaching a contract is typically an order to perform the implied duty of
forbearing any interference with the performance of the contract, to wit, the party’s own. Thus, even when the
subject matter is personal service that cannot be specifically enforced, a court may enforce the duty to forbear
performing that service for another party, regardless of the type of performance. Courts typically refrain from
mentioning mutuality of remedy in such cases.
Practice Resource:
• Corbin § .10 (mutuality not necessary in cases of enforcement by injunction).

End of Document
§ 65.03 Partial Performance by Plaintiff
When full performance of a promise that was not specifically enforceable has been rendered, the mutuality of
remedy doctrine will not preclude a decree enforcing the defendant’s otherwise specifically enforceable
performance. Moreover, such a decree may be justified as a result of less than full performance by the plaintiff. If
the part performance is such as to make the plaintiff a heavy loser and restitution is not adequate, absent a decree
for specific performance, a court will grant the remedy.
Practice Resource:
• Corbin § .11 (plaintiff’s part fully or partly performed though not specifically enforceable while
executory).

End of Document
§ 65.04 Decrees Conditional on Performance by the Plaintiff
If the chief reason underlying the doctrine of mutuality of remedy is to assure a defendant that it will receive the
agreed exchange, it is common for courts, sitting as courts of equity, to provide such assurance in ordinary specific
performance decrees.
In one case, Hoffman agreed to purchase a 1933 Duesenberg J Murphy Coupe automobile for $375,000 from
Sprinchorn, who refused to deliver the car. Since there were no substitutes for this unique chattel, an award of
damages would be inadequate. The specific performance decree granted to Hoffman included the following
statement: “Hoffmann (or his agent) shall, simultaneously with the delivery to him (or to his agent) of such
automobile and title, deliver to Sprinchorn $ 375,000 in cash or a certified check in such amount . Hoffmann v.
Sprinchorn, 1997 U.S. Dist. LEXIS 3130 (W.D.N.Y. Mar. 12, 1997). While this decree required simultaneous or
concurrent conditions of tender, a court may render a decree requiring a plaintiff to tender performance as a
condition precedent to the enforcement of the decree. A court could also issue a decree that modifies the plaintiff’s
performance.
Practice Resources:
• Corbin § .12 (mutuality of remedy not required in cases where the decree can properly be made
conditional on performance by the plaintiff); § .1 (specific enforcement on condition of a
modification of the contract).

End of Document
§ 65.05 Performances Subject to an Express Condition
Specific performance of a defendant’s promise will not be refused simply because the plaintiff’s promise is subject
to an express condition precedent. See Safeway Sys. v. Manuel Bros., 228 A.2d 851 (R.I. 1967). If the contract is
aleatory, the plaintiff’s promise will never be activated if the condition does not occur. The defendant will receive
nothing, but this was the very risk that the defendant assumed in making such a contract. When the contract is
conditional but the parties intend each to receive the other’s performance, specific performance should not be
decreed unless the plaintiff’s performance has been rendered or is made secure.
Practice Resource:
• Corbin § .1 (plaintiff’s promise subject to a condition precedent).

End of Document
§ 65.06 Effect of the Statute of Frauds
If a defendant has signed a memorandum sufficient to satisfy the statute of frauds in a contract for the sale of land,
a plaintiff who has not signed it will nonetheless be entitled to specific performance notwithstanding the “broken”
mutuality of remedy rule. Such a plaintiff has submitted itself to the court, thereby making the remedy mutual.
Practice Resource:
• Corbin § .1 (specific enforcement in favor of a plaintiff who would be protected by the statute of
frauds).

End of Document
§ 65.0 Enforcement of Cooperative Marketing Association Contracts

Without Mutuality
Statutes permit cooperative marketing associations to pursue specific performance against individual producers. An
individual may not be entitled to specific performance against the association, however.

End of Document
§ 65.0 A Vendor With Imperfect Title at the Time of Contract Formation May
Be Awarded Specific Performance if the Defects Are Cured
A vendor with an imperfect title at the time of contract formation may be awarded specific performance if the defects
are cured at the time of performance. In the absence of an express or tacit misrepresentation, it makes no
difference whether the parties were aware of the defect in the vendor’s title at the time of formation.
Practice Resource:
• Corbin § .1 (vendor with imperfect title afterwards perfected not refused specific enforcement).

End of Document
§ 65.0 Remedies Need Not Be Mutual If the Defendant Is Precluded From

Specific Performance by Its Own Fraud
If a defendant is precluded from specific performance by its own fraud, the aggrieved plaintiff may still be entitled to
specific performance even though the remedies are not mutual. When a defendant can only perform part of its
otherwise specifically enforceable promise, the plaintiff may get specific performance of the available part and
damages for breach of the non-performable part.
Practice Resource:
• Corbin § .1 (remedy need not be mutual where its unavailability is due to party’s own default).

End of Document
§ 65.10 Specific Enforcement of Option Contracts
When Ames has an option to purchase Barnes’s land, Barnes is under a conditional duty to sell the land to Ames;
Ames, however, is under no duty to purchase the land. By exercising her irrevocable power of acceptance, Ames is
entitled to specific performance of Barnes’s promise to sell the land. A contract by an owner to give a party the right
of first refusal is not an option contract because the owner need not sell the property to anyone, including the
promisee. If the owner makes an offer to a third party or to the promisee to sell the land, the right of first refusal
becomes an option contract, creating a conditional duty in the owner that is specifically enforceable. If the owner
breaches a promise to provide the plaintiff with a right of first refusal, the plaintiff will be entitled to specific
performance subject to the rights of an innocent purchaser. Daniels v. Anderson, 162 Ill. 2d 47, 642 N.E.2d 128,
204 Ill. Dec. 666 (1994).
Practice Resource:
• Corbin § .1 (specific enforcement of option contracts).

End of Document
§ 65.11 Specific Performance in Favor of Trustees, Assignees, and Minors
[1] A Trustee in Bankruptcy Can Get Specific Performance of a Contract for Sale of Land Against a
Vendor
A trustee in bankruptcy can get specific performance of a contract for the sale of land against a vendor,
conditioned on the payment of the price. Similarly, a buyer can get specific performance against the vendor’s
trustee in bankruptcy on the same condition. The vendor, however, could not get specific performance against
a trustee who elects to disclaim the entire contract. There is no unfairness here since the trustee can only get
specific performance if the vendor received the full purchase price.
[2] An Assignee May Seek Specific Performance Against an Obligor on the Same Terms as the
Assignor
An assignee may seek specific performance against an obligor on the same terms as the assignor, but the
obligor will not be able to sue the assignee for either damages or specific performance if the assignee has not
assumed the duties under the contract. If the assignee has assumed the duty, the obligor may secure specific
performance against the assignee.
[3] Specific Enforcement in Favor of a Third-Party Beneficiary

A third-party beneficiary has the same rights as the promisee. It may sue for specific performance despite the
fact there is no duty that can be enforced against the third party. (See Chapter 46 above.)
[4] Specific Enforcement Against a Party with a Power to Terminate

Specific performance against a defendant who possesses a power of termination under the contract will
typically not be granted since the exercise of that power could nullify the decree. There may be circumstances,
such as a relatively long period of notice to effect the termination, in which specific performance could be
granted. As one court suggests, however, “the possibility of nullifying the decree must be taken into account.”
Ecri v. McGraw-Hill, Inc., 809 F.2d 223 227 (3d Cir. 1987).
Specific performance in favor of a plaintiff holding the power of termination is problematic for the same reason.
If the power could be used to defeat a decree in such a fashion as to deprive the defendant of the agreed
exchange, specific performance should be denied. If, however, the power of termination is extinguished by the
decree or by the defendant’s performance, there is no reason to preclude specific performance for such a
plaintiff. Merely reserving a power of termination is not a sufficient reason for denying specific performance to
the party holding such a power.
[5] Specific Performance Is Not Available for a Minor with the Power to Avoid the Contract
Because a minor has the power to avoid contracts made before reaching the age of majority, a plaintiff who is
still a minor will not be given a decree for specific performance. With certain exceptions, neither specific
performance nor any other remedy is available against a minor. The minor’s power of avoidance (disaffirmance)
could undo an equitable decree.
If the contract is for the support and education of the minor, specific performance will be decreed. Upon
attaining the age of majority, the minor can get specific performance on the same terms as adult contractors,
Page 2 of 2
but as in the case of all other adults, it will be conditional on substantial performance of the former minor’s
obligations under the contract.
Practice Resources:
• Corbin § .1 (mutuality of remedy as between one party and the trustee in bankruptcy of the
other); § .20 (assignee not denied specific performance on ground of mutuality); § .21
(specific enforcement in favor of a third-party beneficiary); § .22 (specific enforcement
against one having power to terminate); § .2 (specific enforcement in favor of one having
power to terminate); § .2 (specific performance in favor of an infant contractor).

End of Document
§ 65.12 Contracts for Rendering Personal Services
[1] A Contract for Personal Services Will Not Be Specifically Enforced

There are essentially three reasons for the almost universal rule against decreeing specific performance in
contracts for non-delegable personal services, either by affirmative decree or injunction. The first is the difficulty
of gauging the quality of the performance involving the efforts of artists, athletes, or efforts involving taste or
judgment. The second reason is the strong policy evidenced in the Constitution of the United States against
involuntary servitude. Finally, in cases involving relationships between individuals, such as associations
between employers and employees, it is undesirable to force either party to perform when confidence and
loyalty have been destroyed.
In certain cases, express and implied negative promises will be enforced specifically by injunction, but the
injunction is granted in such cases to prevent irreparable injury caused by the breach of the negative promise
and not for the purpose of indirectly enforcing affirmative promises to render a personal service.
Specific performance of a commercial contract, albeit one involving personal services, typically does not come
within the prohibition against enforcing such contracts since such services are incidental and do not require
personal associations over a long period. For example, one buyer purchased a fully automated device under a
contract that required the defendant to send an engineer to install the device, test it, and train the buyer in its
use. The court held that the remedy of specific performance was appropriate for this “corporate” rather than
personal service contract. Falk v. Axiam Inc., 944 F. Supp. 542 (S.D. Tex. 1996).
[2] Negative Promises to Forebear Certain Actions

An express positive promise to perform an act may be accompanied by an express negative promise to
forebear from certain action. In the famous case of Lumley v. Wagner, 1 De G. M. & G. 604 (1852 Ch. App.), an
opera singer breached her express negative promise not to sing at rival theater. In granting an injunction, the
chancellor insisted that he was not trying to do indirectly what he could not do directly, that is, to enforce a non-
delegable personal service promise by the artist. He did admit, however, that if the injunction were to cause the
defendant to perform her affirmative promises to sing at the defendant’s theater, so much the better.
American cases generally follow Lumley. See Motown Record Corp. v. Brockert, 160 Cal. App. 3d 123, 207
Cal. Rptr. 574 (1984). In one case, the defendant agreed to render his unique and extraordinary services as a
baseball player exclusively for the plaintiff and not to render such service to others. The court found that the
defendant’s breach would cause the plaintiff irreparable injury and this justified the issuance of an injunction.
Such a finding of irreparable injury involves unique talent or skill and the desire of other parties to possess
those services in competition with the plaintiff. Here, however, the court made no effort to cloak its motivation.
The injunction was issued “to prevent [the defendant] from violating the negative covenant in order to induce
him to perform his contract.” Cincinnati Exhibition Co. v. Marsans, 216 F. 269 (E.D. Mo. 1914). The fact that the
plaintiff had a power to terminate the contract on 10 days’ notice was simply reported with no mention of any
concern over mutuality of remedy.
In a similar case, the lower court found a provision allowing the plaintiff to terminate within 10 days to constitute
a violation of the mutuality of remedy and preclude specific performance. On appeal, the court disagreed on the
footing that there is no necessity that parties to a contract have identical rights or remedies. Philadelphia Ball
Club, Ltd. v. Lajoie, 202 Pa. 210, 51 A. 973 (1902).
Page 2 of 2
Practice Resources:
• Corbin § .2 (contracts for rendering personal services); § .2 (enforcement of negative
promises by injunction—implied negatives); § .2 (enforcement of negative promises by
injunction—implied negatives); § .2 (special considerations involved in the enforcement of
negative promises).

End of Document
§ 65.13 Promises in Restraint of Trade and Competition
Negative promises in reasonable restraint of trade that are ancillary to a legitimate purpose are enforceable. A
seller of a business, including its good-will, who promises not to open a competing business within a relevant
product and geographic market for a reasonable time will be enjoined from breaching that promise. It is a tolerable
restraint of trade that benefits the seller who would otherwise not be able to sell the business either at all or for the
good-will value that is preserved by the covenant in restraint of trade.
Similarly, a reasonable “non-compete” promise by an employee who has had customer contact and could steal
away the employer’s customers will be enforced. If there is no discernible good-will to protect or the former
employee has had no contact with customers, there is no legitimate business purpose served by the negative
covenant and it will not be enforced. A former employer has a right to be protected against unfair competition, but
not ordinary competition. Boisen v. Petersen Flying Service, Inc., 222 Neb. 239, 383 N.W.2d 29 (1986). An
injunction will not be enforced if it is unreasonable in space, time, or subject matter.
Practice Resource:
• Corbin § . 0 (promises in restraint of trade and competition).

End of Document
§ 65.14 Restrictive Covenants as to the Use of Land
Restrictive covenants in deeds and conveyances that create easements or other property interests are also
contracts ordinarily enforceable by injunction since money damages do not constitute an adequate remedy. If the
character of the neighborhood has changed, making the purpose of the restrictive covenant unattainable, the
injunction will not be granted. Covenants by lessees that limit the usage to which the property may be put are also
enforceable by injunction.
Practice Resource:
• Corbin § . 1 (restrictive covenants as to the use of land).

End of Document
§ 65.15 Specific Performance in Spite of a Provision for Liquidated Damages
As indicated in Chapter 58 above, absent a contrary manifestation of the parties’ intention, the remedy of specific
performance is not precluded by the existence of a valid liquidated damages clause. In one case, the parties to a
contract for the sale of a townhouse agreed that if the seller failed to perform, the buyer’s “sole remedy” and “only
remedy” was the return of its earnest money payments; it provided further that upon such return the contract would
be “null and void.” The court refused to grant specific performance. The plaintiffs appealed on the footing that the
remedy clause should be treated as a liquidated damages provision. While noting that the existence of a liquidated
damages clause does not itself bar the remedy of specific performance, the court stated that a buyer and seller may
effectuate a complete bar to that remedy through clear language indicating their intention to treat the liquidated
damages provision as the sole and exclusive remedy. That intention was clearly manifested in this contract. The
return of the earnest money operated to discharge the defendant’s obligations under the contract. O’Shield v.
Lakeside Bank, 335 Ill. App. 3d 834, 781 N.E.2d 1114, 269 Ill. Dec. 924 (2002). Accord Willert v. Russo, 2009
Conn. Super. LEXIS 1212 (May 4, 2009).
Practice Resource:
• Corbin § . (specific performance in spite of a provision for liquidated damages).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 66 ELECTION OF REMEDIES
CHAPTER 66 ELECTION OF REMEDIES
§ .01The Proper Mode of Exercising a Power of Choice Among Remedies
[1]The Purpose of the “Election of Remedies” Doctrine
[2]The Remedial Relief Sought Must Not Exceed What Is Necessary to Redress the Wrong
[3]Distinguishing Merger and Res Judicata
§ .02 i est tio of Remedy Choice
[1]Bringing Suit for One Remedy Rather than Another Is a Manifestation of Choice
[2]Effect of Reliance on Election
[3]“Inconsistent” Remedies
§ .0 ectio Among Damages, Restitution, and Specific Performance
[1]Specific Performance and Damages for Total Breach Are Not Simultaneously Available
[2]Restitution Is Available Only When a Benefit Has Been Conferred on a Party That Would Be Unjustly
Enriched if Allowed to Retain the Value of That Benefit
[3]Buyer and Seller Remedies for Contracts for the Sale of Goods Are Governed By the UCC
§ .0 eme i Rights in Connection with Conditional Sales and Chattel Mortgages
§ .0 eme y Reserved in Contract

End of Document
CHAPTER 66 ELECTION OF REMEDIES
the subject matter.

End of Document
§ 66.01 The Proper Mode of Exercising a Power of Choice Among Remedies
[1] The Purpose of the “Election of Remedies” Doctrine

An offer to enter into a contract presents the offeree with a choice. The offeree has a power of acceptance that
he or she may choose to exercise or not exercise. If the offeree chooses to exercise the power, the substantive
rights and duties of a contract are created between the offeror and offeree. If the offeree rejects the offer, he or
she has chosen to extinguish the power of acceptance. Upon attaining majority, a minor has choice between
affirmance (ratification) of the contract or disaffirmance (avoidance) of the contract. Again, the substantive
rights of the minor and the other party are affected by that choice. Similarly, if a party to a contract can prove
fraud, that party has the power to avoid or ratify the contract, and that election will determine the substantive
rights and duties of the parties.
In addition to choosing substantive rights, an aggrieved party has the power to choose an appropriate remedy
among the remedies that are activated by the other party’s breach of contract. The aggrieved party may choose
among expectation damages, reliance damages, restitution damages, specific performance, injunctions, and
specific restitution. These remedies have been explored in previous chapters. The present chapter focuses on
the proper mode of “electing” (choosing) the appropriate remedy, any limitations on such election, and when the
election becomes irrevocable.
As one court has explained:
“The purpose of the election of remedies doctrine is to prevent a double recovery for a single injury.” …
The doctrine is “merely a legal version of the idea that one can’t have his cake and eat it too.”
Davis v. Cleary Bldg. Corp., 143 S.W.3d 659, 668 (Mo. Ct. App. 2004).
Contract law does not prevent a party from substituting one contract remedy for another unless the other party
has materially changed its position in reliance on the remedy originally chosen. Homeland Training Ctr., LLC v.
Summit Point Auto. Research Ctr., 594 F.3d 285, 294 (4th Cir. 2010) (citing Restatement (Second) of Contracts
§ cmt. a).
[2] The Remedial Relief Sought Must Not Exceed What Is Necessary to Redress the Wrong
The remedial relief sought must not exceed what is necessary to redress the wrong. For example, a buyer of
real property should not get both specific performance and restitution of the purchase price because the
remedies are alternative. Providing both remedies would unjustly enrich the plaintiff. Damages for a delay in
performance, however, would not be inconsistent with the remedy of specific performance. See Restatement
(Second) of Contracts § cmt. d. The remedy must also be one the law provides for the kind of wrong
alleged. As noted earlier, specific performance is typically not available in a personal service contract. If no
benefit has yet been conferred on a defendant, no restitution action will lie since restitution requires unjust
enrichment of a defendant.
[3] Distinguishing Merger and Res Judicata

A judgment or decree on the merits of any specific issue renders that issue res judicata and prevents its
relitigation in another court, regardless of the remedy sought. Issues that were not determined in the first
litigation, however, are not res judicata. A striking illustration occurred in Sadowski v. General Discount Corp.,
81 F. Supp. 381 (E.D. Mich. 1948), aff’d, 183 F.2d 542 (6th Cir. 1950). In that case, the Supreme Court of
Michigan rejected Sadowski’s interpretation of a contract. Armed with that interpretation, Sadowski brought the
Page 2 of 2
present suit for reformation of the writing on the footing that it was mistaken. He met the clear and convincing
evidence standard to secure the reformation remedy, which was not res judicata since that issue had not been
raised in the state court litigation.
If the action in which judgment was issued was one in which the plaintiff could have been reasonably expected
to raise issues that the plaintiff attempts to raise in a second litigation, legal or equitable, the merger and res
judicata rule is properly applied. The doctrine of res judicata includes both issue preclusion and claim
preclusion. “Merger” and “bar” each have a special meaning in the lexicon of res judicata. “Merger” deals with
all of the claims that were or could have been raised that “merge” into a judgment. “Bar” refers to a judgment for
the defendant that bars the plaintiff from litigating claims that were or could have been brought in the lawsuit.
See Restatement (Second) of Judgments § 2 discussed in Waid v. Merrill Area Pub. Sch., 91 F.3d 857, 863
(7th Cir. 1996). Barring an action because of res judicata, however, should not be confused with the quite
distinct doctrine of election of remedies.
Practice Resources:
• Corbin § .1 (meaning of the term election—different kinds of election); § .2 (exercising a
power of choice—ratification and avoidance); § . (mode of exercising a power of choice
between remedies); § . (merger and res judicata distinguished from election).

End of Document
§ 66.02 Manifestation of Remedy Choice
[1] Bringing Suit for One Remedy Rather than Another Is a Manifestation of Choice
Bringing suit for one remedy rather than another is an election of remedies but it is not a conclusive election
unless the remedies are inconsistent and the other party materially changes its position in reliance on the
election. Restatement (Second) of Contracts § . If the remedy turns out not to be available for the kind of
wrong involved, in one sense, it should not be called an “election” since there was no choice of remedies even
though the plaintiff mistakenly thought the remedy was available. If the remedy was never available for the type
of breach involved if it became unavailable because the statute of limitations has run, it was a mistaken choice.
Such an “election,” does not bar a second application for a different available remedy. If the chosen available
remedy turns out to be inadequate, as where damages are not sufficiently certain, restitution should not be
barred. A complaint may include counts for alternative remedies or the plaintiff may amend the complaint to
seek a different remedy.
[2] Effect of Reliance on Election

Ames repudiates a promise to sell real property to Barnes, who elects to bring an action for damages. Barnes
may change the remedy to specific performance instead of damages. Assuming both remedies were available
and Ames relied on Barnes’s action for damages by making valuable improvements on the property, Barnes’s
election of the damages remedy will be viewed as conclusive because of Ames’s change of position.
If Barnes had made no earnest money or other payment to Ames but had mistakenly sued for restitution that
was not available to him, Barnes could sue for damages or specific performance, notwithstanding reliance by
Ames. The reliance factor operates to make the election irrevocable only when there is a real choice at the time
of the first election. Since Barnes mistakenly thought a remedy was available that was not, Barnes may make
another election among available remedies regardless of Ames’s reliance. Similarly, if Barnes elected a remedy
when he was unaware of Ames’s misrepresentation or fraud, he may shift to another remedy regardless of
Ames’s reliance because his first choice was made on the basis of a mistaken assumption. Finally, if Barnes
made a choice between available remedies and Ames relied on the choice, but then committed another breach,
Barnes would not be precluded from making another election. See Restatement (Second) of Contracts §
cmts. b and c.
[3] “Inconsistent” Remedies

It is common to suggest that the election of remedy rules apply only where the remedies are “inconsistent.”
Restatement (Second) of Contracts § cmt. d. It is certainly true that a remedy of specific performance is
inconsistent with a full damages remedy for total breach of contract. See Croy v. Cobe Labs., Inc., 2005 U.S.
App. LEXIS 10018 (10th Cir. June 1, 2005). It is equally true, however, that a remedy of specific performance
would not preclude damages for a delay in performance caused by the defendant’s breach. The remedies are
not inconsistent in the sense that they are both premised on the validity of the contract, but a seller is not
entitled to both remedies. Perroncello v. Donahue, 448 Mass. 199, 859 N.E.2d 827 (2007). But see Gwinnett
County v. Old Peachtree Partners, LLC, 329 Ga. App. 540, 764 S.E.2d 193, 2014 Ga. App. LEXIS 688 (Ga. Ct.
App. 2014), where the court, citing Corbin, explained: “… specific performance at the end of a protracted
litigation under compulsion is practically never full performance of the contract; instead, there has been an
extensive and injurious partial breach. In such a case, the court should decree the payment of damages for the
Page 2 of 2
partial breach that has already occurred, even though obedience of the decree will prevent the commission of
further breaches.”
Indeed, there is nothing inconsistent about expectation, reliance, or restitution damages, or specific
performance or an injunction. They are all available, but they are simply not available at the same time for the
same breach if we are to avoid a plaintiff’s windfall and a defendant’s forfeiture.
Practice Resources:
• Corbin § . (bringing suit or giving notice as a manifestation of election); § . (estoppel as the
true basis of election of remedy); § . (meaning of statement that remedies are inconsistent);
§ .10 (restitution and damages are alternative remedies that are legally inconsistent); § .11
(attempt to get a remedy that is not available).

End of Document
§ 66.03 Election Among Damages, Restitution, and Specific Performance
[1] Specific Performance and Damages for Total Breach Are Not Simultaneously Available
Specific performance and damages for total breach are not simultaneously available to the plaintiff.
Nonetheless, if a court discovers insuperable obstacles to the awarding of specific performance, it may grant
damages. See Homeland Training Ctr., LLC v. Summit Point Auto. Research Ctr., 594 F.3d 285 (4th Cir. 2010),
where the plaintiff sought specific performance but it became apparent that there was no hope of salvaging the
contract. The trial court held that the original decision to seek specific performance constituted a waiver of the
plaintiff’s right to damages. The court of appeals, however, quoted § comment a, of the Restatement
(Second) of Contracts in holding that a party would be precluded from seeking damages instead of its original
choice of specific performance only if the other party had materially changed its position in reliance on the
original choice. On the other hand, if damages prove to be uncollectible, absent sufficient reliance by the
defendant, a decree for specific performance should lie. Even when a court decrees specific performance, by
the time of the decree the partial breach before the decree may require compensatory damages to be included
in the decree. Thus, absent reliance, there is no limitation to the plaintiff’s shifting to another alternative remedy.
[2] Restitution Is Available Only When a Benefit Has Been Conferred on a Party That Would Be Unjustly
Enriched if Allowed to Retain the Value of That Benefit
The remedy of restitution is available only when a benefit has been conferred on a party and that party would
be unjustly enriched if allowed to retain the value of the benefit without compensating the first party. A decree of
specific performance for a buyer of land at a price of $100,000 that also contains an order to repay a $10,000
earnest money payment would place the buyer in a better position than it would have been in had the contract
been performed. In effect, the court would be ordering the buyer to pay only $90,000 for the land, thereby
unjustly enriching the plaintiff. In any event, unsuccessful pursuit of a restitution remedy will not preclude a
second election of remedy. When a plaintiff sues to recover the $10,000 down payment on the footing that the
contract is unenforceable under the statute of frauds, if the court finds the contract to be enforceable, the buyer
may shift to a specific performance remedy to recover the land for the payment of the $90,000 balance.
[3] Buyer and Seller Remedies for Contracts for the Sale of Goods Are Governed By the UCC
Buyer and seller remedies for contracts for the sale of goods are governed by the Uniform Commercial Code
(UCC), which expressly rejects the doctrine of election of remedies. The remedies under the UCC are
cumulative. “Whether the pursuit of one remedy bars another depends entirely upon the facts of the individual
case.” UCC § 2- 0 cmt. 1.
UCC § 2- 11 1 recognizes a buyer’s right to recovery of “so much of the price as has been paid.” Such a
restitution recovery is based on the assumption that the buyer is entitled to additional damages beyond such a
recovery to fulfill its reasonable expectations. If a buyer accepts goods which it will retain notwithstanding a
breach of warranty, it is entitled to the difference between the value of the goods accepted and the value they
should have had as warranted. If the buyer has made a down payment of $10,000 of a contract price of
$100,000 and the difference in value for breach of warranty is less than $10,000, the buyer will not recover the
entire down payment since such a recovery would place the buyer in a better position than it would have been
in had the contract been performed.
Page 2 of 2
Practice Resources:
• Corbin § . (election between damages and specific performance); § .10 (restitution and
damages are alternative remedies).

End of Document
§ 66.04 Remedial Rights in Connection with Conditional Sales and Chattel

Mortgages
In the past, issues arose concerning remedial rights in connection with a contract for a “conditional sale” and in the
case of a “chattel mortgage.” The terms “conditional sale” and “chattel mortgage” are no longer in use. They are
“security interests” and these issues are now governed exclusively under UCC Article 9, which replaces all of the
former law in this area. Article 9 provides uniformity in commercial financing and sets forth necessary rules for
priorities between Article 9 secured creditors and other creditors, including trustees in bankruptcy.

End of Document
§ 66.05 Remedy Reserved in Contract
Parties may expressly include remedies in addition to or in substitution of those provided by law. In contracts for the
sale of goods, UCC § 2- 1 expressly permits such remedies, which are deemed to be additional (“optional”) unless
the parties have agreed that a sole remedy will be the “exclusive” remedy. The parties:
may limit or alter the measure of damages recoverable … as by limiting the buyer’s remedies to return of the
goods and repayment of the price or to repair and replacement of non-conforming goods or parts.
UCC § 2- 1 1 .
The underlying concept is to allow the parties to shape their own remedies subject to the limitation that “at least
minimum adequate remedies be available.” UCC § 2- 1 cmt. 2.
Cases concerning remedy clauses in other types of contracts are typically concerned with whether the parties
intended the remedy to be exclusive. Courts are unanimous in holding that any agreement to limit generally
available remedies must be clearly expressed in the contract. See Interim Healthcare v. Spherion Corp., 884 A.2d
513 (Del. Super. 2005).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 67 DISCHARGE OF CONTRACT: PERFORMANCE,
TENDER, RESCISSION, RELEASE, GIFT, SURRENDER, CANCELLATION, CONTRACT NOT TO
SUE
CHAPTER 67 DISCHARGE OF CONTRACT: PERFORMANCE, TENDER,

RESCISSION, RELEASE, GIFT, SURRENDER, CANCELLATION, CONTRACT
NOT TO SUE
§ .01 he Obligations Under a Contract Are Extinguished, They Are Deemed “Discharged”
§ .02 isch e Distinguished from “Cancellation” and “Termination”
§ .0 The Clearest Manifestation of Discharge Is Full Performance of the Contractual Duty
§ .0 ic tio of Payments When More Than One Debt Exists
§ .0 Te e of Performance
§ .0 Te e of Money in Discharge of Obligation
§ .0 isch e by Rescission
[1]The Purpose of a Rescission Contract Is to Discharge the Parties’ Executory Duties Under an
Existing Contract
[2]Rescission After Part Performance
[3]Consideration or Another Validation Device Is Required for an Effective Rescission
[4]Rescission of a Contract for the Sale of Goods
[5]Effectiveness of an Oral Rescission
[6]Rescission May Occur by Conduct
§ .0 isch e by Release
[1]A Release Is a Writing Manifesting an Intention to Discharge Another’s Existing or Asserted Duty
[2]Effect of Fraud or Mistake
[3]Release of Joint Obligors
[4]Release May Be Subject to a Condition
[5]Attempted Gift Discharge by Oral Release or Renunciation
§ .0 isch e Before a Breach Distinguished from Discharge After a Breach
§ .10 isch e by Voluntary Waiver and Proceeding with Performance

Page 2 of 2
[1]Discharge by an Expression of Assent at the Time Performance Is Tendered
[2]Construction Contracts
[3]Contracts for the Sale of Goods
[4]Installment Contracts for the Sale of Goods
§ .11 isce eo s Gift Discharges
[1]Delivery of Receipt in Full
[2]Gratuitous Reduction of Rent by a Landlord
[3]Delivery of Documents Representing Intangible Rights
§ .12 isch e or Suspension of Debt by Contract Not to Sue

End of Document
SUE
CHAPTER 67 DISCHARGE OF CONTRACT: PERFORMANCE, TENDER,

RESCISSION, RELEASE, GIFT, SURRENDER, CANCELLATION, CONTRACT
NOT TO SUE
the subject matter.

End of Document
SUE
§ 6 .01 When Obligations Under a Contract Are Extinguished, They Are

Deemed “Discharged”
Parties to a contract have undertaken legal obligations to each other. At some point, these obligations will end.
When obligations under a contract are extinguished, they are “discharged.” This chapter considers the various ways
in which the discharge of contractual obligations occurs.
It is possible for all legal obligations to be discharged by a party to a contract who has a power of termination
provided by the contract itself. Absent such a power provided to one or both parties, the parties may agree to
surrender their mutual obligations to each other in a contract of discharge called a rescission, which extinguishes all
rights, duties, powers, and privileges.
Often, however, the discharge of a contract will leave certain legal powers or privileges in one or both parties. One
of the parties may retain a privilege to prohibit the disclosure of trade secrets or other confidential information.
When a contract is materially breached and the breach cannot be cured, the aggrieved party may treat the contract
as discharged, but the party retains the power to pursue remedies for the injury caused by the breach. When the
contract contains an enforceable provision evidencing the parties’ agreement to resolve any disputes through
arbitration, either may insist upon arbitration of a dispute in lieu of an action adjudicated in court.
In an action for breach of contract, the plaintiff must prove the formation of a valid contract and a breach of the
duties under the contract. The plaintiff does not have the burden of proving that discharge of these duties did not
occur; that burden is on the defendant.
Practice Resource:
• Corbin § .1 (discharge—the general principle).

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SUE
§ 6 .02 Discharge Distinguished from “Cancellation” and “Termination”
Terms that signal the discharge of a legal duty are not always used with precision. The Uniform Commercial Code
(UCC) sought to elucidate certain commonly used terms to denote a discharge. The UCC does not officially define
“discharge,” but a comment to one of the sections suggests that “discharge” involves a loss or impairment of
unaccrued rights. UCC § 2- 20 Official Comment. The Restatement (Second) of Contracts elaborates this concept:
“Discharge of a duty extinguishes the obligor’s duty and terminates the obligee’s correlative right and any claim
based on that right.” Restatement (Second) of Contracts Chapter 12, Introductory Note.
The UCC distinguishes “termination” from “cancellation.” When the express terms of an agreement reserve a power
in one or either party to discharge the contract otherwise than for its breach, the contract contains a power of
“termination.” UCC § 2-10 . “Cancellation” occurs when either party discharges its unperformed duty under the
contract because of an uncured material breach by the other party. With respect to the discharge of all executory
obligations under the contract, the effect of termination or cancellation is the same. A party who cancels, however,
retains any remedy for breach. UCC § 2-10 . A termination discharges executory duties, but it does not
discharge executed duties for which the other party is liable. A party who properly exercises a power of termination
after completing a certain performance at an agreed price is entitled to be paid the agreed price for the performance
already rendered.
Notwithstanding the UCC effort to distinguish termination from cancellation, there is no escape from the need to
fully interpret how the parties used those terms beyond the mere use of the labels; the parties may not have used
either term with the precision suggested by the UCC. See, e.g., John B. Conomos, Inc. v. Sun Co., 831 A.2d 696,
2003 PA Super. 310, concerning ambiguity in the use of “termination” versus “cancellation.”
The United Nations Convention on Contracts for the International Sale of Goods (“CISG” or the “Vienna”
Convention) applies to the United States and 79 other nations. The CISG allows either a buyer or seller in a
contract for the sale of goods to avoid the contract and discharge all executory obligations under certain conditions:
when the other party has committed a “fundamental breach” (CISG Article 25); when such a breach is apparent
before the date of performance (CISG Article 72(1)); and when nonperformance has occurred after an extended
period of time (Article 47 (buyer); Article 64 (seller)). After avoidance, the aggrieved party’s remedial rights remain
effective.
Practice Resource:
• Corbin § .2 (“discharge,” “termination,” and “cancellation”—distinguishing the concepts).

End of Document
SUE
§ 6 .03 The Clearest Manifestation of Discharge Is Full Performance of the

Contractual Duty
The clearest manifestation of discharge of a contractual duty is a full and timely performance of the primary duty
under the contract. The primary duty is discharged by such performance; the secondary duty, to compensate the
other party for failure to perform, never arises where the necessary condition to the secondary duty, the breach of
the primary duty, has not occurred.
If the primary duty is only substantially performed, it is not discharged, although a slight deviation from the literal
duty may be excused under the principle of de minimis non curat lex, which suggests a court’s disdain for fussing
with trifles. If more than a trifle is involved, but the performance remains substantial, the breach is necessarily
immaterial. The substantially performing party has a cause of action for the contract price minus the damages
provable by the other party for the insubstantial breach.
Failure of a promisor to perform the primary duty activates the promisor’s secondary (remedial) duty to place the
injured party in the position that party would have been in had the contract been performed. If the amount owed is
unliquidated, it will have to be determined in litigation. Upon its determination, the secondary duty will be discharged
by the payment of the amount required by the judgment entered against the breaching promisor.
Practice Resource:
• Corbin § . (discharge of duty by performance).

End of Document
SUE
§ 6 .04 Application of Payments When More Than One Debt Exists
An obligor who owes two or more duties to the same obligee can direct application of any payment tendered, unless
the obligor holds the money as a trustee or under a duty to apply it in a particular fashion. Thus, where a lessee
manifested an intention that the checks it issued were for monthly rent rather than other obligations, the creditor
was not permitted to override the debtor’s intention. South Sea Co. v. Global Turbine Component Techs., LLC, 95
Conn. App. 742, 899 A.2d 642 (2006), citing Restatement (Second) of Contracts § 2 .
In another case, a licensee under three agreements made late payments of royalties. Lacking direction from the
licensee, the licensor spread the payments ratably over all three agreements. The licensee argued that the
payments should have been allocated to two of the three agreements, which would have been paid in full, thereby
precluding default as to all three agreements, which resulted in the forfeiture of its license. Absent direction from the
debtor, the court found that the four-level hierarchy of applying payments set forth in Restatement (Second) of
Contracts § 2 0 should apply. Under the hierarchy:
(1) payments should be applied to a debt the debtor is under a duty to pay to a third person immediately;
(2) any payments are applied to overdue interest before principal, and unsecured debt before secured debt;
(3) the oldest matured debt should be paid first; and
(4) if the first three are inapplicable, the payments should be applied pro rata among debts of the same
maturity.
The court adopted the fourth and final tier as the payment method allocation since that is the method accepted by
most courts. Shadewell Grove IP, LLC v. Mrs. Fields Franchising, LLC, 2006 Del. Ch. LEXIS 85 (May 8, 2006).
Practice Resource:
• Corbin § . (application of payments when more than one debt exists).

End of Document
SUE
§ 6 .05 Tender of Performance
In Chapter 30 above, we considered the meaning and operation of concurrent conditions when each party’s
performance is due simultaneously. Neither party is required to perform before the other. For one party to place the
other in default, a tender of performance is necessary. If neither party tenders performance during the time for
performance, neither duty can be activated. Both duties are discharged. There is no breach in such a situation.
Each party has simply chosen to abandon the contract; this has the effect of a mutual rescission.
Actual “tender of performance” would require holding out whatever is to be delivered or performed. A tender is
ineffective if it attempts to substitute a performance not due under the contract. Cent. Utah Water Conservancy Dist.
v. Upper East Union Irrigation Co., 2013 UT 67, 321 P.3d 1113. An offer of performance with a manifested present
ability to perform, however, is typically sufficient. Restatement (Second) of Contracts § 2 cmt. b; UCC § 2- 0
cmt. 1. Neither a tender of performance nor an offer to perform will by itself discharge a promisor’s duty, but where
a tender requires the cooperation of the promisee, the failure of the promisee to cooperate will discharge the
promisor’s duty. Where a creditor refused to accept a proper tender of installment payments on a loan, it could not
later assess additional interest or declare the loan in default for the plaintiff’s refusal to pay the additional amounts.
Saunders v. Equifax Info. Servs., L.L.C., 2006 U.S. Dist. LEXIS 71976 (E.D. Va. Oct. 3, 2006).
Practice Resources:
• Corbin § . (tender of performance); § . (legal effect of tender).

End of Document
SUE
§ 6 .06 Tender of Money in Discharge of Obligation
Tendering money to satisfy one’s obligation is effective if it meets certain criteria. The money must be a medium of
exchange authorized by a government; this includes a monetary unit such as the Euro established through the
agreement of several countries. UCC § 1-201 2 . Absent a contrary agreement or the creditor’s demand for legal
tender, payment in a manner consistent with ordinary means such as payment by check is a proper tender.
Restatement (Second) of Contracts § 2 . If a bank obligation instrument such as cashier’s check or certified check
is taken, the obligation is discharged. UCC § - 10 . A personal check constitutes conditional satisfaction of the
debtor’s obligation, suspending it until the check is honored.
Tender requires the relinquishment of control over the money by the debtor. The payment must be unconditional.
Payment of the money into court would constitute such a tender. If the creditor has indicated it will not accept the
payment, tender is excused. The exact amount due plus any interest or a greater sum without demanding change
must be tendered. It must be made at the time and place required by the contract. An earlier tender refused by the
creditor has no effect on the duty to tender at the right time and place. Tenders made after default are ineffective
unless a statute allows such a tender including any interest and any further amount a court may deem necessary to
compensate the creditor.
If a creditor has refused to accept a tender of money but later demands payment, tender must, nonetheless, be
“kept good.” The debtor must make a new tender within a reasonable time after the creditor’s new demand is made.
UCC § - 01. As to whether the payor can demand a receipt, the better view is that such a demand does not defeat
an otherwise effective tender.
Failure to comply with the formal requisites of tender will not make the tender ineffective if a creditor repudiates the
obligation, if tender would be useless given the creditor’s conduct, or if the creditor expressed objections to the
tender on other grounds or objected without specifying a reason. Where the suit is brought in equity, the formalities
of tender are generally relaxed since equitable relief is sufficiently flexible to allow a court to assure the payee of
what it is entitled to receive.
Practice Resource:
• Corbin § . (tender of money for discharge of obligation).

End of Document
SUE
§ 6 .0 Discharge by Rescission
[1] The Purpose of a Rescission Contract Is to Discharge the Parties’ Executory Duties Under an
Existing Contract
The proper use of the term “rescission” is relegated to an agreement between parties to an existing contract to
discharge their duties under it. Burlington County Inst. of Tech. v. Burlington County Institute of Technology
Education Association, 2015 N.J. Super. Unpub. LEXIS 1570 (2015). The purpose of a rescission contract is to
effect the parties’ intention to discharge the executory duties under the existing contract. Unfortunately,
rescission is sometimes used to describe the exercise of a power of avoidance by a minor or a defrauded party
who is provided with a power to avoid the contract. As the Restatement (Second) of Contracts indicates, such a
power of avoidance is created by case law or statute to rectify misconduct or to protect minors. It differs from a
power of termination, which arises from express terms of a contract to allow one or either party to discharge
executory duties by the exercise of that power. Restatement (Second) of Contracts § cmt. b, and Chapter 6,
Introductory Note.
The rescission contract requires a manifestation of mutual assent through a typical offer and acceptance or a
similar manifestation of assent through conduct. Parties may simply decide to abandon the contract. The legal
effect is the discharge of the contract they intended to rescind. The rescission contract extinguishes itself in the
process of extinguishing the duties under the original contract. As a basis for recovery or affirmative defense,
rescission must be alleged and tried at the trial court level; it may not be raised for the first time on appeal.
The parties may agree that a rescission will be effective upon the occurrence of a certain condition. Thus, the
parties may agree upon the cancellation of an insurance policy when a new policy becomes effective. The
rescission and consequent discharge of duties under the original policy are thereby activated only upon the
creation of a new and effective policy.
[2] Rescission After Part Performance

If no part performance of the original contract has occurred, a rescission of the purely executory contract raises
no issues concerning compensation for part performance or a breach. Where part performance preceded the
rescission agreement and the rescission agreement includes the parties’ express agreement concerning such
compensation, no difficulties attend the rescission. If, however, the rescission is silent concerning
compensation for part performance, compensation for that performance should be recoverable and payments
made should be restored. On the other hand, if the original contract was breached, the rescission discharges
any claim based on the breach unless the right to damages is expressly preserved.
Like other contracts, rescission agreements are not always clear concerning the parties’ intention with respect
to pre-rescission performances or breaches. Whether a given rescission agreement was intended to operate
only in future, leaving the original contract operative as to past performances, requires interpretation of the
terms of the agreement and includes review of all the surrounding circumstances. The use of any particular
expression or term should not be conclusive. The parties’ final decree of divorce incorporated their property
settlement agreement that provided that the wife was entitled to a marital portion, “which is 50 percent of the
husband’s pension.” Subsequently, the parties entered into a consent order that provided: “[Wife] is entitled to a
marital share of the retirement benefits of Randal Kennedy, not to exceed 50 percent of the marital share of the
retirement benefits.” The parties disputed whether the wife was entitled to one-half of the gross amount of her
Page 2 of 3
ex-husband’s pension or one-half of the marital share of the pension. The former would yield a larger amount.
The court held that the later consent order was binding, citing the Corbin treatise: “When two parties make a
new contract that is inconsistent with the terms of a previous one dealing with the same subject matter, it may
be described as both a rescission and a discharge by substitution [of the previous contract].” Kennedy v.
Kennedy, 83 Va. Cir. 439 (2011). As noted earlier, terms such as “rescission,” “termination,” and “cancellation”
are often used imprecisely. The UCC insists that:
expressions of “cancellation” or “rescission” of the contract or the like shall not be construed as a
renunciation or discharge of any claim in damages for an antecedent breach.
UCC § 2- 20.
[3] Consideration or Another Validation Device Is Required for an Effective Rescission

Rescission is a contract where consideration is found in a party surrendering its rights under an executory
contract in exchange for the other party’s surrender of its rights. The fact that the rights of Ames are greater
than the rights of Barnes will not preclude a rescission since, like other contracts, courts will not inquire into the
relative values exchanged. If, however, Ames has fully performed her obligations under the original contract,
her promise is not supported by consideration since Barnes has no rights to surrender. New consideration or
promissory estoppel will be necessary to support such a promise.
[4] Rescission of a Contract for the Sale of Goods

UCC § 2-20 1 allows a good faith modification of a contract for the sale of goods without consideration or
other validation device. It is clear that this section would not apply to rescissions since rescissions are included
in UCC § 2-20 2 and we have just seen how careful the UCC’s drafters were in guarding against
unintentional surrender of rights through the misuse of terms such as “rescission” versus “cancellation” or
“termination.”
United Nations Convention on Contracts for the International Sale of Goods (“CISG” or the “Vienna”
Convention) Article 29, permits a contract to be modified “or terminated” by the mere agreement of the parties.
An earlier draft of that provision used the term “rescinded” instead of “terminated,” which might be interpreted to
include “rescinded.” It should, however, be remembered that CISG follows the Civil Law tradition and does not
require consideration or promissory estoppel to support a promise.
[5] Effectiveness of an Oral Rescission

It has generally been held that an oral rescission does not implicate the statute of frauds. Restatement
(Second) of Contracts § 2 cmt. b; Braith v. Hagerty, 1999 Minn. App. LEXIS 788 (July 13, 1999). Even
though the contract to be rescinded is required to be evidenced by a writing and was fully expressed in writing,
it is generally held that an oral rescission of purely executory duties will be enforceable. Indeed, even if the
writing evidencing the contract to be rescinded contains a clause requiring a rescission of the contract to be in
writing, clear and convincing evidence of an oral rescission has been held to be effective. See Crye-Leike, Inc.
v. Estate of Earp, 2004 Tenn. App. LEXIS 779 (Nov. 18, 2004).
UCC § 2-20 2 however, states a contrary view: a provision in the original contract requiring a rescission of
that contract to be evidenced in a signed writing will be enforced. Moreover, if the new agreement contains
more than a rescission so that a modification of the contract ensues, the modification must be evidenced by a
writing. (Aspects of UCC § 2-20 in connection with the statute of frauds are discussed in Chapter 13 above.)
[6] Rescission May Occur by Conduct

The parol evidence rule has no application to rescissions since they occur after the contract to be rescinded
was made. Like other contracts, contracts of rescission may be made by conduct.
It is possible to discover an effective rescission even though it is accompanied by a threatened breach that is
not improper because it does not violate the duty of good faith and fair dealing. Absent an improper threat,
acquiescence in a rescission is effective even though it may not be a satisfying experience. A mere expression
Page 3 of 3
of repudiation is not an offer to rescind. Acquiescence in such a repudiation does not preclude any available
remedy for breach. Thus, if Ames informs Barnes that Ames will not perform the contract, Barnes’s reply that he
will immediately discover another party to perform is not an acceptance of an offer to rescind.
Similarly, it is not a rescission when a party commits a material breach and the other party “cancels” the
contract. The cancellation merely confirms the aggrieved party’s discharge from any further duties under the
contract. Such a cancellation may be followed by entering into a substitute (“cover”) contract for goods or
services or otherwise attempting to avoid further losses under the contract. None of these or similar actions
should be construed as offers to rescind or “waivers” of the agreed party’s remedial rights.
The UCC provides buyers and sellers with a panoply of remedies, and these have been extensively explored in
previous chapters. (See, e.g., Chapter 60 above.) The UCC’s drafters were careful to avoid the use of the term
“rescission” or “rescind” so as to avoid the confusion that term has engendered in common law contract
remedies. A rescission agreement of a contract for the sale of goods would be recognized under UCC § 1-
103(b) (formerly § 1-10 which allows any principle of law or equity not displaced by particular provisions of
the UCC to supplement it.
Practice Resource:
• Corbin § . (discharge by rescission).

End of Document
SUE
§ 6 .0 Discharge by Release
[1] A Release Is a Writing Manifesting an Intention to Discharge Another’s Existing or Asserted Duty
A release is a writing manifesting an intention to discharge another’s existing or asserted duty immediately or
upon the occurrence of a condition. Restatement (Second) of Contracts § 2 1 . Traditionally, a release was a
writing under seal or was otherwise supported by consideration or reliance. The seal has been abolished in
many jurisdictions and others have made sealed or unsealed writings presumptive evidence of consideration.
Still other jurisdictions have special provisions for written releases.
When a writing is only presumptive evidence of consideration, it is necessary to review the interpretation and
construction of such a statute to determine the validity of a gratuitous release. In general, a release need not be
supported by consideration or detrimental reliance. Absent such support, however, the writing evidencing the
release must be delivered unconditionally and it becomes effective upon such delivery. Restatement (Second)
of Contracts § 2 2 . An electronic record will be a sufficient “writing” under the Uniform Electronic
Transactions Act or a similar statute. If a release is supported by consideration or reliance, the transaction may
be fully effective without delivery. Moreover, an oral release supported by consideration would also be effective.
See, e.g., DeLago v. Robert Plan Corp., 2006 U.S. Dist. LEXIS 7831, at *11 (S.D.N.Y. Feb. 28, 2006) (“New
York law enforces oral releases supported by consideration, [but] releases without consideration must be in
writing.”). Whether a given statement expresses that intention is a question of interpretation. No particular form
of words is necessary to effect a release. It is necessary only that the words manifest a present intention to
discharge a right under an existing contract.
In exchange for severance pay and medical benefits, a plaintiff signed a document stating that the employee
released “all claims arising from his employment including anti-discrimination claims” and listed 16 anti-
discrimination statutes including age discrimination statutes as the bases for claims that the plaintiff agreed to
surrender. The plaintiff was given 21 days to consider the release and was encouraged to consult an attorney
before signing it. Without consulting an attorney, he signed the release three days later. Eight months after the
benefits promised under the release were completed, he brought an action on the basis of age discrimination
under a state statute that had not been listed in the release. The court rejected the argument in light of the all-
encompassing quoted language. Weinberg v. Interep Corp., 2006 U.S. Dist. LEXIS 23746 (D.N.J. Apr. 26,
2006).
A present release that purports to discharge future rights in transactions that are not in existence are
inoperative to discharge any rights in a contract made subsequent to the release. Suppose Ames receives a
writing from Barnes stating that Barnes releases Ames from all debts Ames owes or may in the future owe to
Barnes. A month later, Barnes sells property to Ames at a price of $50,000; the transaction is silent concerning
the prior release. Ames owes Barnes $50,000. The later contract is inconsistent with the language of the former
release and prevails over it since the release was only effective with respect to the previously existing
contractual relationship giving rise to the release. This hypothetical is virtually identical to Restatement
(Second) of Contracts § 2 illus. 3, which arrives at the same result but suggests that the later contract for the
sale of goods constitutes a modification of the release, an analysis with which Corbin on Contracts expressly
disagrees.
If, however, Barnes had stated, “I hereby discharge all claims and rights existing against Ames and those
hereafter accruing in subsequent contractual or legal relationships for the acquisition or purchase of goods as
Page 2 of 3
defined by Article 2 of the Uniform Commercial Code,” Barnes’s right to payment would not arise in the later
contract. Barnes’s unambiguous expression of release and covenant not to sue would be given effect.
[2] Effect of Fraud or Mistake

If the execution of a release was induced by fraud, duress, mistake, or unconscionability, it may be avoided,
thereby allowing the aggrieved party to sue on the original claim. Consideration received in exchange for the
release must be returned as a condition to the exercise of the power of avoidance. The aggrieved party may
choose to affirm the release transaction and sue for misrepresentation or fraud, but only if such a claim was not
within the previous release. A mistaken release can also be reformed to state the true intention of the parties.
[3] Release of Joint Obligors

The common law rule that a voluntary release of one of a number of obligors for a single performance
discharges all others operated as a trap for the unwary obligee of a contract or tort obligation. The Restatement
(Second) of Contracts § 2 recognizes that release of one joint promisor discharges other promisors unless
the discharged promisor was a surety, the duties are joint and several, or the common law rule was changed by
statute. These and related issues are fully discussed in Chapter 52 above.
[4] Release May Be Subject to a Condition

Just as the duty created by a promise may be conditioned on the occurrence of an event, so may a release be
subject to a condition. Upon receipt of a conditional release subject to a condition precedent, the obligee’s right
remains active until the condition occurs. If, therefore, Ames’s release of Barnes is conditioned on Barnes
delivering specific goods or rendering a specific service, the release is not effective until the required acts
occur. The obligee might agree to a temporary suspension of its right until the occurrence of some event. This
is similar to payment of a debt by a personal check that suspends the duty of payment until the check is
honored or dishonored by the bank on which it was drawn. See UCC § - 10 1.
[5] Attempted Gift Discharge by Oral Release or Renunciation

An oral statement to a debtor that the debt is discharged is not effective as a legally operative discharge. Such
an oral statement given in exchange of consideration would be effective to discharge the debt, and the
discharge would be effective upon reasonable reliance of a substantial character by the debtor. Orally waiving a
right to damages is not an operative discharge, though such a waiver accompanied by continuing performance
under a contract may very well be deemed an executed gift via an agreed modification that discharged the prior
debt.
The underlying rationale for the refusal to regard oral releases or renunciations of obligations as legally
operative is the absence of sufficient evidence of the donor’s intention; a signed document makes such
releases or renunciations operative. Moreover, though they are in the minority, there are cases in which courts
have given effect to an oral discharge. As emphasized earlier, a release without consideration or promissory
estoppel requires “delivery.” Since releases of debts or claims are not tangible chattels, a writing stating the
donor’s intention to release the debtor may be delivered. This treatise would urge a greater emphasis on the
donor’s expression of intention rather than delivery.
Practice Resources:
• Corbin § . (discharge by release); § .10 (gift discharge by creditor’s oral release or
renunciation).

Page 3 of 3
End of Document
SUE
§ 6 .0 Discharge Before a Breach Distinguished from Discharge After a

Breach
Discharge of a debt before breach is enforceable absent consideration or other validating device. Discharge after
breach, however, requires consideration or another validation device. If one party to a contract has fully performed,
making the obligation of the other party unilateral, a unilateral obligation may be discharged before but not after
breach. This historical perspective is consistent with modern authority holding that discharge by rescission is
unavailable after one party has fully performed since there are no rights to surrender by the party who has received
the full performance.
Practice Resource:
• Corbin § .11 (discharge: distinguishing treatment before and after breach).

End of Document
SUE
§ 6 .10 Discharge by Voluntary Waiver and Proceeding with Performance
[1] Discharge by an Expression of Assent at the Time Performance Is Tendered

A party may renounce a claim to damages for either partial or total breach by delivery of a signed writing to that
effect. Restatement (Second) of Contracts § 2 1 . If the breach is only partial, but the obligor continues to
perform and the continued performance is accepted by the obligee, the obligee may orally renounce its claim to
damages for the partial breach. Restatement (Second) of Contracts § 2 2 . In assenting to this form of
discharge, there is no new consideration, no bargain or resolution of a doubtful claim—there is only the
obligee’s voluntary and gratuitous expression of assent. Reliance by the obligor is not necessary, but timing
may be important since a voluntary statement that the claim is waived made long after performance has ceased
may not be seen as an operative discharge. As the rule is commonly stated, discharge is by an expression of
assent at the time performance is tendered.
There can be no waiver, however, where the injured party does not manifest intent to waive the breach. The
waiver must be voluntary, knowing and intentional. Where USA Truck agreed to pay a 5 percent commission on
transportation contracts solicited by All-Ways, the largest account that All-Ways brought to USA Truck was the
Rheem account. After paying the Rheem commission for two years, USA Truck would no longer pay that
commission but continued to pay All-Ways the commission on the other accounts. USA Truck argued that, by
accepting commissions on the other accounts, All-Ways had waived the breach as to the Rheem account.
Noting that All-Ways had immediately and consistently complained to USA about the failure to pay the Rheem
commission, the court of appeals held that the trial court did not abuse its discretion in determining that the
affirmative defense of waiver by acceptance of benefits did not apply in this case. All-Ways Logistics, Inc. v.
USA Truck, Inc., 583 F.3d 511 (8th Cir. 2009). See also, Johnson v. Walker, 2015 U.S. Dist. LEXIS 58078
(W.D. Ark. 2015) (court cited the Corbin treatise for the proposition that the waiver of a breach of contract must
be voluntary, knowing, and intentional. “Without some statement or expression of an intent to discharge, merely
proceeding with performance in spite of nonfulfillment of some condition precedent by the other party is not
operative as a discharge of an existing right to damages for such nonfulfillment.”)
[2] Construction Contracts

When a completed building has been defectively constructed, the mere receipt of the building will not be
sufficient to discharge a claim for damages. To effect a renunciation of the claim for damages, some expression
in words or conduct to accept the building as satisfactory and in complete discharge of any remaining duty on
the part of the builder is necessary. The owner must have knowledge of the defects. If the defects are latent,
conduct apparently manifesting assent and a discharge of any claim will be insufficient.
[3] Contracts for the Sale of Goods

Former UCC § 1-10 permitted a discharge of an obligation by written waiver or renunciation delivered to the
wrongdoer. The revised waiver and renunciation section, UCC § 1- 0 allows a claim or right arising out of an
alleged breach to be “discharged in whole or in part without consideration by agreement of the aggrieved party
in an authenticated record.” UCC § 1- 0 (emphasis supplied). Either a traditional writing or authenticated
electronic record manifesting the aggrieved party’s discharge of its claim or right will be effective to prove the
discharge of the debt. The new section does not require the writing to be “delivered.”
Page 2 of 3
It is commonly suggested that silence does not constitute renunciation of rights, but an aggrieved party may
find that its failure to reserve rights for a breach by the other party may have the effect of an involuntary
renunciation. In a contract for the sale of goods, a buyer’s right to reject the goods for any defect requires
notification to the seller. UCC §§ 2- 01 and 2-602. If the buyer has accepted the goods, as defined in UCC § 2-
606, with a defect amounting to a substantial impairment of their value that was reasonably undiscoverable
during inspection or was discovered and the seller promised and failed to cure, the buyer may revoke
acceptance of the goods. UCC § 2- 0 . Revocation of acceptance must be within a reasonable time and notice
of revocation must be given to the seller. If the buyer accepts the goods and neither rejects them nor revokes
acceptance of them, the buyer may still sue for breach of warranty to recover the difference between the value
of the goods accepted and the value they would have had if they were as warranted. UCC § 2- 1 . Since the
goods have been accepted, failure to notify the seller of the breach within a reasonable time after the buyer
discovered or should have discovered the defect will bar the buyer from any remedy. UCC § 2- 0 .
The content and timing of the 2-607(3) notice are much litigated. See, e.g., Galoski v. Stanley Black & Decker,
Inc., 2015 U.S. Dist. LEXIS 114663 (N.D. Ohio 2015) defendant moved to bar plaintiff from bringing a breach of
express warranty claim because she did not provide defendant with notice of the defect prior to bringing suit.
The court denied the motion. Notice can be inferred from the circumstances of the case, and notice under
proper circumstances can be satisfied by the filing of a complaint, or when the defendant is aware of the
alleged defect through other channels. Plaintiff presented evidence that defendant had actual or constructive
knowledge of the alleged defect prior to the filing of the suit. “[R]equiring notice and a prior opportunity to cure
the defect would be wholly futile.” In Patterson Oil Co. v. VeriFone, Inc., 2015 U.S. Dist. LEXIS 141635 (W.D.
Mo. 2015), plaintiff claimed that defendant’s electronic payment servers failed. but defendant moved to dismiss
claiming, inter alia, that plaintiff did not provide notice of the product failure. The court noted that the “[t]he bar
for notification here is low. As contemplated by the Uniform Commercial Code and incorporated into Missouri
law, notice ‘does not require any particular formality or detail as to the nature of the buyer’s com i t. Notice
must only “be sufficient to let the seller know that the transaction is still troublesome and must be watched.”
UCC § 2- 0 Comment 4 (1989). The court denied the defendant’s motion to dismiss, holding that plaintiff
reported failures to defendant’s authorized distributor and dealer. In Halderson v. Star Blends, LLC, 2016 Wisc.
App. LEXIS 11 (Wis. Ct. App. Jan. 12, 2016), dairy farm owners sued a supplier of livestock feed claiming the
feed caused their cattle to experience illness and death. The court denied defendant’s motion for summary
judgment, concluding that a jury could find sufficient notice in a phone call by one of the plaintiffs informing
defendant “that I have high concentrations of heavy metal type in the necropsies of the tissues of the cows[,]”
and asking if defendant “had some retained samples to see if there was a problem.” Plaintiff need not explicitly
state that he is rejecting the product, that he is making a claim, or that he is providing notice of a contract
violation. The call put defendant on notice that the transaction was troublesome and must be watched. In
Hartness v. Nuckles, 2015 Ark. 444, 475 S.W.3d 558, 2015 Ark. LEXIS 645 (Ark. 2015), following restoration of
plaintiff’s 1968 Pontiac Firebird, plaintiff failed to notify defendant of his dissatisfaction with the quality of the
work until filing suit, some thirty-three months after he picked up the vehicle and after he had driven the car for
almost 1000 miles. The court held that, assuming UCC warranties applied, notice of the breach should be given
before a lawsuit is filed. In Lukoil N. Am. LLC v. Turnersville Petroleum Inc., 2015 U.S. Dist. LEXIS 123434 (D.
N.J. 2015), the court franchisee’s complaint about franchisor’s “intolerable” pricing, opened the way for
settlement through negotiation and satisfied the requirements of § 2- 0 .
While a consumer’s duty to provide notice under UCC § 2- 0 arguably differs from merchants’ duties, this
does not excuse them from the obligation, and a thirty month delay is unreasonable. Tomasino v. Estee Lauder
Cos., 2015 U.S. Dist. LEXIS 103991 (E.D. N.Y. 2015) and Tomasino v. Estee Lauder Cos., 44 F. Supp. 3d 251,
261 (E.D. N.Y. 2014).
[4] Installment Contracts for the Sale of Goods

Any defect in goods to be delivered in a single lot will provide the buyer with a right to reject the goods. When
the contract authorizes or requires goods to be shipped in installments, a buyer may reject an installment only if
a non-conformity substantially impairs the value of that installment and cannot be cured. If the substantial
impairment can be cured, even that installment has to be accepted upon the seller providing adequate
assurance of cure. UCC § 2- 12 2 . A defective tender in one installment or the cumulative effect of defects in
Page 3 of 3
prior installments may substantially impair the value of the whole contract and constitute a breach of the whole
contract. The buyer, however, will reinstate the contract if it accepts a non-conforming installment without
seasonably notifying the seller of cancellation. UCC § 2- 12 . If a party is unsure whether the breaching
party’s conduct constitutes a substantial impairment of value, reasonable grounds for such insecurity allow that
party to demand adequate assurances of performance according to the terms of the contract. UCC § 2- 0 .
Practice Resource:
• Corbin § .12 (discharge of right to compensation for a breach by voluntary waiver and
proceeding with performance).

End of Document
SUE
§ 6 .11 Miscellaneous Gift Discharges
[1] Delivery of Receipt in Full

The delivery of a receipt in full is evidence that full payment was made, but it is not conclusive evidence. Nor is
a receipt in full, by itself, conclusive evidence of a gift discharge.
In an old case, a creditor received a payment of $1, executed a receipt stating, “in full balance all accounts,”
entered the payment of $1 on its ledger, and added the words “Gift to balance account $820.” The court held
that the debt was discharged based on the creditor’s clearly manifested intent to make a gift. Gray v. Barton, 55
N.Y. 68 (1873). Gray emphasizes the fact that allowing a party to make a gift by delivering a writing that
constitutes a receipt is not novel. The issue is simply one of sufficient evidence of donative intent.
The classic case of Foakes v. Beer, L. R.9 A.C. 605 (1884), held that part payment of a liquidated debt is not
operative as a discharge of the whole debt even where the creditor assents to receive it as such. The facts in
that case suggest no donative intention by the creditor, however. Cases in which a creditor announces an
intention to make a gift of the balance due are clearly distinguishable cases repeating the classic statement that
payment of part of a liquidated debt is not consideration for the discharge of the whole debt.
[2] Gratuitous Reduction of Rent by a Landlord

If a lease requires monthly payments of $2,000, a landlord’s executory promise to accept $1,000 is not
enforceable. Like a promise to accept part payment as full payment of a liquidated debt, it is not supported by
consideration. Yet, if the landlord accepts the $1,000 payments while permitting the tenant to stay in
possession, numerous cases hold that the excess $1,000 per month debt is discharged. These cases suggest
commercial or other legitimate reasons for the request to reduce the rent, and the rationale is akin to
Restatement (Second) of Contracts § which allows a good faith modification without consideration based on
unanticipated difficulties.
[3] Delivery of Documents Representing Intangible Rights

The delivery of documents that represent intangible rights constitutes a gift of those rights if donative intention
is sufficiently evidenced. Chapter 48 demonstrated how an irrevocable gift assignment could be effective in this
fashion. Thus, like other documents, a negotiable instrument may be discharged gratuitously by its surrender
with an intent to discharge. UCC § - 0 i . Such a document may also be discharged by its intentional
destruction. See Restatement (Second) of Contracts § 2 .
Practice Resource:
• Corbin § .1 (other miscellaneous gift discharges).

Page 2 of 2
End of Document
SUE
§ 6 .12 Discharge or Suspension of Debt by Contract Not to Sue
The technical common law rule that the discharge of one joint obligor discharges all obligors induced courts to allow
a party to release one joint obligor while expressly reserving all rights against the other obligors. Such a device was
viewed as a mere contract not to sue rather than a release. Statutory changes converting joint obligations to joint
and several obligations minimized the need for the contract not to sue, but certain important effects remain. See the
discussion in Chapter 52 above. See also Restatement (Second) of Contracts § 2 .
A release is a present discharge of an obligation; a contract not to sue is an executory promise never to bring an
action against a particular debtor. As such, it may appear to simply create a duty in the promisor. Notwithstanding
its promissory form, it is treated as a present discharge of the debtor to avoid circuity of action in which the creditor
sues the debtor who counterclaims for damages for the creditor’s breach of the contract not to sue and the debtor’s
damages would be the amount of the creditor’s recovery. Thus, the contract or “covenant” not to sue is treated as a
release.
The plaintiff provided a covenant not to sue a corporate defendant but claimed the right to sue the successor
corporation. The trial court held that the covenant not to sue prevented imposition of successor liability as a matter
of law. On appeal to the intermediate appellate court, the court distinguished a covenant not to sue which it
described as an agreement not to enforce an existing cause of action against a particular party as distinguished
from a release which abandons the claim against all tortfeasors. The defendants, however, were not joint
tortfeasors. The issue of first impression in this jurisdiction was whether a covenant not to sue a predecessor
corporation prevents the imposition of liability on a successor corporation. In keeping with analogous precedent, the
intermediate appellate court noted that a covenant not to sue should be construed in harmony with the intent of the
parties and held that the covenant did not prevent the imposition of liability on the successor corporation in this
case. Robbins v. Physicians for Women’s Health, LLC, 133 Conn. App. 577, 38 A.3d 142 (2012). On appeal, the
state Supreme Court reversed, holding that “the plaintiff's execution of the covenant not to sue … in perpetuity
foreclosed, as a matter of law, her right of action … against any subsequent purchaser of [the predecessor
corporation’s] assets under the mere continuation theory of successor liability.” Robbins ex rel. Martins v.
Physicians for Women's, LLC, 311 Conn. 707, 90 A.3d 925, 2014 Conn. LEXIS 138, 2014 WL 2088229 (Conn.
2014).
A contract not to sue for a limited period of time encountered the early technical procedure of a “plea in bar” that
precluded it from operating as a defense. A Michigan court finally held that such a contract was simply a
modification of the original contract that should be enforced. Morgan v. Butterfield, 3 Mich. 615 (1855). In 3M Co. v.
Ivoclar Vivadent AG, 2012 U.S. Dist. LEXIS 58221 (D. Minn. Apr. 26, 2012), however, the court felt compelled to
follow a decision of a Minnesota intermediate appellate court (Kunza v. St. Mary’s Reg’l Health Ctr., 747 N.W.2d
586, 591–593 (2008)) which held that dismissal of an action is not an available remedy for a temporary covenant
not to sue. Only damages would be available for such a breach. The same court rejected the approach in § 2 2
of the Restatement (Second) of Contracts that bars an action to enforce a duty during that time.
It is important to remember that an agreement extending the time for the payment of debts discharges secondary
obligors or sureties who have not consented to such an extension. See Restatement (Third) of Suretyship and
Guaranty § 0 cmts. d–f.
Page 2 of 2
Practice Resource:
• Corbin § .1 (discharge or suspension by contract not to sue).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 68 DISCHARGE BY NONPERFORMANCE OF
CONDITION—BREACH—FAILURE OF CONSIDERATION—PREVENTION— POWER RESERVED—
CONDITION SUBSEQUENT
CHAPTER 68 DISCHARGE BY NONPERFORMANCE OF CONDITION—

BREACH—FAILURE OF CONSIDERATION—PREVENTION— POWER
RESERVED—CONDITION SUBSEQUENT
§ .01 isch e of Duty by Nonoccurrence of Condition
§ .02 isch e or Suspension of Duty by the Other Party’s Breach
[1]What Constitutes a Material Breach
[2]Delay as a Material Failure
[3]Effect of Immaterial Performance
[4]Minimizing the Effect of Total Breach
§ .0 isch e and the “Willful” Breach
§ .0 isch e by Existing or Prospective Failure of Consideration
[1]A Failure to Render a Promised Performance May Not Constitute a Breach of Contract but Still Be a
Failure of Consideration
[2]A Promisor May Be Discharged by a Prospective Failure of Consideration
[3]Concurrent Conditions and the Effect of Failing to Tender
[4]Constructive Condition Precedent
§ .0 oo of Prospective Failure of Performance
[1]A Party with Reasonable Grounds for Insecurity May Issue a Written Demand for Adequate
Assurances
[2]Insolvency as Reasonable Grounds for Insecurity
[3]Written Demand Requirement
[4]Extent of Adequate Assurances
[5]Anticipatory Repudiation
§ .0 Defendant Who Is Being Sued for Breach of Promise May Allege as a Defense That the Plaintiff
Prevented Its Performance
§ .0 cc e ce of a Condition
Page 2 of 2
§ .0 Te mi tio of a Contract
[1]Power to Terminate Distinguished from the Right to Cancel
[2]Notice Must Be Given to Exercise a Power of Termination
[3]Franchise Agreements
[4]“Null and Void” Provisions
[5]Avoidance Distinguished from Termination
§ .0 isch e by Condition Subsequent

End of Document
CHAPTER 68 DISCHARGE BY NONPERFORMANCE OF CONDITION—

BREACH—FAILURE OF CONSIDERATION—PREVENTION— POWER
RESERVED—CONDITION SUBSEQUENT
the subject matter.

End of Document
§ 6 .01 Discharge of Duty by Nonoccurrence of Condition
Contractual promises create duties, but duties are often conditional. Unless excused, a condition is an event not
certain to occur but which must occur to activate the existing duty to which it is attached and make it immediately
enforceable. See Restatement (Second) of Contracts § 22 see also Chapter 30 above. The condition may be
express or implied or it may be a constructive condition created by the court. If the condition does not occur, no
breach of the duty to which it is attached is possible. If the time has expired for the conditioning event to occur, the
duty to which the condition is attached is discharged.
The performance of a contract typically requires cooperation between the parties. To allow a seller to complete
delivery of goods by a certain date, the buyer had to notify the seller of the shipment destination two weeks in
advance of that date. Timely notification was a condition precedent to the seller’s duty to ship the goods to the
buyer. The failure of that condition with no possibility that it could be performed later discharged the seller’s duty to
ship the goods. Internatio-Rotterdam, Inc. v. River Brand Rice Mills, Inc., 259 F.2d 137 (2d Cir. 1958). In another
case, a defendant’s obligation to supply Jeeps was “subject to” the plaintiff providing separate facilities that it failed
to provide. The court found that providing such facilities was a condition precedent. The failure of the condition to
occur discharged the defendant’s duty. Anchorage Chrysler Ctr., Inc. v. Daimlerchrysler Corp., 129 P.3d 905
(Alaska 2006).
The fact or event that the parties agreed upon as a condition may also be a duty of one of the parties to the
contract. If a party has promised that a certain event within its control will occur, the failure to perform that event is
like any other failure to perform a contractual duty and will constitute a breach of contract as well as the
nonoccurrence of a condition. In the River Brand case, where the buyer failed to notify the seller of a destination,
time was of the essence. The buyer had promised to provide notice no later than a certain date; this was essential
to allow the seller to perform. The promise created a duty that the buyer breached by failing to provide that notice
on time. The breach is answerable in damages. The failure of the condition discharged the seller’s duty, which
could never be activated when the time for the occurrence of the condition expired.
Practice Resource:
• Corbin § .1 (discharge of duty by nonperformance of a condition).

End of Document
§ 6 .02 Discharge or Suspension of Duty by the Other Party’s Breach
[1] What Constitutes a Material Breach

A party who breaches a contract commits a wrong, but not a crime. The breach does not discharge the duty of
the other party unless the effects of the breach are so material as to deprive the aggrieved party of the
substantial benefits of the bargain. To determine whether a breach is so “material” as to discharge the other’s
duty, the First Restatement of Contracts set forth “influential circumstances” to expose “the inherent justice of
the matter” in answering the basic question:
Will it be more conformable to justice in the particular case to free the injured party, or, on the other hand,
to require her to perform her promise, in both cases giving her a right of action if the failure to perform was
wrongful?
Restatement (First) of Contracts § 2 cmt. a.
Restatement (Second) of Contracts § 2 1 lists similar “circumstances” in determining the materiality of
a breach:
(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of
which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking
account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with
standards of good faith and fair dealing.
See Foster Poultry Farms, Inc. v. SunTrust Bank, 2010 U.S. App. LEXIS 8827 (9th Cir. 2010) (applying New
York law). Otherwise, however, the Restatement (Second) pursues a different approach. The duties of each
party are constructively conditioned on the lack of any uncured material failure of performance by the other
party. See Frazier v. Mellowitz, 804 N.E.2d 796 (Ind. Ct. App. 2004), (quoting the analysis of John E. Murray,
Jr., Murray on Contracts § 1 (2d Rev. ed. 1974), in comparing the First and Second Restatements of
Contracts treatments of material breach). A material breach allows the aggrieved party to suspend
performance, but only a total breach allows the party to cancel the contract, which discharges its duty. A total
breach occurs when the material breach cannot be cured or nonperformance is accompanied by repudiation or
there is a substantial impairment of the value of the contract at the time of the breach. (The concept of “cure” is
borrowed from the Uniform Commercial Code (UCC) § 2- 0 which permits a party to remedy deficiencies
within the time for performance. Restatement (Second) of Contracts § 2 1 cmt. e, suggests a number of
inquiries to guide courts in determining whether a material breach may be cured.)
The UCC employs a different approach for breaches of a contract for the sale of goods. The “perfect tender
rule” of § 2- 01 allows rejection of goods for “any” defect. This seemingly draconian approach, however, is
heavily qualified. It is explored extensively in Chapter 33 above. The United Nations Convention on Contracts
for the International Sale of Goods (CISG) allows a buyer or seller of goods to avoid the contract when the
Page 2 of 3
other party has committed a “fundamental” breach under Article 25. See the description of this concept in
Chapter 33 above.
[2] Delay as a Material Failure

While delay in performance can constitute a material breach that cannot be cured, it may also be so minor as
not to allow even a suspension of performance. Even a material delay may not justify the other party’s
cancellation and discharge of its duty even though it would justify its suspension of performance. Thus, a
builder who has not received a progress payment on time could be justified in suspending its performance, but
not in abandoning the project, depending upon all of the surrounding circumstances. Circumstances relevant to
determining the materiality of delay are the same kinds of guidelines used to determine materiality of any
breach. Restatement (Second) of Contracts § 2 2.
[3] Effect of Immaterial Performance

Where a breach is immaterial (partial), the injured party is not discharged from its contractual duties. The only
remedy is an action for damages. In the well-known case of Walker & Co. v. Harrison, 347 Mich. 630, 81
N.W.2d 352 (1957), the plaintiff installed a large neon sign for the defendant’s business for which the defendant
agreed to pay 36 monthly installments. The contract required the plaintiff to maintain and service the sign. After
it was installed, the defendant requested that the sign be cleaned. Repeated calls were ignored and the
defendant notified the plaintiff that, having made only the first payment, it would make no more payments. The
plaintiff sued for entire contract price on the basis of an acceleration clause in the contract. The defendant
argued that a material breach by the plaintiff would justify its repudiation of its duties under the contract. While
agreeing with the defendant’s “legal proposition,” the court issued what has become a celebrated caveat:
But the injured party’s determination that there has been a material breach, justifying his own repudiation,
is fraught with peril, for should such determination, as viewed by a later court in the calm of its
contemplation, be unwarranted, the repudiator himself will have been guilty of material breach and himself
have become the aggressor, not an innocent victim.
Walker & Co., 347 Mich. at 635, 81 N.W.2d at 355.
The court proceeded to apply the guideline “circumstances” of the First Restatement of Contracts in concluding
that the plaintiff’s breach was immaterial. The defendant’s repudiation, however, was a material breach and
judgment was rendered for the cash price of the sign minus an amount the service would have cost the
defendant during the unexpired period of the contract.
The determination of whether a buyer or seller of goods has committed an anticipatory repudiation of a contract
allowing the aggrieved party to treat the contract as discharged is also “fraught with peril.” The UCC provides
some alleviation of that challenge by allowing a party with reasonable grounds for insecurity to demand
adequate assurances that the other party will perform. UCC § 2- 0 (which is explored in detail in Chapter 54
above). Similarly, CISG Article 71 allows performance to be suspended and a demand for adequate
assurances when it becomes apparent that the other party will not perform a substantial part of its obligations.
[4] Minimizing the Effect of Total Breach

If a contract is deemed “divisible,” a party will be able to recover for the divisible parts performed and suffer
damages only for the divisible part breached. As noted in Chapter 67 above, an injured party may voluntarily
discharge the other party’s obligation to compensate in damages by an oral or written renunciation with the
intention of making a gift.
Practice Resource:
• Corbin § .2 (discharge or suspension of duty by the other party’s breach of contract).

Page 3 of 3
End of Document
§ 6 .03 Discharge and the “Willful” Breach
It is not uncommon to discover statements in the case law indicating that a “willful” breach discharges the other
party from a duty under the contract, regardless of whether that breach would otherwise constitute an uncured
material breach. The Restatement (Second) of Contracts substitutes a standard of good faith and fair dealing for the
“willful” term, which is “less precise.” Restatement (Second) of Contracts § 2 1 cmt. f. Neither the good faith nor
bad faith of the defaulting party is viewed as conclusive, but failing to perform or offering to perform in good faith is
considered a “significant circumstance in determining whether the failure is material.” Id.
Practice Resource:
• Corbin § . (discharge and the “willful” breach).

End of Document
§ 6 .04 Discharge by Existing or Prospective Failure of Consideration
[1] A Failure to Render a Promised Performance May Not Constitute a Breach of Contract but Still Be a
Failure of Consideration
When an offer can be accepted only by performance, and the offeree does not perform, no unilateral contract is
formed. There is a failure of performance, but there is no breach because the offeree made no promise to
perform. Indeed, any promise in response to such an offer would have been useless since the offeree had no
power to accept the offer and form a unilateral contract except by performance. Where parties exchange
promises to form a bilateral contract and the duty of one party is excused because of impossibility or
impracticability of performance, there is a failure of consideration, but there is no breach. In the typical bilateral
contract, the unexcused failure of consideration constitutes a breach of contract that discharges the other party
from its duty of performance and allows that party to pursue an appropriate remedy.
[2] A Promisor May Be Discharged by a Prospective Failure of Consideration

When a party to a contract commits an anticipatory repudiation by words or conduct, the aggrieved party may
cancel the contract and pursue its remedies even though the time for performance has not arrived. Canceling
the contract discharges the aggrieved party from any further duty under the contract. The aggrieved party is not
compelled to treat the repudiation as an immediate breach. It may choose to allow the other party to retract is
repudiation. (The doctrine of anticipatory repudiation, and the choices available to the aggrieved party and their
legal effects are explored in detail in Chapter 54 above.)
[3] Concurrent Conditions and the Effect of Failing to Tender

In a bilateral contract, the promised performances are the consideration for each other. They are viewed as
constructive conditions for various purposes including the order of performances. If the performances are
concurrent, i.e., if neither performance must precede the other, it will be necessary for one party to tender
performance to place the other in default. If the time for such performances has expired, neither party may
make an operative tender and both parties are discharged from their duties. (The analysis of concurrent
constructive conditions is found in Chapter 30 above.)
[4] Constructive Condition Precedent

If the contract requires one of the exchanged performances to be performed before the other, or the contract is
silent concerning the order of performance but one performance takes more time to complete than the other,
the performance that takes time is a constructive condition precedent to the duty of the other party. In a contract
for the painting of a house for a total price of $20,000, absent contrary terms, the performance that takes more
time (painting) will precede the performance that can be accomplished instantly (payment). Thus, the
completion of the painting is a constructive condition precedent to the duty of the owner to pay $20,000. If the
parties agreed that the owner must make an initial payment of $5,000 with the remainder of the price to be paid
upon completion, the owner’s duty to pay $5,000 is a constructive condition precedent to the painter’s duty to
commence work. If the $5,000 is paid, the painter’s duty of painting the house is a condition precedent to the
owner’s duty to pay the balance of $15,000.
Page 2 of 2
Practice Resource:
• Corbin § . (discharge by failure of consideration either existing or prospective).

End of Document
§ 6 .05 Proof of Prospective Failure of Performance
[1] A Party with Reasonable Grounds for Insecurity May Issue a Written Demand for Adequate
Assurances
Modern contract law has radically modified the dilemma of a promisor who has a reasonable belief that there
will be a failure of consideration by the other party. As noted previously, the UCC allows a party with reasonable
grounds for insecurity to issue a written demand for adequate assurances and suspend its performance until it
receives such assurances that must be provided within a reasonable time not exceeding 30 days. UCC § 2- 0 .
The insecure party may treat the failure to provide such assurances as a repudiation of the contract, which it
may treat as a present breach, thereby discharging its duty and allowing a claim for an appropriate remedy.
While the UCC applies technically only to contracts for the sale of goods, the Restatement (Second) of
Contracts replicates the same doctrine for other contracts. Restatement (Second) of Contracts § 2 1. The
Restatement version does not require the demand for adequate assurances to be in writing, although it does
note that a written demand may be preferable. Nor does it limit the time to provide such assurances to a
maximum of 30 days.
[2] Insolvency as Reasonable Grounds for Insecurity

A party asserting rights under UCC § 2- 0 or Restatement (Second) § 2 1 has the burden of proving that it
met the requirements, including the threshold of reasonable grounds for insecurity. The grounds for insecurity
must have arisen after the contract was formed. If they antedated the contract, the risks giving rise to insecurity
were already assumed. An early minor breach may provide reasonable grounds for believing that a major
breach is likely. If a party is defaulting on other contracts, or manifests financial or other difficulties of
performance, the other party may have reasonable grounds for insecurity. If it is discovered that a party who
has agreed to sell property neither owns the property nor has the apparent ability to acquire it in time to perform
its promise to convey the property, there are reasonable grounds for insecurity. Insolvency, alone, does not
provide the other party with reasonable grounds for insecurity if the insolvent party is to perform personal
services. If, however, a seller of goods discovers that its buyer is insolvent, the seller may refuse delivery
except for cash, stop delivery of goods in transit, or reclaim goods that the buyer has received within 10 days
after receipt. UCC § 2- 02. If the buyer has made a misrepresentation of insolvency within three months before
delivery, the 10-day limitation does not apply.
[3] Written Demand Requirement

Some courts hold that a failure to meet the § 2- 0 requirement that a demand must be evidenced by a writing
is not fatal under certain circumstances. See, e.g., AMF v. McDonald’s Corp., 536 F.2d 1167 (7th Cir. 1976).
More recent cases suggest that the writing requirement under the statute must be met. Chronister Oil Co. v.
Unocal Ref. & Mktg., 34 F.3d 462 (7th Cir. 1994). A statutory requirement is not to be dismissed, but where an
oral demand for adequate assurances is clear and convincing, treating the absence of a writing as fatal to its
operation could result in manifest injustice.
[4] Extent of Adequate Assurances

Page 2 of 2
A demand for adequate assurances can fail if the demand is excessive. The demanding party is entitled to have
its reasonable grounds for insecurity overcome by sufficient assurances. The party is entitled to what it has
been promised under the contract and reasonable security that those promises will be performed. The party is
not entitled to insist upon additional or greater obligations or risks than the other party has assumed.
[5] Anticipatory Repudiation

If a demand for adequate assurances is not met, the other party may treat the failure to provide such
assurances as an anticipatory repudiation. For a complete analysis of the doctrine of anticipatory repudiation,
see Chapter 54 above.
Practice Resources:
• Corbin § . (proof of prospective failure of performance); § . (prospective inability—three
special settings).

End of Document
§ 6 .06 A Defendant Who Is Being Sued for Breach of Promise May Allege as
a Defense That the Plaintiff Prevented Its Performance
If a promisee has prevented the occurrence of a constructive or express condition to the duty of a promisor, the
prevention is an effective defense against the promisee’s action for breach of contract. If a contractor is prevented
from performing a construction contract by the owner’s failure to cooperate, the contractor is excused and the
owner is liable for breach. If a promisee causes a mere delay in performance, the promisor is typically not excused
from performing. For the defense to be effective, the promisee’s action or forbearance must increase materially the
cost or difficulty of the promisor’s performance. While the duty of good faith may require affirmative cooperative
action, prevention of the promisor’s performance may result in discharge even though the promisee’s conduct is in
itself neither unjust nor in bad faith.
Practice Resource:
• Corbin § . (prevention by promisee as a defense to the promisor).

End of Document
§ 6 .0 Occurrence of a Condition
When a defendant asserts that its duty under a contract was subject to a condition that had not occurred, the
prevention of that condition by the defendant eliminates the defense. In one case, the defendant author failed to
deliver four books under its contract with the plaintiff. The defendant had not written or delivered the first three
books, which were part of a series. The plaintiff had a right of first refusal of the fourth book, which the defendant
had written and delivered to another publisher. The defendant claimed that the plaintiff’s right of first refusal was not
enforceable because her contract obligation to submit the fourth book would not be triggered until “one month after
the completion and acceptance” of the first three books. Noting that the failure to deliver first three books
constituted a breach, the court quoted Corbin on Contracts in explaining that the defendant could not employ her
own breach of the agreement as a defense to her failure to perform her obligation with respect to the fourth book.
Dorchester Publ. Co. v. Lanier, 2007 U.S. Dist. LEXIS 23103 (S.D.N.Y. Mar. 19, 2007).
In another case, a wife was entitled to a large payment under a prenuptial agreement on condition that she survive
her husband. That condition was prevented when the husband shot and killed the wife, thereby excusing the
condition. Foreman State Trust & Sav. Bank v. Tauber, 348 Ill. 280, 180 N.E. 827 (1932).
Causing a condition to a promisor’s duty to occur may also discharge the duty to which the condition is attached. In
an aleatory contract, the promisor assumes a risk that will be activated only upon the occurrence of a condition.
Thus, a life insurance policy is payable to a beneficiary only upon the death of the insured. If the beneficiary
murders the insured, the life insurance company is discharged from its duty to the beneficiary. Beck v. West Coast
Life Ins. Co., 38 Cal. 2d 643, 241 P.2d 544 (1952).
Practice Resource:
• Corbin § . (discharge by unjustly increasing the promisor’s risk—causing the happening of a
condition).

End of Document
§ 6 .0 Termination of a Contract
[1] Power to Terminate Distinguished from the Right to Cancel

A power of termination that provides a privilege to the party or parties holding such a power to extinguish duties
under a contract has been explored in detail in previous chapters, including Chapter 6 above. See Manpower
Inc. v. Mason, 377 F. Supp. 2d 672 (E.D. Wis. 2005) (noting the Corbin distinction between termination and
rescission). In particular, the power of termination has been distinguished from “cancellation” of the contract,
which allows a party to discharge its duty under a contract upon a material breach by the other party. A power
of termination is not subject to some failure to perform by the other party. It is privilege allowing the party to
whom the power is reserved to exercise it at will.
A power of termination may be subject to a condition of personal satisfaction as where Ames promises to pay
Barnes $10,000 for a portrait of Ames’s daughter only if Ames likes the finished product. If Ames inspects the
painting and in good faith states his honest view that he does not like the painting, he may exercise an express
power of termination. There is no breach of contract since Barnes did not undertake to assure Ames’s
satisfaction. (See Chapter 31 above, for a complete analysis of conditions or satisfaction.)
On the other hand, where a so-called power of termination is subject to a condition that constitutes a breach of
duty by the other party, it is not a power of termination; it is properly called a power of cancellation. Thus, failure
to satisfy a condition that construction of a building comports with the plans as determined in good faith by a
named architect or engineer will preclude payment to the builder since the condition precedent to payment has
not occurred. The builder has breached the contract by not performing in accordance with the plans. A reserved
power to terminate a contract in the absence of breach or upon an express condition that may constitute a total
or partial breach does not displace the right to rescind a contract for total breach. Facility Wizard Software, Inc.
v. Southeastern Tech. Servs., LLC, 647 F. Supp. 2d 938 (N.D. Ill. 2009).
Since a power of cancellation is subject to the failure of the promisor to render a constructive condition
precedent by performing in accordance with the contract, if the promisee’s interference or lack of cooperation
with that performance causes the promisor’s failure, the power of cancellation with respect to that performance
will be extinguished. See, e.g., Vanadium Corp. v. Fidelity & Deposit Co., 159 F.2d 105 (2d Cir. 1947).
[2] Notice Must Be Given to Exercise a Power of Termination

To exercise a power of termination, notice must be given. If it is not given in the form or within the time set forth
in the contract, there is no effective termination. In one case, a retransmission agreement provided that, upon
its expiration date, it would:
automatically renew for successive six (6)-year periods after the expiration of the Initial Term … provided,
however, that either party may terminate this Agreement effective as of the end of the Initial Term or any
Renewal Term upon six (6) months’ prior written notice to the other party.
The first renewal would expire in 2007. The plaintiff television station sent a notice indicating its desire to
discuss the agreement and amend its terms, which it later claimed was a notice of termination. The court held
that while it was not necessary to use the word “termination” in the notice, it quoted Corbin in support of its
conclusion that notice of termination must be clear, definite, unambiguous, and unequivocal. Here, the notice
did not meet this standard, and the station was bound by the automatic renewal language of the agreement
through 2013. Cedar Rapids TV Co. v. MCC Iowa LLC, 524 F. Supp. 2d 1127 (N.D. Iowa 2007). In Whispering
Page 2 of 2
Pines of Royal Palm Beach Homeowners Ass’n v. Comcast Cable Communs., LLC, 2014 U.S. Dist. LEXIS
84283 (S.D. Fla. June 19, 2014), a cable television service contract for 10 years contained an automatic
renewal clause for another 10 years absent notice of termination within 90 prior to the time for renewal. The
subscriber was 23 days later in providing notice of termination. The court held that an automatic renewal or
termination clause had the same effect as an option contract there time is normally of the essence.
[3] Franchise Agreements

In exchange for a fee, a franchise agreement grants to a franchisee the right to offer, sell, or distribute goods or
services under a marketing plan prescribed or suggested by the franchisor. The franchisee has the right to use
the franchisor’s trademark, servicemark, trade name, advertising, or other commercial symbol. Franchise
agreements pervade our society, from hamburgers and automobiles to tax planning. Since the franchisor has
an interest in protecting its name and corresponding goodwill, these agreements allow the franchisor to
terminate the agreement. The franchisee, however, has an interest in protecting its investment of resources,
time, and effort against an arbitrary exercise of the power of termination by the franchisor.
Courts responded to this tension by finding “implied” promises and conditions in franchise agreements, but this
judicial response was necessarily uneven. In 1956, Congress enacted the Automobile Dealers’ Franchise Act.
15 U.S.C.S. § 1221. The Act enabled auto dealers to sue for damages in federal court when its franchise was
terminated or not renewed in bad faith. State laws have also been enacted to protect franchisees. These
statutes typically preclude the exercise of a power of termination except for good or just cause. Franchises may
be terminated for failure to meet sales quotas or to make required royalty or other payments, violations of
quality standards, poor customer service, misrepresentation in accounting, or similar standards. If the power of
termination is exercised absent one of these violations, the franchisee may sue for wrongful termination.
[4] “Null and Void” Provisions

When a contract states that it will become “null and void” upon the failure of a party to perform as specified, it is
typically interpreted as allowing the other party to treat its own performance as discharged and not to allow the
other party the privilege of not performing. Indeed, such an interpretation would necessarily suggest that no
contract ever existed. When a contract becomes “null and void” upon the occurrence of a condition other than
the other party’s performance, such as a condition that the purchaser of property cannot procure a loan, the
failure of the condition will discharge the duty to which it is attached.
[5] Avoidance Distinguished from Termination

A power of avoidance is granted as a matter of public policy to parties such as minors, the mentally ill, or
parties who have been induced to enter into agreements because of fraud, misrepresentation, or duress. The
timely exercise of a power of avoidance discharges the duty of the party who holds that power. A power of
termination, however, exists because it was created by the contract the parties made.
Practice Resource:
• Corbin § . (termination of a contract—exercise of a power reserved).

End of Document
§ 6 .0 Discharge by Condition Subsequent
The confusing distinction between conditions “precedent” and conditions “subsequent” has been thoroughly
explored in a prior chapter. (See Chapter 39 above.) As noted in that exploration, the Restatement (Second) of
Contracts has eliminated the use of the phrase “condition subsequent” by focusing on an event that extinguishes an
active or matured duty. Restatement (Second) of Contracts § 2 0. At this point, it is appropriate to repeat the basic
distinction: if a conditioning event must occur to activate a promisor’s duty, it is necessarily a condition “precedent.”
The Restatement (Second) prefers that the use of the term “condition” be restricted to such conditions. References
to a condition “subsequent” will undoubtedly continue for some time, however. A condition “subsequent” refers to
the occurrence of an event that terminates an existing duty. A traditional illustration is the requirement in a casualty
insurance policy that any action against the insurer for failure to pay a claim under the policy must be brought within
two years of the casualty. Some courts may still resort to calling a failure to bring suit within that period a condition
subsequent, which terminates a matured duty of the insurer. Restatement (Second) of Contracts § 22 cmt. e. If
the term “condition” is to be attached to such an event, however, it may be more accurate to refer to it as a
condition precedent to the insured’s secondary duty to pay damages, which is discharged if the event does not
occur. When dealing with conditions, there is no escape from the essential question, condition to what?
Practice Resource:
• Corbin § .10 (discharge by condition subsequent).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 69 LEGAL OPERATION OF AN EXECUTORY
ACCORD
CHAPTER 69 LEGAL OPERATION OF AN EXECUTORY ACCORD
§ .01 ec to y Accord” Distinguished from “Substitute Contract”
§ .02 t Performance of an Executory Contract

End of Document
ACCORD
CHAPTER 69 LEGAL OPERATION OF AN EXECUTORY ACCORD
the subject matter.

End of Document
ACCORD
§ 6 .01 “Executory Accord” Distinguished from “Substitute Contract”
An “executory accord” is an agreement for the future discharge of an existing (original) claim arising out of a breach
of contract, tort, quasi contract, or other claim. Both the duty under the original claim and the duty under the
executory accord are discharged only upon the performance (“satisfaction”) of the accord. District of Columbia v.
Young, 39 A.3d 36 (D.C. 2012). Section 281 of Restatement (Second) of Contracts. Executory accords are not
mere offers; they are contracts requiring an offer and acceptance and consideration or promissory estoppel. See
Diaz-Amador v. Wells Fargo Home Mortg., Inc., 856 F. Supp. 2d 1074 (D. Ariz. 2012); Reg’l Transit Auth. v. Heirs &
Devisees, 135 Wash. App. 446, 144 P.3d 322 (2006). In some jurisdictions, a written promise to accept or render a
substituted performance in full satisfaction of a claim is an executory accord, not because it has been accepted, but
because it is an enforceable promise for the future discharge of the claim. This unilateral promise is enforceable
upon performance of the substitute requested by the claimant.
A “substitute contract” differs from an accord. It is a present discharge of an existing claim based upon a party’s
present promise rather than a future performance if the parties manifest an intention to discharge the duties under
the original contract immediately upon the formation of the substituted contract. Restatement (Second) § 2 .
Rosen v. Ascentry Techs., Inc., 143 Wn. App. 364, 177 P.3d 765 (2008) cites Corbin on Contracts in making this
distinction between an executory accord and a substitute contract.
Whether a contract is an executory accord or a substitute contract is a matter of interpretation. Where the
interpretation is doubtful, it is not likely that an obligee would be willing to accept a promise as an immediate
discharge of a claim that is clear, undisputed, and liquidated. Restatement (Second) of Contracts § 2 1 cmt. e. In
Cirrus Design Corp. v. Sasso, 95 So. 3d 308 (Fla. Dist. Ct. App. 2012), a settlement offer contained the following
language: “If accepted, this offer of judgment constitutes satisfaction of all claims.” Since the offers were to settle
unliquidated claims for a liquidated amount, the court noted the presumption of immediate satisfaction whereas
offers to settle liquidated claims carry the presumption that satisfaction occurs only when such accords are
performed. The court concluded that this accord contemplated immediate satisfaction upon acceptance of the offer.
An executory accord is more likely to be made after breach than before breach, although it is possible to make such
an accord prior to breach or the maturity of the claim. A part payment of a debt before the debt matures may be
viewed as an accord and satisfaction of the debt; consideration is found in the early payment of the debt. Executory
accords are enforceable because they are contracts. They are favored by the law because they allow parties to
resolve their own disputes through compromise and settlement. While an executory accord is not a compromise if it
is an agreement for the future discharge of an undisputed claim, most accords arise out of disputed claims. Accords
made in the course of a pending action may be specifically enforced by a summary order in the very proceeding
that is compromised. They may also be specifically enforced in an independent action.
Practice Resources:
• Corbin § .1 (definition of accord—compromise agreements); § . (mere offer is not an accord).

Page 2 of 2
End of Document
ACCORD
§ 6 .02 Part Performance of an Executory Contract
Only full performance by the debtor discharges the original claim against it. Part performance of the accord
suspends the original claim, but the failure to complete performance lifts the suspension and the creditor may sue
on either the original claim or the accord, although credit will be given for any part performance received by the
creditor. See Int’l Regulatory Consultants, v. Optis S.A., 2005 U.S. Dist. LEXIS 37045 (D. Utah Aug. 25, 2007).
If a creditor breaches the accord, the debtor’s duty is not discharged, but the debtor has rights against the creditor
under the accord. If the creditor’s breach is total, the debtor is discharged and has no claim for breach of the
accord. The original claim, however, is not discharged. To discharge the original claim, the debtor may specifically
enforce the accord if that remedy is practicable, or the debtor may sue for damages for the creditor’s partial or total
breach of its obligations under the accord. See Dobias v. White, 239 N.C. 409, 80 S.E.2d 23 (1954); Restatement
(Second) of Contracts § 2 1 .
Practice Resources:
• Corbin § .2 (executory accord: part performance, performance, and breach); § . (executory accord
is an enforceable contract).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 70 ACCORD AND SATISFACTION
CHAPTER 70 ACCORD AND SATISFACTION
§ 0.01 “Accord And Satisfaction” Is Completed when a Creditor Accepts a Substitute Performance for a
Previously Existing Claim or Prior Original Duty
§ 0.02 essio of Assent Is Required
[1]An Accord Is Effective if a Reasonable Person in the Creditor’s Position Would Understand the
Substitute Performance Is Offered in Full Satisfaction of the Original Claim
[2]Assent by Cashing a Check
[3]Assent by Retaining a Check
§ 0.0 cce t ce of Part Payment of a Liquidated Debt
§ 0.0 yme t in Advance
§ 0.0 tis ctio by a Different Performance
§ 0.0 yme t or Performance by a Third Person
§ 0.0 t Discharge of Reciprocal Obligations
§ 0.0 is te as to Validity of Claims
[1]Distinction Between Unliquidated and Liquidated Claims
[2]A Good Faith Dispute May Be Sufficient to Cause a Part Performance to Be Operative as Full
Satisfaction
[3]Settlement of Doubtful, Disputed, or Unliquidated Claims
[4]Discharge by Payment of an Amount Admittedly Due
§ 0.0 ett eme ts by Fiduciaries
§ 0.10 om ositio s with Creditors
§ 0.11 ect of Mistake or Misrepresentation on Accord and Satisfaction
§ 0.12 e of Proving Accord and Satisfaction

End of Document
CHAPTER 70 ACCORD AND SATISFACTION
the subject matter.

End of Document
§ 0.01 An “Accord And Satisfaction” Is Completed when a Creditor Accepts

a Substitute Performance for a Previously Existing Claim or Prior Original
Duty
An accord and satisfaction is completed when a creditor accepts a substitute performance for a previously existing
claim or prior original duty. Abbott v. Banner Health Network, 236 Ariz. 436, 341 P.3d 478, 2014 Ariz. App. LEXIS
258, 702 Ariz. Adv. Rep. 14 (Ariz. Ct. App. 2014); Pomstein v. Henderson, 2014 Conn. Super. LEXIS 2368 (Conn.
Super. Ct. Sept. 18, 2014). The nature of the prior claim—contract, tort, or otherwise—is irrelevant. A debtor’s
pleading and proving the acceptance of the substitute performance is a complete defense to the creditor’s action on
the previously existing claim.
The acceptance of the substitute performance can occur in two ways. The first way is by formation of a bilateral or
unilateral contract called an executory accord, a subject discussed in Chapter 69 above. The accord is the
agreement and the performance is the satisfaction. When the accord is performed (satisfied), the original claim is
discharged. The second way of achieving the effect of an accord and satisfaction does not involve promises. A
debtor may offer a substituted performance and the creditor may accept it in satisfaction of a claim without either
party making a promise. Similarly, a creditor may ask for a substitute performance in satisfaction of the original
claim and the debtor may perform in accordance with that request, thereby satisfying the original claim.
Compromises are agreements for the settlement of doubtful or disputed claims by a substitute performance.
Accords typically involve disputed claims that are compromised, but parties may enter into an accord involving an
undisputed claim. Thus, a compromise is always an accord, but an accord is not necessarily a compromise.
An accord must be supported by consideration. If the prior claim was known to be invalid ab initio, the accord is
unenforceable. As seen in Chapter 7 above, however, even a claim that turns out to be invalid may constitute
consideration.
Practice Resource:
• Corbin § 0.1 (discharge by substituted performance).

End of Document
§ 0.02 Expression of Assent Is Required
[1] An Accord Is Effective if a Reasonable Person in the Creditor’s Position Would Understand the
Substitute Performance Is Offered in Full Satisfaction of the Original Claim
The law of accord and satisfaction is not independent of the law of contract. See Baylor Health Care Sys. v.
Emplrs. Reinsurance Corp., 492 F.3d 318 (5th Cir. 2007). Any offer must effectively express its terms and must
provide the offeree with an understanding that its assent will form a contract. An offer of an accord is effective if
a reasonable person in the creditor’s position would understand the substitute performance is offered in full
satisfaction of the original claim and not otherwise.
In one case, a buyer of software support services claimed that a dispute with the seller had been resolved
under an escrow agreement constituting an accord and satisfaction. There was no language in the escrow
agreement dealing with its effect on the original claim. The court, quoting Corbin on Contracts, recognized that
whether the seller should have understood the escrow agreement as an accord and satisfaction was a question
of fact that could not be decided as a matter of law. Britvic Soft Drinks, Ltd. v. ACSIS Techs., Inc., 265 F. Supp.
2d 1179 (D. Kan. 2003).
[2] Assent by Cashing a Check

Numerous accord and satisfaction cases arise from payments by check of lesser amounts than the amounts
claimed by the creditor. If a debtor owes a liquidated, undisputed amount to a creditor, sending a check for a
lesser amount with a notation that it constitutes payment in full does not satisfy the necessary expression of
assent to constitute an accord and satisfaction. The creditor must have a reasonable basis for understanding
that a check is being offered in full satisfaction of a disputed claim.
If the amount due is unliquidated or subject to dispute and the debtor merely sends a check for an amount less
than the amount claimed by the creditor without clearly expressing its intention that the amount is offered in full
satisfaction of the disputed claim, it is not an effective accord and satisfaction. Saul Subsidiary II Ltd. P’ship v.
Venator Group Specialty, Inc., 830 A.2d 854 (D.C. 2003). If there is a clear expression that a check is sent in
full satisfaction of an unliquidated or disputed claim, cashing or certifying (thereby accepting) a check sent in full
satisfaction of a disputed claim with knowledge or reason to know of the condition on which the check is
tendered manifests dominion and control and provides a basis for discovering a manifestation of acceptance.
Restatement (Second) of Contracts § 2 (an offeree who performs an act inconsistent with the offeror’s
ownership of offered property is bound by the offered terms unless they are manifestly unreasonable). See also
Uniform Commercial Code (UCC) § - 11.
Phrases such as “in full payment” or “in full satisfaction” are sufficient to indicate the intention of the debtor. The
act of the creditor in crossing out such phrases on the check will have no operative effect. Neither will the
creditor’s notation of “under protest” or “with full reservation of rights” before cashing the check have an
operative effect on the otherwise effective accord and satisfaction that is completed when it cashes the check.
A 1990 Amendment to UCC § 1-20 resolved a misconstruction of the original language in that section to
prevent a creditor from cashing the check and treating it as only a part payment.
UCC § - 11 includes two limitations on this method of effecting an accord and satisfaction. When the claimant
is an organization with large numbers of customers who send checks to pay their bills, the organization may
guard against inadvertent acceptance of a check in full satisfaction of a disputed claim by a conspicuous
statement sent to a party against whom such a claim is asserted directing any such check marked payment in
Page 2 of 2
full to be sent to a designated person, office, or place. Failure to send the “full satisfaction” check to that
designated party or office precludes an effective accord and satisfaction. UCC § - 11 c 1 .
A separate safeguard against inadvertent accord and satisfaction allows a claimant, whether or not an
organization, that cashes a check in full satisfaction, to tender repayment of that amount within 90 days of
payment of the instrument to the person against whom the claim is asserted. Both of these limitations are
subject to proof by the debtor that, within a reasonable time before collection of the check was initiated, the
claimant or its agent having direct responsibility concerning the disputed obligation knew that the check was
tendered in full satisfaction of the claim. UCC § - 11 .
[3] Assent by Retaining a Check

Simply retaining a check issued in full satisfaction of a claim, however, may not be manifest assent to an accord
and satisfaction. Where a plaintiff was entitled to a return of a $25,000 deposit minus any preparation or part
performance costs incurred by the defendant, the defendant issued a check for $6,545.20 with a handwritten
notation that it was issued in full settlement of the plaintiff’s claim. Within weeks of the receipt of the check the
plaintiff notified the defendant that he disputed the amount of the check. The plaintiff did not cash the check
though he retained it for more than 10 months before returning it. The trial court held that the retention of the
check for that period was unreasonable as a matter of law and granted the defendant’s motion for summary
judgment because the retention of the check amounted to an accord and satisfaction. On appeal, the court
reviewed precedent and concluded that none of the cases suggested that the mere length of time the check is
held was determinative, regardless of when the creditor actually notified the debtor. The court held that the trial
court erred by grating summary judgment for the defendant on that basis alone. Wagner v. Foremost Bldgs.,
Inc., 322 Wis. 2d 736, 778 N.W.2d 172, 2010 WI App 1.
Practice Resource:
• Corbin § 0.2 (accord and satisfaction requires an expression of assent).

End of Document
§ 0.03 Acceptance of Part Payment of a Liquidated Debt
Part payment of an overdue money debt is the performance of only part of an existing legal duty. The issue of
consideration in such cases was explored in Chapter 7 above. The well-known case of Foakes v. Beer, 9 App. Cas.
605 (Eng. C.A. 1884), held that payments in installments of a liquidated debt did not discharge the debtor’s
obligation to pay interest even though the creditor had agreed that the installment payments would constitute a
complete discharge. While numerous American decisions have followed Foakes v. Beer, some jurisdictions have
adopted a contrary rule by statute or judicial decision.
UCC § - 0 allows the discharge of the obligation of a party to pay a negotiable instrument without consideration
by a voluntary act such as surrender, destruction, mutilation, or cancellation of the instrument or by agreeing not to
sue or expressly renouncing rights in a signed writing. Another section allows a claim to be discharged in whole or
in part without consideration by an agreement of the aggrieved party in an authenticated record. UCC § 1- 0
(formerly § 1-10 .
Practice Resource:
• Corbin § 0. (acceptance of part payment of a liquidated debt as a discharge).

End of Document
§ 0.04 Payment in Advance
Even in the case of a liquidated, undisputed money debt, if the creditor agrees to take a lesser sum in advance of
the time for payment in full satisfaction of the claim, the original claim is discharged. The value of the acceleration in
payment is irrelevant if the creditor bargained for such an advance payment as a complete discharge. Similarly, a
bargain for payment or a lesser sum at a place different from the place of payment in the original obligation as full
satisfaction will discharge the original claim.
Practice Resource:
• Corbin § 0. (part payment in advance of maturity).

End of Document
§ 0.05 Satisfaction by a Different Performance
Early on, it was held that a liquidated debt, regardless of its size, could be satisfied by the delivery of an article
different from the original obligation such as a “horse, hawk, or robe.” Pinnel’s Case, 5 Coke 117a (1602). The
value of the substituted consideration is irrelevant if it was bargained for. The new consideration need not be real or
personal property; it can be a contract right or other general intangible such as a security interest in personal
property. It could be a forbearance by a debtor to file in bankruptcy or any other consideration. While it has been
held that acceptance of a debtor’s check or promissory note is not consideration, there is an argument that the
debtor’s obligation in issuing such an instrument is different, since the instrument could be negotiated to a holder in
due course who could take the check free of most of the claims and defenses that would be available to the obligee
or a mere assignee.
Practice Resource:
• Corbin § 0. (some performance different from that previously required).

End of Document
§ 0.06 Payment or Performance by a Third Person
A creditor’s acceptance of a lesser amount of a liquidated claim paid by a third person out of monies not owned by
the debtor, or a check or promissory note in a lesser amount from a third person accepted by the creditor,
discharges the original claim against the debtor. While payment out of the debtor’s monies would not be effective,
part payment of a liquidated debt by a trustee or assignee for creditors operates as a full satisfaction even though
the debtor has transferred assets to the trustee or assignee. Similarly, the acceptance of a different medium of
payment from a third person operates as a discharge of the original claim if it was bargained for.
Practice Resource:
• Corbin § 0. (payment or other performance by third person as satisfaction).

End of Document
§ 0.0 Mutual Discharge of Reciprocal Obligations
If Ames owes Barnes $1,000 and Barnes owes Ames $1,000, their bargain to discharge both claims is not simply
an executory accord; it is an accord and satisfaction discharging both claims. If Barnes owed Ames $2,000, Ames’s
debt would be totally discharged and Barnes’s debt would be discharged to the extent of $1,000, since part
payment of a liquidated debt is not consideration. If the debts of Ames and Barnes were unliquidated, their assent
to reciprocal discharge of each claim would be immediately operative as a mutual accord and satisfaction even
though they may have contemplated subsequent formal releases or the surrender of documents. Their mutual
assent would be sufficient to discharge their respective claims unless they manifested an intention that the
discharges would not occur until the formal releases were executed or the documents were surrendered.
Practice Resource:
• Corbin § 0. (mutual discharge of reciprocal obligations).

End of Document
§ 0.0 Dispute as to Validity of Claims
[1] Distinction Between Unliquidated and Liquidated Claims

Part payment of a matured liquidated claim will not operate as a discharge of the original obligation by accord
and satisfaction, but it will be an accord and satisfaction if the debt is unliquidated or disputed. It is, therefore,
important to consider illustrations of unliquidated claims.
Among other examples, a plumber’s work and other services are often performed without advance agreement
as to compensation. The service provider has an unliquidated claim for his services. He is entitled to
reasonable compensation. A claim for damages for an alleged breach of contract or for commission of a tort is
also unliquidated. If Ames has agreed to perform a service for Barnes at a contract rate of $500 per day and
there is a dispute over the number of days Ames has worked, the claim is unliquidated. If the amount of the
claim is definite and certain but the debtor asserts the right to a set-off or recoupment, the amount owed is
unliquidated. Unclear terms of a contract can convert a definite amount owed into an unliquidated claim.
[2] A Good Faith Dispute May Be Sufficient to Cause a Part Performance to Be Operative as Full
Satisfaction
When a claim is disputed in good faith, it is an unliquidated claim that can be discharged by part performance of
what is claimed if the obligee accepts that part performance in full satisfaction. Good faith requires an honest
belief based on a foundation that is not unreasonable that what is owed to the creditor is less than the amount
claimed by the creditor.
UCC § - 11 requires an unliquidated claim or a bona fide dispute and a good faith tender of a check in full
satisfaction to discharge the original claim. “Good faith” is defined as both “honesty in fact and the observance
of reasonable commercial standards of fair dealing.” UCC § 1-201 20 .
[3] Settlement of Doubtful, Disputed, or Unliquidated Claims

If the performance that is asserted to be due is doubtful, disputed, or unliquidated, the rendition of any part of
the performance, even part payment of money, operates in full satisfaction of the claim if the claimant has
agreed. Similarly, acceptance of any different performance, including the acceptance of the debtor’s promissory
note or check, will discharge the claim although the debtor’s note or check will only suspend the claim until the
instrument is paid. If Ames owes $10,000 to Barnes but the parties agree that Ames will surrender a disputed or
unliquidated claim against Barnes in exchange for Barnes’s discharge of his $10,000 claim against Ames, both
claims are discharged.
The validity of a claim is doubtful if the operative facts are doubtful or if the legal effects of known facts are
doubtful. If Ames has a doubtful claim of $10,000 against Barnes, Ames’s agreement to accept $1,000 in
satisfaction of the claim is an effective discharge of the claim even if the claim turns out to be a valid $10,000
claim.
[4] Discharge by Payment of an Amount Admittedly Due

When a debtor admits that a certain amount is due a creditor but makes a good faith claim of a set-off or
recoupment that is disputed by the creditor, most courts hold that the payment of the amount admittedly due
apart from the set-off or recoupment constitutes an accord and satisfaction if it is accepted by the creditor.
Page 2 of 2
Practice Resources:
• Corbin § 0. (dispute as to validity of claim—good faith is necessary); § 0. (settlement of
doubtful, disputed, or otherwise unliquidated claims); § 0.10 (discharge of unliquidated claim
by performance of a part that is admittedly due); § 0.11 (illustrations of unliquidated claims).

End of Document
§ 0.0 Settlements by Fiduciaries
When a fiduciary such as an agent or trustee holds funds of a principal or beneficiary, part payment of such funds
conditioned on their acceptance by the principal or beneficiary and retention of that payment by the recipient does
not constitute an accord and satisfaction even where the payment is disputed. The fiduciary is not making a part
payment of its money; it is making a part payment of money belonging to the principal or beneficiary. It is a breach
of trust, a breach of duty, and, perhaps, a tort, for such a fiduciary to impose conditions on the payment of the
funds. The principle is applicable to attorneys as fiduciaries.
When an agent holds funds not as a trustee, settlement of a dispute with the principal follows the ordinary rules of
accord and satisfaction. The agent is still a fiduciary, however, and that higher standard may make an otherwise
valid accord voidable by reason of the agent’s nondisclosure of facts that an ordinary debtor would not be required
to disclose. See Gleason v. Metropolitan Mortg. Co., 15 Wash. App. 481, 551 P.2d 147, 158 (1976).
Practice Resource:
• Corbin § 0.12 (settlements by fiduciaries).

End of Document
§ 0.10 Compositions with Creditors
A composition with creditors is an agreement between a debtor and two or more of its creditors, or between its
creditors for the debtor’s benefit, or between the debtor’s creditors and a third party, that the creditors will accept in
full satisfaction something less than or different from their original claims. Although bankruptcy filings are quite
common, creditors may choose this traditional method of settlement rather than the debtor’s bankruptcy because of
its relative informality, lower costs, and the stigma associated with bankruptcy. Unlike bankruptcy, a composition
with creditors applies only to participating creditors. The composition may be a bilateral contract under which the
debtor promises a substituted performance and the participating creditors agree to accept that substitute in full
satisfaction of their claims. This is an executory accord.
The creditors may offer to accept a substitute performance from the debtor or a third person in satisfaction of their
claims. This is not an accord. When the requested performance is accepted, however, it is an accord and
satisfaction discharging the original claims. On the other hand, the debtor or a third party may offer an instant
performance in satisfaction of the creditors’ claims. The creditors’ receipt of the performance is an accord and
satisfaction. The debtor and creditors may instead agree on a substitute contract with the intention that the
creditors’ claims will be discharged upon the formation of that contract. The substituted contract operates as an
immediate discharge of the claims.
It is important to note that, even though a debtor’s payment of part of a liquidated debt to a single creditor would not
be an accord and satisfaction because it lacks consideration, when two or more creditors agree to accept less than
full payment, there is consideration in the benefit to the creditors receiving equal treatment in exchange for each
creditor suffering the same detriment. Notwithstanding contrary arguments, such composition agreements are also
typically bargained for.
Practice Resource:
• Corbin § 0.1 (compositions with creditors).

End of Document
§ 0.11 Effect of Mistake or Misrepresentation on Accord and Satisfaction
Like other contracts, an executory accord or an accord and satisfaction may be set aside or reformed because of
fraud or mistake. A mistake is a belief not in accord with the facts. Restatement (Second) of Contracts § 1 1.
Where, however, a claim is doubtful or disputed in good faith and the parties reach a compromise and enter into an
executory accord, they are consciously assuming a risk that one or both are mistaken and have decided to resolve
their doubtful or disputed situation by the compromise agreement they make. Thus, such an accord or accord and
satisfaction could not be reformed or avoided on the basis of mistake.
Similarly, if a claim is made for an injury, the compromise is not made voidable for mistake because the injury is
greater and lasts longer than the parties assumed at the time of settlement. An annuity contract is not voidable
because the annuitant’s life turns out to be shorter or longer than either party anticipated. If, however, a settlement
was predicated on a minor injury but an unknown major injury later appears, the settlement may be set aside since
it is not simply a difference in the degree of harm but a difference in kind.
Practice Resource:
• Corbin § 0.1 (effect of mistake or misrepresentation upon accords and compromises).

End of Document
§ 0.12 Burden of Proving Accord and Satisfaction
Once a plaintiff creditor alleges and proves a breach of duty by the defendant in failing to pay a matured debt, an
accord and satisfaction is properly viewed as an affirmative defense where the burden of proof is on the party
alleging it as a defense. A plaintiff who sues on the original obligation during the pendency of an accord will not
prevail. The creditor’s right to sue on the original claim is suspended until the accord is either fully performed, at
which time the claim is discharged, or until it is breached by the debtor, which will allow the creditor to sue on the
accord or on the original claim.
Practice Resource:
• Corbin § 0.1 (burden of proving accord and satisfaction).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 71 SUBSTITUTED CONTRACT AND NOVATION
CHAPTER 71 SUBSTITUTED CONTRACT AND NOVATION
§ 1.01 isch e by a Substituted Executory Contract
[1]An Existing Claim Can Be Discharged by Substitution of a New Executory Agreement
[2]Substitute Contract Distinguished from Contract Modification
[3]Substitute Contract Distinguished from Accord and Satisfaction
[4]Substitute Contract Distinguished from Novation
[5]Substitute Contracts Distinguished from Rescission
[6]A Substitute Contract Can Be Avoided
§ 1.02 Discharge or Variation of a Written Contract
[1]Parties May Orally Vary or Rescind a Written Contract
[3]Clauses Prohibiting Rescission or Modification Unless Evidenced by a Writing
§ 1.0 isch e by Novation
[1]Operation of a Novation
[2]Assent of the Original Obligor Is Not Required
[3]Simple and Compound Novations
§ 1.0 o tio by Accepting a Third Party’s Note
§ 1.0 Thi Party’s Erroneous Belief of an Existing Debt to the Discharged Obligor
§ 1.0 t t te of Frauds

End of Document
CHAPTER 71 SUBSTITUTED CONTRACT AND NOVATION
the subject matter.

End of Document
§ 1.01 Discharge by a Substituted Executory Contract
[1] An Existing Claim Can Be Discharged by Substitution of a New Executory Agreement

Parties may decide to resolve disputes about a contract by entering into a new contract that immediately
discharges all rights and duties under the original contract. An existing claim can be discharged by the
substitution of a new executory agreement by which a creditor accepts the debtor’s new promise of
performance in immediate satisfaction of the creditor’s money claim. Such new contracts are properly called
“substitute contracts.” Confusion arises, however, in distinguishing a substitute contract from other forms of
discharging or changing contractual duties such as a modification, accord and satisfaction, rescission or
novation.
To determine whether the parties intended to enter into a substituted contract, the essential test is whether the
terms of the second contract are so inconsistent with the terms of the first contract that the two contracts cannot
co-exist. The fact of inconsistency, itself, is sufficient to find that the old terms have been discharged and only
the new, substituted terms exist. Butcher v. Dravo Corp., 2009 U.S. Dist. LEXIS 25128 (W.D. Pa. Mar. 25,
2009).
[2] Substitute Contract Distinguished from Contract Modification

A substitute contract immediately discharges the rights and duties of the original contract. A modification of a
contract does not discharge the rights or duties under the original contract. It retains the original rights and
duties while modifying one or more terms. The modification may not change any of the existing rights or duties;
it may simply add a new duty. In a contract for the sale of goods, such a modification can be effective without
consideration; in other types of contracts, the modification may be enforceable without consideration if it arises
from unanticipated difficulties. (These concepts are explored in Chapter 7 above.) Sometimes, it is not easy to
determine whether a second contract is a modification or a substitute. Citing Corbin, the court in Subsea Co. v.
Payan, 448 S.W.3d 557, 2014 Tex. App. LEXIS 10374, 39 I.E.R. Cas. (BNA) 75, 164 Lab. Cas. (CCH) P61,524
(Tex. App. Houston 14th Dist. 2014) explained that “[g]enerally, when parties enter into a second contract
dealing with the same subject matter as a prior contract without stating whether the second contract operates
as a discharge of or substitute for the first, the two contracts must be interpreted together and the later contract
prevails to the extent they are inconsistent.” Any portion of the first contract not in conflict will remain
enforceable.
[3] Substitute Contract Distinguished from Accord and Satisfaction

A substitute contract may be described as one type of accord and satisfaction. Such a description would not be
incorrect since a new contract properly called a substitute contract constitutes both an accord and immediate
satisfaction of the original claim. The typical accord and satisfaction, however, begins with an executory accord,
which is an agreement between the parties to discharge one or more claims by a future performance. The
discharge becomes effective only upon completion of the performance.
Whether the parties have entered into an executory accord or a substitute contract is a critical question in
resolving the effect of breach on the rights and duties of the parties. If a substitute contract is breached, absent
a contrary agreement, the rights of the aggrieved party are determined exclusively by its rights under the
substitute contract. The breach of the substitute contract generally does not revive the former claim which has
been discharged. The breach of an executory accord by the debtor, however, allows the creditor a choice
between suing on the original claim or on the breached executory accord, which only operated to suspend
Page 2 of 2
rather than discharge the original claim. In King v. Espinoza, 2011 Ariz. App. Unpub. LEXIS 1079 (Aug. 11,
2011), King signed a warranty deed to his wife, Betty, on property they had previously purchased to enable her
to apply for a loan. Betty conveyed the property to Espinoza and filed for divorce from King, retaining the
proceeds of the sale. King claimed the transfer to Espinoza was a fraudulent conveyance. The property was
sold to the Shinns. Betty then acknowledged that she fraudulently conveyed community property and entered
into a settlement contract with King by agreeing to pay him $120,000. The court found that the King and Betty
had entered into a substitute contract that discharged the original contract, precluding King from enforcing it.
Since the $120,000 settlement had been reduced to judgment, King could only look to Betty to pay the
judgment rather than either Espinoza or the Shinns.
Whether the parties intended a substitute contract or an executory accord is a question of interpretation like any
other interpretation of a contract to determine the parties’ intentions. In doubtful cases, the Restatement
(Second) of Contracts suggests that, where the original duty was one to pay an undisputed, liquidated money
debt, it is more likely that the parties intended an executory accord. Restatement (Second) of Contracts § 2
cmt. c.
[4] Substitute Contract Distinguished from Novation

A substitute contract is sometimes called a novation. Indeed, a California statute lists a substitute contract
under the general heading of “novation.” Cal. Civ. Code § 1 1 1 . The usual understanding of novation,
however, would view it as one species of a substitute contract; a novation refers to a new contract with a
substituted debtor or creditor while a substitute contract refers to a new contract exclusively between the
original parties that immediately discharges the rights and duties between them.
In one case, a defendant attempted to establish an affirmative defense of a substituted contract. The court
relied on the Corbin on Contracts analysis and held that “substitute contract” applies only to the original parties
and not to a third party. Landover Corp. v. Bellevue Master, LLC, 2006 U.S. Dist. LEXIS 1845 (W.D. Wash. Jan.
6, 2006).
[5] Substitute Contracts Distinguished from Rescission

The purpose of a contract of rescission is the discharge of the original executory contract with no payments or
any new executory promises. Thus, the only similarity between a contract of rescission and a substitute
contract or executory accord is that they all involve an intention to discharge rights and duties under an original
contract.
[6] A Substitute Contract Can Be Avoided

Either an executory accord or a substitute contract can be avoided on the traditional basis of infancy, fraud, or
the like. When the power of avoidance is exercised, the avoided contract is nullified both as an executory
contract and a discharge of the original claim. The prior claim is reinstated. The same analysis would apply if
the parties had entered into a contract of rescission that discharged their original contract.
Practice Resource:
• Corbin § 1.1 (discharge by substituted executory contract).

End of Document
§ 1.02 Oral Discharge or Variation of a Written Contract
[1] Parties May Orally Vary or Rescind a Written Contract

Subject to the statute of frauds, a written contract may be varied or rescinded by the parties’ oral agreement.
The most frequent illustrations of modifications occur in construction contracts, where “change orders” are the
rule rather than the exception. If the contract as modified is within the statute of frauds, the modification must be
evidenced by a writing to satisfy the statute.
Construction contract change orders would typically not involve the statute of frauds unless such an oral
modification expressly stated a duration of performance exceeding one year from the time the modification was
made. Such modifications do not come within the other traditional categories of contracts under the statute of
frauds.

Modifications of contracts for the sale of goods are expressly required to comply with the basic provisions of the
Uniform Commercial Code (UCC) statute of frauds. UCC § 2-20 requires the “contract as modified” to meet
the requirements of the basic statute of frauds provision in UCC § 2-201 requiring all contracts for the sale of
goods priced at $500 or more to be evidenced by a sufficient writing. Modifications of any term that must be in
writing under § 2-201 such as the quantity term or changes to the parties to the contract or the subject matter,
must be evidenced by a new writing or electronic record. The better view is that modifications to terms that § 2-
201 does not require to be in writing for the original contract, such as the price term or the time or place of
delivery, should not be required to be in writing as modifications. The prevailing view, however, is that any
modification of a contract for the sale of goods must be evidenced by a writing, although the case law
supporting that view provides little supporting analysis. (For more discussion of these issues, see Chapter 13
above.)
[3] Clauses Prohibiting Rescission or Modification Unless Evidenced by a Writing

Prior to the UCC, attempts by parties to prohibit themselves from modifying or rescinding their contract absent a
writing were generally unsuccessful. The paradigm was the construction contract that prohibited the
enforcement of any change order absent a signed writing evidencing assent to such a change. When the work
pursuant to the oral change order was performed, however, courts used judicial tools such as the parties’
waiver of their own clause prohibiting oral modifications and the implied promise to pay for any additional work
done pursuant to the change order. See, e.g., Uhrhahn Constr. & Design, Inc. v. Hopkins, 2008 UT App 41, 179
P.3d 808. A classic illustration is found in Wagner v. Graziano Constr. Co., 390 Pa. 445, 136 A.2d 82 (1957).
UCC § 2-20 2 states that a clause prohibiting rescission or modification of a contract for the sale of goods
must be enforced. With respect to modifications, the interpretation of § 2-20 as requiring any modification to
be in writing would appear to eliminate any need for that portion of § 2-20 2 referring to modifications. Thus,
the prevailing interpretation of § 2-20 with respect to modifications appears faulty for this reason alone.
Section 2-209(3), however, does not refer to rescissions.
Section 2-209(4) allows for the waiver of the writing requirements of either § 2-20 2 or (3), while § 2-20
allows the waiver to be retracted prior to a material change of position in reliance on the waiver. Beyond the
confusion involving the construction of § 2-20 the case law demonstrates further confusion in the
construction and application of §§ 2-20 and (5).
Page 2 of 2
If an oral modification has been performed or if one or both parties have reasonably relied on an oral rescission
of the contract, courts will generally enforce such modifications or rescissions. Indeed, both New York (N.Y.
Gen. Oblig. Law, § 1 - 01 and California (Cal. Civ. Code § 1 statutes requiring modifications to be in
writing exempt executed oral agreements.
Practice Resource:
• Corbin § 1.2 (oral discharge or variation of a written contract).

End of Document
§ 1.03 Discharge by Novation
[1] Operation of a Novation

A novation is a substitute contract with at least a new obligor or obligee. Restatement (Second) of Contracts
§ 2 0. Generally, the new party is a substituted obligor. Upon the formation of the novation, the original obligor
is discharged. A novation requires a prior obligation, either actual or asserted, that is discharged. If the asserted
obligation turns out to be invalid, there is nothing to discharge, but the new contract is valid if the obligee had an
honest and not unreasonable belief in its validity. The novation operates as a defense by the original obligor
against a valid or asserted obligation that has been discharged.
The performance to be rendered under a novation may be the same or different from the performance required
under the original contract. The old debtor may join the new debtor in making the promise to the obligee that
discharges the old debtor’s original duty. If the parties to the new contract were identical, their agreement
should be called a “substitute contract” rather than a “novation.” The breach of a novation does not revive the
original obligation. If the obligee agrees to accept only the performance of the new agreement as satisfaction,
the parties have formed an executory accord rather than a novation.
[2] Assent of the Original Obligor Is Not Required

The statement that a novation requires the assent of three parties, the creditor, the original debtor, and the
substituted debtor, is no longer the law, if it ever was. The new debtor must assent since it is undertaking the
obligation in lieu of the old debtor. The creditor must agree to surrender its rights against the old debtor. Am.
Gen. Fin. Servs. v. Teodosio, 2009 Conn. Super. LEXIS 966 (Apr. 9, 2009). The old debtor, however, may be
discharged even though it has not assented to the novation. The old debtor is an intended beneficiary of the
novation. While it may disclaim the benefit of the novation, simply pleading it in defense to an action by the
creditor will indicate that it was not disclaimed.
If the original debtor contracts with a third party to assume its obligation under a contract, the creditor has not
agreed to a novation by simply acquiescing in the assumption nor even by acceptance of partial payments by
the third party. See Thomas v. Frederick J. Borgsmiller, Inc., 155 Ill. App. 3d 1057, 508 N.E.2d 1235, 108 Ill.
Dec. 658 (1987). Acceptance of such performance by a third party with knowledge that it is offered only on the
basis of a novation, however, could be sufficient evidence of a novation by conduct. A creditor could provide
advance assent to a novation by empowering the debtor to assign its rights and delegate its duties to a third
party meeting certain financial or other requirements.
[3] Simple and Compound Novations

A novation may occur through the substitution of a new obligee. Absent a material change in the duty of the
obligor, an assignee may assign its rights under a contract and the assignee may also delegate its duty, if the
duty is normally delegable. The assignee is not discharged from its duty unless the other party agrees to accept
the substitute obligor, thereby forming a novation. A novation may occur without the consent of the new obligee,
as where the original obligee offers to discharge the debtor if the debtor promises to pay $10,000 to a third
party.
The simple novation occurs when creditor Ames agrees to discharge original debtor Barnes in exchange for the
promise of replacement debtor Carr. The consideration supporting Carr’s promise to pay the debt is Ames’s
discharge of her claim against Barnes. The novation could instead involve a new obligation as where Ames
agrees to discharge her claim against Barnes in exchange for Carr’s promise to paint Ames’s house.
Page 2 of 2
A compound novation may occur where, for example, Ames owes Barnes $10,000 and Barnes owes Carr
$10,000. The three parties may agree to discharge both claims immediately in a novation that creates a new
debt where Ames owes Carr $10,000.
Practice Resource:
• Corbin § 1. (discharge by novation).

End of Document
§ 1.04 Novation by Accepting a Third Party’s Note
A novation occurs when an obligee holds an obligor’s note and a new note from a third party is taken in substitution
and discharge for the original obligor’s note. In the absence of such an agreement, the obligation under the original
note would only be suspended until the new note is paid. UCC § - 10 2 . In such a case, the new note would
have the effect of an executory accord rather than a novation.
If Ames and Barnes are jointly and severally liable on a $50,000 note to the bank and Barnes provides a $50,000
note to the bank, which takes the note in payment of the joint obligation and in substitution for the first note, there is
a novation discharging the first note. If the transaction did not preserve Barnes’s right of recourse as a secondary
obligor against Ames for contribution on the first note, Barnes’s right to contribution of $25,000 from Ames is
discharged.
A third-party note taken in substitution for the original note must be supported by consideration. Under UCC § -
303, a maker of a note has a defense if an instrument is issued without consideration. An instrument is issued or
transferred for consideration if it is issued or transferred for “value.” Value includes payment of or security for an
antecedent claim. UCC § - 0 . Thus, there is consideration supporting the issuance of note by a third person in
payment of the original obligor’s note, whether it is issued pursuant to a novation or an executory accord.
Practice Resource:
• Corbin § 1. (novation by accepting a third person’s note).

End of Document
§ 1.05 Third Party’s Erroneous Belief of an Existing Debt to the Discharged

Obligor
A third party may agree to pay the obligor’s debt because the third party owes a debt to the obligor and the third
party believes that its payment will discharge both debts. For example, Ames believes she owes a balance to
building contractor Barnes and makes a promise to pay Barnes’s debt to Carr, who supplied Barnes with materials,
in exchange for Carr’s promise to discharge Barnes’s debt. If it is turns out that Ames did not owe a balance to
Barnes, the novation discharging Carr’s claim against Barnes is still effective and Ames’s promise to Carr is
enforceable.
Practice Resource:
• Corbin § 1. (effect of third-party promisor’s erroneous belief of an existing debt to the discharged
obligor).

End of Document
§ 1.06 Statute of Frauds
The typical novation creates a new contract involving a new obligor while simultaneously discharging the original
obligor from its duty under the original contract. Thus, at the moment of formation, there is one obligor and one
obligee. There is no promise to answer for the debt of another requiring the satisfaction of the suretyship provision
of the statute of frauds since the “other” party has already been discharged. If the original debtor is not released
upon the promise of the new debtor, a novation has not occurred.
Practice Resource:
• Corbin § 1. (statute of frauds).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 72 ACCOUNT STATED
CHAPTER 72 ACCOUNT STATED
§ 2.01 Account Stated Is a Computation of a Liquidated Monetary Debt That Both the Debtor and
Creditor Agree Is the Amount Owed by the Debtor
§ 2.02 ctio by Creditor for an Amount in Excess of the Account Stated
§ 2.0 Account Stated May Be Oral or Written
§ 2.0 Account Stated Is a New Cause of Action
[1]Claim Preclusion
[2]Statute of Limitations
[3]An Account Stated Cannot Operate as a Discharge of Prior Debts

End of Document
CHAPTER 72 ACCOUNT STATED
the subject matter.

End of Document
§ 2.01 An Account Stated Is a Computation of a Liquidated Monetary Debt

That Both the Debtor and Creditor Agree Is the Amount Owed by the Debtor
An “account stated” is an arithmetical computation of previously liquidated monetary debts that strikes a balance to
which both the debtor and creditor manifest agreement as the correctly computed amount owed by the debtor. An
account stated is an admission by each party of facts stated therein and constitutes a promise by the debtor to pay
according to its terms. C. Thorrez Indus. v. LuK Transmissions Sys., LLC, 2010 U.S. Dist. LEXIS 34724 (N.D. Ohio
Apr. 8, 2010). See also Restatement (Second) of Contracts § 2 2.
The essence of an account stated is not compromise where consideration is found by each party surrendering its
original claims and agreeing upon some amount that will discharge the obligation. The essence of account stated is
computation of existing liquidated amounts due and owing to arrive at a balance to which the parties manifest their
assent as an accurate accounting of the amount the debtor owes. Parties would have to come to a separate
agreement, a compromise, to arrive at a certain amount due for any unliquidated claim. Such an unliquidated claim
could not be part of the amounts due and owing the creditor.
A debtor’s promise to pay the amount due is enforceable even though it is not supported by consideration. The
early common law apparently viewed it as an enforceable promise based on past debts at a time when past
consideration would support such a promise. Modern courts recognize this rationale in enforcing a debtor’s promise
to pay the balance. See Chrysler Corp. v. Airtemp Corp., 426 A.2d 845, 849 (Del. 1980).
The new promise is enforceable only to the extent of the prior indebtedness since it is enforceable only because of
that indebtedness. The promise is enforceable as made, absent proof that it was erroneous. The submission of the
account stating a balance due is a prima facie admission by the claimant that the amount is correct. By merely
receiving the statement, the debtor admits nothing, but the debtor’s silence beyond a reasonable time after receipt
will be viewed as evidence that the statement is correct and of its implied promise to pay the amount stated. A prior
objection, however, may preclude an effective account stated.
In United Capital Funding Corp. v. N.Y. City Dep’t of Educ., 2012 U.S. App. LEXIS 1779 (2d Cir. Jan. 30, 2012), the
plaintiff sent a February 19 “statement of account” to the defendant seeking payment for past services. While the
defendant did not object to this statement, it had previously stated its objections in a February 3 e-mail stating its
serious doubt regarding the legitimacy of the billings and further stated that the account would remain frozen and
money withheld until the defendant became confident that no money was owed to the defendant for prior false
invoices. The plaintiff argued that the objection was insufficiently specific as it did not address each of 3,913
invoices in the alleged account. The district court held that the February 3 objection precluded any finding of an
implicit agreement by the defendant to pay the February 19 statement of account. On appeal, the Second Circuit
Court of Appeals affirmed since the essence of account stated requires the parties to agree on the amount so
stated, and such an agreement is precluded where a party has raised an objection to the billings or the quality of
the work.
The burden is on the creditor to establish the debtor’s assent and promise to pay. Channel Group, LLC v. Cooper,
2010 N.C. App. LEXIS 312 (Feb. 16, 2010). Even where the debtor has made a promise to pay the amount stated,
it may still attack the amount shown by evidence of errors in the computation or the erroneous inclusion of
antecedent debts. The debtor has only the burden of going forward with such evidence rather than the burden of
persuasion. The creditor must then establish proof of the correctness of the computation or inclusion of the items
Page 2 of 2
contested by the debtor. The parties may agree on a specific time after which assent will be imputed to the debtor.
They may also agree on their own statute of limitations after which errors or omissions will be barred.
One of the obvious illustrations of an account stated occurs when a debtor has an open account to purchase items
on credit from a supplier or a credit card holder and the issuer of the card. The monthly Visa or MasterCard
computation statement of liquidated debts incurred through the purchase of individual items or services at specific
prices is presented to the cardholder. Absent objection to the statement within a reasonable time, the debtor will be
said to have manifested assent and promised to pay the balance on the statement. A microcosmic version of
account stated occurs in a retail store such as a supermarket where the customer makes contracts for individual
items as he or she removes them from shelves and places them in a shopping basket. The computation of these
liquidated obligations and the consequent account stated is presented at the checkout counter when the final
amount to be paid is announced.
Practice Resource:
• Corbin § 2.1 (account stated—striking the balance due).

End of Document
§ 2.02 Action by Creditor for an Amount in Excess of the Account Stated
A creditor’s presentation of the account stated is a prima facie admission on the issue of the amount due. If the
creditor’s promise to accept the stated amount is actually less than the amount legally due, the creditor has a claim
for the excess over the amount stated. The burden is on the creditor to establish the greater amount due. The
creditor’s own prima facie admission must be overcome and it may be precluded from recovering even a provable
excess amount by a statute of limitations or even by a delay in asserting the claim.
Practice Resource:
• Corbin § 2.2 (action by creditor for an amount in excess of the account stated).

End of Document
§ 2.03 An Account Stated May Be Oral or Written
In general, there is no requirement that an account stated be evidenced in a writing or retrievable electronic record.
If, however, individual liquidated claims are within the statute of frauds, a sufficient record of the debtor’s promise to
pay the claims may be required. For example, the new promise in the account stated of a liquidated claim arising
out of the debtor’s earlier promise to answer for the debt of another is still a promise to pay the debt of another that
must meet the requirements of the suretyship provision of the statute of frauds.
Practice Resource:
• Corbin § 2. (an account stated may be oral or written).

End of Document
§ 2.04 An Account Stated Is a New Cause of Action
[1] Claim Preclusion

When liquidated claims are included in an account stated to which the debtor expressly or impliedly assents,
only one indivisible action based on the account stated may be maintained. Under the doctrine of preclusion by
merger, a judgment on any part of the cause of action precludes a second action on any of the individual claims
included in the computation. If a judgment is rendered on an account stated based on a series of debts and
credits over a specific period but the statement omits some of the debts or credits that accrued during that
period, the omitted terms are likely merged and extinguished by the judgment. If, however, the statement omits
a particular liquidated claim arising from a separate transaction, its omission is unlikely to trigger the doctrine of
claim preclusion.
[2] Statute of Limitations

An account stated includes a liquidated claim on which the statute of limitations would have ordinarily begun to
run on the date of the maturity of each claim. When the debtor assents to these claims in an account stated,
however, the statute of limitations commences anew on any promise made resulting from the balance struck by
the parties. With respect to open accounts, the commencement of the statute varies by jurisdiction. If a statute
of limitations bars an action on an account stated, the bar is effective against actions on the open account that
was the basis of the account stated.
Since promises to pay debts barred by the statute of limitations are enforceable without consideration, debts
already barred by the statute of limitations that are included in the account stated become enforceable through
the new promise in the account stated. Similarly, debts discharged in bankruptcy that may be revived by a new
promise to pay them consistent with judicial approval under the Bankruptcy Code would also be enforceable as
part of an account stated.
Under the Uniform Commercial Code, an action for breach of a contract for the sale of goods must be
commenced within four years of the time of accrual, which is defined as the time the breach occurs, regardless
of the aggrieved party’s lack of knowledge of the breach. UCC § 2- 2 1 and (2). An action on an account
stated that strikes a balance on liquidated claims for sales of goods is not an action for breach of a contract for
sale. It is an action to enforce a subsequent debtor’s promise to pay an account. Thus, the UCC statute of
limitations would not apply to an action on the account stated.
It is not the antecedent obligations that are being enforced in such actions. It is the enforcement of the
subsequent promise to pay the balance struck. The governing statute of limitations, therefore, should be the
statute that applies to accounts stated and not to actions on contracts for the sale of goods or other types of
contracts that spawn liquidated claims later included in an account stated.
[3] An Account Stated Cannot Operate as a Discharge of Prior Debts

As suggested earlier, it is important to recognize that an account stated is not designed to effect a compromise
of one or more unliquidated claims through an executory accord manifesting an agreement to discharge such
claims by a substituted performance.
An account stated strikes an agreed balance of liquidated debts and credits between the parties where an open
account is maintained or where the parties set off liquidated claims resulting from separate transactions
between the parties. The validity and obligation under an account stated is co-extensive with the antecedent
Page 2 of 2
liquidated obligations from which the computed balance results. Unlike an accord and satisfaction, substitute
contract, novation, or rescission, an account stated cannot operate as a discharge of prior debts. It only
constitutes an evidentiary admission of the facts that is not conclusive and a promise by the debtor to pay the
balance struck.
Practice Resource:
• Corbin § 2. (account stated: new cause of action—account stated).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 73 SPECIALTIES— ALTERATION—JUDGMENT—
AWARD —CLAIM PRECLUSION
CHAPTER 73 SPECIALTIES— ALTERATION—JUDGMENT— AWARD —

CLAIM PRECLUSION
§ .01 isch e of Sealed Promises by Parol
§ .02 isch e by Alteration of a Written Contract
[1]Alteration Under Restatement (Second) of Contracts
[2]Alteration of Negotiable Instruments
[3]Assent to Altered Terms
[4]Discharge of Duty Does Not Discharge Right
§ .0 isch e by Judgment or Arbitral Award
§ .0 isch e by Deed or Formal Contract

End of Document
CHAPTER 73 SPECIALTIES— ALTERATION—JUDGMENT— AWARD —

CLAIM PRECLUSION
the subject matter.

End of Document
§ 3.01 Discharge of Sealed Promises by Parol
The early common law required the same formality in discharging or modifying a sealed contract that was required
for its formation. Over time, courts held that a contract under seal could be released, surrendered, or discharged
upon a showing of reliance. With the abrogation or diminished effect of the seal, it is reasonable to suggest that,
absent a contrary statutory requirement, the discharge of sealed contracts should not be different from unsealed
contracts, where a contract in writing may be varied or rescinded by the oral agreement of the parties.
Practice Resource:
• Corbin § .1 (discharge of sealed promises by parol).

End of Document
§ 3.02 Discharge by Alteration of a Written Contract
[1] Alteration Under Restatement (Second) of Contracts

At early common law, alteration of a sealed writing discharged the obligation evidenced by the writing. That
draconian rule was relaxed over the years to allow relief for alteration by accident or mistake or alteration by a
stranger. In keeping with this evolutionary trend, Restatement (Second) of Contracts § 2 1 states that if one
to whom a duty is owed under a contract alters the writing that evidences that duty, the duty is discharged if the
alteration is both fraudulent and material.
Alterations by strangers to the contract do not discharge the duty. An alteration is material if it would vary the
legal relations of any party with the maker of the alteration, or affect that party’s legal relations with a third party.
Restatement (Second) of Contracts § 2 2 . Alterations are additions, deletions, or substitutions in the writing.
An unauthorized insertion in a blank space is an alteration, but it would not be material if it did not change legal
relationships under the contract. Restatement (Second) of Contracts § 2 cmt. b.
In one instance, a finance lessor filled blank spaces in the lease of commercial equipment requiring payments
to be made by the lessor to the manufacturer. The court held that, even if the lessor was not impliedly
authorized to fill the blanks, the alterations were immaterial because they did not change the legal relations of
the parties. M&I Equip. Fin. Co. v. Lewis County Dairy Corp., 2007 U.S. Dist. LEXIS 3053 (N.D.N.Y. Jan. 11,
2007).
[2] Alteration of Negotiable Instruments

The Uniform Commercial Code (UCC) takes a somewhat different view concerning alteration of negotiable
instruments. A fraudulent alteration by any person, even a stranger to the instrument, discharges a party whose
obligation is affected by the alteration. UCC § - 0 . When, however, a person pays a fraudulently altered
instrument or takes it for value, in good faith and without notice of the alteration, the obligor is not discharged.
UCC § - 0 c .
[3] Assent to Altered Terms

If a party to an altered contract assents to the altered terms, the assent is treated as an acceptance of an offer
to substitute the altered terms. Restatement (Second) of Contracts § 2 1 . If Ames agreed to work for Barnes
at $6,000 per month but altered the writing to $7,000, the fraudulent and material alteration would discharge the
duty of Barnes. If, however, Barnes then voluntarily assented to the altered term, there is consideration to
support Barnes promise since Ames’s original duty under the contract was discharged. A party may also assent
to an alteration of a negotiable instrument. Whether the assent occurs before or after the alteration, it prevents
the assertion of discharge as a defense to the obligation to pay the instrument. UCC § - 0 .
[4] Discharge of Duty Does Not Discharge Right

An alteration that discharges a duty under a contract does not discharge that party’s rights under the contract.
The discharged party may enforce its rights as if no alteration had occurred. The assertion of rights revives the
original terms and makes the agreement enforceable under those terms.
Page 2 of 2
Practice Resource:
• Corbin § .2 (discharge by alteration of a written contract).

End of Document
§ 3.03 Discharge by Judgment or Arbitral Award
A final judgment on a cause of action concerning the existence or extent of a primary or secondary (remedial)
contractual duty extinguishes that duty, regardless of the outcome. The cause of action is res judicata and the legal
relations are determined by the judgment and not by the antecedent obligation. The entire cause of action is
merged with the judgment, thereby precluding further pursuit of the claim. The doctrine of claim preclusion by
merger forecloses litigation on issues that should have been included in the cause of action. Issues, theories, and
alternative remedies relevant to the cause of action, even if not raised, are extinguished, and the judgment
constitutes a bar to future causes of action within the scope of the cause of action.
A plaintiff obtained a default judgment for breach of a settlement agreement. Various court actions ensued to collect
the judgment and the plaintiff claimed attorneys’ fees based on a provision in the settlement agreement. Citing
Corbin, the court explained that a valid final judgment for the payment of money extinguishes the original claim and
a new cause of action is substituted for it. The settlement agreement containing the provision for attorneys’ fees
merged into the prior judgment of the court. Thus, the plaintiff had no basis for asserting its claim to such fees for
later actions to pursue the default judgment. Monarc Constr., Inc. v. Aris Corp., 188 Md. App. 377, 981 A.2d 822
(2009).
When the parties have agreed to arbitrate disputes, the award of the arbitrator has the same preclusive effect as a
final judgment. The award need not be confirmed to have res judicata effect. Since arbitration is required by the
agreement, however, it may be limited by the agreement. The remedial concept in the agreement may lean more
toward mediation than a final arbitration award. The claim made for breach of the agreement may not fall within the
scope of the arbitration agreement. Just as a judgment from a court without jurisdiction is not binding on the parties,
neither is an arbitration award that exceeds the bounds of the arbitration agreement.
Practice Resource:
• Corbin § . (discharge by judgment or arbitral award—claim preclusion).

End of Document
§ 3.04 Discharge by Deed or Formal Contract
The performance of a contract for the sale of land is the delivery of a deed of conveyance. At common law, it was
common to view the contract as being “merged” into the deed, thereby discharging the rights under the contract
even when the conveyance did not conform to the terms of the contract. The “merger by deed” concept has been
discredited. Restatement (Second) of Contracts § 2 cmt. a. It is certainly possible for a buyer of land to assent to
a conveyance that is inconsistent with the terms of the contract as full performance of the contract. In that situation,
the contractual duties are discharged by an accord and satisfaction or substitute contract, not because of any
“merger by deed.” Absent an express agreement to that effect, the buyer would have a cause of action for breach of
contract.
A contract often contains collateral promises that were never intended to be “merged” into a deed of conveyance.
For instance, when a new house was not completed on time, the parties agreed on a rescheduled closing
conditioned on an escrow agreement where $10,000 would be held until the escrow agent received a “clear final
inspection.” Although work remained to be completed, the escrow was released to the defendant. In the plaintiff’s
action on the contract, both the trial and intermediate appellate courts held that the original building contract merged
into the escrow agreement, thereby precluding any action on the original contract. The Supreme Court of Georgia
disagreed. It held that the escrow agreement would have extinguished the original contract only if it covered the
same subject matter and had inconsistent terms constituting a later, substitute agreement. The escrow agreement,
however, was not inconsistent with the original contract; indeed, it reaffirmed the original contract terms. It was
simply a modification concerning a rescheduled closing. The lower courts erred in applying the merger doctrine to
preclude the plaintiff’s action. Wallace v. Bock, 279 Ga. 744, 620 S.E.2d. 820 (2005).
Practice Resource:
• Corbin § . (discharge by deed or formal contract).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 74 IMPOSSIBILITY OF PERFORMANCE—
PERSONAL INABILITY
CHAPTER 74 IMPOSSIBILITY OF PERFORMANCE—PERSONAL INABILITY
§ .01 t o ctio to Impossibility of Performance and Frustration of Purpose
[1]The Rigid Common Law Rule
[2]The “Implied Condition” Analysis
[3]Commercial Impracticability
[4]Frustration of Purpose
[5]Judicial Reluctance to Excuse Performance
§ .02 o tio of Impossibility and Frustration of Purpose Doctrines
§ .0 m ossi i ity Caused by the Other Party
§ .0 m ossi i ity Due to “Acts of God”
§ .0 e i of the Term “Impossibility”
§ .0 omme ci Impracticability
[1]To Avoid a Contract for Reasons of Commercial Impracticability, Supervening Unforeseeable

Circumstances Must Result in Unreasonable Difficulty or Expense in Performance
[2]Under the UCC, Commercial Impracticability Rather Than Impossibility Will Suffice to Excuse
Performance
[3]Application of Impracticability Defense to Buyers of Goods
[4]Elements of a § 2- 1 Defense
[5]A Seller Must Notify the Buyer of Delay or Non-Delivery
[6]Foreseeability of Contingencies
[7]Impact of Increased Costs
[8]Long-Term Supply Contracts
[9]English Courts Have Refused to Embrace the Commercial Impracticability Doctrine
[10]Convention on Contracts for the International Sale of Goods
§ .0 m ossi i ity or Frustration Existing at the Time the Bargain Is Made
§ .0 Tech o o ic Impossibility
Page 2 of 2
§ .0 Promisor May Assume the Risk of Impossibility of Performance
§ .10 m ossi i ity That the Promisor Could Have Avoided
§ .11 Alternative Performance May Become Impossible
§ .12 isch e by Impossibility Based on a Condition Implied in Fact
§ .1 o ce Majeure Clauses

End of Document
PERSONAL INABILITY
CHAPTER 74 IMPOSSIBILITY OF PERFORMANCE—PERSONAL INABILITY
the subject matter.

End of Document
PERSONAL INABILITY
§ 4.01 Introduction to Impossibility of Performance and Frustration of

Purpose
[1] The Rigid Common Law Rule

After a contract is formed, unforeseen events beyond the control of the promisor may make the promise
impossible to perform. Even in such situations, the early common law applied a literal version of the maxim,
pacta sunt servanda (promises must be kept). In 1647, the Court of King’s Bench stated, “When the party by his
own contract creates a duty or charge upon himself, he is bound to make it good … notwithstanding any
accident or inevitable necessity, because he might have provided against it by his contract . Paradine v.
Jane, 82 Eng. Rep. 897 (K.B. 1647). The court was not sympathetic to the view that providing against a specific
unforeseeable event in the contract is prohibitively difficult. When a promise was literally impossible to perform,
equity could not decree specific performance, but the promisor was still liable in damages for the failure to
perform.
[2] The “Implied Condition” Analysis

The absurdity of the draconian early common law view augured evolutionary changes, which occurred against
a background of resistance to any change in the basic rule that one is bound to perform in accordance whit
one’s agreement, regardless of the circumstances. Instead of changing the basic rule, the common law
developed exceptions for obvious situations. A landmark change occurred when Caldwell licensed a music hall
for Taylor’s use and, without the fault of either party, the hall burned down. The court was careful to pay
homage to the rigid rule that one is bound to carry out one’s contract, “although in consequence of unforeseen
accidents, the performance of his contract has become unexpectedly burthensome or even impossible.”
Nonetheless, it went on to limit that rule to contracts that are not subject to an “implied condition.” In the case
before it, the court identified the implied condition as an understanding by the parties at the time the contract
was formed that their agreement was subject to the implied condition that, if the music hall had perished prior to
its use under the license, the parties would be excused from performing. Taylor v. Caldwell, 3 B. & S. 826
(1863).
The “implied condition” analysis was landmark since it was not limited to destruction or deterioration of the
subject matter of the contract without the fault of either party. It could be applied to any unforeseen,
supervening event that made performance impossible. Under what may have been the covert tool of “implied
condition,” the procrustean view had changed officially to allow clear recognition of other exceptions, such as
incapacity in personal service contracts and prevention of performance because of changes in the law.
Nonetheless, courts still treating the general rule as if it had not changed found excusable nonperformance in
three kinds of supervening events: death or incapacity in personal service contracts, a supervening act of state
precluding enforcement of the contract, and destruction of the subject matter, as in the music hall case. See
Specialty Tires of Am., Inc. v. CIT Group/Equipment Fin., Inc., 82 F. Supp. 2d 434, 438 (W.D. Pa. 2000), aff’d,
248 F.3d 1131 (3d Cir. 2000).
[3] Commercial Impracticability

In the twentieth century, the standard was relaxed further to recognize that while literal performance of a
contract may still be possible, performance had become burdensome almost to the point of forfeiture. In such
Page 2 of 2
circumstances, a performance could be excused because of commercial impracticability. This development was
described in a leading case:
The doctrine of impossibility of performance has gradually been freed from the earlier fictional and
unrealistic strictures of such tests as the “implied term” and the parties’ “contemplation.” … It is now
recognized that “A thing is impossible in legal contemplation when it is not practicable; and a thing is
impracticable when it can only be done at an excessive and unreasonable cost.” … The doctrine ultimately
represents the ever-shifting line, drawn by courts hopefully responsive to commercial practices and mores,
at which the community’s interest in having contracts enforced according to their terms is outweighed by
the commercial senselessness of requiring performance. When the issue is raised, the court is asked to
construct a condition of performance based on changed circumstances, a process which involves at least
three reasonably definable steps. First, a contingency—something unexpected—must have occurred.
Second, the risk of the unexpected occurrence must not have been allocated either by agreement or by
custom. Finally, occurrence of the contingency must have rendered performance commercially
impracticable.
Transatlantic Financing Corp. v. United States, 363 F.2d 312, 315 (1966).
[4] Frustration of Purpose

The terms “impossibility of performance” and “commercial impracticability” are now used interchangeably. A
companion doctrine called “frustration of purpose” developed in the twentieth century. The circumstances
surrounding England’s “coronation” cases provide an example of frustration as American courts use the term
today. Parties paid premium rates to hire vantage points along a scheduled line of march to observe the
coronation procession of the new King. The procession was postponed because the King became ill. It was still
possible for the hiring parties to use the hired flats along the route. The purpose for which they hired the flats at
premium fees, however, was frustrated and the use of the flats would be pointless. The postponement of the
coronation, spawned a number of “coronation” cases dealing with the question of whether such frustration could
excuse a promisor from performing. While closely related to impossibility and severe impracticability of
performance, the doctrine is treated separately in the United States. In England, however, the phrase has a
broader meaning to include any supervening event.
[5] Judicial Reluctance to Excuse Performance

In the sections that follow, the doctrines of impossibility, impracticability, and frustration of purpose will be
explored in detail. In one sense, all contracts are risk allocation devices. Buyers and sellers of land, goods, and
services are assuming certain risks when a contract is made. The nature and extent of the assumed risks often
change as market prices and other circumstances change. The essential question to be explored in this and
succeeding chapters is, when have the risks changed sufficiently to warrant excusing a promise to perform?
Courts have been reluctant to excuse promisors from their contractual duties. In Milnes v. Blue Cross & Blue
Shield of Vermont, 2013 U.S. Dist. LEXIS 44162 (Mar. 28, 2013), the court quoted comment d to § 2 1 of the
Restatement (Second) of Contracts noting that the excuse for nonperformance is “narrowly applied.” In general,
the case law indicates that a successful use of the doctrines of impossibility, impracticability, or frustration of
purpose have rarely succeeded in excusing promisors’ duties. While the concept of pacta sunt servanda is no
longer applicable in its rigid form, there is still a strong adherence to the concept that promises should be kept.
Practice Resource:
• Corbin § .1 (introduction to impossibility and frustration of purpose).

End of Document
PERSONAL INABILITY
§ 4.02 Evolution of Impossibility and Frustration of Purpose Doctrines
By continuing the absolute requirement of performance subject to an “implied condition” that created exceptions,
the Taylor v. Caldwell analysis is subject to the criticism that a court can always imply a condition to reach what it
deems to be a just result. To escape the fiction of the implied condition, the Uniform Commercial Code (UCC)
suggests that a seller will be excused for a delay or non-delivery of goods where its performance “has been made
impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which
the contract was made.” UCC § 2- 1 .
Not surprisingly, the Restatement (Second) of Contracts states the test in virtually identical language. Section 261
states that performance is made impracticable “by the occurrence of an event the non-occurrence of which was a
basic assumption on which the contract was made.”
While these new iterations appear to state a positive principle rather than negative exceptions, the ghost of the
implied condition remains. The UCC version recognizes the “occurrence of a contingency,” while the Second
Restatement refers to the occurrence of an “event” contrary to the parties’ basic assumption. As used, both terms
are highly reminiscent of the discarded term, “condition.” The judicial process of discovering the parties’ “basic
assumption” at the time the contract was made that a given “contingency” or “event” would not occur requires the
use of a court’s presumed assumption which the parties’ manifested intention does not otherwise reveal. Indeed,
the court must engage in the implication of an assumption that a particular contingency or event would not occur—a
negative implication that the new articulation sought to avoid. The UCC and Restatement (Second) versions of the
impossibility (impracticability) doctrine are preferred over the nineteenth century “implied condition” analysis, but
any substantive enhancement of the doctrine from the new iteration may have been overstated.
The Restatement (Second) also continues the classic common law exceptions to the absolute duty to perform. The
death or incapacity of a person necessary for performance is viewed as a specific application of the principle of
impracticability rather than its old connotation as an exception to the absolute rule. Restatement (Second) of
Contracts § 2 2. The other classic common law “exceptions” that have been converted to specific applications of
the general impracticability principle are: (1) the destruction, deterioration, or failure to come into existence of a
thing necessary for performance (such as a destroyed music hall), as set forth in Restatement (Second) of
Contracts § 2 and (2) performance made impossible or impracticable by a supervening government regulation or
order, as set forth in Restatement (Second) of Contracts § 2 .
Practice Resource:
• Corbin § .2 (evolution of impossibility and frustration doctrines).

End of Document
PERSONAL INABILITY
§ 4.03 Impossibility Caused by the Other Party
If a plaintiff has made the defendant’s performance materially more difficult or expensive, albeit not impossible, the
defendant is normally discharged from its duty to perform. Thus, where the plaintiff has made the defendant’s
performance impossible, a fortiori, the duty is discharged.
In exchange for access to his property through a railroad crossing, Plogeman agreed to indemnify the railroad
against liability at the crossing and to trim the surrounding vegetation. Plogeman’s son and grandson were injured
when their van was struck by a train at the crossing. They claimed the railroad was negligent in not maintaining the
vegetation. The railroad sought indemnity from Plogeman’s estate, but the court held that the railroad had leased
the property to another without reserving Plogeman’s right to maintain the vegetation. Since Plogeman was not
permitted to enter the property to maintain the vegetation, his performance was excused as legally impossible.
Ploegman v. Burlington N. & Santa Fe Ry. Co., 2002 Wash. App. LEXIS 1212 (June 3, 2002).
Practice Resource:
• Corbin § . (impossibility of performing a promise that is caused by the other party).

End of Document
PERSONAL INABILITY
§ 4.04 Impossibility Due to “Acts of God”
The phrase “act of God” was commonly used to describe supervening causes making the performance impossible.
Impossibility or impracticability as a defense, however, is not limited to true acts of God, such as natural disasters
often involving inclement weather. Moreover, while weather conditions may make performance particularly difficult,
such conditions may have been clearly foreseeable and, as such, parties should not have assumed that such
conditions would not occur. For example, in one case, the defense of impossibility based on an “act of God,”
namely freezing weather conditions, did not excuse the promisor’s performance since such conditions were to be
expected during the winter season. Missouri P. R. Co. v. Terrell, 410 S.W.2d 356 (Mo. Ct. App. 1966).
Other terms used to describe impossibility or impracticability include vis major or force majeure. Like “act of God,”
neither of these serves a useful purpose in determining the allocation of risk when a party pleads impossibility or
impracticability of performance.
Practice Resource:
• Corbin § . (impossibility of performance as a discharge of contractual duty—“act of God”).

End of Document
PERSONAL INABILITY
§ 4.05 Meaning of the Term “Impossibility”
Courts describe impossibility in various ways. “Absolute” impossibility or “physical impossibility” refers to the fact
that no person could perform the promise. The promised performance simply cannot be done. As one court put it,
impossibility requires that “performance is not merely difficult or relatively impossible, but absolutely impossible,
owing to the act of God, the act of the law, or the loss or destruction of the subject-matter of the contract.” Lutheran
Homes, Inc. v. Lock Realty Corp. IX, 2015 U.S. Dist. LEXIS 24588 (N.D. Ind. Mar. 2, 2015). This is true impossibility
of performance. When performance becomes impossible for a specific promisor, not because another person could
not perform but because the promisor is insolvent or has suffered other reverses that make it impossible for him to
perform, such subjective impossibility will not excuse him from performing.
In East Capitol View Cmty. Dev. Corp. v. Denean, 941 A.2d 1036 (D.C. 2008), the court recognized the distinction
between objective and subjective impossibility as found in Corbin on Contracts and in the Restatement (Second) of
Contracts § 2 1 cmt. e. that a promisor’s financial inability to perform would rarely, if ever, excuse performance. As
to insolvency or bankruptcy, the court quoted Corbin in finding an implied obligation in every contract that a
promisor will not permit itself to be disabled from performing through insolvency or acts of bankruptcy. Further
relying on Corbin, the court noted that even when the promisor is adjudicated a bankrupt, it is discharged under the
court’s decree and not because of its subjective inability to perform. Where a buyer sought to “terminate” a contract
for the purchase of property at $1.8 million because he alleged that the fraud of Bernard Madoff caused the loss of
nearly all of his personal assets, the court noted that the impossibility doctrine is limited to making performance
objectively impossible. Though the buyer may have been the victim of fraud that impacted his assets and finances,
he was not excused from performing his contract. Sassower v. Blumenfeld, 24 Misc. 3d 843, 878 N.Y.S.2d 602
(Sup. Ct. 2009). Where a lessee terminated production on leased property due to severance orders issued under a
government regulation, though the lease contained a force majeure clause that included regulatory requirements,
the court held that a lessee’s failure to comply with government regulations does not constitute a force majeure
event when compliance with the regulation violated was within the reasonable control of the lessee. Red River Res.,
Inc. v. Wickford, Inc., 443 B.R. 74 (E.D. Tex. 2010).
Practice Resources:
• Corbin § . (what is meant by the term impossibility?); § . (subjective inability of a contractor to
perform).

End of Document
PERSONAL INABILITY
§ 4.06 Commercial Impracticability
[1] To Avoid a Contract for Reasons of Commercial Impracticability, Supervening Unforeseeable

Circumstances Must Result in Unreasonable Difficulty or Expense in Performance
In an early case recognizing that it is not necessary to prove that a performance is literally impossible to excuse
a duty, the defendant agreed to buy all of the gravel it would need for a building project from the plaintiff’s land.
After taking some 50,000 yards of the gravel, the remaining gravel was submerged in water and would have
been available at only 10 times the original cost. The defendant purchased 51,000 yards elsewhere and the
plaintiff sued. The court held that, although it was not impossible to take the remaining gravel from the plaintiff’s
land, the cost was prohibitive; the defendant was excused. Mineral Park Land Co. v. Howard, 172 Cal. 289, 156
P. 458 (1916). This case proved influential in the development of the modern concept of impracticability found
in Uniform Commercial Code (UCC) § 2- 1 and Restatement (Second) of Contracts § 2 1.
The general rule is that increased cost alone, even substantial or material increases in cost, will not excuse to
the promisor. Unless the contract expressly allows for additional compensation under the circumstances, or the
promisor requests additional compensation because of unanticipated difficulty and the other party voluntarily
agrees to pay it, the risk of the additional cost to perform remains on the promisor. Army Material Command
awarded TPL contracts involving the disposal of ammunitions, but TPL failed to dispose of certain materials as
required by the contracts. TPL claimed its performance to dispose of pyrotechnic materials was made
impracticable due to intervening changes in U.S. tariff policies that put the domestic fireworks companies with
whom TPL planned to work out of business. The court rejected TPL’s impracticability defense because the
doctrine is not applicable merely because costs have become more expensive than originally contemplated.
TPL assumed the risk in its contracts that changes in market conditions might occur and make its performance
more expensive. TPL, Inc. v. United States, 118 Fed. Cl. 434, 2014 U.S. Claims LEXIS 971 (Fed. Cl. 2014).
The court in Fargo Mgmt., LLC v. City of Worcester, 2014 Mass. Super. LEXIS 173, 33 Mass. L. Rep. 65
(Mass. Super. Ct. 2014) quoted Corbin: “Insurance rates go up, the cost of labor and materials rises, routes of
shipment may have to be changed—these risks are on the promissor.”
Whether the non-occurrence of a supervening event that has made performance impracticable constituted a
“basic assumption” on the basis of which the parties contracted is relatively easy to determine in cases such as
the classic rental of a building or a personal services contract made with a healthy person. At the time the
contract is made, it is reasonable to assume that the building would not be destroyed or that the other party
would not die or become incapacitated. If a contingency that the parties assumed would not occur does occur,
the duty is discharged. Just as clearly, however, it would be unreasonable to assume that hurricanes will not
occur in Florida where they are reasonably foreseeable. Thrifty Rent-A-Car Sys. v. S. Fla. Transp., 2005 U.S.
Dist. LEXIS 38489 (N.D. Okla. Oct. 26, 2005). Similarly, it would be unreasonable to assume that market or
financial conditions would not change. See Restatement (Second) of Contracts § 2 1 cmt. d, and Seaboard
Lumber Co. v. United States, 308 F.3d 1283 (Fed Cir. 2002) (where the court stated that Seaboard “bet” that
the market would remain strong and assumed the risk of a fixed-price contract). These are precisely the kinds
of risks parties should reasonably contemplate or foresee at the time the contract is made.
To avoid a contract on the basis of commercial impracticability requires the occurrence of supervening
circumstances that were unforeseeable or at least highly unexpected, that were neither caused by the promisor
nor under the promisor’s control, and that would cause extreme and unreasonable difficulty or expense if the
promisor were to perform.
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[2] Under the UCC, Commercial Impracticability Rather Than Impossibility Will Suffice to Excuse
Performance
From its inception, the UCC concluded that commercial impracticability rather than impossibility would suffice to
excuse a perform under certain conditions. Section 2-615 states:
Excuse by Failure of Presupposed Conditions.
Except so far as a seller may have assumed a greater obligation and subject to the preceding section
on substituted performance:
(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b)
and (c) is not a breach of his duty under a contract for sale if performance as agreed has been
made impracticable by the occurrence of a contingency the non-occurrence of which was a basic
assumption on which the contract was made or by compliance in good faith with any applicable
foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform,
he must allocate production and deliveries among his customers but may at his option include
regular customers not then under contract as well as his own requirements for further manufacture.
He may so allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when
allocation is required under paragraph (b), of the estimated quota thus made available for the
buyer.
As suggested by one court, under the UCC the critical question:
is not whether the promisor could not have performed his undertaking but whether the nonperformance
should be excused because the parties, if they had thought about the matter, would have wanted to assign
the risk of the contingency that made performance impossible or uneconomical to the promisor or to the
promisee; if to the latter, the promisor is excused.
Northern Indiana Public Service Co. v. Carbon County Coal Co., 799 F.2d 265, 276 (7th Cir. 1986).
[3] Application of Impracticability Defense to Buyers of Goods

Although UCC § 2- 1 technically applies only to contracts for the sale of goods, courts may apply it by analogy
to other types of contracts. The Restatement (Second) of Contracts § 2 1 includes the same fundamental
principle. See Thrifty Rent-A-Car Sys. v. S. Fla. Transp., 2005 U.S. Dist. LEXIS 38489 (N.D. Okla. Oct. 26,
2005). Unlike the Restatement (Second) version that applies to either “party” to the contract, UCC § 2- 1
literally applies only to sellers, presumably because a buyer only has an obligation to pay under a contract for
the sale of goods and sellers would rarely assume the risk that a buyer would not be able to pay. Northern
Indiana Public Service Co. v. Carbon County Coal Co., 799 F.2d 265, 276 (7th Cir. 1986). Comment 9 to UCC
§ 2- 1 however, suggests situations where “the reason of the present section may well apply and entitle the
buyer to the exemption.” Armed with this comment, some courts have concluded the section applies to buyers
as well as sellers of goods. Power Eng’g & Mfg., Ltd. v. Krug Int’l, 501 N.W.2d 490, 494 n.2 (Iowa 1993);
Lawrance v. Elmore Bean Warehouse, 108 Idaho 892, 894, 702 P.2d 930, 932 (Ct. App. 1985); Northern Illinois
Gas Co. v. Energy Cooperative, Inc., 122 Ill. App. 3d 940, 954, 461 N.E.2d 1049, 1060, 78 Ill. Dec. 215 (1984).
If a court concluded that the section does not apply to buyers, there is nothing in the section that would
preclude the buyer from proceeding with an identical defense under the Restatement (Second) of Contracts
version of the same principle. UCC § 1-10 (formerly § 1-10 recognizes that a principle of law or equity
continues unless it is displaced by a particular provision of the UCC.
[4] Elements of a § 2 615 Defense

Like several other sections of UCC Article 2, § 2- 1 begins by reaffirming the freedom of contract principle in
permitting parties to agree to assume greater risks than they would otherwise be required to assume under the
section. Unless a party assumed a greater obligation under the contract, to assert a defense under § 2- 1 a
party must prove that:
Page 3 of 5
(1) a contingency occurred;

(2) its nonoccurrence was a basic assumption of the contract; and
(3) the occurrence of the contingency made the party’s performance commercially impracticable.
The burden of proof is on the party seeking to be excused. The UCC “deliberately refrains” from expressing a
list of the types of contingencies that may be involved since no list could be exhaustive. UCC § 2- 1 cmt. 2.
[5] A Seller Must Notify the Buyer of Delay or Non-Delivery

To invoke the commercial impracticability defense, a seller must notify the buyer seasonably that there will be a
delay or non-delivery of the goods. UCC § 2- 1 c . If the seller can deliver part of the goods, it must make a
reasonable allocation of what is deliverable among its customers, which may include the seller’s regular
customers as well as those with whom it has a contract. UCC § 2- 1 .
In one case, a contract required notification by certified mail. The seller was not precluded from the commercial
impracticability defense notwithstanding his failure to meet the contractual notice requirement. The court was
satisfied that the buyer had actual knowledge of the seller’s limited production. Red River Commodities v.
Eidsness, 459 N.W.2d 805, 809–810 (N.D. 1990).
[6] Foreseeability of Contingencies

If the contingency that was not supposed to occur did occur and allegedly made performance impracticable, it is
often suggested that the contingency had to be unforeseeable at the time of contracting. If it was foreseeable,
courts view the risk as having been implicitly assumed by the promisor, who should have expressly guarded
against it. Waldinger Corp. v. CRS Group Engineers, Inc., Clark Dietz Div., 775 F.2d 781, 786 (7th Cir. 1985).
The term “foreseeability” is not found in § 2- 1 but comment 1 to that section refers to “unforeseen
supervening circumstances not within the contemplation of the parties at the time of contracting.” “Unforeseen,”
however, suggests a subjective test of the parties’ knowledge while “unforeseeable” suggests an objective test.
In one case, a court noted that there was no evidence that the parties subjectively contemplated a train
derailment, but they could easily have foreseen (objectively) such a contingency. The § 2- 1 defense was held
not to be available. Bende & Sons, Inc. v. Crown Recreation, Inc., Kiffe Products Div., 548 F. Supp. 1018
(E.D.N.Y. 1982).
Foreseeability is clearly the most important factor in this analysis, but if “foreseeable” is equated with
“conceivable,” nothing is unforeseeable. Specialty Tires of Am., Inc. v. CIT Group/Equipment Fin., Inc., 82 F.
Supp. 2d 434, 438–439 (W.D. Pa. 2000), quoting Murray on Contracts at § 112 (3d ed. 1990). There are risks
over which the parties have not consciously bargained. “So, while the risk of an unforeseeable event can safely
be deemed not to have been assumed by the promisor, the converse is not necessarily true.” Specialty Tires of
Amer., Inc., 82 F. Supp. 2d at 439.
[7] Impact of Increased Costs

Both the UCC and Restatement (Second) of Contracts, as well as numerous cases, make it abundantly clear
that increased cost alone will not excuse performance under a commercial impracticability rubric. The severe
(not just material) loss must be caused the occurrence of an unforeseeable contingency that the parties
assumed would not occur. The Restatement (Second) suggests that:
[a] severe shortage of raw materials or supplies due to war, embargo, local crop failure, unforeseen
shutdown of major source of supply, or the like, which either causes a marked increase in cost or prevents
performance altogether may bring the case within the rule.
Restatement (Second) of Contracts § 2 1 cmt. d.
Under the UCC, “[i]ncreased cost alone does not excuse performance unless the rise in cost is due to some
unforeseen contingency which alters the essential nature of the performance.” UCC § 2- 1 cmt. 4 (emphasis
supplied). Assuming such an unforeseen condition has occurred, which the parties assumed at the time they
made the contract would not occur, and has caused an increased cost or loss, how extensive must that loss be
to trigger the impracticability defense? The Restatement (Second) states that “impracticability” does not simply
Page 4 of 5
mean “impractical.” Impracticability suggests “extreme and unreasonable difficulty, expense, injury, or loss to
one of the parties.” Restatement (Second) of Contracts § 2 1 cmt. d.
[8] Long-Term Supply Contracts

A coal company entered into a long-term coal supply with a public utility. The price escalator clause was based
on an industrial commodity index that proved ineffective. The utility rejected the supplier’s demands for price
increases and the supplier stopped deliveries. At the time of trial, the coal supplier claimed losses of $3.4
million and claimed it was excused from performing under the impracticability doctrine. The court rejected the
supplier’s claim that an oil embargo that allegedly caused the loss was unforeseeable. Even if that contingency
had been unforeseen, the supplier’s alleged losses did not approach the level of loss necessary to invoke the
doctrine. Although recognizing the supplier had incurred losses on this contract, the court allowed evidence of
the overall financial condition of the supplier, whose coal reserves had experienced a marked increase in value
because of the energy crisis. Missouri Public Service Co. v. Peabody Coal Co., 583 S.W.2d 721 (Mo. Ct. App.
1979).
A number of cases involving suppliers of energy illustrate failed attempts to be excused under the
impracticability doctrine. The one exception was Aluminum Co. of America v. Essex Group, Inc., 499 F. Supp.
53 (W.D. Pa. 1980). In that case, a price formula under a contract to convert the raw material alumina into
aluminum proved to be mistaken, and would have resulted in a projected Alcoa loss of $75 million. While the
court did not discharge Alcoa, it ordered reformation of the contract. With respect to the commercial
impracticability defense, the case has proven to be an unreliable precedent. The facts, however, suggested a
strong argument based on the mistaken price formula and the parties’ understanding that the formula would
preclude the kinds of losses that were being experienced by Alcoa. The remedy of reformation based on a
mistake analysis would not have been unusual. A mistake analysis would also be preferable in requiring only a
showing of a material effect upon the agreed exchange rather than the kind of excessive loss required under a
commercial impracticability analysis.
A successful commercial impracticability defense is rare. It is necessary to establish that the duty under the
contract becomes vitally different from the original duty because of an unforeseen contingency not caused by
the promisor and over which it had no control. In addition, the defendant must establish that the costs of
performance would not simply reduce profit, but would eliminate profit and subject the defendant to a major
loss.
A promisor contemplated a profit of $18 to $20 million, but the cost of performing the duty of disposing of waste
fuel would not only eliminate the profit but cost well over $80 million. The court held the promise excused. The
method of disposal had not been conceived at the time the contract was formed and was not available at the
time the case was decided. Thus, an acceptable method of disposal and the excessive cost of such a method
were totally unforeseeable at the time the contract was made. Florida Power & Light Co. v. Westinghouse
Electric Corp., 826 F.2d 239 (4th Cir. 1987), cert. den., 485 U.S. 1021 (1988).
[9] English Courts Have Refused to Embrace the Commercial Impracticability Doctrine
The classic doctrine of impossibility of performance continues in England, but English courts have expressly
refused to embrace the commercial impracticability doctrine. See, e.g., British Movietonenews, Ltd. v. London
District Cinemas, [1952] A.C. 166, 185, where the court’s rhetoric clearly expresses hostility to the commercial
impracticability concept. The British upper lip is particularly stiff with respect to the sanctity of the bargain.
[10] Convention on Contracts for the International Sale of Goods

The Convention on Contracts for the International Sale of Goods (CISG), which is operative in 80 nations
including the United States, addresses the impossibility of performance doctrine in Article 79:
(1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to
an impediment beyond his control and that he could not reasonably be expected to have taken the
impediment into account at the time of the conclusion of the contract or to have avoided or overcome it
or its consequences.
Page 5 of 5
(2) If the party’s failure is due to the failure by a third person whom he has engaged to perform the whole or
part of the contract, that party is exempt from liability if;
(a) he is exempt under the preceding paragraph; and
(b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were
applied to him.
(3) The exemption provided by this article has effect for the period during which the impediment exists.
(4) The party who fails to perform must give notice to the other party of the impediment and its effect on his
ability to perform. If the notice is not received by the other party within a reasonable time after the party
who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting
from such non-receipt.
(5) Nothing in this article prevents either party from exercising any right other than to claim damages under
this Convention.
There is a dearth of American case law interpreting or applying Article 79. Even where it applies, an American
court may view it as if it were UCC § 2- 1 . See Raw Materials Inc. v. Manfred Forberich GmbH & Co., 2004
U.S. Dist. LEXIS 12510 (N.D. Ill. July 7, 2004). Article 79 differs from the literal language of its American
counterpart in applying to a “party” who may be a buyer or seller. While § 2- 1 applies where a shipment of
goods is either delayed or not delivered, Article 79 may excuse the performance of any contract obligation.
Article 79 requires an impediment to performance beyond the promisor’s control that the promisor “could not
reasonably be expected to take into account.” A party could not be expected to take an impediment into
account that the party should not have reasonably foreseen and assumed, therefore, that it would not occur.
The third requirement is that the impediment could not have been avoided by the promisor. Thus, even if the
promisor did not expect it, if the promisor could have reasonably avoided it and failed to do so, the duty would
not be excused. The case law interpreting Article 79 has applied it narrowly.
Subsection (2) allows the defense to be raised where the obligor has delegated the duty to a third party, but
only where the obligor can establish that it should be excused under the requirements of subsection (1) and the
third party would have also met the requirements of subsection (1) if those provision had been applied to it.
Article 79(3) allows the defense only during the time the impediment continues to preclude performance. Once
the impediment ends, so does the excuse for nonperformance. The notice requirement of Article 79(4) is similar
to the notice requirement in UCC § 2- 1 c . Subsection (5) simply reconfirms the right to damages; such a
right could only occur if there is a breach that could not be established if Article 79 excused a party’s
performance.
Practice Resources:
• Corbin § . (unexpected difficulties and economic loss—commercial impracticability); § .
(commercial impracticability under UCC § 2- 1 § . (increased cost cases under UCC § 2-
615); § .10 (buyers of goods and the impracticability defense); § .11 (impracticability under
English law); § .12 (international sales of goods—impossibility under the CISG).

End of Document
PERSONAL INABILITY
§ 4.0 Impossibility or Frustration Existing at the Time the Bargain Is Made
A party’s performance under a contract may be excused where impracticability existed at the time the contract was
made, but only where the party claiming impracticability has no reason to know of the existing fact whose non-
existence was a basic assumption on which the contract was made. Restatement (Second) of Contracts § 2 1
Patterson v. Methodist Healthcare-Memphis Hosps., 2010 Tenn. App. LEXIS 78 (Feb. 2, 2010). Similarly, if a
party’s purpose is frustrated without its fault by a fact it had no reason to know and whose non-existence was a
basic assumption on which it made the contract, no duty arises under such a contract. Restatement (Second) of
Contracts § 2 2 .
Such situations are more typically analyzed under the doctrine of mistake where one or both parties are laboring
under a belief not in accord with the facts that constitutes a basic assumption on which they made the contract. A
complete analysis of mistake in the law of contracts is found in Chapter 28 above. Mutual mistake allows either
party to avoid the contract by showing a material effect on the agreed exchange. In contrast, under the doctrine of
impossibility or impracticability of performance, it is necessary to show effects that are more severe than material.
Practice Resource:
• Corbin § .1 (impossibility or frustration existing at the time the bargain is made).

End of Document
PERSONAL INABILITY
§ 4.0 Technological Impossibility
It is possible for a party to promise to do what has never been done. When the Federal Reserve Board sought bids
for a new computer system, Wegematic promised a system with a revolutionary breakthrough. When it could not
perform as it promised, Wegematic sought to rely on a commercial impracticability test under an analogous
application of UCC § 2- 1 . Relying heavily on Corbin on Contracts, the court reduced the issue to a basic
determination of the risk assumed by Wegematic:
We see no reason for thinking that when an electronics system is promoted by its manufacturer as a
revolutionary breakthrough, the risk of the revolution’s occurrence should fall on the purchaser; the reasonable
supposition is that it has already occurred or, at least, that the manufacturer is assuring the purchaser that it
will be found to have when the machine is assembled . If a manufacturer wants to be relieved of the risk that
what looks good on paper may not prove so good in hardware, the appropriate exculpatory language is well
known and often used.
The exculpatory language did not appear in the contract. The court affirmed the district court award of $46,000 in
liquidated damages for delays, $179,000 in excess cost of substituted equipment, and $10,000 in preparatory
expense. The court also noted that the defendant’s evidence of the cost to the defendant was far from compelling.
United States v. Wegematic Corp., 360 F.2d 674, 676–677 (2d Cir. 1966).
Practice Resource:
• Corbin § .1 (interpretation of the contract may show that performance is not impossible;
technological impossibility).

End of Document
PERSONAL INABILITY
§ 4.0 A Promisor May Assume the Risk of Impossibility of Performance
Courts and commentators engage in risk analysis in cases of impossibility, impracticability, or frustration of purpose.
If a party seeking discharge of its duty under one of these doctrines has assumed the risk that the disabling event
might occur, its duty is not discharged. The question remains, how is “assumption of risk” determined?
A promisor may expressly assent to assume a risk. In 476 Grand, LLC v. Dodge of Englewood, Inc., 2012 N.J.
Super. Unpub. LEXIS 457 (Mar. 2, 2012), the plaintiff landlord and defendant car dealer entered into a five-year
lease that contained a broad force majeure provision, but the final sentence of that provision stated, “Nothing herein
shall be deemed to relieve Tenant of its obligation to pay Rent when due.” The defendant claimed that its duty
under the lease was excused through impracticability and frustration of purpose, but the court noted the provision in
the lease and the express language of both Sections 261 and 265 of the Restatement (Second) of Contracts which
recognize that a party may agree to perform regardless of impracticability or frustration. It concluded that the
defendant had assumed the risk of paying the rent, regardless of the circumstances.
A promisor may tacitly assume a risk by failing to protect against a known risk. Risk assumption can be implied by
custom, or by a court determining that a risk should be allocated to one of the parties. When, however, a court
states that a particular party assumed the risk, it not always possible to determine whether the court has found
some express or implied assumption of the risk by that party, or whether it decided on some basis of fairness that
the risk should be allocated to that party.
Where a near-retirement age couple contracted to have a new house built within a block of their daughter’s
residence, they subsequently confronted a reduction in monthly income and were not successful in selling the rental
property they intended to sell. The court cited Restatement (Second) of Contracts § 2 1 cmt. b, in noting that
market shifts or financial inability are not usually the kinds of risks that allow a performance to be excused under the
impracticability doctrine. Oakwood of Cambridge v. Kapsa, 2010 Mich. App. LEXIS 932 (May 20, 2010).
Contract interpretation may be critical in determining risk allocation. When a buyer of land promised that no building
other than a house would be constructed on the land, but a railroad company took the land by eminent domain and
constructed other buildings, one interpretation of the contract may suggest that the buyer’s promise was limited to
situations within his control The other interpretation would suggest that the buyer has indemnified the seller against
any loss caused by the construction of other buildings. Absent clear language of indemnification, however, the first
interpretation would control and the buyer would not risk liability for the additional buildings.
The most frequently cited inquiry in determining allocation of risk is whether the supervening event causing a major
change in the risk was foreseeable. If a court concludes that the party seeking a discharge did or should have
foreseen the risk, the defense will fail. The greater the unforeseeability of the risk, the more likely it is that the
defense will succeed.
Practice Resource:
• Corbin § .1 (when a promisor assumes the risk of impossibility of performance).

Page 2 of 2
End of Document
PERSONAL INABILITY
§ 4.10 Impossibility That the Promisor Could Have Avoided
If a promisor willfully brought about a supervening event that makes its performance impossible, or if it could have
foreseen and avoided such an event through reasonable diligence, the promisor will not be excused from
performance. Since impossibility-related doctrines are affirmative defenses, the promisor asserting discharge must
allege and prove that the supervening event occurred, it made performance impossible or impracticable or
pointless, and was not brought about by the promisor’s own willfulness or was the fault of someone within the
promisor’s control.
Williams agreed to deliver chickens and hired Hall to drive one of his trucks even though he knew that Hall was not
drug tested as required by law. When Hall failed to perform, the court held that Williams was not excused from his
contractual obligation since the hiring of Hall was within his control. Mountaire Farms, Inc. v. Williams, 2005 Del.
Super. LEXIS 165 (Apr. 25, 2005). Jin Rui failed to perform its contractual obligations to deliver paper to SKB. Jin
Rui had promised to deliver the paper even though its supplier was under no contractual obligation to supply paper
to Jin Rui. The contractual force majeure clause excused Jin Rui from “non-delivery … arising from any event
beyond its reasonable control.” The court held it was within Jin Rui’s control to obtain a binding commitment from its
supplier, so it was not entitled to relief. Jin Rui Group, Inc. v. Societe Kamel Bekdache & Fils S.A.L., 2015 U.S. App.
LEXIS 19285 (9th Cir. 2015).
Whether the supervening event could have been avoided, however, may not lend itself to great clarity in a given
case. While a death or illness is always a possibility in a personal service contract, it is not viewed as a foreseeable
event that the promisor can avoid under ordinary circumstances. If an athlete suffers a head injury in a motorcycle
accident that could have been avoided by wearing a protective helmet, the argument will be that he should not be
excused from paying damages for failure to perform a contract due to his injury since the injury could have been
avoided. If, however, wearing a helmet was not required in the jurisdiction in which he suffered the injury, the
question would be, how careful must such a party be in avoiding physical injury? Decisions in such cases are not
predictable. The estate of a popular young actor was not barred from the impossibility defense when the actor died
of a self-administered overdose of drugs. CNA Int’l Reinsurance Co. v. Phoenix, 678 So. 2d 378 (Fla. Dist. Ct. App.
1996). Other courts, however, would disagree with that holding.
Practice Resource:
• Corbin § .1 (impossibility that the promisor could have avoided; burden of proof).

End of Document
PERSONAL INABILITY
§ 4.11 An Alternative Performance May Become Impossible
When a contractor promises to render either of two performances and one become impossible to perform, it is
generally held that the contractor is bound to render the remaining performance. If, however, the promisee has the
option and makes a choice while either alternative is performable, the contract is no longer an option contract.
Practice Resource:
• Corbin § .1 (alternative performances, one of which becomes impossible).

End of Document
PERSONAL INABILITY
§ 4.12 Discharge by Impossibility Based on a Condition Implied in Fact
Although courts continue to speak in terms of “implied conditions” in cases involving impossibility, impracticability,
or frustration of purpose, it would be beneficial if they openly recognized the need to fill a gap in the parties’
expression on a reasonable basis rather than pretend they have discovered something in the contract language or
the circumstances manifesting the parties’ intent. In the landmark case of Taylor v. Caldwell, discussed earlier, in
which the court provided the famous “implied condition” analysis to overcome the draconian effect of requiring
absolute performance, there was preciously little ground for assuming that the parties actually thought of the
possibility of fire and made their contract on the condition that the building would continue to exist.
As early as 1922, Lord Atkin stated that there is no such “implied term” and the court should not pretend that it is
determining what the parties would have provided had they foreseen the actual event. Russkoe v. Stirk & Sons,
[1922] 10 Lloyd’s List Rep. 164, 214. Lord Sands echoed that view: “It does seem to me somewhat far-fetched to
hold that the non-occurrence of some event, which was not within the contemplation or even the imagination of the
parties, was an implied term of the contract.” Scott & Sons v. Del Sel, [1922] S. C. 592. Subsequent English cases
were not consistent in this regard.
While the “implied condition” phrase has been thoroughly criticized for well over a century, the more recent iteration
requiring a determination of the parties’ “basic assumption” is hardly more precise. Both phrases provide
rationalizing solace for a process that courts have some difficulty describing or explaining.
Practice Resource:
• Corbin § .1 (discharge by impossibility based on a condition implied in fact).

End of Document
PERSONAL INABILITY
§ 4.13 Force Majeure Clauses
When the common law generally restricted excuses for nonperformance to the classical exceptions of death or
disability a person, destruction or deterioration of the subject matter of the contract, or a new statute or regulation
making performance impossible, force majeure (superior or irresistible force) clauses could be employed to list
other events that made performance impossible or impracticable. It was common to list “acts of God” such as
earthquakes, floods, and other natural disasters as well as other tragic events such as wars and civil strife as
excuses for nonperformance. Labor strikes were commonly included. A current force majeure clause may now
include “terrorist attacks.”
A producer of solar panels contracted under a “take-or-pay” arrangement to purchase from a third party supply
polysilicon that was used in the manufacture of solar panels. The contract contained a force majeure clause that
included the following: “Neither Buyer nor Seller shall be liable for delays or failures in performance of its obligations
under this Agreement that arise out of or result from causes beyond such party's control, including without
imit tio acts of the Government . The producer claimed that China provided illegal subsidies to Chinese
companies and engaged in “large-scale dumping,” and the U.S. reciprocated with tariffs, causing the price of
polysilicon to which the parties agreed in 2008 to rise significantly higher than the market price. The court held that
the risk of such a change in market prices—no matter the cause—was expressly assumed by plaintiff in its take-or-
pay contract with defendant. Kyocera Corp. v. Hemlock Semiconductor, LLC, 2015 Mich. App. LEXIS 2249 (Mich.
Ct. App. Dec. 3, 2015).
U.S. Sugar claimed its failure to meet its purchase obligations under its fixed price contracts was excused by the
force majeure clause that excused non-performance when governmental action ‘prevent[s] or prohibit[s] [U.S.
Sugar] from … ordering … sugar products or performing’ under the contracts.” U.S. Sugar contended that the
governmental action clause was applicable because it relied on a monthly estimate published by the USDA in
negotiating contract prices, and this estimate failed to anticipate the sugar price collapse in 2012. The court held
that these facts did not trigger the force majeure clause. “At most, the governmental action here made U.S. Sugar's
performance unprofitable, but did not prevent or prohibit its performance.” Numerous courts have declined to apply
a force majeure clause where governmental action affects the profitability of a contract but does not preclude a
party's performance. Indeed, a “force majeure clause is not intended to buffer a party against the normal risks of a
[fixed-price] contract.” United Sugars Corp. v. U.S. Sugar Co., 2015 U.S. Dist. LEXIS 43573 (D. Minn. 2015).
In light of the recognition of excusable nonperformance in UCC § 2- 1 and the replication of that principle in
Restatement (Second) of Contracts § 2 1 the interesting question is whether a force majeure clause is necessary.
If a particular event is foreseeable but the parties do not wish to be bound to the contract should that event occur,
courts expect parties to deal with such foreseeable events apart from excused performance under a force majeure
clause. The parties could certainly agree on an express condition to the parties’ duties that a specified event must
not occur. The failure of that condition (because the event did occur) would preclude the activation of the duty to
which it is attached. The excusing event, however, must not be within the control of the party asserting the excuse.
Just as a party may not rely upon a contingent event that it could have avoided to excuse performance, a party may
not rely on a force majeure event over which it has control. Nissho-Iwai Co. v. Occidental Crude Sales, Inc., 729
F.2d 1530, 1539 (5th Cir. 1984).
UCC § 2- 1 suggests that parties may agree to greater obligation than that imposed by the UCC provision. The
language does not mention a lesser obligation through the agreement of the parties. Comment 8 suggests,
Page 2 of 2
however, that the parties may “supplant” the terms of the Code provision and there are cases enforcing clauses
enlarging the exemptions, thereby lessening the obligation. See, e.g., Interpetrol Bermuda, Ltd. v. Kaiser Aluminum
International Corp., 719 F.2d 992 (9th Cir. 1983). It is, therefore, possible to include contingencies that the parties
deem as sufficient to excuse performance even if they would not be sufficient absent such clauses.
Care must be taken in drafting force majeure clauses to ascertain that implied legal protection is not lost. The
classic example of unwitting drafting is found in clauses listing specific events followed by general language that will
be interpreted as referring only to the same kinds of events in the list under the interpretation guide known as
ejusdem generis (“the same kind, class, or nature”).
In one case, the parties, who had set forth a list of force majeure events in their contract, tried to rely upon the
common law and UCC defenses of impossibility of performance and frustration of purpose. The court concluded
that the parties could not circumvent the terms and limitations of their own force majeure provision. Aquila, Inc. v. C.
W. Mining, 2007 U.S. Dist. LEXIS 80276 (D. Utah Oct. 30, 2007). To avoid that result, the common phrase,
“including but not limited to” or “without limitation” may appear just before the listed events. At the conclusion of the
listed events, general language stating that the impracticability principle applies to any other kind of event may also
be included. For example, after the specifically listed events, the clause could end with, “or by any other event of
whatsoever kind or nature not within the control of the party whose performance has been interfered with, which, by
the exercise of reasonable diligence such party is unable to prevent, whether of the class of events numerated
above or not.”
Practice Resource:
• Corbin § .1 (force majeure clauses).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 75 DEATH OR DESTRUCTION OF SPECIFIC
THINGS—PRORATING SUPPLY
CHAPTER 75 DEATH OR DESTRUCTION OF SPECIFIC THINGS—

PRORATING SUPPLY
§ .01 e o m ce Made Impossible by Death or Illness
[1]The Death or Disabling Illness of a Party Whose Continued Life and Health Are Necessary for
Performance Under the Contract Will Discharge a Contractual Duty
[2]Personal Service Contracts
[3]A Duty May Be Discharged if Performance Is Sufficiently Dangerous
§ .02 est ctio of Specific Subject Matter Necessary to Performance
[1]The Risk of Destruction of a Specific Thing Necessary for the Performance of the Contract Is
Assumed by Both Parties
[3]Casualty to “Identified” Goods
§ .0 est ctio of a Building During Construction
§ .0 i e of Source of Supply
§ .0 i e of Necessary Cooperation by a Third Party
§ .0 est ctio or Nonexistence of Contemplated Conditions or Means of Performance
§ .0 m ossi i ity After Breach Has Already Occurred
§ .0 i c mst ces Justifying the Prorating of Supply

End of Document
CHAPTER 75 DEATH OR DESTRUCTION OF SPECIFIC THINGS—

PRORATING SUPPLY
the subject matter.

End of Document
§ 5.01 Performance Made Impossible by Death or Illness
[1] The Death or Disabling Illness of a Party Whose Continued Life and Health Are Necessary for
Performance Under the Contract Will Discharge a Contractual Duty
The death or disabling illness of a promisor, a promisee, or a third party whose continued life and health are
necessary for performance under the contract will discharge a contractual duty. Though illness and death are
foreseeable contingencies, the foreseeability factor is typically ignored in recognizing that performance is
impossible.
Where Ryan agreed to provide pilot services as Sheppard’s “personal instructor” and “pilot in command” for
three years, before any of the services could be performed, Sheppard died. Ryan sued the Sheppard estate for
$105,000. The court noted that, while death alone does not discharge contractual obligations, where distinctly
personal considerations are foundational to the contract, the relation of the parties is dissolved by the death of a
party whose personal qualities constituted a particular inducement to the formation of the contract. By
specifying that Ryan would be Sheppard’s “personal instructor” and “pilot in command,” the contract specified
not only the services but the party for whom the services would be rendered. Sheppard’s death precluded such
flight instruction and Ryan could no longer serve as his pilot. The duty to pay was discharged because the
rendition of the service is no longer possible. Ryan v. Estate of Sheppard (In re Estate of Sheppard), 328 Wis.
2d 533, 789 N.W.2d 616, 2010 WI App 105.
The threshold question is whether the promised performance can be rendered only by or to the party who is no
longer available. The terms of the contract may indicate the parties’ intention that a duty may be performed by
another. Contract language, however, is not conclusive.
A written contract for over $24,000 in dance lessons conspicuously stated that it was “non-cancellable” and “no
refunds will be made.” When the customer suffered injuries that made it impossible for him to continue the
lessons, the court refused to construe the contract language as manifesting an intention to surrender the
defense of impossibility of performance. Parker v. Arthur Murray, Inc., 10 Ill. App. 3d 1000, 295 N.E.2d 487
(1973).
A discharge of a contractual duty because of incapacity refers to physical incapacity. The discharge is
coextensive with the illness or disability since it is an excuse for nonperformance only to the extent that
performance is actually prevented.
[2] Personal Service Contracts

Absent contract language expressing the parties’ intention, analysis is aided by a determination of whether the
duty is delegable under the contract. A book contract is discharged upon the death of the author. An artist’s
death or incapacitating illness will discharge the artist’s duty. The duty of an actor, a teacher, or a professional
athlete is not delegable. The death or incapacity of such parties discharges their service obligations.
In contracts for the sale of goods, the Uniform Commercial Code (UCC) restates the traditional view that a duty
may be delegated unless the other party has a substantial interest in having the original promisor perform or
control the performance of the duty. UCC § 2-210. Such reliance would be unusual. A buyer’s contract to
purchase a product is typically not discharged by the buyer’s death, nor is the seller’s duty dependent upon the
seller’s continued life or health.
The death of an employee who is obligated to render personal service discharges the employee’s duty, but the
death of an employer does not discharge the employer’s duty unless an essential part of the duty was to direct
Page 2 of 2
the work of the employee. A simple duty to pay wages, however, does not require the personal effort of the
employer.
When a television station is sold, the contract duties of a popular news anchor cannot be delegated because of
the anchor’s unique personality and skills. The anchor’s death or incapacity would discharge those duties. The
duties of the original owner to compensate the anchor, however, require no unique ability or skill. The anchor is
not affected by the fact that he or she is being paid by the new owner or that the news program is under the
direction of different people if there is no material change in the program or the anchor’s duties. See Evening
News Asso. v. Peterson, 477 F. Supp. 77 (D.D.C. 1979). The unavailability of the people who had originally
performed those duties not affecting the performance of the anchor does not discharge those duties.
[3] A Duty May Be Discharged if Performance Is Sufficiently Dangerous

A party’s duty to perform may be discharged if the performance can only be continued under circumstances
that are sufficiently dangerous to the party’s life or health. A court will weigh the seriousness and extent of injury
to be feared, the probability that life or health will be affected, the importance of the promised performance, and
the kind and extent of loss that the failure to perform will cause others.
Where risks to life, health, or property are known at the time the contract is formed and the performance is not
against public policy, the promisor has assumed the risk. Daredevil performers and stunt men and women
assume such risks, as do medical personnel dealing with the outbreak of a disease that would discharge the
duty of other workers. Lakeman v. Pollard, 43 Me. 463 (1857) (worker excused by outbreak of cholera).
A promisor may be excused from performance although the danger is to a third party. The promoters of a baby
show were justified in cancelling the show in light of an outbreak of infantile paralysis. Hanford v. Connecticut
Fair Ass’n, 92 Conn. 621, 103 A. 838 (1918). When a famous lead actor left a production to have medical tests
done because he was reasonably apprehensive about a nagging throat condition, the producer of the show was
justified in cancelling performances even though the tests proved negative. Wasserman Theatrical Enterprise,
Inc. v. Harris, 137 Conn. 371, 77 A.2d 329 (1950).
Practice Resources:
• Corbin § .1 (performance rendered impossible by death or disabling illness); § .2 (contracts of
service—death of servant or employer); § . (performance rendered impracticable by danger
to life, health, or property).

End of Document
§ 5.02 Destruction of Specific Subject Matter Necessary to Performance
[1] The Risk of Destruction of a Specific Thing Necessary for the Performance of the Contract Is
Assumed by Both Parties
Absent an expression of contrary intention, the risk of destruction of a specific thing necessary for the
performance of the contract without the fault of either party is assumed by both parties. The duty of a party
whose performance is rendered objectively impossible by such destruction is discharged. The landmark case of
Taylor v. Caldwell, 3 B. & S. 826 (1863), in which performance was excused when a music hall burned without
the fault of either party, is the most famous illustration. The case illustrates the paradigm situation of destruction
of the subject matter of the contract some time after the contract is formed but before the time for performance
has arrived.
A contract to clean, paint, or repair property is discharged if the property is destroyed without the fault of either
party prior to the time for performance. When, however, a building is destroyed during construction without the
fault of the builder or the owner, the builder will be required to rebuild it.

One of the most important changes effected by the UCC in contracts for the sale of goods was the elimination
of the notion of “title” as an analytical construct. The UCC risk of loss rules focus on the contract the parties
made to determine when risk of loss passed rather than on “title.” UCC § 2- 01 deals with the “passing of title,”
but it was included essentially to address issues beyond the UCC such as those dealing with taxation and
insurance where existing statutes were based on the party who had “title” to the property.
If goods are shipped by an independent carrier when the contract does not require the seller to deliver them to
a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier.
UCC § 2- 0 1 . If the contract requires the goods transported by independent carrier to be delivered to a
particular destination, the risk of loss passes to the buyer when the goods are duly tendered there. UCC § 2-
509(1)(b). Goods may be held by a bailee such as a public warehouse. The risk of loss as to such stored goods
will pass by an acknowledgment by the bailee of the buyer’s rights or the transfer of a warehouse receipt, even
though the goods have not been moved from their pre-sale location. UCC § 2- 0 2 .
The sale of goods may not involve delivery by independent carrier or a bailment. In such a case, the risk of loss
passes to the buyer upon the buyer’s receipt of the goods if the seller is a merchant, and on the tender of
delivery of the goods if the seller is not a merchant. UCC § 2- 0 . As is typically true of other sections of
Article 2, the risk of loss rules are subject to the parties’ contrary agreement. UCC § 2- 0 . Moreover, the
risk of loss rules change if either the buyer or seller has breached the contract. UCC § 2- 10.
When a buyer has the right to reject the goods though it has not yet rejected or even become aware of that
right, the risk of loss remains on the seller until the nonconformity has been cured or the goods have been
accepted (UCC § 2- 0 regardless of the nonconformity (UCC § 2- 10 1 . Under UCC § 2- 10 2 where the
buyer not only has the right to revoke acceptance of the goods under UCC § 2- 0 but exercises that right, the
buyer may treat the risk of loss as resting on the seller to the extent of any deficiency in the buyer’s effective
insurance coverage. If the buyer breaches as to conforming goods that have been identified (UCC § 2- 01 to
the contract, the seller’s breach before risk of loss passed to the buyer under UCC § 2- 0 allows the seller to
treat the risk of loss as resting on the buyer to the extent of any deficiency in the seller’s insurance coverage.
Page 2 of 2
[3] Casualty to “Identified” Goods

After a contract for the sale of goods is made, the goods may suffer a casualty without the fault of either party
while they are still in the seller’s possession. The risk of loss will then depend on whether the goods have been
“identified” to the contract. When a buyer agrees to purchase a product such a refrigerator of a certain model
(K-270), the seller typically has a number of K-270 refrigerators in its inventory. Under the contract with the
buyer, the seller has agreed to sell one of these “existing” refrigerators to the buyer. No property interest in any
one of the seller’s refrigerators passed at the time the contract was made. UCC § 2-10 2 requires goods to be
both “existing” and “identified” for a property interest in the goods to pass to the buyer.
If, however, the buyer has agreed to purchase the floor model of the K-270 (perhaps at a discount price
because it is a floor model), the parties have agreed at the time the contract is made on the transfer of
ownership of that specific K-270 model refrigerator sitting on the seller’s retail floor, not in any one of the K-270
refrigerators in the seller’s warehouse inventory. The specific refrigerator has been “identified” for sale to the
specific buyer. Thus, at the moment of contract formation, the buyer obtains a special property interest in that
specific refrigerator. UCC § 2- 01. If the refrigerator “identified” at the time the contract is made suffers a
casualty without the fault of either party before the risk of loss passes to the buyer, the contract is avoided if the
loss is total. UCC § 2- 1 (a). If the loss of identified goods is partial or the goods have deteriorated as to no
longer conform to the contract description, the buyer may choose to treat the contract as avoided or accept the
goods with due allowance from the contract price for the deterioration or other deficiency in the goods. UCC
§ 2- 1 . If the buyer chooses to accept the goods with due allowance from the contract price, the buyer has
no further rights against the seller.
Practice Resource:
• Corbin § . (destruction of specific subject matter necessary to performance).

End of Document
§ 5.03 Destruction of a Building During Construction
When a building, a bridge, a tunnel, a dam, or similar subject matter suffers a casualty during the course of
construction without the fault of the contractor or the owner, the risk of loss is on the builder even if it is due to a
flood, earthquake, or other “act of God.” The contractor must either start anew or pay damages to the owner. The
building or other structure did not yet exist; thus, it could not have been “identified” to the contract at the time the
contract was made.
In such contracts, there is no specific thing that must continue to exist for the contract to be performed. The contract
requires the creation of a physical object and that creation is still possible although it will be more expensive for the
contractor. When the contract is to repair a structure, its destruction without the fault of either party before the
repairs occur will discharge the builder’s duty under the contract.
The situation changes, however, with respect to repairs or remodeling of existing buildings. A building was heavily
damaged by fire and the contractor had not finished repairs when it burned again without fault. The question was
whether the contract required the continued existence of a structure, albeit severely damaged, as a basic
assumption of the contract. The court held such continued existence to be a basic assumption of the contract and
held that the builder was entitled to damages based upon the net addition to the value of the building before it was
destroyed for the second time. Fowler v. Insurance Co. of North America, 155 Ga. App. 439, 270 S.E.2d 845, 846-
47 (1980).
If a subcontractor has agreed to install heating or air conditioning in a building being constructed by a general
contractor, unless the subcontractor has agreed to assume all risk of loss or destruction, courts have generally
analogized these situations to repair cases requiring the continued existence of a structure as an implied condition
of the subcontractor’s duty.
The allocation of risk of loss caused by a casualty to an unfinished structure will revert to the owner when a
contractor has justifiably relied on the plans and specification of the owner’s architect or engineer. If, however, an
owner’s plans show a desired result without indicating the method of achieving that result, the builder assumes the
risk that the method it chooses will be effective. See Eichler Homes, Inc. v. County of Marin, 208 Cal. App. 2d 653,
25 Cal. Rptr. 394 (1962).
Practice Resource:
• Corbin § . (destruction of a building in course of construction).

End of Document
§ 5.04 Failure of Source of Supply
When a defendant seeks to be excused from its duty because a supply of necessary goods or services has failed,
the issue is whether the parties understood at the time the contract was formed that the defendant’s performance
depended upon a specific source of supply. The paradigm case involves a farmer agreeing to sell crops.
If a farmer agrees to sell his entire crop of tomatoes grown only on his land to a catsup manufacturer, the parties’
basic assumption is that the farmer’s own land, if properly cultivated, would allow the production of the tomato crop.
If that basic assumption is contradicted by drought or other disasters without the fault of the farmer, the farmer’s
duty is excused and discharged. The leading English crop failure case is Howell v. Coupland, [1876] 1 Q.B.D. 258
aff’g. [ 1874] L.R. 9 Q.B. 462. UCC § 2- 1 cmt. 9, would allow the discharge to be effected either under the
general impracticability section, UCC § 2- 1 or under the destruction to identified goods, UCC § 2- 1 if the
growing tomato crop had been destroyed by drought or other cause without the fault of the farmer.
If, however, the seller simply promises to deliver tomatoes to the catsup manufacturer with no designation of a
source of supply, the failure of one or several sources of supply the seller normally engages to fulfill its contracts will
not discharge the duty. The leading American case is Anderson v. May, 50 Minn. 280, 52 N.W. 530 (1892). In that
case, a contract did not mention any location where beans were to be grown even though the farmer planned to
grow them only on his land. The bean crop was destroyed by an early frost and the court held the farmer was not
discharged.
Whether the contract should be deemed to have designated a particular source of supply, the failure of which would
discharge the defendant, is a matter of interpretation. If the contract expressly indicated the source of supply as a
condition to the supplier’s duty, the risk allocation is simple. As is true in so many contracts cases, however, the
parties often fail to express themselves with clarity and precision. In one case, a defendant’s attempt to be excused
from supplying school buses because its source of supply failed was rejected by the court because the defendant
had failed to make the contract expressly contingent on such supply. Alamance County Bd. of Educ. v. Bobby
Murray Chevrolet, Inc., 121 N.C. App. 222, 465 S.E.2d 306 (1996).
In the case of growing crops, a reference to the location of the land on which the expected crops are to be grown
will be sufficient. It should also be sufficient if course of dealing evidence or other circumstances indicate that the
farmer sells only crops grown on his own land.
In any case involving a failed source of supply, if the parties know or should have known that if a particular source
of supply becomes impossible the supplier would not be able to complete the contract, the supplier’s duty should be
discharged. Such an interpretation of the contract is highly unlikely, however, absent some reference to the source
of supply in the agreement. Beyond the failure of the source of supply, the supplier must show that the failure of the
source was not foreseeable; if it was foreseeable, the supplier should have expressed that contingency in the
contract. The supplier must also show that it pursued reasonable efforts to assure the specified source of supply
would be effective, and it should transfer any of its rights against the source of supply to the promisee.
Sunshine paid Luxury to obtain a Mercedes for Sunshine, but the Mercedes was never delivered because Luxury
had entrusted the funds to a third party, which entrusted the funds to another third party, but that other third party
absconded with the money. Sunshine sued Luxury, and the court rejected Luxury’s impossibility and frustration
defenses because these ordinarily cannot rest on the failure of a third party to perform, unless the risk of the third
Page 2 of 2
party’s non-performance was not assumed in the contract. Sunshine Imp & Exp Corp. v. Luxury Car Concierge,
Inc., 2015 U.S. Dist. LEXIS 60034 (N.D. Ill. May 7, 2015).
Practice Resource:
• Corbin § . (failure of a source of supply).

End of Document
§ 5.05 Failure of Necessary Cooperation by a Third Party
The same analysis may be applied where performance fails because a third party has failed to perform or
cooperate. A general contractor sought to be excused from 171 days of delay in performance due to the failure of a
subcontractor, a third party “supplier” of services. Quoting extensively from Corbin on Contracts, the court
recognized that where both parties understand that performance will be impossible unless a third party performs, it
may be reasonable to view the contract as conditioned on such performance. This interpretation, however, will not
apply if nothing is said concerning the third-party supplier at the time the contract was made. Where a party
promises to produce a result for which it is necessary to obtain the cooperation of third parties, the promisor
generally assumes the risk of such cooperation. Xtria LLC v. Tracking Sys., 2009 U.S. App. LEXIS 21607 (5th Cir.
2009). The owner is not a third party beneficiary of a contract between a general contractor and the subcontractor
chosen by the general contractor to perform certain aspects of the construction. Absent a contrary agreement, the
risk of a subcontractor’s default is on the general contractor. Hutton Contr. Co. v. City of Coffeyville, 487 F.3d 772
(10th Cir. 2007).
The courts generally follow the same approach in other circumstances where the failure of a non-party to perform
its duty or otherwise cooperate causes the promisor’s default. When a workers’ strike causes a company to delay
delivery, the company is not excused, absent a contrary provision. When a supplier of concrete refused to cross a
picket line at a job site, the court rejected the commercial impracticability defense, but suggested that labor disputes
may provide an excuse for a failure to perform depending on the predictability of the dispute and the difficulty of
performing in light of the dispute. Mishara Constr. Co. v. Transit-Mixed Concrete Corp., 365 Mass. 122, 310 N.E.2d
363 (1974).
Practice Resource:
• Corbin § . (effect of refusal of necessary cooperation by a third party).

End of Document
§ 5.06 Destruction or Nonexistence of Contemplated Conditions or Means

of Performance
When performance of a contract requires the existence of definite physical conditions or means of performance, the
duty may be discharged by the nonexistence or destruction of such necessary means or conditions. A contract may
designate certain loading or unloading conditions, or means of transportation, or manner of payment. If they are
express conditions, the failure of the condition discharges the duty. If they are not express conditions, a court will be
required to determine if they should be implied conditions of fact or constructive conditions. Trade usage, course of
dealing, and evidence of commercial reasonableness will aid courts in this effort.
In some cases, a court may find it reasonable to require a contractor to perform through available substitute means
or methods of performance. A common scenario involves the unavailability of a method of delivery as required
under the contract. The UCC provides that where an agreed method of berthing, loading, unloading, or an agreed
type of carrier becomes unavailable, if a commercially practicable substitute is available, performance must be
tendered and accepted. UCC § 2- 1 . Under § 2- 1 2 if the manner or payment prescribed in the contract is
prevented by domestic or foreign regulation, the seller may withhold or stop delivery of goods unless the buyer
provides a commercially reasonable substitute method of payment.
The closing of the Suez Canal during an international crisis spawned a number of “Suez Canal” cases. In these
cases, ships that would have normally traveled through the Canal extended the voyage by thousands of miles
around the Cape of Good Hope. In one case, a contract specified a voyage from Galveston, Texas to Sahpur, Iran,
but did not indicate the route. The ship sailed on a course that would have taken it through the Canal, but Israel’s
invasion of Egypt caused Great Britain and France to invade the Canal zone. Egypt obstructed the Canal with
sunken ships and closed it to traffic. The ship’s operator claimed that the parties understood that the contract was
based on the usual route assumption in such a contract through the Canal and sought additional compensation for
the cost of the extended voyage. The court disagreed on the footing that the hostilities in the Canal Zone were not
unexpected and that increased cost alone does not excuse a duty. Moreover, the increased cost in this case (15
percent more than expected) was within the risk assumed. Transatlantic Financing Corp. v. United States, 363 F.2d
312 (D.C. Cir. 1966).
Practice Resource:
• Corbin § . (destruction or nonexistence of contemplated conditions or means of performance).

End of Document
§ 5.0 Impossibility After Breach Has Already Occurred
When a party breaches a contract and the contract would have become impossible or impracticable to perform
shortly thereafter, the party is not excused from the breach. Similarly, if performance was possible through the
exercise of due diligence prior to the event making performance impossible or impracticable, the duty is not
excused. As noted earlier, the UCC rules concerning risk of loss change dramatically where a buyer or seller
breaches the contract.
Practice Resource:
• Corbin § . (impossibility after breach has already occurred).

End of Document
§ 5.0 Circumstances Justifying the Prorating of Supply
When a supply of goods is reduced by an event constituting impossibility or impracticability of performance, the
common law recognized a prorating, or rationing, process among customers. The UCC later provided that, when
only part of a seller’s supply is affected, the seller must allocate production and deliveries among its customers in a
fair and reasonable manner; the seller may include regular customers as well as contract customer in such an
allocation. UCC § 2- 1 .
Whether a given allocation is fair and reasonable under the standards provided in the statute is a fluid question
because of the great flexibility afforded to sellers in designing and applying the process. As one case suggests, the
seller may base its allocation on historic deliveries, contract amounts, current needs, and other grounds. See
Cliffstar Corp. v. Riverbend Products, Inc., 750 F. Supp. 81, 87 (W.D.N.Y. 1990), quoting J. White & R. Summers,
Uniform Commercial Code, § - n.4.
The seller must also notify buyers of delay or non-delivery that will ensue and the estimated quota made available
to the buyer. UCC § 2- 1 . It may, however, be difficult for the seller to provide any reliable estimate. Indeed, the
seller may not know whether the excusing contingency will merely delay or preclude deliveries. It has been
suggested that such a seller should be protected if it provides reasonable notice of the situation including its
uncertainties and assurances that it will keep the buyers informed. Cliffstar Corp. v. Riverbend Products, Inc., 750
F. Supp. 81, 87 (W.D.N.Y. 1990), quoting W. Hawkland, Uniform Commercial Code Series § 2- 1 13.
Practice Resource:
• Corbin § .10 (circumstances justifying the prorating of available supply).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 76 LEGAL PROHIBITION—GOVERNMENT
PROHIBITION AND EXIGENCIES OF WAR
CHAPTER 76 LEGAL PROHIBITION—GOVERNMENT PROHIBITION AND

EXIGENCIES OF WAR
§ .01 e o m ce That Has Become Unlawful Due to a Change in the Law
§ .02 m ossi i ity by Government Requisition of a Ship, Factory, or Other Property
§ .0 o e me t Regulation Cases Under UCC § 2- 1
§ .0 ici or Administrative Orders Preventing Performance
§ .0 e s of License or Permit
§ .0 m ossi i ity of Temporary or Uncertain Duration
§ .0 ect of Government Moratorium
§ .0 t e of War May Make Performance More Expensive
§ .0 m ossi i ity Caused by Foreign Law or Government
§ .10 e Impossibility Caused by a Promisor’s Own Act

End of Document
CHAPTER 76 LEGAL PROHIBITION—GOVERNMENT PROHIBITION AND

EXIGENCIES OF WAR
the subject matter.

End of Document
§ 6.01 Performance That Has Become Unlawful Due to a Change in the Law
One of the classic excuses for nonperformance at common law was called the “supervening act of state” exception,
which excused any performance that had become unlawful due to a change in the law. The contract was said to be
subject to an “implied condition” that the law would continue to allow performance. Baily v. De Crespigny, L. R. Q.
B. 180 (1869) (covenant of landlord to prevent the erection of any buildings on adjoining land excused when the
land was taken by a railroad under an Act of Parliament). The same result is achieved by the modern diction that a
basic assumption of the parties in making the contract is the nonoccurrence of a contingency (a change in the law)
that occurred. Uniform Commercial Code (UCC) § 2- 1 .
The change need not occur through legislation. A new regulation will suffice, but the change must be mandatory; a
mere recommendation will not do. The new regulation or ordinance need not be valid. The government, however,
cannot be excused by passing an ordinance that prevents performance of its own contract. Similarly, when an
injunction is issued through the fault of the promisor, the promisor is not excused from performing.
UCC § 2- 1 and Restatement (Second) of Contracts § 2 expressly permit a performance to be excused by

necessary compliance with any foreign law as well as domestic government regulations or orders. A Federal
Reserve Board notification that a bank was in “troubled condition” triggered a regulation prohibiting “golden
parachute” payments. When the bank refused to pay the plaintiff, a former executive, he brought an action that
resulted in a settlement. The bank then refused to pay the settlement because the plaintiff knew any such payment
was subject to Federal Reserve approval which was not provided. Citing § 2 of the Restatement (Second) of
Contracts, the court held that the bank was excused from making the payment since its performance would have
violated the order. Martinez v. Rocky Mt. Bank, 2013 U.S. App. LEXIS 20340 (10th Cir. 2013).
Legislation or other government orders or regulations that made the performance under a contract unlawful may be
overturned on constitutional grounds. In one instance, 1993 legislation allowed a local referendum to determine
whether cash payouts for video gambling machines should remain legal. As a result, the machines became illegal,
thereby making unlawful Brown’s right under a 15-year exclusive contract to place the machines in White’s stores.
Brown removed the machines. In 1996, however, the Supreme Court of South Carolina declared the local
referendum law to be unconstitutional. Brown sought to replace the machines in White’s stores, but White had
made a contract with another supplier. Noting the Corbin on Contracts analysis, the court held that when
performance becomes illegal, the contractual duty is discharged. The duties under the contract died under the local
referendum and could not be revived by the later determination that it was unconstitutional. White v. J.M. Brown
Amusement Co., 360 S.C. 366, 601 S.E.2d 342 (2004).
Practice Resource:
• Corbin § .1 (legal prohibition, act of state, or outbreak of war).

End of Document
§ 6.02 Impossibility by Government Requisition of a Ship, Factory, or Other

Property
Requisition by the government or military authorities of the subject matter of a contract makes performance of the
contract unlawful if the contract cannot otherwise be performed. Even an invalid requisition will make performance
of the contract impossible and the duties under it will be discharged.
Such requisitions typically occur during time of war or other national emergencies. A wartime requisition of vessels
owned by British citizens under charter contracts with Americans discharged the duties of the owners of the vessels
as well as the charterers. Texas Co. v. Hogarth Shipping Co., 256 U.S. 619, 41 S. Ct. 612, 65 L. Ed. 1123 (1921). A
manufacturer of goods may be prevented from performing by a government requisition of the goods. The
manufacturer’s duties under contracts with customers are discharged as are the duties of the customers. Moore &
Tierney, Inc. v. Roxford Knitting Co., 250 F. 278 (N.D.N.Y. 1918), aff’d, 265 F. 177 (2d Cir. 1920) (under the
National Defense Act, the government ordered so much of the manufacturer’s output that it could not perform its
contracts with customers). The manufacturer is not required to make capital expenditures to expand production
capacity.
The government may requisition railroads, trucks, and transportation facilities, thereby making the delivery of goods
impossible. It may requisition goods for health or safety reasons. Whether the government has made a “requisition”
is a question of fact. The government need not expressly state its statutory authority or threaten punishment for its
request to be compulsory. Even an informal government order can operate to discharge a contractual duty. One
court held that a defendant’s evidence that the government was pressuring its suppliers and subcontractors to give
military orders precedence for the Viet Nam war effort was sufficient to excuse the defendant’s substantial delays in
delivering passenger jet aircraft to Eastern Air Lines. Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d
957, 995 (5th Cir. 1976). Although the government order may be directed at suppliers of materials rather than the
manufacturer, the manufacturer’s duty is still discharged unless it can procure the necessary materials elsewhere.
Practice Resources:
• Corbin § .2 (impossibility by government requisition of a ship or vessel); § . (government
requisition of a factory or other facilities or specific property required for performance).

End of Document
§ 6.03 Governmental Regulation Cases Under UCC § 2 615
The commercial impracticability defense under UCC § 2- 1 was explored Chapter 74 above. Supervening
governmental orders will give rise to a UCC § 2- 1 defense. A United States manufacturer agreed to sell radio
equipment to a Swedish company that served as the manufacturer’s distributor to Iran. The U.S. Government
seized the shipment because of its potential military use. The manufacturer then “voluntarily” withdrew further sales
to Iran. When the Swedish company sued for breach of contract, the court held that the manufacturer had
established the impracticability defense because it had, in good faith, complied with the government’s “informal
requirements.” Harriscom Svenska, AB v. Harris Corp., 3 F.3d 576, 580 (2d Cir. 1993).
If government demands can be satisfied without substantially interfering with customer contracts, the seller is not
discharged from the contracts. When full performance is impossible or impracticable because of a government
order, a customer may agree to take a pro rata share of the goods it contracted to purchase. When the government
order causes a delay in performance, the buyer may waive the delay and accept performance at a later time.
It is, important, however, to remember that the buyer is not compelled to continue the contract if the deficiency will
substantially impair the value of the contract to the buyer. Under the UCC, when a buyer receives notification of a
material or indefinite delay or of an allocation justified because performance has become impracticable, if the
resulting deficiency substantially impairs the value of the whole contract, the buyer may, by written notification,
discharge its duty under any unexecuted portion of the contract. UCC § 2- 1 1 . If the seller has requested a
modification of the contract, such as the acceptance of a pro rata share, and the buyer fails to agree to the
modification within a reasonable time not exceeding 30 days, the contract lapses. UCC § 2- 1 2 . Moreover, an
express provision in the original contract requiring the buyer to stand ready to take delivery whenever the seller is
excused by impracticability of performance will not be enforced. UCC § 2- 1 which provides, “The provisions of
this section may not be negated . It is rare to discover such a provision in the UCC which otherwise emphasizes
freedom of contract.
Practice Resource:
• Corbin § . (governmental regulation cases under UCC § 2- 1 .

End of Document
§ 6.04 Judicial or Administrative Orders Preventing Performance
Like other acts of government, judicial or administrative orders may preclude the performance of a contract. A
judicial seizure of subject matter or a means necessary to perform a contract, however, will not discharge the
promisor’s duty if the judicial action was initiated by the defendant’s failure to perform a legal duty or the defendant
could have prevented the judicial action through reasonable diligence.
Practice Resource:
• Corbin § . (prevention by order or decree of a court or administrative officer).

End of Document
§ 6.05 Refusal of License or Permit
If a party knows at the time the contract is made that government authorization will be required to perform the
contract, the contractor will not be discharged when the authorization is not granted. Where a bank was obligated to
seek governmental approval as a condition precedent to the termination of a lease, the bank failed to obtain such
approval but insisted that it was excused from obtaining such approval because of impossibility of purpose. The
court, however, noted that the parties contemplated the risk of the bank’s inability to obtain the release. It was a
foreseeable event. Thus, the bank could not rely on an impossibility defense to excuse its performance under the
lease. Four Asteria Realty, LLC v. BCP Bank of N. Am., 71 A.D.3d 822, 897 N.Y.S.2d 487 (2010).
The foreseeability factor in such cases is abundantly clear. The defendant understands that a government permit or
license to perform will be necessary. Thus, the critical unforeseeability element to establish the impossibility or
impracticability defense is missing. The obvious solution is to expressly condition such a performance on success in
procuring the permit. It may be possible to establish an implied condition to this effect, but an express condition
would prevent any dispute over the existence of such a condition.
Practice Resource:
• Corbin § . (refusal of a license or permit; effect of embargo).

End of Document
§ 6.06 Impossibility of Temporary or Uncertain Duration
A promisor is not discharged from its duty because of impossibility or impracticability of performance until it can be
shown that supervening events beyond the promisor’s control and without its fault actually prevented substantial
performance. When the disabling event occurs, it may not be possible to predict how long it will last. Temporary
disability only suspends the obligation. Since certainty is not always possible, where continuing disability is
probable, a quick decision that will avoid losses will be viewed favorably and constitute a discharge of the duty.
An opera singer was diagnosed as being unable to sing for some time prior to opening night. The employer
contracted with the only available competent substitute for the entire season. The signer recovered in a few days
and sued. The court held that the defendant’s duty was discharged because the decision was reasonable under the
circumstances. Poussard v. Spiers & Pond, (1876) Q. B. D. 410. When the famous cowboy film star, Gene Autry,
was drafted into the army, the court held that the period of delay discharged his duty under a contract with a film
studio because it made his performance substantially more burdensome for the entire contract term. Autry v.
Republic Productions, Inc., 30 Cal. 2d 144, 180 P.2d 888 (1947).
Practice Resource:
• Corbin § . (impossibility of temporary or uncertain duration).

End of Document
§ 6.0 Effect of Government Moratorium
A government moratorium may suspend or discharge contractual duties. In 1933, to prevent runs on banks and
further bank failures, banks were forbidden to perform their duty to pay depositors on demand under a government
order closing all banks. Government moratoriums may be declared to prevent runs on banks and financial
difficulties of key industries such as the automobile industry. A moratorium may suspend rights of action on
contracts with persons who enter military service. The moratorium may suspend all remedies for delays in
performance.
Lloyd v. Murphy, 25 Cal. 2d 48, 153 P.2d 47 (1944), is a well-known moratorium case. Just before the United States
entered World War II, an automobile dealer entered into a lease that restricted the use of the premises to the sale of
new cars and operating a filling station. Subleasing was prohibited. New cars became unavailable as manufacturers
of passenger cars willingly accepted government orders to manufacture tanks, planes, trucks, and jeeps for military
use. Gasoline was rationed. Although the lessor waived the use restrictions that would have permitted the lessee to
repair automobiles, the lessee abandoned the lease and sought to avoid liability on the basis of impossibility of
performance and frustration of purpose. The court rejected the defense primarily because the unavailability of new
cars was clearly foreseeable at the time the lease was made. The lessee, therefore, bore the risk of such
foreseeably changed circumstances.
Practice Resource:
• Corbin § . (effect of a governmental moratorium).

End of Document
§ 6.0 Outbreak of War May Make Performance More Expensive
An outbreak of war may make a performance unlawful, impossible, or dangerous to life or property. Common law
courts, however, were reluctant to hold that a duty under a contract was discharged simply because goods typically
become scarce causing prices to rise during wartime. The nineteenth century view, however, has changed over the
years as evidenced by UCC § 2- 1 cmt. 4.
The comment begins with the general rule that increased cost alone does not excuse performance, nor does a rise
or collapse in the market justify excusing performance since that is exactly the type of business risk that is assumed
under a fixed price contract. With respect to wartime conditions, however, the comment suggests a different
standard: “But a severe shortage of raw materials or of supplies due to a contingency such as war … which either
causes a marked increase in cost or altogether prevents … performance, is within the contemplation of this
section.” (emphasis supplied).
This comment suggests a clear departure from earlier cases by allowing a party to invoke the commercial
impracticability defense without requiring a showing that war would prohibit performance, but requiring only a
showing of a “marked increase in cost” of raw material or supplies caused by a severe shortage.
Practice Resource:
• Corbin § . (outbreak of war may make performance merely more expensive).

End of Document
§ 6.0 Impossibility Caused by Foreign Law or Government
The older view that impossibility of performance due to the law, decree, or administrative action of a foreign
government is not a valid defense for breach of contract is no longer reliable. Thus, the UCC expressly provides
that a contractual duty may be discharged “by compliance in good faith with any applicable foreign or domestic
governmental regulation or order whether or not it later proves to be invalid.” UCC § 2- 1 .
Legality of performance is usually determined by the place of performance. If the performance is unlawful in that
place, duties under the contract are discharged. When a contract is performable in the United States, our courts will
not give effect to a foreign law forbidding performance even though the promisor is a citizen of the foreign nation.
To that extent, the foreign law does not make performance impossible.
Practice Resource:
• Corbin § .10 (impossibility caused by foreign law or government).

End of Document
§ 6.10 Legal Impossibility Caused by a Promisor’s Own Act
It is not surprising that courts would hold that when a promisor is legally prohibited from performing its duty under a
contract, the defense of impossibility is not available if the prohibition is attributable to the act of the promisor. Thus,
where a promisor is prohibited from performing due to his arrest and conviction of a crime, it would seem to follow
that the promisor should not be discharged of his duty since he was precluded from preforming by his own act.
Nonetheless, it has been held that a party was excused from performing when he was arrested and convicted. The
court suggested that refusing to recognize an excuse in such a case confuses remote and proximate causes. When
someone becomes ill or disabled because of voluntary imprudent or negligent acts, the party is excused because
illness or disability is not a voluntary proximate cause of the disability that excuses performance. Neither is arrest
and conviction. Hughes v. Wamsutta Mills, 93 Mass. 201 (1865).
The failure of a bail bonding business to produce the accused in court, however, can be excused if the accused was
arrested for another crime with consequent imprisonment elsewhere; the impossibility was caused by the accused,
not by the bondsman. See State v. Scherer, 108 Ohio App. 3d 586, 671 N.E.2d 545 (1995). If a contractor fails to
perform because of arrest and conviction, the other party is discharged under the contract because of the failure of
consideration whether or not the contractor caused the imprisonment.
Practice Resource:
• Corbin § .11 (legal impossibility caused by promisor’s own act).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 77 DISCHARGE BY FRUSTRATION OF PURPOSE
CHAPTER 77 DISCHARGE BY FRUSTRATION OF PURPOSE
§ .01 st tio of Purpose Justifying Nonperformance
[1]Purposes of the Parties
[2]The Coronation Cases
[3]The Modern Doctrine
[4]Restatement (Second) of Contracts View
§ .02 st tio of Lessee’s Purpose
[1]To Excuse a Lessee’s Performance, There Must Be Frustration of a Foundational Purpose of the
Contract
[2]Termination of a Lease by Eminent Domain
§ .0 choo Teaching Contracts
§ .0 o ts Generally Do Not Regard Inflation as an Excuse for Nonperformance
§ .0 The Frustration of Purpose Defense Succeeds Only in Unusual Cases
§ .0 ti and Temporary Frustration Corbin

End of Document
CHAPTER 77 DISCHARGE BY FRUSTRATION OF PURPOSE
the subject matter.

End of Document
§ .01 Frustration of Purpose Justifying Nonperformance
[1] Purposes of the Parties

Parties make contracts for different purposes. In a simple contract for the sale of goods or lease of property, the
buyer is bargaining for the goods or the use of the property and the seller or lessor is bargaining for the price.
The parties, however, often have different remote purposes. The purchaser may have desired the equipment to
operate a new business. After the purchase, the purchaser may discover that, without his or her fault, the new
business will not become a reality. The owner of the house may have decided to lease it for six months
because the owner anticipated working abroad during that time. After the lease is signed, without the owner’s
fault, that opportunity may have disappeared.
The equipment buyer now owns equipment of a certain value which it can probably resell or for which it may
find another use. The lessor will receive rental payments for six months. Yet, each party has made a contract
on the assumption that a supervening event would not occur and it has occurred, frustrating their respective
remote purposes. Absent additional facts, however, no court will allow either party to be excused from
performing. Each party would be deemed to have assumed the risks that occurred. Where a franchise
agreement required the defendant to open seven restaurants, the restaurants were closed by the defendant
because they were not profitable. When the defendant sought to be excused from performing since its remote
purpose of earning profits was not met, the court held that the defense of frustration of purpose requires more
than unprofitability. The frustration must be so severe as not to be within the risks assumed under the contract,
i.e., complete frustration of the essential purpose of the contract. Qdoba Rest. Corp. v. Taylors, LLC, 2010 U.S.
Dist. LEXIS 27394 (D. Colo. Mar. 23, 2010). Should a court ever allow a party to be excused because the
party’s remote purpose has been frustrated?
[2] The Coronation Cases

English courts confronted this issue when the coronation processions of King Edward VII, who succeeded
Queen Victoria, had to be cancelled because of his illness. In addition to other expansive displays, two
magnificent processional pageants leading to the crowning of the King at Westminster Abbey were planned.
Flats, windows, porches, and roofs along the parade route were rented at high prices. The postponement of the
ceremonies and the processions led to several separate litigations. The English courts had to decide whether
contracts made in anticipation of the procession were discharged and, if so, what remedies would ensue since
some of the payments to rent viewing areas had been paid in advance, while others were to be paid after the
coronation.
In one of the cases, a defendant had hired a steamship for two days on which he intended to sell seats to
observe a naval salute to the new king as well as for sailing around the Isle of Wight. The court held that the
contract was enforceable. Although the collateral event constituting the principal attraction for which he made
the contract did not occur, some benefits remained and there was no impediment to providing the steamship or
paying for its rental. Herne Bay S. S. Co. v. Hutton, [1903] 2 K.B. 683. In another case, parties who paid for
their grandstand seats along the procession routed were denied a refund on the footing that it would be unfair
to place the risk of loss on the defendant who had erected the grandstand. Blakely v. Mueller & Co., [1903] 2
K.B. 760n.
In still another case, part of the payment for a room to watch the procession had been made in advance; the
court held that the hirer was not entitled to a refund of that payment and was also liable for the balance
because the entire amount was due before the coronation was cancelled. If the payment had not been due until
Page 2 of 4
after the coronation, the risk would be allocated to the owner. The court decided to leave the parties where they
were at the time of the frustrating event. Chandler v. Webster, [1904] 1 K.B. 493 (C.A.).
In what has become the leading coronation case, Henry paid one-third of the fee in advance as required by the
contract. Since, however, the balance was not due until the end of the procession, the frustrating event was
held to discharge his duty to pay the balance. Krell v. Henry, [1903] 2 K.B. 740 (C.A.).
Why should any relief have been granted in these cases as compared with the buyer of equipment or the lessor
of the premises whose remote purposes have been frustrated? There was no express statement of the purpose
of the contract in Krell, but the court found that the principal or “foundational” purpose of the contract had been
frustrated. While Henry was entitled to sit in the rented flat overlooking Pall Mall where the coronation was
supposed to pass by and watch ordinary traffic, the court recognized that such a use of the flat at premium
rates would have been absolutely pointless.
In the earlier example, the buyer of the equipment had received real value and the lessor would presumably
receive the market value of the lease. Their immediate purposes were served with substantial value even
though their remote purposes were frustrated. If courts were forced to consider excusing performance for every
disappointed remote purpose, the enforceability of all contracts would be placed in considerable jeopardy.
[3] The Modern Doctrine

The leading American case on frustration is Lloyd v. Murphy, 25 Cal. 2d 48, 153 P.2d 47 (1944). Lloyd involved
the lease of property in the heart of Los Angeles signed just before the United States entered World War II. The
lease restricted the lessee to sell only new automobiles. Pervasive mobilization for war in the United States was
already underway at the time the lease was signed and the existence of severe restrictions on the manufacture
of new automobiles was common knowledge. The lessee’s effort to be excused through frustration of purpose
was rejected because of the clear foreseeability that new automobiles would not be available for sale and the
lessor’s willingness to waive the lease restrictions to allow the lessee to sell used automobile and to repair
automobiles. Thus, the value of the lease was not totally destroyed. The case set the tone for future frustration
of purpose cases that would require the particular purpose of the contract to be the dominant or “foundational”
or principal purpose and the occurrence of the supervening event would have to result in total frustration.
[4] Restatement (Second) of Contracts View

The elements required to establish frustration of purpose under Restatement (Second) of Contracts § 2 are
identical to the requirements to establish commercial impracticability except for one. Since frustration of
purpose occurs without any impediment to the literal performance of the contract, the first element is different.
Instead of performance becoming impracticable, the supervening event requires a party’s principal purpose as
understood by both parties at the time the contract is made to be substantially frustrated. The Restatement
explains:
[T]he purpose that is frustrated must have been the principal purpose of that party in making the
co t ct. The object must be so completely the basis of the contract that, as both parties understand,
without it the transaction would make little sense.
Restatement (Second) of Contracts § 2 cmt. a.
In Next Gen Capital, LLC v. Consumer Lending Assocs., LLC, 234 Ariz. 9, 316 P.3d 598 (Ct. App. 2013), the
defendant operated a money transfer business permitted under a statute that would expire in 2010. In 2007, the
defendant signed a five-year lease of a building to operate the business. In 2010, the defendant vacated the
property without paying the rent. In an action by the lessor, the defendant claimed frustration of purpose since
the statute allowing such a business was no longer in effect. Since the defendant knew that the statute would
expire in 2010, he knew or should have known that, absent legislative action, he could not operate the business
after that date. Thus, the fundamental element of a frustration defense was lacking. There could be no
reasonable basic assumption that the purported frustrating event (expiration of the statute) would not occur.
The court of appeals affirmed the trial court’s holding to this effect.
Refusing to repay a bank loan of some $36 million that had been lent to acquire and environmentally remediate
certain property, the defendant claimed that the “unforeseen and unanticipated presence of methane gas on the
Page 3 of 4
property rendered performance commercially impossible or impracticable (commercial frustration).” Noting that
a court will presume that the parties intend obligors to assume foreseeable risks (Restatement (Second) of
Contracts § 2 1 cmt. e) and that the defendant acquired the property for environmental remediation purposes
aware that it had previously served as a landfill, the court of appeals “suspected” that the presence of methane
gas was a foreseeable risk. Even if the methane gas was not a foreseeable risk, the court noted that the
contamination did not result in a total or practically total destruction of the fundamental purpose of the contract.
While the plan may have been less profitable or would even result in a loss, the court noted that lost profit
without total or practically total destruction of the purpose of the contract will not affect a successful commercial
frustration defense. BancorpSouth Bank v. Hazelwood Logistics Ctr., LLC, 706 F.3d 888 (8th Cir. 2013).
There is universal agreement that the excuse will not be operative just because the frustrated party will sustain
a loss. The severity of the frustration must convince a court that it would be fundamentally unfair to allocate the
risk to the frustrated party. Restatement (Second) of Contracts § 2 cmt. a. Courts will first consider whether
the contract allocated the risks. Where a lessee carefully inspected property and signed a lease stating that he
took the property “as is” and “with all faults,” when he later discovered access problems that would make it
prohibitively difficult to conduct business on the property, the court held that the lessee had assumed such
risks. Nicholson v. Univ. of Minn. Fed. Credit Union, 2007 Minn. App. Unpub. LEXIS 142 (Feb. 6, 2007). Philips
v. McNease, 2015 Tex. App. LEXIS 5171 (2015) (performance will not be excused merely because it has
become economically burdensome).
When these elements are added to the same requirement of impracticability that the parties must have
assumed the non-occurrence of the frustrating event, it is not surprising to find sparse success in the attempts
to be excused from a duty under the frustration of purpose doctrine. Courts have applied both commercial
impracticability and frustration of purpose “sparingly.” Dorn v. Stanhope Steel, Inc., 368 Pa. Super. 557, 586,
534 A.2d 798, 812 (1987). Although frustration of purpose has been more difficult to establish, it is not
impossible to establish.
Parties to a contract agreed that Viking had an exclusive right to distribute shopping cart corrals manufactured
by National to Target Stores. When Target was displeased with Viking’s service and changed its policy to deal
directly with manufacturers, National terminated Viking as the distributor to Target and asserted frustration of
purpose as a defense in Viking’s subsequent action. The court applied the criteria of Restatement (Second) of
Contracts § 2 noting that Minnesota courts require the principal purpose to be so foundational to the contract
that without it, the contract would make little sense. Thus, unless Target was willing to purchase corrals through
Viking, the distributorship contract would be pointless. There was no evidence that National was at fault in
Target’s decision to stop dealing with Viking. While the purpose of the contract was frustrated, Target’s decision
also made performance with Target through Viking impossible and the court so held. Viking Supply v. Nat’l Cart
Co., 310 F.3d 1092 (8th Cir. 2002).
Where a county discovered it could apply for a government grant that would pay 90 percent of the cost of a new
broadband network, it entered into a bond purchase agreement with the plaintiff which agreed to purchase $3.5
million in bonds that would meet the county requirement to match 10 percent of the cost of the network. The
bond purchase agreement had to be approved by the government. When it was not approved, the county
notified the plaintiff that it would not proceed with the bonds since the purpose of the transaction no longer
existed. In the plaintiff’s action, the court granted summary judgment for the county on the basis of a successful
frustration of purpose defense. ORIX Pub. Fin., LLC v. Lake County, Minn., 2013 U.S. Dist. LEXIS 171547 (D.
Minn. Dec. 5, 2013).
Practice Resources:
• Corbin § .1 (introduction to frustration of purpose as a justification for nonperformance); § .2
(risks of loss—assumption of risk by voluntary assent; allocation of risk); § . (frustration by a
collateral event that affects the value of a performance).

Page 4 of 4
End of Document
§ .02 Frustration of Lessee’s Purpose
[1] To Excuse a Lessee’s Performance, There Must Be Frustration of a Foundational Purpose of the
Contract
In an early English case, six years into a 21-year lease of a farm, the tenant was dispossessed for two years by
the invasion of Prince Rupert’s invading army; the tenant paid no rent for that period. When sued by the
landlord, the tenant claimed that, since he had been dispossessed, he could take no profit from the land during
that period, and should not be responsible for the rent. The court held that he had to pay since the invasion did
not destroy his property interest in the land. Paradine v. Jane, 82 Eng. Rep. 897 (K.B. 1647). This decision was
later cited as precedent for refusing to excuse tenants from paying rent because of floods or other unforeseen
events.
Today the frustration doctrine is applied to leases as it is to other types of contracts. If a leased building is
destroyed, the tenant is excused from paying rent. Where the lease is for a building wholly apart from the land,
the transaction is generally viewed as a contract for use and occupation rather than the conveyance of an
interest in land. This construction places a greater risk upon the lessor/owner, who loses not only the rental but
the reversionary interest if the property is destroyed.
To excuse a lessee’s performance, there must be frustration of a foundational purpose of the contract, known to
both parties at the time the contract is formed, and that the parties assumed would not occur. Thus, in a famous
case discussed earlier, the burden was on the tenant to prove that a supervening government regulation
substantially frustrated the purpose of the lease. Lloyd v. Murphy, 25 Cal. 2d 48, 153 P.2d 47 (1944).
In another case, a lessee was a chemical distributor that signed a three-year lease of a building in which its
chemicals were stored. When the tenant was later told that certain of these chemicals could not be stored, the
court found that the landlord had no reason to know that the chemicals in question were legally characterized
as hazardous. The lessee claimed frustration of purpose. The court applied the criteria in Restatement
(Second) of Contracts § 2 . The court concluded that the lessee failed to establish that its principal purpose for
leasing the facility was substantially frustrated by the government action in requiring the hazardous chemicals
to be removed. Mel Frank Tool & Supply v. Di-Chem Co., 580 N.W.2d 802 (Iowa 1998).
[2] Termination of a Lease by Eminent Domain

When the government takes leased property by eminent domain, the taking not only precludes the lessor from
performing its lease obligations, it also frustrates the purposes of the lessee. The government pays
compensation for such a taking. If the lease constitutes a leasehold estate, a court will be called upon to
apportion the compensation between the leasehold and reversionary interests.
A tenant who has use of a part of a building for a short period is not commonly regarded as an owner of an
interest in property with the risks of ownership. Thus, in the famous coronation case, Krell v. Henry, [1903] 2
K.B. 740 (C.A.), where Henry was to use part of a building during day for two days, the court characterized the
contract as a license rather than a lease. The hiring of a music hall for one or two nights is not a conveyance of
the property and its destruction should, therefore, excuse the promisor from the payment of rent.
Practice Resources:
• Corbin § . (partial or total frustration of lessee’s purpose); § . (termination of lease by a
taking of the property by eminent domain); § . (contracts for temporary use and occupation
Page 2 of 2
of buildings).

End of Document
§ .03 School Teaching Contracts
Teachers’ contracts are currently evidenced in large measure in collective bargaining agreements and state
statutes. Frustration of purpose cases involving individual teachers’ contracts typically involve the closing of a
school. When a school is closed for health reasons, some courts hold that both the school district and the teacher
are excused from performing since a teacher should know that boards of health have the authority to close schools;
wages will not be collectible during that period. Other courts require the district to continue to pay teachers on the
footing that the community is better able to sustain that risk that the teacher. Even the destruction of the school
building will not discharge the duty of the district to pay since the district has the obligation to discover other
facilities to allow the education process to continue.
Practice Resource:
• Corbin § . (school teaching contracts).

End of Document
§ .04 Courts Generally Do Not Regard Inflation as an Excuse for

Nonperformance
Contracts typically require payment in money, but the value of money fluctuates and may increase or decrease in
value. Runaway inflation will cause a severe change in value and some currency may become worthless. An
insurance policy was payable in 60,000 German marks at an annual premium of 2,300 marks over 20 years. By
1907, the premiums had been paid. The insured died 15 years later, by which time the value of the mark had
become worthless. An English court held that the beneficiary was entitled to 60,000 German marks with the value of
less than a cent since a mark was a mark. Anderson v. Equitable Life Assurance Society, (1926) 134 L.T. 557, 42
T.L.R. 302. Some earlier decisions in Unites States and English courts demonstrated some leniency. When
Confederate dollars became worthless at the end of the Civil War, courts generally held that the promised
Confederate dollars had to be paid in lawful money, valued at the time the contract was made, and payment in legal
tender then in circulation would be enforced. See Effinger v. Kenny, 115 U.S. 566 (1885).
In general, modern courts do not regard inflation as an excuse for nonperformance, even when the inflation greatly
exceeds the contemplation of the parties. When a currency is no longer a medium of exchange following a war or
other transfer of power, the turmoil may have eliminated any of the older government institutions and duties under
contracts will be discharged. When, however, antecedent transactions are considered valid, discharge may be
denied.
Practice Resource:
• Corbin § . (frustration by inflationary devaluation of money).

End of Document
§ .05 The Frustration of Purpose Defense Succeeds Only in Unusual

Cases
The frustration defense is appealing to disappointed contracting parties, but, as suggested earlier, it typically
succeeds only in unusual cases. A manufacturer agreed to supply more than 25,000 linear feet of precast median
barriers to a contractor performing state highway work. Citizens began to protest the substitution of the barriers for
a grass median strip between highway lanes. Litigation ensued and the highway department entered into a
settlement with the citizens, which resulted in the elimination of half of the ordered barriers. The contractor notified
the manufacturer to cease production of the median barriers. Payment for the delivered barriers had been made.
The manufacturer sued the contractor for failing to take the remaining barriers. The court held the contractor was
excused under frustration of purpose. The court emphasized that the manufacturer was well aware of the highway
department’s power to modify such contracts. Thus, the risk of loss was on the manufacturer. Chase Precast Corp.
v. John J. Paonessa Co., 409 Mass. 371, 566 N.E.2d 603 (1991).
Practice Resource:
• Corbin § . (other illustrations of frustration of purpose).

End of Document
§ .06 Partial and Temporary Frustration Corbin
Frustration may be complete or partial. When only part of a performance is frustrated, a court is less likely to
discharge a promisor from its duties. Frustration may also be only temporary. In the Chapter 76, we noted that
temporary impracticability or impossibility does not discharge a duty; it suspends the duty. Temporary frustration
also merely suspends the duty until the frustration ends. A gas company entered into a five-year contract to supply
gas for street lighting, and the defendant promised to make quarterly payments. During a war, street lighting was
prohibited by mandatory blackouts. The normal effect would have been to suspend the defendant’s duty to make
payments during the blackout period. Since, however, the quarterly payments were not the agreed exchange for
each quarter of gas supply, the contract was not divisible and the court held that the defendant was required to
continue the payments even while it was not using gas. Leiston Gas Co. v. Leiston-Cum-Sizewall Urban Dist.
Council, [1916] 2 K.B. 428 (C. A.).
In contracts for the sale of land, a well-known English case held that, after a contract was made but before title and
possession passed, the risk of a fire or other casualty to the land or its buildings was on the purchaser. Paine v.
Meller, (1801) 6 Ves. 349. That rule was not uniformly adopted in the United States. Many states enacted statutes
modifying the common law rule. For example, under Uniform Vendor and Purchaser Risk Act § 1 the risk does not
pass to the buyer who has equitable title when the contract is made; it passes upon the transfer of legal title and
possession.
Practice Resource:
• Corbin § .10 (partial and temporary frustration).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 78 IMPOSSIBILITY OF PERFORMANCE OF A
CONDITION; REMEDY OF RESTITUTION
CHAPTER 78 IMPOSSIBILITY OF PERFORMANCE OF A CONDITION;

REMEDY OF RESTITUTION
§ .01 m ossi i ity of Performing a Condition Precedent to Defendant’s Duty
§ .02 e o m ce of the Agreed Exchange as a Condition
§ .0 m ossi i ity of Paying Insurance Premiums
§ .0 m ossi i ity of Timely Performance or Bringing Timely Suit
§ .0 m ossi i ity of Bringing Timely Suit
§ .0 estit tio as a Remedy in Cases of Impossibility
[1]When Performance Occurs Before Completion Becomes Impossible, Restitution Can Prevent the
Unjust Enrichment of the Party Who Has Received the Benefit
[2]Restitution Against a Defendant Whose Duty Has Been Discharged
[3]Restitution in Favor of a Plaintiff in Default Without Excuse
[4]Restitution in Favor of a Party Whose Failure of Performance Is Excused by Impossibility
§ .0 om e s tio for Services When Completion Becomes Impossible

End of Document
CHAPTER 78 IMPOSSIBILITY OF PERFORMANCE OF A CONDITION;

REMEDY OF RESTITUTION
the subject matter.

End of Document
§ .01 Impossibility of Performing a Condition Precedent to Defendant’s

Duty
When a defendant’s promise is subject to a condition precedent that has not occurred, the defendant’s duty is not
activated. In Chapter 39 above, we noted that a condition that is not a material part of the agreed exchange could
be excused if its nonoccurrence would result in extreme forfeiture. Restatement (Second) of Contracts § 22 .
Impossibility or impracticability will also excuse a condition that is not a material part of the agreed exchange if
forfeiture of the plaintiff’s right under the contract would otherwise result, even if the forfeiture is not extreme.
Restatement (Second) of Contracts § 2 1 and cmt. a.
The condition is obviously excused if it is rendered impossible or impracticable by the party attempting to use it as a
defense. If an employment contract promises retirement benefits when the employee reaches age 65, the condition
is excused if the employee is fired without cause prior to the employee’s sixty-fifth birthday. Lukasik v. Riddell, Inc.,
116 Ill. App. 3d 339, 452 N.E.2d 55, 72 Ill. Dec. 123 (1983).
Accident insurance policies typically condition the insurer’s duty on notice of the accident within a certain period.
The death, illness, or mental incapacity of the insured may make it impossible for such notice to be given within the
prescribed period. Notice conditions are typically viewed as immaterial, though courts will consider the length of the
delay, the increased difficulty of the insurer to disprove the alleged accident or disability, and the likelihood that
forfeiture of the proceeds of the policy would be a disproportionate penalty for failure to give timely notice.
Building contracts often include a condition of an architect’s approval as a condition to the owner’s duty to make a
progress payment. When this condition becomes impossible or impracticable by the architect’s death or disability,
the condition may be excused upon reasonable substitute proof that the work has proceeded according to plan.
In a contract for the sale of goods, the parties may agree that the price should be fixed by an objective market
standard or index. If that index fails, a reasonable price will be established by the court. Uniform Commercial Code
(UCC) § 2- 0 1 c . If the parties have agreed that the price will be decided by a named individual to determine a
certain grade of goods in an established market, absent contrary language in the contract, that individual’s
unavailability can be excused and a substitute appointed. If, however, the parties agree upon a trusted art expert to
determine the price of a painting where there is no typical market standard, if that person becomes unavailable, a
court may find that the parties did not intend to be bound by the determination of price by any other individual and
the duties would be discharged by impossibility of performance. UCC § 2- 0 cmt. 4.
Practice Resource:
• Corbin § .1 (impossibility of performing a condition precedent to the defendant’s duty).

End of Document
§ .02 Performance of the Agreed Exchange as a Condition
Since a promisor’s contractual duty is constructively if not expressly conditioned on some performance by the
promisee, the promisor is not bound to perform when the promisee’s performance becomes impossible. A promisor
should not be compelled to give something for nothing. This fundamental concept was applied when a power failure
prevented the completion of a wedding reception that had just begun on a hot August evening. The contract
expressly listed a power failure as an event that would excuse performance, but the banquet hall’s performance
would have been excused without any such language in the contract since it neither caused nor had any control
over the power supply. Facto v. Pantagis, 390 N.J. Super. 227, 915 A.2d 59 (2007).
Practice Resource:
• Corbin § .2 (performance of the agreed exchange as a condition).

End of Document
§ .03 Impossibility of Paying Insurance Premiums
The duty to pay premiums under a life insurance contract is an express condition to the duty of the insurer to pay
the face value of the policy to the beneficiary. In such an aleatory contract, there is no exchange of equivalent
performances since an insurer may have to pay a large sum after only a few premiums have been made. The
payment of premiums cannot be viewed as an immaterial condition since the collective premiums form a pool from
which beneficiaries are paid amounts due under policies. Thus, some courts hold that even where an outbreak of
war or some other impediment makes the payment of premiums impossible, the condition is not excused. There are
decisions to the contrary that would allow the tender of overdue premiums with interest to reinstate the policy.
Practice Resource:
• Corbin § . (impossibility of paying premiums on an insurance contract).

End of Document
§ .04 Impossibility of Timely Performance or Bringing Timely Suit
If performance by a specified time is “of the essence” or the duty or performance is otherwise expressly conditioned
on performance by a certain time, impossibility or performing on time will discharge the other party’s duty. Whether
time is “of the essence,” however, may be a question of interpretation. A “time is of the essence” clause in a
standard printed form may not be held to manifest the intention of the parties.
While the UCC states a “perfect tender” rule that would require performance on time, delivery dates may be
interpreted under trade usage or course of dealing as target dates rather than absolute dates. Moreover, the
absolute right to reject goods for failure of a timely tender is subject to contrary contract language; it does not apply
to installment contracts. UCC § 2- 01 and § 2- 12 (installment contracts). The seller also has the right to cure, but
must do so within “contract time.” UCC § 2- 0 1 . If the seller had reasonable grounds to believe that a
nonconforming tender would have been acceptable with or without a money allowance, the seller may have a
further reasonable time to substitute a conforming tender. UCC § 2- 0 2 .
Parties are typically held to strict time limits with respect to option contracts. The option holder has an irrevocable
power of acceptance for a limited time and courts are generally unwilling to find that the time has been extended.
Some courts, however, allow the option to be exercised where the delay did not materially affect the seller and strict
adherence to the condition would result in a disproportionate forfeiture.
For example, an option on the purchase of property required an initial payment of $10,000 and four subsequent
installment payments of $10,000. The initial payment and the first two installments were made on time. The third
installment was mailed to an incorrect address and was one day late. Though the mistake was corrected within two
weeks, the defendant rejected the payment and cancelled the option. Applying a state statute, the court held that
the defendant suffered no damage, but the termination of the option constituted a forfeiture. Holiday Inns of
America, Inc. v. Knight, 70 Cal. 2d 327, 450 P.2d 42 (1969).
Practice Resource:
• Corbin § . (impossibility of performance on time).

End of Document
§ .05 Impossibility of Bringing Timely Suit
A contract such as a contract of insurance is likely to contain an express condition requiring an action to be brought
against an insurer not later than a certain time. Impossibility caused by such supervening events as the death or
disability of the obligee, war, or government order can excuse the failure to meet such a condition when a court
concludes that strict adherence to the condition would cause disproportionate forfeiture.
Practice Resource:
• Corbin § . (impossibility of bringing suit within a time limit).

End of Document
§ .06 Restitution as a Remedy in Cases of Impossibility
[1] When Performance Occurs Before Completion Becomes Impossible, Restitution Can Prevent the
Unjust Enrichment of the Party Who Has Received the Benefit
When some performance has occurred that confers a benefit upon the other party before the supervening event
making further performance impossible or impracticable, the remedy of restitution can prevent the unjust
enrichment of the party who has received the benefit. The same conclusion can be reached on the basis of
frustration of purpose. A plaintiff paid $50,000 in earnest to lease a Sunoco fuel center with an option to
purchase. The agreement recited that the plaintiff sought to acquire the center as a going concern which would
necessarily require his approval as a Sunoco franchisee. The approval was not granted and without it, the lease
was essentially worthless. The court held that the doctrine of frustration of purpose applied and the plaintiff was
entitled to restitution of its $50,000 earnest money payment. Jabero v. Harajli, 2004 Mich. App. LEXIS 1507
(June 15, 2004).
[2] Restitution Against a Defendant Whose Duty Has Been Discharged

Even though a defendant’s duty has been discharged by impossibility or impracticability, the plaintiff is still
entitled to the value of the benefit conferred prior to the event that excused the defendant’s performance. When
a seller’s duty to deliver goods is discharged by their destruction without the seller’s fault and the risk has not
yet passed to the buyer (UCC § 2- 1 if the buyer has made a prepayment, the buyer is entitled to full
restitution of such a payment that would otherwise unjustly enrich the seller. Although a banquet provider was
excused from performing its duty to serve a dinner to wedding guests because of a power failure, the plaintiff
was entitled to recover its prepayment. Facto v. Pantagis, 390 N.J. Super. 227, 915 A.2d 59 (2007). The
plaintiff is not entitled to recover the benefit of the bargain (the expectation interest) because the defendant has
committed no breach and is excused from performing. The defendant, however, may not be unjustly enriched at
the plaintiff’s expense.
[3] Restitution in Favor of a Plaintiff in Default Without Excuse

When a party has agreed to erect a building or some other physical object on another party’s land, the risk of
destruction of the building remains on the builder up to the time of completion and delivery of the completed
work. The builder is generally not discharged from a duty to rebuild the structure. The intended purchaser has
no contractual duty to pay for the partially-completed work that was destroyed unless a statute or the
construction contract allocates that risk to the buyer, who will then have to pay whether or not it has been
unjustly enriched.
[4] Restitution in Favor of a Party Whose Failure of Performance Is Excused by Impossibility

If there is no destruction, but the construction has not been completed at the time the duty to complete is
excused by impossibility or impracticability, the builder, if it has substantially performed the contract, has a right
to the contract price minus the cost of completion saved. If the construction is not substantially completed, the
builder may claim restitution for the value conferred as suggested in § of the Restatement (Second) of
Contracts. Such restitution damages, however, are not available where the contract explicitly contemplates the
event giving rise to impracticability. In such a case, a court may determine the percentage of the performance
Page 2 of 2
completed and multiply that percentage by the contract price. Sea Byte, Inc. v. Hudson Marine Mgmt. Servs.,
565 F.3d 1293 (11th Cir. 2009).
Cases involving repairs or remodeling of structures commonly raise restitution questions. When a party partially
completes repairs on a building that is destroyed without fault, that party is entitled to the net addition to the
value of the building through the repairs made prior to its destruction. While the owner may argue that no unjust
enrichment has occurred since the building was destroyed, there was an enhancement of value to the owner’s
property for the short time prior to the destruction of the building. Unlike the cases involving a new building that
is partially completed when it is destroyed, destruction of the owner’s building where repairs are not completed
is a risk borne by the owner.
The contract price is some evidence of the value of the benefit conferred, but restitution is not predicated on a
pro rata share of a contract price unless the contract is divisible, i.e., where the parties intended each part of
their respective performances to constitute the agreed equivalent of a corresponding part of the other’s
performance. Recovery is based on the contract price for the divisible portion of the contract that has been
completed.
As late as the twentieth century, courts left the parties in the position they were in at the time of the supervening
event. Thus, restitution of prepayments were denied in the famous “Coronation” cases, where the purpose of
licensees of flats and other spaces along the planned procession route of King Edward VII were frustrated by
the cancellation of the procession.
That rule was overturned four decades later in a case which allowed an advance payment to be recovered in
restitution when performance was prevented by war. Fibrosa Spolka Ackjna v. Fairbarne Lawson Combe
Barbour, Ltd., A. C. 32 (1943). Parliament also addressed the situation in the 1943 Frustrated Contracts Act, 6
& & Geo. 6. c. 40, which allows restitution but also allows the recipient to retain such a payment or a portion of
it if the recipient has expended substantial sums in reasonable reliance on the contract.
Practice Resources:
• Corbin § . (restitution as a remedy in cases of impossibility); § . (restitution against a
defendant whose duty has been discharged by impossibility); § . (restitution in favor of a
plaintiff in default without lawful excuse); § . (restitution in favor of one whose failure of
performance is excused by impossibility).

End of Document
§ .0 Compensation for Services When Completion Becomes Impossible
If a duty to render personal services is discharged because of the death or disability of either party, the party
rendering the service or the party's representative may bring an action in quantum meruit to recover the market
value of the services rendered, but not exceeding the contract rate to which the parties had agreed. In one instance,
an aged aunt promised to leave her property to a niece if the niece would care for her for the rest of her life. After
six years of such care, the niece died. The court held that the niece's estate had an equitable right against the
aunt's estate for the reasonable value of the services actually rendered. Staton v. Moody, 208 Okla. 372, 256 P.2d
409 (1953).
Practice Resource:
• Corbin § .10 (compensation for services rendered when completion has become impossible without
fault).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 79 CONTRACTS CONTRARY TO PUBLIC POLICY
CHAPTER 79 CONTRACTS CONTRARY TO PUBLIC POLICY
§ .01 t o ctio to Contracts Contrary to Public Policy
[1]Attempts to Define “Public Policy”
[2]Freedom of Contract
§ .02 isti ctio Between Malum Prohibitum and Malum In Se
§ .0 hoice of Law Questions

End of Document
CHAPTER 79 CONTRACTS CONTRARY TO PUBLIC POLICY
the subject matter.

End of Document
§ .01 Introduction to Contracts Contrary to Public Policy
[1] Attempts to Define “Public Policy”

Although they evidence all of the requirements for a fully enforceable contract, certain agreements will not be
enforced at all, or not fully enforced, if a court concludes that such an agreement is against “public policy.”
Public policy includes freedom of contract, but a refusal to enforce a contract because it is opposed to public
policy is, itself, a restriction on freedom of contract. Our law proceeds on the basis that freedom of contract, like
other freedoms, is not absolute. Agreements that offend a significant public interest should not be enforced. But
that very statement begs the question: exactly what is the public interest in myriad situations that might be
“offended” by contract?
Attempts to define public policy range from the valiant to the lame. One of the better attempts explains:
Public policy is the present concept of public welfare or general oo . Public policy is practically
synonymous with public good and unless the private contract is in terms of such a character as to tend to
harm or injure the public good, public interest [or] public welfare or to violate the Constitution, laws,
common or statutory, or judicial decisions of the State, it is not violative of public policy nor void on that
account.
Lazenby v. Universal Underwriters Ins. Co., 383 S.W.2d 1, 5 (Tenn. 1964).
The phrase “present concept” in the first sentence is critical. Public policy changes as the mores of society
change. One of the clear illustrations of such a change is in wagering agreements that used to be outlawed in
virtually all jurisdictions but which are currently not only permitted but highly encouraged by state governments.
As we will see in a subsequent chapter, however, private wagering contracts, not recognized by the state,
continue to be unenforceable because they are “contrary to public policy.”
The identification of public policy as “synonymous with the public good” merely shifts the focus from the
amorphous “public policy” to the equally amorphous “public good.” One court has stated:
The meaning of the phrase “public policy” is vague and variable; it has never been exactly defined …
however, the courts have with frequency approved Lord Brougham’s definition of public policy as the
principle which declares that no one can lawfully do that which has a tendency to be injurious to the public
good.
Stearns v. Williams, 72 Idaho 276, 286, 240 P.2d 833, 839 (1952).
The underlying assumption is that “public good” can be identified sufficiently as to preclude a contract offending
the public good. Again, what is the “public good”? Where is it to be found? The foregoing definition suggests the
public good or the public interest or the public welfare can be determined by the standards of our laws—our
Federal and state constitutions and other statutes as well as the common law found in our judicial decisions. It
would, however, be a mistake to assume that our combined laws would necessarily provide an exhaustive list
of the standards of “public policy” that could be offended by a given contract. Restatement (Second) of
Contracts § 1 notes that legislation is often the basis of public policy while § 1 notes certain judicial
policies that were the early impediments to enforcement of agreements against public policy such as contracts
in restraint of trade, contracts impairing family relations, and contracts interfering with other protected interests.
Currently, public policy emanates largely from legislation rather than judicial decisions. See Restatement
(Second) of Contracts § 1 cmt b.
This exercise is not designed to criticize a judicial attempt to define “public policy.” Again, this is one of the
better efforts in the case law, but it is clear that even one of the better efforts is of very limited assistance. A
much less charitable view of “public policy” suggests that:
Page 2 of 3
Public policy is ‘a very unruly horse, and once you get astride it you never know where it will carry you. It
may lead you from sound law. It is never argued at all but when other points fail.’
Richardson v. Mellish, 2 Bing. 229, 252, 130 Eng. Rep. 294, 303 (1824).
It is important to add a final point concerning the quoted definition of public policy. It recognizes the importance
of freedom of contract by assuming enforceability of the contract “unless” the contract violates standards of
public policy as discerned by the court. Moreover, the issue of enforceability varies with the particular public
policy involved, whether it is found in a statute of otherwise. If the primary purpose of a statute is to raise
revenue, a court may find a way to provide a remedy in a meritorious case notwithstanding a technical violation
of such a statute.
One court recognized judicial flexibility in the enforcement of a promise that is part of an illegal bargain in light
of such equitable considerations as avoiding having a party pay something for nothing. On the other hand, such
considerations do not apply where a court is asked to enforce a contract in direct violation of a positive directive
such as an Executive Order prohibiting transactions between a United States person and with a party in Iran.
Courts will not become parties to illegal schemes. Bassidji v. Goe, 413 F.3d 928 (9th Cir. 2005).
If a statute and its judicial interpretations establish a standard to protect health and safety, any agreement in
violation of that standard will not be enforced in any fashion. Nonetheless, as the United States Supreme Court
stated, while the principle of unenforceability “is readily understood, its right application is often a matter of
much delicacy.” Steele v. Drummond, 275 U.S. 199, 205, 48 S. Ct. 53, 72 L. Ed. 238 (1927).
Restatement (Second) of Contracts § 1 2 suggests that a court weighs the interest in the enforcement of a
contract term by the parties’ justified expectations and any forfeiture that would result if enforcement was
denied as well as any special public interest in the enforcement of the contract or term of the contract.
Restatement (Second) of Contracts § 1 suggests the criteria a court uses in weighing a public policy
against enforcement: the strength of that policy as manifested by legislation or judicial decisions; the likelihood
that a refusal to enforce that term would further that policy; the seriousness and deliberateness of the conduct
involved; and the directness of connection between the contract term and the misconduct. In Milnes v. Blue
Cross & Blue Shield of Vt., 2014 U.S. App. LEXIS 8865 (2d Cir. May 13, 2014), the court applied this balancing
test where Blue Cross refused to perform its promise to pay additional compensation to its former chief
executive when the state regulator viewed such payments as excessive. The court noted that Blue Cross is a
quasi-public business subject to State regulation. It operates on the backdrop of Vermont public policy that non-
profit hospital service organizations should provide benefits at minimum cost under efficient and economical
management. The primary goal of the regulation is to ascertain that Blue Cross is maintained and operated
solely for the benefit of the subscribers. The regulator determined that the incentive compensation to be paid to
the plaintiff was the product of a “flawed” system that yielded excessive compensation. Payment of excessive
compensation to the chief executive officer of a Vermont public-insurer was sufficiently serious to weigh against
the enforcement of the agreement. The plaintiff’s argument that “public policy” favors the enforcement of
agreements proves too much since such an argument would preclude any public policy defense.
[2] Freedom of Contract

Sir Henry Maine noted that the evolution of civilization manifests a progress “from status to contract.” Sir Henry
Maine, Ancient Law 165 (3d Am. ed. 1873). The social institution of contract allows state enforcement of
individual decisions based on free will. Freedom of contract is essential in a society that essentially relies upon
decisions made by its citizens. Contract is the essential mechanism of a free market system in such a society.
As a great American legal historian noted, however, “The cautious sense that contract alone was not a
sufficient organizing principle for society never quite deserted us.” James Willard Hurst, Law And Economic
Growth 76 (1964). Freedom of contract is limited with broad safeguards precluding enforcement of
unconscionable agreements and agreements made in bad faith. Legislation limits freedom of contract in
employment relations and insurance contracts. Covenants not to compete may be deemed as against the
public policy of ascertaining that a party is not prevented from earning a living or the policy in favor of fair
competition.
Page 3 of 3
Practice Resources:
• Corbin § .1 (the general rule); § .2 (sources of public policy); § . (defining public policy);
§ . (the other public policy—freedom of contract).

End of Document
§ .02 Distinction Between Malum Prohibitum and Malum In Se
When conduct in the performance of a contract is characterized as malum in se, it is evil in itself. It is a serious
manifestation of moral turpitude against the historical mores of virtually any society. An agreement to commit
murder for a price would clearly be malum in se. The enforcement of such an agreement would be anathema. A
current illustration is found in Fed. Ins. Co. v. Sandusky, 2012 U.S. Dist. LEXIS 76880 (M.D. Pa. June 4, 2012)
where the an insurance company sought a declaratory judgment concerning the enforceability of a policy it issued
to a non-profit organization (Second Mile) which included a provision indemnifying an insured person who became
obligated to pay for a wrongful act, including sexual harassment and sexual advances against a third person.
Gerald Sandusky was such an insured person who sought coverage under the policy. The court cited the Corbin
treatise in holding that Pennsylvania public policy would not permit enforcement of the insurance policy to the extent
that it provided for indemnification of Sandusky for civil liability arising out of Sandusky’s alleged molestation and
sexual abuse of children. Such conduct is malum in se—wrong in itself.
When legislation prohibits conduct that is “wrong” because of the legislation and not in itself, it viewed as malum
prohibitum. See Korea Life Ins. Co. v. Morgan Guar. Trust Co. of N.Y., 269 F. Supp. 2d 424 (S.D.N.Y. 2003). An
otherwise qualified builder who failed to get or to renew a license would be committing an offense identified as
malum prohibitum. Rather than allowing a forfeiture, a court may choose to enforce the builder’s contract with
another party for quality work already performed, perhaps in an action in quantum meruit, notwithstanding the
violation of the statute.
Courts no longer view the distinction between legal standards identified as malum in se and malum prohibitum as
reliable. An agreement to bribe a public official would be characterized as malum in se, precluding any
enforceability. In one case, however, a plaintiff gave $28,000 in jewelry as a bribe to the defendant to secure the
necessary visas that would allow him and his Jewish family to leave France in advance of the German Army. The
defendant took the jewelry but failed to perform. When the defendant was later discovered in New York, the plaintiff
sought to recover the value of the jewelry. While a dissenting judge would grant no relief to the plaintiff because the
agreement to bribe an official was malum in se, the majority of the court held that the parties were not in pari delicto
(they were not equally culpable) since the most law-abiding person would have entered into such a malum in se
agreement under the circumstances. The defendant’s motion for summary judgment was denied. Liebman v.
Rosenthal, 185 Misc. 837, 57 N.Y.S.2d 875 (Sup. Ct. 1945).
Although a few courts disagree, a court should be willing to address the issue of whether a contract violates public
policy sua sponte when neither party raises that issue. Moreover, it may be raised sua sponte at the appellate level.
This is consistent with the corollary that neither party may waive the issue of whether an agreement violates public
policy that involves a public interest broader than the parties’ interest. One reason a court refuses to enforce a
contract violating public policy is to deter such undesirable conduct. An equally important reason, however, is to
recognize that enforcement of such a promise is “an inappropriate use of the judicial process in carrying out an
unsavory transaction.” Restatement (Second) of Contracts Chapter 8, Introductory Note.
Even if neither party’s pleading or proof reveals the contravention, the court may ordinarily inquire into it and
decide the case on the basis of it if it finds it just to do so .
Restatement (Second) of Contracts Chapter 8, Topic 1, Introductory Note.
Practice Resources:
Page 2 of 2
• Corbin § . (the malum prohibitum and malum in se distinction); § . (a sua sponte issue for the
court).

End of Document
§ .03 Choice of Law Questions
A contract may be formed in one state, performed in a second state, and litigated in a third state. If there is no
conflict with the public policies of any of these states, the court may apply the law of the forum with no question.
Where there are different views of public policy among different jurisdictions with respect to the contract issue
before the court the conflict must be resolved and courts follow no uniform approach. It is, however, important to
recognize the general rule that the forum state will not apply the law of another state if it would violate the public
policy of the forum state. See Kashani v. Tsann Kuen China Enterprise Co., 118 Cal. App. 4th 531, 13 Cal. Rptr. 3d
174 (2004).
The parties may have included a choice of law provision in their contract, which will be honored unless the public
policy of that jurisdiction conflicts with the public policy of the forum state or the chosen state has no substantial
relationship to the parties or the transaction. Where a contract clause chose Pennsylvania law, the plaintiff was a
Delaware limited liability corporation with its headquarters in Pennsylvania. The contract was formed and was to be
performed in West Virginia. In applying the law of West Virginia, the court held that merely being incorporated in a
jurisdiction or having one’s headquarters in a jurisdiction is not a sufficient relationship to control the applicable
substantive law. Whipstock Natural Gas Servs., LLC v. Trans Energy, Inc., 2010 U.S. Dist. LEXIS 19800 (N.D.W.
Va. Mar. 4, 2010).
When the parties have not dealt with the choice of law in the contract and the issue relates to contract formation,
the law of the state of formation may determine whether the contract violates public policy. If, however, the
challenge concerns the performance of the contract, the public policy of the jurisdiction where the contract is to be
performed would dictate whether the performance of the contract violates public policy. Again, however, either or
both of these public policies would be trumped if the contract formation or performance violated the public policy of
the forum state.
Another method of choosing the appropriate law and public policy is to follow Restatement (Second) of Conflict of
Laws § 202 to determine the law of the state with the most significant relationship to the transaction and the parties.
The facts to be considered in determining this relationship are the place of negotiation and contracting, the place of
performance, the location of the subject matter, and the domicile, residence, nationality, place of incorporation, and
place of business of the parties. Restatement (Second) Conflict of Laws § 1 .
Practice Resource:
• Corbin § . (choice of law questions).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 80 CONTRACTS IN RESTRAINT OF
COMPETITION
CHAPTER 80 CONTRACTS IN RESTRAINT OF COMPETITION
§ 0.01 cti ities That Limit Competition Have Been Disfavored Since the Early Common Law
[1]Value of Competition Is Emphasized
[2]Federal and State Statutes
[3]Development of Restraint of Trade Law
[4]General and Limited Restraints
§ 0.02The Modern Approach to Restraints on Competition
[1]A Restraint Must Be Ancillary to an Otherwise Valid Purpose
[2]Test for Reasonableness
[3]Sale of a Business Distinguished from Post-Employment Restraints
§ 0.0 est i ts Accompanying the Sale of a Business
[1]The Good-Will of a Business Is a Protectable Interest
[2]Restraints Are Unreasonable if They Are Too Extensive in Terms of Activity, Duration, or Geographic
Limits
[3]Reasonableness of Restraint’s Duration
§ 0.0 est i ts Ancillary to Corporate Shares
§ 0.0 ci y Restrictions on the Competitive Use of Property
§ 0.0 est i ts Accompanying Franchise Agreements
§ 0.0 est i ts on Partners
§ 0.0 ost- m oyme t Restraints of Competition
[1]Reasonable Non-Compete Clauses Are Enforceable
[2]Employers’ Protectable Interests
[3]A Restrictive Covenant Will Not Be Enforced Beyond the Territory in Which the Employer Does
Business
[4]Duration of Restriction
§ 0.0 m oyee Agreements to Assign Inventions

Page 2 of 2
§ 0.10 est i t of Gainful Trades and Professions
[1]Most Jurisdictions Will Enforce Reasonable Covenants in Restraint of Trade Covering Professionals
[2]Restrictive Covenants Involving Lawyers Are Not Enforced
§ 0.11 e cy of Consideration
§ 0.12 o itio Promises in Restraint of Competition
§ 0.1 ti Enforcement of Covenants in Restraint of Trade
[1]Courts Will Enforce an Overly-Broad Covenant to the Extent That Is Reasonable
[2]“Blue Pencil Rule”

End of Document
COMPETITION
CHAPTER 80 CONTRACTS IN RESTRAINT OF COMPETITION
the subject matter.

End of Document
COMPETITION
§ 0.01 Activities That Limit Competition Have Been Disfavored Since the
Early Common Law
[1] Value of Competition Is Emphasized

A free society requires free markets and unfettered competition. Activities that limit competition or create a
monopoly have been viewed as evil restraints on competition since the early common law. See the Case of
Monopolies, Darcy v. Allen, 11 Coke 84 b (1603, K. B.) (holding that the monopoly of the sole right to make
playing cards was void at common law). The 1623 Statute on Monopolies declared all grants of monopolies by
the Crown, other than patents, to be invalid.
More than four centuries later, a modern court recognized the same evil in holding that restraints on competition
“curb the ‘fundamental right of individuals to seek success in our free-enterprise society. Lanmark Tech., Inc.
v. Canales, 454 F. Supp. 2d 524, 528 (E.D. Va. 2006), quoting Omniplex World Servs. Corp. v. US
Investigations Servs., 270 Va. 246, 618 S.E.2d 340, 342 (2005). As suggested by Judge Learned Hand:
Many people believe that possession of unchallenged economic power deadens initiative, discourages
thrift and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant to
industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to
leave well enough alone.
United States v. Aluminum Co. of America, 148 F.2d 416, 427 (2d Cir. 1945) (superseded by the Foreign Trade
Antitrust Improvements Act of 1982, 15 U.S.C. § concerning the reach of American antitrust law with respect
to restraints on commerce in foreign countries).
Such condemnations may suggest that any contract in restraint of trade is necessarily against public policy.
Nonetheless, certain contracts in restraint of trade have counterbalancing effects that may outweigh harmful
effects on competition. There are “reasonable” restraints on competition and, as usual, the determination of
whether a given restraint is reasonable is not susceptible to a mechanical analysis.
[2] Federal and State Statutes

The overriding importance of maintaining competition induced the Congress of the United States to create the
“charter of economic freedom” known as the Sherman Act of 1890 (15 U.S.C. §§ 1–7). The act makes
agreements in restraint of trade and monopolizing or attempts to monopolize subject to criminal penalties. A
“monopoly” resulting from simply winning the competitive race without any anticompetitive practices such as
predatory pricing or other exclusionary efforts is theoretically legal. Thus, Section 2 of the Sherman Act requires
a showing of “monopolizing”—the active verb—dealing with such predatory behavior, rather than of a
“monopoly”—the noun.
Major supplements to the Sherman Act occurred in 1914 with the enactment of the Clayton Act (15 U.S.C.
§§ 12–27), the Federal Trade Commission Act (15 U.S.C. §§ 1–45). In 1936, the Robinson-Patman
Amendment to the Clayton Act dealt with price discrimination. 15 U.S.C. § 1 . The states enacted laws, often
mimicking the Federal antitrust laws, to deal with restraints on intrastate competition. For example, Section 1 of
the Sherman Act proscribes a contract, combination, or conspiracy in restraint of trade, as does the Michigan
statute (Mich. Comp. Laws Serv. § . 2 (“Unlawful contract, combination or conspiracy”)).
Practices such as naked price fixing agreements among competitors, agreements to limit output, collective
refusals to deal, or various practices such as predatory pricing with an intent to monopolize, or other unfair
Page 2 of 2
methods of competition are now prosecuted by the Antitrust Division of the Department of Justice or the
Federal Trade Commission and supplemented by private treble damage actions brought by parties injured by
such restraints on competition. The extensive case law and literature on these practices are not explored in
Corbin on Contracts. They are left to texts and courses on antitrust law. The exclusion of antitrust laws,
however, does not mean there is nothing left to consider within the confines of a treatise on contract law.
[3] Development of Restraint of Trade Law

Courts continue to develop a body of restraint on competition law as a matter of traditional contract law. The
great majority of these cases are found in two basic contexts: cases in which the owner of a business has sold
the business and has promised not to engage in a similar business in competition with the buyer, and cases
where an employee promised not to compete with his or her employer after leaving the employment. Two
potential injuries to the community occur in the enforcement of such promises. First, the promisor may be
deprived from earning a living which, would create a burden on community coffers. Second, the community is
deprived of the promisor’s skills. The promisor is also eliminated from competition, and this may aid in the
development of a monopoly that raises prices and promotes inefficiency.
Early English cases displayed hostility to covenants not to compete, particularly at times when a shortage of
workers had developed. See Dyers’ Case, Y.B. Mich. 2 Hen. 5 fo.5, pl. 26 (C. P. 1414). The plague of the
1300’s had caused such a shortage of workers that unemployment became a crime. Thus, restraint on a right to
work was against public policy. In later cases, courts recognized that the extent of harm to the community from
a particular contract in restraint or trade would vary with the circumstances of the individual case.
The countervailing policy in favor of freedom of contract played a major role in allowing certain types of
contracts in restraint of trade to be enforceable. Mitchel v. Reynolds, 1 P. Wms. 181, 24 Eng. Rep. 347 (Q.B.
1711) was one of the earlier cases to recognize the importance of enforcing such a covenant. There, a bakery
was leased for five years and the lessor promised not to do business in the parish of the baker during the lease
term. Intangible good will may be the most valuable asset in a given business. If a court will not enforce the
owner’s promise not to compete in the same locale with a new owner, the sale may never occur or, it will occur
only at a substantial reduction in price. Thus, courts had to balance potential injuries to competition against the
freedom of a party to contract in such a fashion as to reap the benefits of diligence in the creation of an asset.
[4] General and Limited Restraints

To determine whether a restraint was enforceable, the court in Mitchel distinguished general restraints, which
were unenforceable, from partial restraints, which were enforceable. A general restraint would have applied to
the whole of England and would not be enforceable, while a partial restraint such as precluding the lessor’s
competition within the boundaries of a parish was enforceable. American courts adopted this distinction until the
middle of the nineteenth century, when it began to erode and be replaced with a reasonableness analysis.
Practice Resources:
• Corbin § 0.1 (background of the law regarding restraint of competition generally—the value of
competition); § 0.2 (nature and sources of the present law of restraint of competition); § 0.
(historical classification of restraints as voluntary and involuntary); § 0. (restraints that limit
transactions with a party to the agreement—the history of covenants not to compete); § 0.
(historical distinction between general and limited restraints).

End of Document
COMPETITION
§ 0.02 The Modern Approach to Restraints on Competition
[1] A Restraint Must Be Ancillary to an Otherwise Valid Purpose

The modern approach to contracts in restraint of competition was candidly addressed in J. C. Nichols Co. v
Eddie Bauer, Inc.:
The law strongly favors free competition, subject to reasonable contractual limits. What is reasonable is
very difficult to define. Judges and lawyers are expected to know it when they see it. Evaluation of all
pertinent circumstances must be made on an ad hoc basis, instance by instance.
J.C. Nichols Co. v. Eddie Bauer, Inc., 4 F. Supp. 2d 875, 878 (W.D. Mo. 1998).
In a modern court, a condition to the enforcement of a contract in restraint of competition is that it must be
ancillary to a legitimate purpose other than the restraint of competition. Only if the restraint is tied to such a
valid transaction will the restraint outweigh the potential injury to the restrained party and the public. Absent
such a valid and legitimate purpose, a naked covenant in restraint of trade has no redeeming virtue and will not
be enforced. See Summits 7, Inc. v. Kelly, 178 Vt. 396, 400, 886 A.2d 365, 370, 2005 VT 97.
The paradigm valid transaction is the sale of a business and its good-will. Without a restriction on the seller to
refrain from competition within reasonable time and geographic limits, the value of the business may be
reduced to nothing or to levels that would not allow the seller to reap the benefits of its work. No sensible buyer
would invest in such a business absent the restraint.
Courts have also recognized post-employment restraints as ancillary to employment contracts, even where the
employment is at will. Thus, where an at-will employee left employment after five years, the employee’s
agreement not to solicit the employer’s customers was upheld as ancillary to the legitimate protection of the
employer’s customer base. Applied Micro v. SJI Fulfillment, 941 F. Supp. 750 (N.D. Ill. 1996). There is a split of
authority as to whether a covenant not to compete entered into after the commencement of at will employment
without additional consideration is enforceable. Where a statute required such a covenant to be ancillary to an
otherwise enforceable agreement, a promise to provide confidential information at the time an at-will contract is
made is unenforceable. Thus, the employee’s agreement to a restrictive covenant would not be ancillary to an
“enforceable agreement.” Where, however, the confidential information was nevertheless provided, the court
found a unilateral contract binding the employee to the terms of the restrictive covenant. Mann Frankfort Stein &
Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009).
[2] Test for Reasonableness

If a restraint is ancillary to an otherwise valid purpose, the court must then determine whether it is reasonable.
Restatement (Second) of Contracts § 1 1 suggests that an ancillary restraint is unreasonable if it is greater
than needed to protect a promisee’s legitimate interest, or the promisee’s need is outweighed by the hardship
to the promisor and the likely injury to the public. Courts consider numerous factors, including the type of
transaction accompanying the restraint, the extent of the restraint in time and place, the activity restrained, and
the nature of the interest to be protected.
The public interest in some contexts may preclude enforcement of the restraints as where a contract restraining
competition from a physician who has left a practice may reduce the number of available physicians to such a
degree that the public interest requires the court to refuse enforcement of the promise not to compete.
Typically, however, courts do not find the loss of one competitor to be problematic for the community.
Page 2 of 2
[3] Sale of a Business Distinguished from Post-Employment Restraints

Courts are more willing to enforce covenants ancillary to the sale of a business than post-employment restraints
since the buyer of virtually any business clearly requires such protection. Indeed, there are cases providing
such protection absent any express provision in the contract of sale. A promise by the seller not to solicit its
former customers could be implied from the requirement of good faith and fair dealing.
A large part of the value for which the buyer has paid is in the good-will of a business, which could be quickly
depreciated by the return of the seller in a competing role. Non-compete covenants by employees, however,
are strictly construed since they typically emanate from agreements between parties of unequal bargaining
strengths, one of the factors determining a covenant’s enforceability. In Capital One Fin. Corp. v. Kanas, 871 F.
Supp. 2d 520 (E.D. Va. 2012), the court recognized that Virginia applied a stricter standard to post-employment
restraints though the reasonableness of such a non-compete agreement is to be determined on its facts. Here,
the restraint was in separation contracts with the former president and former vice-chairman of the board of
directors of an acquired bank. The court found the restraints reasonable in light of the sophistication of the
defendants who stood on equal footing in bargaining, had advice of counsel and received very substantial
consideration in exchange for their agreements.
Some courts require covenants ancillary to the sale of a business to be proved invalid by the restricted party
while requiring the unrestricted party to establish the reasonableness of a post-employment restraint. Statutes
may also limit the extent to which a covenant in restraint of trade is enforceable. See, e.g., Ala. Code § -1-1
Tex. Bus. & Com. Code § 1 . 0.
Practice Resources:
• Corbin § 0. (modern approach to restraints of competition—reasonableness); § 0. (ancillarity).

End of Document
COMPETITION
§ 0.03 Restraints Accompanying the Sale of a Business
[1] The Good-Will of a Business Is a Protectable Interest

The good-will of a business can be an extremely valuable intangible asset because it will provide a new owner
with the opportunity to retain customers of the old business that have been developed over a long period. While
the continuation of the old customers is not certain, the seamless operation of the business in the same location
with the same merchandise and the same practices can preserve and maintain the good-will of the seller.
The replacement of a new seller for the old seller does not injure competition; indeed, it maintains that
operation to compete with others. The covenant of the seller not to compete with that business prevents that
seller from entering the same business in the same locale. That restraint is justified by the sale of the good-will
that would have no value if the seller could open a competing business within the same locale. The
enforceability of the restraint enables the seller to receive full value for the seller’s good-will while protecting the
buyer’s interest. A few courts would imply the protection of good will-even without an express provision in the
contract, but courts generally require an express covenant by the seller not to compete.
[2] Restraints Are Unreasonable if They Are Too Extensive in Terms of Activity, Duration, or Geographic
Limits
Although a buyer has a protectable interest in the good-will of a business, the ancillary covenant restraining the
seller from competing must not be any greater than is necessary to protect that interest. Restraints will be
deemed unreasonable if they are too extensive in terms of activity, duration or geographic limits. One business
sold water softeners at the time of an action to enforce a covenant not to compete. The court held that the
restraint did not cover water softeners because they were not part of the business at the time the contract for
sale was made. Antrim v. Pittman, 189 Neb. 474, 203 N.W.2d 510 (1973).
In terms of geography, the restraint may be coextensive with the area or territory in which the seller had
developed business and good-will. That area could range from a neighborhood to an entire country or beyond.
Verson Wilkins, Ltd. v. Allied Products Corp., 723 F. Supp. 1 (N.D. Ill. 1989) (restraint valid for all of Europe but
not the United States and Canada). A covenant against competing in the United States will not be enforced for
the sale of a regional business. Ridgefield Park Transport v. Uhl, 803 F. Supp. 1467, 1470 (S.D. Ind. 1992).
[3] Reasonableness of Restraint’s Duration

The reasonableness of the duration of a covenant not to compete will depend upon the nature of the business.
If the customers of a given business typically turn over every three years, a covenant considerably in excess of
that period to protect the goods would not be enforceable. A business that is heavily identified with the former
owner may justify a much longer covenant, but, absent other factors, the duration of the covenant should not
exceed the life of the seller. The sale of the good-will provides the new owner with an opportunity to retain the
customer base of the seller; it is not an assignment of rights against such customers that guarantees the
continuation of the good-will. The new owner should have a reasonable time to grasp this opportunity to make
the good-will its own through service to the customers.
Practice Resources:
Page 2 of 2
• Corbin § 0. (restraints accompanying the sale of a business—protectable interests); § 0.

(restraints accompanying the sale of a business—reasonableness analysis generally and
territorial restrictions specifically); § 0.10 (restraints accompanying the sale of a business—
time restrictions).

End of Document
COMPETITION
§ 0.04 Restraints Ancillary to Corporate Shares
It is possible for a shareholder to have such an interest in the good-will as well as tangible assets of a corporation
as to justify a covenant not to compete to a purchaser of his or her shares. The sale may be those of a majority
shareholder intimately associated with the business as part of the sale of the business; courts will treat this as the
sale of any other business with an ancillary covenant not to compete. A covenant not to complete attached to the
sale of corporate shares in a professional corporation may be more like a post-employment restraint than a restraint
to protect good-will in the sale of a business When shareholders agree not to compete with a business during the
time they hold the shares, courts generally enforce these covenants if they are otherwise reasonable. Gramanz v.
T-Shirts & Souvenirs, 111 Nev. 478, 894 P.2d 342 (1995).
Practice Resource:
• Corbin § 0.11 (restraints ancillary to a sale of corporate shares).

End of Document
COMPETITION
§ 0.05 Ancillary Restrictions on the Competitive Use of Property
When property that is sold or leased is accompanied by a covenant not to use that property for certain purposes,
the restriction may have nothing to do with competition. It may deal with environmental or aesthetic concerns, and
courts will enforce such covenants. The covenant, however, may be designed to restrict competition, as where
property is sold by a seller who conducts a certain kind of business on adjacent property and does not wish to be
confronted with the competition from the same kind of business next door. Such restrictions are common in the sale
or lease of commercial space. A supermarket or a pharmacy may not want to lease extensive space in a shopping
center unless it can be assured that it will be the only business of its kind in the center. See, e.g., Walgreen Co. v.
Sara Creek Property Co., 966 F.2d 273 (7th Cir. 1992). Courts enforce such restrictions if they are reasonable.
Practice Resource:
• Corbin § 0.12 (restrictions on the competitive use of property by a seller, purchaser, lessor, or lessee).

End of Document
COMPETITION
§ 0.06 Restraints Accompanying Franchise Agreements
Franchise agreements allow a franchisee to operate a business selling products or services under the franchisor’s
brand name. The franchisee is typically limited in the products or services it can sell and the manner in which the
business must be conducted and marketed. The agreements typically require the franchisee not to compete with
the franchisor and it may also restrict the franchisee from competing after the franchise ends.
Courts tend to treat covenants not to compete in a franchise arrangement as analogous to post-employment
restraints rather than using the more lenient attitude governing ancillary covenants in the sale of a business. (One
court, however, viewed a covenant attached to a franchise as if it were attached to the sale of a business. Jiffy Lube
Int’l v. Weiss Bros., 834 F. Supp. 683 (D.N.J. 1993) (applying New Jersey law)). If covenants are reasonable in
time, geography, and scope, courts will enforce them because they recognize a legitimate business interest in the
franchisor. See, e.g., Carvel Corp. v. Eisenberg, 692 F. Supp. 182, 186 (S.D.N.Y. 1988). The time restriction may
be judged by how long the franchisor normally takes to groom and put in place a replacement franchisee. See, e.g.,
Novus Franchising, Inc. v. Taylor, 795 F. Supp. 122 (M.D. Pa. 1992).
Practice Resource:
• Corbin § 0.1 (restraints accompanying franchise agreements).

End of Document
COMPETITION
§ 0.0 Restraints on Partners
When parties agree to combine their efforts in a partnership, it is not uncommon for the agreement to contain an
ancillary promise not to compete with the partnership. Restatement (Second) of Contracts § 1 2 c and cmts. b
and h. A partnership among physicians or dentists or accountants may involve an ancillary commitment not to
compete within a certain radius of the partnership business for a certain time after departing from the partnership.
See Rhoads v. Clifton, Gunderson & Co., 89 Ill. App. 3d 751, 411 N.E.2d 1380, 44 Ill. Dec. 914 (1980)
(accountants). These noncompete clauses are treated as if they were post-employment restraints and they are
enforced if reasonable. There has been some concern in these situations about the possible harm to patients
requiring continuing care. See Paula Berg, Judicial Enforcement of Covenants Not to Compete Between
Physicians: Protection of Doctors’ Interests at Patients’ Expense, 45 Rutgers L. Rev. 1 (1992).
Practice Resource:
• Corbin § 0.1 (restraints involving partners).

End of Document
COMPETITION
§ 0.0 Post-Employment Restraints of Competition
[1] Reasonable Non-Compete Clauses Are Enforceable

It is common for contracts of employment to include a non-compete clause requiring the employee not to
compete with the employer for some period after the employment ends. See, e.g., Salewski v. Pilchuck
Veterinary Hosp., Inc., 189 Wn. App. 898, 359 P.3d 884, 2015 Wash. App. LEXIS 2087 (Wash. Ct. App. 2015).
The employee may specifically agree not to reveal trade secrets or confidential information or not to contact the
customers or clients of the employer. Some states have statutory restrictions on non-compete agreements. In
most states, however, courts determine their enforceability by balancing the legitimate interests of the employer
that deserve protection, the legitimate interest of the employee to earn a living, and the legitimate interest of the
public in having such a former employee’s service available in a different employment context. In general, such
restraints are enforced if they are reasonable.
Absent a non-compete agreement, the employee is not prohibited from competing, though trade secret acts
enacted in various jurisdictions would preclude the revelation of trade secrets, including confidential customer
lists. Since employees who sign non-compete agreements typically have less bargaining power than the
employer, courts typically view such agreements more warily than ancillary agreements not to compete in the
sale of a business. Restatement (Second) of Contracts, cmt. g (post-employment restraints are strictly
construed because they are often the product of unequal bargaining power and the employee is likely to pay
scant attention to such a restriction which could have a very harsh effect on his livelihood).
Employers are not entitled to protection against competition by the former employee; they are only entitled to
protection from improper and unfair methods of competition by the former employee such as developing good-
will with the employer’s customers and, upon leaving the employment, siphoning away that good-will that
properly belongs to the employer. Moore v. Eggers Consulting Co., 252 Neb. 396, 401–403, 562 N.W.2d 534,
539–540 (1997), citing Boisen v. Petersen Flying Service, Inc., 222 Neb. 239, 383 N.W.2d 29 (1986).
In terms of the harshness of enforcing such a covenant on the employee, the ability of the employee to continue
to earn a living is a factor. If the employee has left voluntarily, the rationale for enforcing a non-compete
agreement is much more credible than it would be if the employer has dismissed the employee for ineffective
performance. If the employee has been terminated without cause, courts will not enforce the covenant by
construing the contract to avoid such enforcement or simply viewing the employer has having “unclean hands.”
While the public interest could be a factor in deciding whether to enforce a restraint on a physician or other
necessary party in an isolated situation, the public interest is not generally viewed as a determining factor.
[2] Employers’ Protectable Interests

An employer has a legitimate interest in confidential information or trade secrets. It also has a protectable
interest beyond trade secrets or confidential information in the good-will it has developed and the expansion of
its good-will through its salaried employees. See Sys. & Software, Inc. v. Barnes, 178 Vt. 389, 886 A.2d 762
(2005). If an employee learns no secrets or confidential information and has no contract with customers, there
is no legitimate interest of the employer to protect, and the restraint would not be enforceable. Boisen v.
Petersen Flying Service, Inc., 222 Neb. 239, 383 N.W.2d 29 (1986). In Gaver v. Schneider's O.K. Tire Co., 289
Neb. 491, 856 N.W.2d 121, 2014 Neb. LEXIS 179, 39 I.E.R. Cas. (BNA) 698, 165 Lab. Cas. (CCH) P61,539
(Neb. 2014), the court held the non-compete that Gaver signed with his former employer Schneider's, a seller of
tires and servicer of motor vehicles, was not valid or enforceable. The court explained that “an employer does
Page 2 of 3
not ordinarily have a legitimate business interest in the postemployment preclusion of an employee's use of
some general skill.” The court explained: “There is no evidence that Gaver had any personal and business-
based contact with customers or prospective customers of ch ei e s. Gaver was not exposed to, and did
not acquire, confidential information accumulated by Schneider's regarding its customers or potential
customers, such as customer lists. There is no evidence that the on-the-job training and knowledge acquired by
Gaver was any different from that which would have been received from another employer engaged in the
business of automotive repairs and sales. And the record contains no evidence that Schneider's had any trade
secrets regarding automotive repairs and sales.” The noncompete agreement “does not protect a legitimate
business interest of Schneider's, such as its goodwill, confidential information, or trade secrets, but, rather, it
seeks to prevent competition in e e . In Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871, 965
N.E.2d 393, 358 Ill. Dec. 322, the court further clarified Illinois law by emphasizing that the legitimate business
purpose did not depend exclusively on the two factors of customer relationships that were near-permanent and
confidential information, alone. Rather, whether a legitimate business interest exists depends upon the totality
of facts in each case. These include the near-permanent customer relationship and the employee’s acquisition
of confidential information, but they also include time (duration) and place (geographic) restrictions. No single
factor carries more weight than any other factor. Rather, its importance will depend on the specific facts and
circumstances of each case.
While courts will enforce a restraint on soliciting customers with whom the employee had dealt, they may not
enforce promises not to deal with potential customers. A restraint may be unreasonable because it precludes a
former employee from offering products with which the employee never dealt when working for the employer. A
restraint is overly broad if it stops an employee from performing in any capacity for a competitor and the
employee performed in limited capacities for the employer. In one instance, the defendant left a practice of oral
surgery. The court held that a covenant not only precluding his practice of oral surgery but of general “dentistry”
was too broad. Karpinski v. Ingrasci, 28 N.Y.2d 45, 268 N.E.2d 751 (1971).
Just because an employee has developed exceptional skills in the performance of his or her employment does
not provide the employer with a right to preclude the employee from the post-employment rendering of those
exceptional skills for a competing employer. In a personal service situation, a court may even find that the
unique skills and techniques of an employee were responsible for earning the good-will of given customers that
the employer is not entitled to retain. As suggested in a recent case:
Hairdressers are not fungible; each employs individual skills and techniques that may, or may not, meet the
needs and preferences of an individual client. Location, ambience, business hours, and other factors may
also influence a client’s choice, but at least on the present record, it is not apparent that the good will of the
clients these defendants have serviced necessarily belongs to [the employer] rather than to the
defendants.
Lunt v. Campbell, 2007 Mass. Super. LEXIS 484, at *8 (Sept. 24, 2007).
Where, however, an employee claimed that the employer had no protectable interest because the employee
was not provided with customer lists, the court emphasized that a protectable interest may exist other than an
interest in protecting the identity of customers. The employee knew nothing about the employer’s business
before coming to work. He learned the trade and became a very good salesman. In that role, the employer
provided him with the means to facilitate client contacts and to develop relationships with other customers of
the employer. Those relationships were very important in stimulating business in the industry. Noting that
employers have an important interest in preserving customer relationships built and maintained by their sales
representatives, the court held that the employer had a protectable interest. James Roberson & Penhall Co. v.
C.P. Allen Constr. Co., 50 So. 3d 471 (Ala. Civ. App. 2010).
[3] A Restrictive Covenant Will Not Be Enforced Beyond the Territory in Which the Employer Does
Business
A restrictive covenant will certainly not be enforced beyond the territory in which the employer does business.
Moreover, most courts define permissible territorial scope in post-employment restraints as the territory in which
the employee worked and had customer contact. Thus, a restriction that would preclude the former employee
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from a broader area in which the employee does not do business will not be enforced. All Stainless, Inc. v.
Colby, 364 Mass. 773, 308 N.E.2d 481 (1974).
The factors that will be considered in determining the reasonableness of territorial restrictions include the area
of the restriction, the area of the employer’s business, the area in which the employee worked, the nature of the
business, the nature of the employee’s duties, and the employee’s knowledge of the former employer’s
operations. Hartman v. W.H. Odell & Assocs., 117 N.C. App. 307, 450 S.E.2d 912 (1994). While nationwide
and worldwide limitations are generally disfavored as being overly-broad, it is possible to find such a broad
clause enforced, particularly where the employee uses the internet throughout the country or the world. See
National Bus. Servs. v. Wright, 2 F. Supp. 2d 701 (E.D. Pa. 1998). The absence of any territorial limitation
suggests that the restriction is too broad, but it may be possible to enforce a clause that simply precludes
solicitation of customers without a territorial limitation.
[4] Duration of Restriction

With respects to customer good-will, the employer’s protectable interest does not require a restriction beyond
the time required for the employer to reestablish its bond with customers or clients through a replacement
employee. Midwest TV v. Oloffson, 298 Ill. App. 3d 548, 699 N.E.2d 230, 232 Ill. Dec. 783 (1998). The time
necessary to protect trade secrets or confidential information may be different. As usual, there are no possible
bright line rules since the test is one of reasonableness which must be employed in a specific context. An
acceptable time restriction on a typical sales person would be shorter than a time restriction on a professional
providing a service since relationships with professionals tend to be enduring. Moore v. Dover Veterinary Hosp.,
116 N.H. 680, 685, 367 A.2d 1044, 1048 (1976) (five-year restriction on veterinarian upheld).
Practice Resources:
• Corbin § 0.1 (post-employment restraint of employees from competition—generally); § 0.1
(protectable interests); § 0.1 (territorial restrictions); § 0.1 (time restrictions); § 0.1
(agreements by employees to assign inventions to employers).

End of Document
COMPETITION
§ 0.0 Employee Agreements to Assign Inventions
Employees who work as researchers or in other fields in which they may be expected to develop inventions or new
methods or designs in the course of their employment are often required under their contracts to assign the rights to
these discoveries to their employer. Such assignments are generally enforced without difficulty.
When an employee agrees to assign post-employment discoveries to the employer, the situation is more complex.
Such a post-employment restraint would have to meet the strict scrutiny standards of such restraints to be
enforceable. An employer could have a protectable interest in such discoveries if they necessarily included the
employer’s trade secrets or confidential information that the employee had gleaned during the former employment.
Practice Resource:
• Corbin § 0.1 (agreements by employees to assign inventions to employers).

End of Document
COMPETITION
§ 0.10 Restraint of Gainful Trades and Professions
[1] Most Jurisdictions Will Enforce Reasonable Covenants in Restraint of Trade Covering Professionals
While the distinction between a “trade” and a “profession” may be based on working with one’s hands and brain
versus the brain alone, the work of the trades and professions are both dignified. The restraint of a
“professional” is subject to the same essential analysis as the restraint of any other worker.
Some jurisdictions prohibit restrictive covenants for professionals. See, e.g., Ala. Code Ann. § -1-1 . Most
jurisdictions will enforce reasonable covenants in restraint of trade covering physicians, accountants,
veterinarians, and other professionals. The covenant will be enforced if the promisee has an interest to be
protected and enforcement would not unduly burden the promisor or the public. When the restraint is on a
physician, a court may place greater weight on the effect on the public interest. The American Medical
Association has consistently opposed the enforcement of noncompetition agreements between physicians as
negatively impacting patients’ care. See Paula Berg, Judicial Enforcement of Covenants Not to Compete
Between Physicians: Protection of Doctors’ Interests at Patients’ Expense, 45 Rutgers L. Rev. 1 (1992).
Where a covenant restricted the seller of a dental practice from practicing dentistry within 15 miles of the
practice for two years, the seller returned to the area within a year and began practicing dentistry in a federally-
funded health center for natives of Alaska and other native Americans. Unlike a seller of such a practice
opening a new for-profit office, the seller became an employee who did not solicit private patients in a
community health center. The court held that competition could not be presumed in such a case. Wenzell v.
Ingrim, 228 P.3d 103 (Alaska 2010).
[2] Restrictive Covenants Involving Lawyers Are Not Enforced

The American Bar Association Model Rules of Professional Conduct Rule 5.6 forbids any agreement in restraint
of an attorney’s right to practice after the termination of a partnership or other employment relationship. The
rationale is that clients must not be robbed of their choice of counsel, but the rule also protects the attorney’s
interests. In one case, physicians argued that covenants in restraint or trade involving physicians are even
more opposed to public policy by interfering with the physician-patient relationship than such covenants
involving attorneys. The court distinguished state ethical rules for attorneys and the American Medical
Association opposition as informative but not rising to the level of an ethical violation. Mohanty v. St. John Heart
Clinic, S.C., 225 Ill. 2d 52, 866 N.E.2d 85, 310 Ill. Dec. 274 (2006) (noting that some jurisdictions prohibit non-
compete clauses in physician’s contracts, but the majority of courts enforce such restrictions if they are
reasonable).
Courts will enforce even indirect restrictions. In one instance, a contract required withdrawing partners to forfeit
their share of the firm’s uncollected revenue if they practiced law in any state in which the firm had an office or
in a neighboring state. The provision was unenforceable. Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 550 N.E.2d
410 (1989).
Practice Resources:
• Corbin § 0.20 (restraint of gainful trades and professions); § 0.21 (restraints of competition
involving professionals—generally); § 0.22 (restraints of competition involving lawyers).
Page 2 of 2

End of Document
COMPETITION
§ 0.11 Adequacy of Consideration
A covenant not to compete requires consideration like any other promise. It is supported by the price paid for the
business if it is ancillary to the sale of a business. Similarly, as a post-employment restraint, it is supported by the
promised compensation when the covenant is made at the start of the employment, even an employment without a
stated duration.
If an at-will employee does not agree to the covenant until well after the employment relationship has begun, some
courts find no consideration for such a covenant since the employee may be discharged at any time. Since the
employer has made no commitment, there is no benefit to the promisor-employee or detriment to the promise-
employer. See, e.g., Ikon Office Solutions, Inc. v. Belanger, 59 F. Supp. 2d 125 (D. Mass. 1999). Courts will find
consideration if the employer makes a commitment of continued employment of substantial duration. The prevailing
view, however, finds consideration for the covenant after the at-will employment has begun through continued
employment alone. See Summits 7, Inc. v. Kelly, 178 Vt. 396, 886 A.2d 365 (2005). See also Lake Land Empl.
Group of Akron, LLC v. Columber, 101 Ohio St. 3d 242, 2004-Ohio-786, 804 N.E.2d 27 (2004).
In Preston v. Marathon Oil Co., 2012 WY 66, 277 P.3d 81, the Supreme Court of Wyoming was presented with a
certified question: Does continuing the employment of an at-will employee constitute adequate consideration to
support an agreement containing an intellectual property assignment provision? While post-employment covenants
not to compete must evidence additional consideration in Wyoming, the court distinguished intellectual property
assignments which do not limit an employee’s right to earn a living.
Practice Resource:
• Corbin § 0.2 (adequacy of consideration).

End of Document
COMPETITION
§ 0.12 Conditional Promises in Restraint of Competition
Promises in restraint of competition may be conditional. Thus, where Ames agrees to sell her business to Barnes
for $100,000 and also promises to pay $10,000 if she ever opens a similar business, the conditional duty to pay
$10,000 may operate as an effective restraint on competition. As such, it would have to meet the same standards of
enforceability as any other covenant in restraint of trade.
Suppose, however, that Ames agrees to sell her business to Barnes in exchange for Barnes’s promise to pay
$100,000 plus a $5,000 annuity so long as Ames forbears opening a business in competition with Barnes. Ames
has made no promise of any kind not to compete; rather, she has received a promise of $5,000 annually which she
will forfeit if she competes. These agreements are not viewed as covenants not to compete because Ames has a
choice. She may compete and not collect the $5,000 annuity, or she may choose not to compete and collect it.
Although restraint of competition law does not prohibit forfeiture provisions in deferred compensation and pension
plans, it is important to recognize that federal law greatly restricts the validity of pension forfeitures.
Practice Resources:
• Corbin § 0.2 (conditional promises in restraint of competition); § 0.2 (conditions in restraint of
competition).

End of Document
COMPETITION
§ 0.13 Partial Enforcement of Covenants in Restraint of Trade
[1] Courts Will Enforce an Overly-Broad Covenant to the Extent That Is Reasonable
If a covenant in restraint of trade is too broad or excessive in terms of scope, territory, or duration, courts in
most jurisdictions will enforce the covenant to the extent that is reasonable. If the seller of a retail bakery
business agrees not to compete in the bakery business or in the buyer’s general department store business,
the buyer’s legitimate protectable interest should be limited to the retail bakery business. If a former employee
agrees not to compete “in New York or anywhere in the United States” but his employment was exclusively in
New York, a court could refuse enforcement of the covenant beyond New York. Similarly, if the duration is
longer than needed to provide adequate protection to an employer or buyer of a business, the duration of an
otherwise reasonable clause can be shortened.
[2] “Blue Pencil Rule”

In an early case the court decided that an excessive restraint of competition clause could be enforced if the
excessive portion could be removed mechanically, by simply “blue penciling” that portion; if so, the remaining
language would constitute a perfectly enforceable clause. Mallan v. May, 11 M & W. 63 (1843).
Thus, in the previous example, if the clause stated that the former employee could not compete “in New York or
anywhere in the United States,” it would be possible to blue pencil the phrase, “or anywhere in the United
States” and the clause could be enforced. If, however, the clause was not drafted to allow such a clean
mechanical separation of the excessive portion of the clause, the court would not enforce it. There is no
justifiable basis for making the enforceability of clause depend on the accident of how it was drafted if a
redrafted clause would produce the identical result. See Restatement (Second) of Contracts § 1 Reporter’s
Notes. Some courts would view such an effort as reformation, which they would decline to pursue. Other courts
pursue a “severance” concept in striking excessive provisions of covenants in restraint of trade.
The essential issue in such cases ought to be whether modified enforcement of the covenant is possible
without injury to the public and without injustice to the parties. One defendant argued that a non-competition
clause should be remanded to the trial court to examine a geographical scope that was allegedly excessive.
The Vermont Supreme Court concluded that it was not necessary to remand the case to consider
reasonableness since a trial court can enforce restrictive covenants to the extent that they are reasonable.
Thus, in a post-employment restraint case, it is not necessary for a court to determine the exact limiting
boundary of the restriction so long as the employer can show the employee breached a reasonable restriction.
Summits 7, Inc. v. Kelly, 178 Vt. 396, 400, 886 A.2d 365, 370 (2005).
Even with respect to a covenant with no geographic or temporal limitations, the Supreme Court of Rhode Island
held that the trial judge had “a free hand to take a ‘blue pencil’ if necessary, to draw in any reasonable
limitations on such covenants that it concludes are overbroad.” Cranston Print Works Co. v. Pothier, 848 A.2d
213, 221 (R.I. 2004). The court’s use of quotation marks with respect to “blue pencil” clearly indicates
concurrence with the view opposing any mechanical application. Moreover, a trial court could not follow such a
direction to “draw in” any reasonable limitations under the original mechanical rule.
Practice Resource:
• Corbin § 0.2 (partial enforcement of restrictive covenant).
Page 2 of 2

End of Document
Corbin on Contracts Desk Edition > CHAPTER 81 CONTRACTS INVOLVING FAMILIAL
RELATIONSHIPS
CHAPTER 81 CONTRACTS INVOLVING FAMILIAL RELATIONSHIPS
§ 1.01 est i ts on the Right to Marry
§ 1.02 eeme t in Derogation of Marriage
§ 1.0 eeme t to Marry by One Already Married
§ 1.0 oh it tio Agreements
§ 1.0 eeme ts Relating to the Support and Custody of Children
§ 1.0 o cy Contracts
§ 1.0 eeme ts Relating to Pre-Embryos

End of Document
RELATIONSHIPS
CHAPTER 81 CONTRACTS INVOLVING FAMILIAL RELATIONSHIPS
the subject matter.

End of Document
RELATIONSHIPS
§ 1.01 Restraints on the Right to Marry
Because the institution of marriage is vital to society, contracts in restraint of marriage are subject to special
scrutiny by courts. A contract that has the effect of restraining marriage is not necessarily unenforceable unless the
only purpose of the contract is the restraint of marriage. Just as a contract to restrain competition will be enforced
only if it is ancillary to an otherwise legitimate purpose, so a contract to restrain marriage will be enforceable only if
it is connected with a legitimate purpose.
A promise by an elderly person to include a bequest in a will if the promisee refrains from marrying and provides
care to the promisor may be enforceable, notwithstanding the restraint on marriage. See Restatement (Second) of
Contracts § 1 illus. 2. As part of a divorce settlement, a promise by a spouse to pay a certain amount of support
until the other spouse remarries will be enforceable even though it may have the effect or restraining the second
marriage. As in contracts in restraint of trade or post-employment restraints, the duration and extent of the restraint
on marriage will be factors in determining its enforceability.
Practice Resource:
• Corbin § 1.1 (restraints on the right to marry).

End of Document
RELATIONSHIPS
§ 1.02 Agreement in Derogation of Marriage
In addition to restraints on marriage, courts question other agreements in derogation of the public policy favoring
marriage. When a plaintiff made a promissory estoppel claim against her paramour from a 23-year adulterous
relationship, the court found no reasonable reliance on a promise of an adulterer who had previously lied to the
plaintiff. The court cited Corbin on Contracts in holding that, in any event, such a promise would be unenforceable
as against the public policy favoring marriage. Norton v. Hoyt, 278 F. Supp. 2d 214 (D.R.I. 2003).
Courts used to be skeptical about antenuptial and postnuptial agreements relating to property as agreements in
derogation of marriage that could invite termination of the marital relationship. Currently, however, courts enforce
such agreements if they are fair.
One trial court applied Virginia law to a prenuptial agreement, holding it to be valid. On appeal, the court held that
the law of the Virgin Islands applied. A Virgin Islands statute incorporates the Restatement (Second) of Contracts.
Under § 12 a prenuptial agreement is presumptively valid. Conceding the presumptive validity of such an
agreement, the wife argued that the agreement was against public policy under Restatement (Second) of Contracts
§ 1 0. Section 190, illus. 5, posits a prenuptial agreement under which A promises B that he will settle $1 million on
her in the event of a divorce. The illustration concludes that A’s promise is not enforceable because it may
unreasonably encourage divorce in derogation of marriage. Restatement (Second) of Contracts § 1 0 cmt. c. The
court was not convinced by this argument and noted a comment in the same Restatement section: “A promise that
merely disposes of property rights in the event of divorce or separation does not of itself tend unreasonably to
encourage either.” Black v. Powers, 48 Va. App. 113, 628 S.E.2d 546 (2006).
A prenuptial or postnuptial agreement manifesting unconscionability in terms of the nondisclosure of relevant

information, superior bargaining power, and adhesiveness will prevent enforcement. The challenger must shoulder
the burden of establishing unconscionability or the lack of fairness.
Practice Resource:
• Corbin § 1.2 (agreement in derogation of marriage).

End of Document
RELATIONSHIPS
§ 1.03 Agreement to Marry by One Already Married
A promise by a married party to marry another party is not enforceable even if the promisor is separated and the
promise is expressly conditioned upon obtaining a divorce. See Norton v. Hoyt, 278 F. Supp. 2d 214 (D.R.I. 2003).
If the promisor has concealed the marriage from the promisee, however, a breach of promise action will lie in those
jurisdictions allowing such actions.
An agreement to procure a wife or husband by a marriage broker for a fee is against public policy. An international
matchmaking service charged a nonrefundable $700 fee. If a marriage resulted, the client agreed to pay $7,500 to
the plaintiff. The defendant was introduced to her future husband through the service, but after marriage she
refused to pay the $7,500. The court cited the Corbin discussion of older cases where marriage brokerage
agreements were not enforced because of their pernicious tendencies, including deception and exploitation.
Notwithstanding the changing mores of the twenty-first century, the court concluded that the contract before the
court fell squarely within the common law prohibition of such contracts, which should be continued. Ureneck v. Cui,
59 Mass. App. Ct. 809, 798 N.E.2d 305 (2003), review den., 440 Mass. 1110, 801 N.E.2d 803 (2003).
Practice Resource:
• Corbin § 1. (agreement to marry by one already married).

End of Document
RELATIONSHIPS
§ 1.04 Cohabitation Agreements
The judicial reaction to agreements between unmarried cohabitants illustrates changing public policy as societal
mores change. The undeniable facts of such cohabitation by a significant number of citizens induced a review of
several public policies including the desire to protect the institution of marriage, statutes making adultery or
fornication crimes, and prostitution statutes.
The leading “palimony” case is Marvin v. Marvin, 18 Cal. 3d 660, 134 Cal. Rptr. 815, 557 P.2d 106 (1976). In
Marvin, a woman claimed she had an unwritten contract with a well-known film actor under which she had
surrendered her career to become a homemaker and companion in exchange for his promise to provide her
financial support for the rest of her life. Though such cohabitation involves sexual relations, the court distinguished
the modern nonmarital relationship from prostitution. While expressing continued and strong support for the
institution of marriage, the court also recognized the changes in the mores of society with respect to such
agreements and the abandonment of the moral foundations on which the earlier cases refusing enforcement of
such promises between unmarried cohabitants were based.
The great majority of modern courts now enforce cohabitation agreements. See Wilcox v. Trautz, 427 Mass. 326,
693 N.E.2d 141 (1998) and cases cited therein; Boland v. Catalano, 202 Conn. 333, 521 A.2d 142 (1987) and
cases cited therein. It is of little consequence if one of the parties is already married. It is now common for courts to
hold that such agreements are enforceable unless the agreement rests on illicit meretricious consideration. An
agreement based on the performance of sexual acts is unenforceable, but existing (albeit unenforced) fornication
statutes have not precluded the enforcement of cohabitation agreements if the relationship resembles a normal
family relationship. In a given jurisdiction a court may require, unlike the Marvin court, the agreement to be
evidenced by a writing. Wilcox, id. A statute may demand a writing to avoid the threat of fraud in palimony cases.
In one case, the defendant was living in a condominium purchased by the plaintiff, but the parties had not
cohabited. The trial court held that cohabitation was a necessary condition to her recovery in a palimony action. On
appeal, the court held that cohabitation was only one of the relevant factors to be considered to determine the
critical question of whether the parties manifested a marital-type relationship. The court recognized that parties
could manifest that kind of relationship without cohabiting and concluded that the “entirety” of the relationship had to
be considered. The court held that such an examination in this case revealed that the trial court based its holding on
credible evidence. Devaney v. L’Esperance, 195 N.J. 247, 949 A.2d 743 (2008). Subsequently, in response to
Devaney and similar decisions, New Jersey enacted a statute requiring a writing for “[a] promise by one party to a
non-marital personal relationship to provide support or other consideration for the other party, either during the
course of such relationship or after its te mi tio . . no such written promise is binding unless it was made with
the independent advice of counsel for both parties.” N.J.S.A. 25:1-5(h) is discussed in Botis v. Estate of Kudrick,
421 N.J. Super. 107, 2011 N.J. Super. LEXIS 76, 22 A.3d 975 (App. Div. 2011). See also, Maeker v. Ross, 219 N.J.
565, 2014 N.J. LEXIS 910, 99 A.3d 795 (N.J. 2014). Maeker and Ross, while unmarried, lived together for 13 years.
After the relationship dissolved, Maeker filed an action to enforce Ross’s promise to provide financial support,
claiming the two had entered into an oral palimony agreement. Ross argued the 2010 Amendment to the Statute of
Frauds, N.J.S.A. 25:1-5(h), barred enforcement of any oral palimony agreements, even those predating the
Amendment. The Amendment states that a “[n]o action shall be brought upon any of the following agreements or
promises, unless the agreement or promise … shall be in writing, and signed by the party to be charged
the e ith A promise by one party to a non-marital personal relationship to provide support or other
consideration for the other ty . Citing the Corbin treatise, the court explained that “most courts have held that
Page 2 of 2
if an oral contract is lawful when made, it is not rendered unenforceable by a later-passed statute requiring the
contract to be in writing.” The court, again citing Corbin, further explained that “various reasons have been given for
not retroactively applying the Statute of Frauds to nullify an earlier-made oral contract, but one clear reason is that
rendering a previous valid contract unenforceable would ‘impair the obligation’ of a contract and run counter to the
constitutional provision.” Therefore, the court held the 2010 Amendment to the Statute of Frauds does not invalidate
oral palimony agreements predated before it.
While cohabitation agreements will typically be enforced, such agreements do not provide the parties with all of the
protections in legislation designed for married parties. Thus, an unmarried cohabitant may have no right to the
equitable distribution of property or loss or consortium available to a married spouse. Devaney v. L’Esperance, 195
N.J. 247, 949 A.2d 743 (2008).
Courts have enforced contracts between cohabiting parties of the same gender. Thus, an agreement for support
between adults of the same gender will be valid unless the primary reason for the agreement was to deliver and be
paid for sexual services. Posik v. Layton, 695 So. 2d 759, 762 (Fla. Dist. Ct. App. 1997).
One court, while recognizing that the enforcement of cohabitation agreements between same-sex couples involving
the support of a child are enforceable, would not enforce an agreement to become a parent against an individual
who reconsidered that decision. “[P]arenthood by contract” is opposed to the public policy of Massachusetts. T.F. v.
B.L., 442 Mass. 522, 813 N.E.2d 1244 (2004).
Practice Resource:
• Corbin § 1. (cohabitation agreements)

End of Document
RELATIONSHIPS
§ 1.05 Agreements Relating to the Support and Custody of Children
Pursuant to separations and divorces, parents enter into agreements concerning child custody, visitation rights,
support obligations, and even termination of parental rights. Courts do not favor such agreements since the
overriding concern is not the wishes of the parents, but the best interests of the children. Some courts simply refuse
to recognize contracts concerning child custody since it is a judicial matter not suitable for determination by private
contract. Similarly, courts are not bound to enforce contracts involving child support.
Practice Resource:
• Corbin § 1. (agreements relating to the support and custody of children).

End of Document
RELATIONSHIPS
§ 1.06 Surrogacy Contracts
Since a child can be born from the womb of a surrogate, courts have been challenged to decide questions
concerning surrogate contracts. In a famous case, a surrogate mother agreed to bear a child for a couple using the
surrogate’s own egg and the husband’s sperm in exchange for $10,000 plus expenses. The court found numerous
violations of public policy, including adoption policy, proof that a parent was unfit before terminating a parent’s
rights, a statute allowing a surrogate to revoke her surrender of the child, the policy of not separating a child from its
mother, and the principle that custody is determined by the best interest of the child. The court refused to enforce
the agreement, which it viewed as a form of baby selling. In re Baby M, 109 N.J. 396, 537 A.2d 1227 (1988).
Gestational surrogacy, however, involves a fertilized egg produced by the couple that is implanted in the womb of
the surrogate. In one case, a court determined that the biological mother and not the surrogate mother was the
natural mother of a child. Thus, adoption law and parental termination laws were not implicated. The baby was not
being adopted and the surrogate had no parental rights to terminate. Moreover, the surrogate’s right to terminate
the pregnancy was not infringed upon. The court enforced the contract under which the surrogate was to receive
$10,000 and a life insurance policy. Johnson v. Calvert, 5 Cal. 4th 84, 19 Cal. Rptr. 2d 494, 851 P.2d 776 (1993).
J.F. agreed to pay D.B. and her husband $20,000 plus expenses to carry a donated egg from another party that
had been implanted with J.F.’s semen. The Supreme Court of Ohio enforced the contract because such a
gestational surrogacy does not involve the surrogate’s own egg. A dissenting opinion joined by two other members
of the court, however, viewed the transaction as an agreement among unrelated persons for the creation of a child
for the payment of money, which, the dissent concluded, was the kind of contract that violated Ohio public policy.
J.F. v. D.B., 116 Ohio St. 3d 363, 2007-Ohio-6750, 879 N.E.2d 740 (2007).
Some states prohibit surrogacy contracts by statute. Courts in other states refuse to enforce them. Neither the
statutes nor case law typically distinguish traditional surrogacy contracts like the Baby M case from gestational
surrogacy agreements.
Practice Resource:
• Corbin § 1. (surrogacy contracts).

End of Document
RELATIONSHIPS
§ 1.0 Agreements Relating to Pre-Embryos
Couples suffering from infertility may produce pre-embryos (fertilized eggs) that are preserved cryogenically. Clinics
providing this service often have the couples sign a form designating ownership of the pre-embryo in the event of
death or divorce. The question of the enforceability of these agreements arises typically upon the couple’s divorce.
A few states have enacted statutes to deal with these questions. Absent a statute, the case law is sparse. The
courts have not forced either a husband or wife to become a parent against his or her will, regardless of any prior
agreement between them.
In one case, a husband wanted the pre-embryo destroyed and his former wife wanted it donated to a childless
couple. Absent any prior agreement, the court awarded the pre-embryo to the husband to protect his right to
procreate or not to procreate. Davis v. Davis, 842 S.W.2d 588 (Tenn. 1992). Where the parties had agreed on the
disposition of the pre-embryo, the court enforced the agreement since the progenitors had both made a
quintessentially private decision that the court concluded should be enforced even though the former wife changed
her mind after the divorce. Kass v. Kass, 91 N.Y.2d 554, 673 N.Y.S.2d 350, 696 N.E.2d 174 (1998). Another court,
however, refused to enforce an agreement providing the pre-embryo to the wife, essentially on the basis that a
party should not be bound by an agreement to enter or not enter a familial relationship. A.Z. v. B.Z., 431 Mass. 150,
725 N.E.2d 1051 (2000). While the court found the agreement so incomplete that it could not be enforced, it noted
that even if the agreement had been sufficiently complete, it would still not be enforceable because agreements to
enter or not enter familial relationships are not enforceable.
When a child born as a result of a donor arrangement suffered from a kidney disease, the parents sued the clinic to
ascertain the identity of the donor notwithstanding their contract not to seek that identity. The court held the contract
was unenforceable because it conflicted with the public policy of California where a statute permitted the revelation
of donor identity “for good cause” as well as California’s compelling interest in the welfare of children. Johnson v.
Superior Court, 80 Cal. App. 4th 1050, 95 Cal. Rptr. 2d 864 (2000).
Practice Resource:
• Corbin § 1. (agreements relating to pre-embryos).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 82 SUNDAY CONTRACTS
CHAPTER 82 SUNDAY CONTRACTS
§ 2.01 i s Made or to Be Performed on Sunday
§ 2.02 ti ic tio or Adoption of a Sunday Bargain
§ 2.0 o t cts to Be Performed on Sunday

End of Document
CHAPTER 82 SUNDAY CONTRACTS
the subject matter.

End of Document
§ 2.01 Bargains Made or to Be Performed on Sunday
Laws proscribing commercial activity on Sundays have a long history. As early as 1237, King Henry III forbade the
frequenting of markets on Sunday. In 1448, Henry VI made all fairs and markets unlawful on Sundays. In the middle
of the sixteenth century, Edward VI disallowed bodily labor to be performed on Sundays. A 1677 statute prohibited
“any worldly labor or business or work of their ordinary callings on the Lord’s day.” 29 Charles II c.7 (1677). This
legislation was clearly in support of an established church. McGowan v. Maryland, 366 U.S. 420, 431–432, 81 S.
Ct. 1101, 6 L. Ed. 2d 393 (1961). Similar laws are found in America as early as 1650 in the Plymouth Colony.
While the origins of these laws (often called “Blue Laws”) were strongly religious, arguments for Sunday closing
laws began to take on a secular character by treating Sunday as a day of rest to allow people to recover from the
labors of the week. When twentieth century Sunday laws were alleged to violate the establishment of religion clause
of the First Amendment of the United States Constitution, the United States Supreme Court held that such laws
“advance religion only minimally because many working people would take the day as one of rest regardless.”
McCreary County v. ACLU, 545 U.S. 844, 861, 125 S. Ct. 2722, 162 L. Ed. 2d 729 (2005), citing McGown v.
Maryland, 366, U.S. 420, 449–451 (1961).
Practice Resource:
• Corbin § 2.1 (bargains made or to be performed on Sunday).

End of Document
§ 2.02 Ratification or Adoption of a Sunday Bargain
Notwithstanding their constitutionality, few jurisdictions have retained such Blue Laws and where they have been
retained, the recorded case law reveals that their enforcement has fallen out of favor. Even during their heyday,
courts often required a Sunday contract defense to be affirmatively proved. If consideration was received pursuant
to a Sunday contract, the recipient might have to restore the consideration as a condition to asserting the defense.
If an offer was made on Sunday but was not accepted until Monday or another weekday, the Sunday law was not
violated. An innocent third party such as a purchaser for value of a negotiable instrument or an innocent assignee
could enforce a right created under a Sunday contract. While there were cases holding that a contract made on
Sunday was “void” and could not be revived by ratification on a weekday, many cases held that a promise made on
a weekday after receiving consideration under a Sunday contract would be enforced.
Practice Resource:
• Corbin § 2.2 (ratification or adoption of a Sunday.

End of Document
§ 2.03 Contracts to Be Performed on Sunday
If a contract made on a weekday was to be performed on Sunday, it was not uncommon for a court to hold that
neither the agreed price nor the value of the performance would be recoverable since the vice was not the making
of the contract but its performance. Simple fairness tended to move a number of courts away from such draconian
decisions. Any vestige of the idea that transacting business on Sunday is wicked had vanished at the start of the
twenty-first century.
Practice Resource:
• Corbin § 2. (bargains made on a weekday requiring performance on Sunday).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 83 BARGAINS HARMFUL TO THE
ADMINISTRATION OF JUSTICE
CHAPTER 83 BARGAINS HARMFUL TO THE ADMINISTRATION OF JUSTICE
§ .01 i s for Compounding a Crime or Stifling Prosecution
[1]Receipt of Consideration in Exchange for a Promise to Conceal a Crime Is Contrary to Public Policy
[2]Plea Agreements and Agreements Not to Prosecute Are Enforceable
[3]Bargains for Obtaining Evidence or Giving Testimony
§ .02 eeme ts to Oust Courts of Jurisdiction—Arbitration
[1]Courts Generally Will Enforce Agreements That in the Past Would Have Been Unenforceable
Because They Serve to Oust the Court of Its Jurisdiction
[2]Arbitration Agreements
[3]Forum Selection Agreements
[4]Choice of Law Provisions
[5]Agreements Limiting Remedies
[6]Agreements Modifying Limitations Periods
§ .0 h m e ty and Maintenance
[1]Modern Courts Tend to View the Champerty Doctrine with Disfavor
[2]Attorneys’ Contingent Fees Are Not Viewed as Champertous
[3]Effect of Champertous Agreement on Defendant’s Liability
[4]Effect of Champerty on Attorney’s Right to Compensation
[5]An Assignment Is Void if It Is Part of a Champertous Bargain
[6]Bargains to Procure Clients and Promote Litigation
[7]Bargains to Split Fees
[8]“Mary Carter” Arrangements

End of Document
CHAPTER 83 BARGAINS HARMFUL TO THE ADMINISTRATION OF JUSTICE
the subject matter.

End of Document
§ 3.01 Bargains for Compounding a Crime or Stifling Prosecution
[1] Receipt of Consideration in Exchange for a Promise to Conceal a Crime Is Contrary to Public Policy
It is a crime to compound any crime, felony, or misdemeanor by receiving consideration in exchange for a
promise to conceal a crime or evidence of a crime or a promise not to prosecute a crime. Such agreements are
among the clearest violations of public policy. The citizen’s duty to report crimes to the authorities “was an
established tenet of Anglo Saxon law at least as early as the thirteenth century.” Roberts v. United States, 445
U.S. 552, 557, 100 S. Ct. 1358, 63 L. Ed. 2d 622 (1980). Notwithstanding this civic duty, however, absent any
agreement, citizens in general commit no crime by failing to report crime.
Bargains to stifle prosecution are typically made by those who have suffered tortious injury by a criminal
offender. The injured party feels justified in putting pressure on the offender by threats of prosecution unless the
matter is settled by the offender’s payment of compensation. Such an injured party is certainly allowed to sue
the offender for civil damages and to enter into a settlement of such a lawsuit. Instead of suing and, perhaps,
settling the lawsuit, forbearance of such an action appears to satisfy the requirement of consideration. Courts,
however, will generally not enforce such bargains.
While a settlement of a civil action is said not to be unenforceable merely by the injured party’s threat of
criminal prosecution, threats of criminal prosecution may allow a court to infer that the settlement was in
exchange for such forbearance to prosecute, thereby making such an implied agreement contrary to public
policy. Moreover, such a threat would allow the offender to challenge any such agreement on the basis of
duress, not only when the offender is innocent, but particularly where the offender is guilty of the wrongdoing.
(For a detailed discussion of duress, see Chapter 28 above).
Courts usually regard parties to an agreement compounding a crime as operating in pari delicto (equally guilty),
thereby precluding any remedies. Courts do consider mental and moral duress. Moreover, an embezzler may
be held liable for the value stolen notwithstanding the unenforceability of an agreement to repay it.
[2] Plea Agreements and Agreements Not to Prosecute Are Enforceable

Agreements between alleged offenders and prosecuting officials constitute a major exception to the general
rule that agreements not to prosecute violate public policy. Prosecutors may agree not to prosecute at all in
exchange for the disclosure of information or testimony. These agreements are enforced. They differ from plea
agreements, which are designed to allow for prompt and final disposition of criminal cases in a highly efficient
fashion, thereby benefiting the public interest.
If the prosecution breaches a plea agreement with respect to sentencing, a court may order a new sentencing
hearing or allow the defendant to withdraw a guilty plea. If the breach relates to charging the party, a court may
dismiss the charges.
The court in United States v. Viju, 2016 U.S. Dist. LEXIS 2860 (N.D. Tex. Jan. 11, 2016) explained that Federal
courts have come to regard plea agreements essentially as contracts. But, while plea agreements are like
contracts—they are not contracts. In the plea bargain milieu, there is no distinction between “total” and “partial”
breach per Restatement (Second) Contracts, §§ 2 and 243 (1981). Another court refused to apply the
doctrine of mutual mistake to relieve defendants of their guilty pleas. The instant court explained these
holdings: “… fairness to the defendant, rather than strict adherence to the law of contracts, is the touchstone for
delimiting the contours of the right to enforce plea deals.” In this case, the court held that third-party
beneficiaries “have no contractual right to enforce plea agreements.”
Page 2 of 2
The prosecution may agree to not pursue charges in exchange for a promise not to pursue a civil action against
the prosecutorial authority. Such agreements are not per se unenforceable, but they are viewed skeptically by
state courts. As suggested by one court, the prosecution must have a reason for such an agreement that is
“genuine, compelling and legitimately related to the prosecutorial function” in light of strong considerations
disfavoring such agreements. Cowles v. Brownell, 73 N.Y.2d 382, 387, 540 N.Y.S.2d 973, 538 N.E.2d 325, 327
(1989).
[3] Bargains for Obtaining Evidence or Giving Testimony

Bargains for the concealment of evidence are crimes, but bargains to compensate a party for the collection of
evidence or testifying in a judicial proceeding may be reasonable and lawful. Because, however, bargains to
pay witnesses compensation in addition to fees they receive as subpoenaed witnesses may color their
testimony, such bargains are against public policy. When a prosecutor agrees not to prosecute or offers a
lighter sentence in exchange for testimony, courts have rejected claims that the testimony constitutes a
“payment” and such bargains are not against public policy since the public policy in favor of securing the
testimony outweighs the public policy against the enforcement of such agreements.
Courts will not enforce agreements specifying the content and character of the testimony. A witness not subject
to subpoena may be compensated unless the compensation depends on the success of the litigation or on the
witness testifying in a specified manner. Wegmann v. Tramontin, 2016 La. App. LEXIS 45, 2015-0561 (La.App.
4 Cir. 01/13/16) held that bargain to pay one who is amenable to process a further sum for attending as a
witness is generally invalid’ as against public policy.” If an agreement calls for a witness to be paid more than
his or her legal fees, or if some other elements are present that tend to show that the witness’s evidence may
be improperly influenced, the contract is against public policy.
Experts may be paid for determining the facts and developing an opinion so long as such payment is not made
to depend upon the success of the litigation and the agreement does not specify that the expert is to be paid
only if the testimony is of a certain character. Thus, agreements to pay experts contingent on the success of the
litigation are unenforceable. When an attorney hires an investigator to collect evidence and testify as to the
facts found, however, such agreements are enforceable. Similarly, rewards for information leading to the arrest
and conviction of a criminal are enforceable even though they are conditioned on conviction.
Practice Resources:
• Corbin § .1 (bargains for compounding crime or stifling a prosecution—generally); § .2
(bargains for compounding crime of stifling—prosecution pleas agreements and other
agreements by prosecuting officials); § . (bargains for obtaining evidence or giving
testimony).

End of Document
§ 3.02 Agreements to Oust Courts of Jurisdiction—Arbitration
[1] Courts Generally Will Enforce Agreements That in the Past Would Have Been Unenforceable
Because They Serve to Oust the Court of Its Jurisdiction
The history of English law reveals an obsessive concern on the part of English courts to repel any effort to oust
them of their jurisdiction. Indeed, that history reveals efforts to expand jurisdiction to assure the receipt of fees.
While American courts manifested sympathy with this view during the nineteenth century, by the twentieth
century our courts recognized the absence of any rationale for this view.
[2] Arbitration Agreements

[Arbitration & Unconscionability. Over the last 25 years, a plethora of cases revived the relatively dormant
unconscionability doctrine with claims that various provisions in arbitration agreements made them
unconscionable. These cases are discussed at § 2 .0 supra.]
Parties to an agreement may choose to avoid any legal obligations or remedies by clearly stating that intention.
They may decide that a named third party should review any dispute over their agreement and present an
advisory view as a condition to any lawsuit. The parties may also decide to go a step further and submit any
dispute to arbitration. The essential purpose of the 1925 United States Arbitration Act, later called the Federal
Arbitration Act (FAA), 9 U.S.C. §§ 1–14, was to overcome any common law hostility to the enforcement of
arbitration agreements.
A party cannot be compelled to enter into arbitration if it has not agreed to do so. Nevertheless, “broad
language of an arbitration clause in one agreement can cover matters arising out of an agreement not
containing an arbitration clause.” Stafford v. Flextronics Int'l USA, Inc., 2014 U.S. Dist. LEXIS 174538 (D. Kan.
Dec. 18, 2014). In the Stafford case, defendant Flextronics International acquired the assets of Lightwild
pursuant to an asset purchase agreement. The asset purchase agreement required defendant to hire plaintiff,
Lightwild’s president and chief executive officer, as part of the acquisition. The asset purchase agreement
contained an arbitration provision, but plaintiff did not sign off on that agreement in his personal capacity.
Nevertheless, the court granted defendant’s motion to arbitrate. Plaintiff’s claim was premised on defendant’s
purported failure to adhere to a business plan that was an exhibit expressly referenced in and attached to the
asset purchase agreement. The arbitration provision was very broad, requiring arbitration for claims in any way
connected with the asset purchase agreement or its breach. The court concluded that plaintiff's claim was
connected with the asset purchase agreement. The asset purchase agreement and plaintiff’s offer of
employment were related (“without the asset acquisition, there would have been no offer of employment”)—the
two were executed just days apart.
The FAA applies to any contract “evidencing a transaction involving commerce.” 9 U.S.C. § 2. It applies in
federal courts in diversity actions. It applies to state courts and state law. Southland Corp. v. Keating, 465 U.S.
1, 14, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984) (confining the FAA to arbitrations to be enforced in federal courts
would frustrate Congressional intent to create a broad enactment favoring arbitration of disputes). A state
statute or judicial decision refusing to recognize an arbitration clause in a given contract is preempted by the
FAA. Section 2 of the FAA, however, includes a savings clause that makes arbitration agreements enforceable
“save upon such grounds as exist at law or equity for the revocation of any contract” (9 U.S.C. § 2 . There are
two types of challenges under 9 U.S.C. § 2 one challenges specifically the agreement to arbitrate while the
other challenges the contract as a whole. Only the first is relevant to a court’s determination of the enforceability
Page 2 of 7
of an arbitration agreement. Whether the underlying contract is unconscionable is arbitrable. Prima Paint Corp.
v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–404, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967).
The history of the FAA is one of continuous expansion by the United States Supreme Court. The FAA applies
very broadly to any transaction that affects interstate commerce. Allied-Bruce Terminix Cos. v. Dobson, 513
U.S. 265, 115 S. Ct. 834, 130 L. Ed. 2d 753 (1995). Section 1 excepts “contracts of employment of seamen,
railroad employees, or any other class of workers engaged in foreign or interstate commerce.” This exception,
however, has been very narrowly construed to apply only to transportation workers in interstate commerce. See
Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 111, 121 S. Ct. 1302, 149 L. Ed. 2d 234 (2001). The arbitrator
has the power to choose among the whole panoply of remedies and may even grant punitive damages.
Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52, 115 S. Ct. 1212, 131 L. Ed. 2d 76 (1995). Whether the
arbitration clause, itself, is valid, however, is a matter reserved to the courts under principles of contract law.
In Kubista v. Value Forward Network, LLC, 2012 U.S. Dist. LEXIS 101420 (D.S.D. July 20, 2012), the plaintiff
claimed that an entire contract including the arbitration provision was void. Relying on Prima Paint Corp., supra,
the court reiterated the classic holding that a court may only consider issues relating to the making and
performance of the arbitration agreement since issues dealing with the contract as a whole are arbitrable. A
claim of fraud in the inducement to the arbitration clause alone is adjudicable in court while a claim of fraud in
the inducement to the contract can only be arbitrated. The plaintiff, however, claimed that the contract was void
and, as such, was subject to adjudication in court. The court disagreed, noting the holding in Buckeye Check
Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S. Ct. 1204, 163 L. Ed. 2d 1038 (2006), where the Supreme
Court made it clear that a challenge to a contract containing an arbitration provision on the footing that it is void
for illegality is arbitrable since it is not a challenge to the separate arbitration provision. The plaintiff claimed that
the court could adjudicate its issue under Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287, 130 S. Ct.
2847, 177 L. Ed. 2d 567 (2010), which held that whether parties ever successfully formed a contract was an
issue for the court. The court noted, however, that the plaintiff did not deny there was an agreement; rather he
sought to have the agreement declared void as in the Buckeye case. This is an issue for the arbitration and
Granite Rock did not counsel a different result.
Three recent United States Supreme Court holdings have further emphasized the breadth and preemptive
application of the FAA. In 2010, the Supreme Court reiterated its long-standing position that the central or
“primary” purpose of the FAA is to ensure that private agreements to arbitrate are enforced according to their
terms.
In Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 130 S. Ct. 1758, 176 L. Ed. 2d 605 (2010), the
Court recognized that the contractual rights and expectations of the parties emanate from their arbitration
agreement. By agreeing to arbitrate, a party trades the procedures and opportunity for review in the courtroom
for the simplicity, informality, and expedition of arbitration. Arbitration agreements, therefore, may be structured
as the parties see fit. They may limit the issues to be arbitrated, the rules under which arbitration will proceed,
and they may choose who will resolve specific disputes. Arbitration is simply a matter of contract between the
parties. Thus, a party may not be compelled under the FAA to class arbitration unless there is a contractual
basis for concluding that the party agreed to do so. Here, the arbitration panel’s conclusion was “fundamentally
at war with the foundational FAA principle that arbitration is a matter of consent.” While it may be appropriate in
certain contexts to presume that parties who enter into an arbitration agreement implicitly authorize the
arbitrator to employ procedures that are necessary to give effect to the parties’ agreement, (cf. Restatement
(Second) of Contracts § 20 an implicit agreement to authorize class-action arbitration changes the nature of
arbitration. In class-action arbitration, the arbitrator no longer resolves a single dispute between the parties. The
presumption of privacy and confidentiality that applies in many bilateral arbitrations do not apply in class
arbitrations. Moreover, the class-action award of an arbitrator adjudicates the rights of absent parties as well
and the commercial stakes of class-action arbitration are comparable to class action litigation though the scope
of review is much more limited. Thus, on the basis of fundamental contract principles, class-action arbitration
may not be inferred from the parties’ silence in an otherwise bilateral arbitration agreement.
In Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772, 177 L. Ed. 2d 403 (2010), the arbitration
agreement included a provision delegating to the arbitrator the exclusive authority to resolve any dispute
relating to the interpretation, applicability, enforceability, or formation of the agreement. The court separated
this “delegation provision” from the arbitration agreement. The agreement to arbitrate the enforceability of the
Page 3 of 7
underlying arbitration clause was deemed to be a separate agreement subject to a claim of unconscionability.
The employee did not challenge the delegation provision but only challenged the underlying arbitration
agreement. The court held that the parties’ agreement to delegate the validity of the arbitration provision to the
arbitrator is enforceable unless the other party can sustain an attack on the validity of that provision. The
claimant may have no more bargaining power concerning the delegation provision than the arbitration
agreement itself. The fact that the delegation provision is viewed as a contract of adhesion, however, will not be
sufficient to make it unenforceable. Thus, a preliminary, successful attack on the delegation provision on the
ground of unconscionability would be required before the main attack on the arbitration provision.
AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S. Ct. 1740, 179 L. Ed. 2d 742 (2011). In a 5-4 decision,
the United States Supreme Court reversed the Ninth Circuit Court of Appeals, which had held an arbitration
agreement unconscionable that it otherwise recognized as fair to consumers because it contained a waiver of
classwide arbitration. The court felt compelled to follow Discover Bank v. Superior Court, 36 Cal. 4th 148, 30
Cal. Rptr. 3d 76, 113 P.3d 1100 (2005), where the California Supreme Court found most collective-arbitration
waivers in consumer contracts to be unconscionable. The United States Supreme Court concluded that the
Discover Bank rule was preempted by the FAA because it would stand as an obstacle to the execution and
accomplishment of the full purposes and objectives of Congress. The Court restated the purpose of the FAA as
a “liberal federal policy favoring arbitration” (Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S.
1, 24, 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983)), placing arbitration agreements on a par with other contracts
that should be enforced according to their terms. The court recognized that the savings clause in § 2 of the FAA
(“save upon such grounds as exist in law or equity for the revocation of any contract”) allows arbitration
agreements to be invalidated by generally applicable contract defenses such as fraud, illegality, and
unconscionability, but it does not recognize defenses that apply only to arbitration or derive their meaning from
the fact that an agreement to arbitrate is at issue (Doctor’s Assocs. v. Casarotto, 517 U.S. 681, 687, 116 S. Ct.
1652, 134 L. Ed. 2d 902 (1996)).
The court noted that the preemptive effect of the FAA may extend to grounds traditionally thought to exist at law
or in equity for the revocation of a contract. Agreements failing to provide for judicially monitored discovery
make such agreements appear to be one-sided and tend to exculpate the company. In practice, however,
finding such agreements unenforceable would have a disproportionate impact on arbitration agreements though
it would apply to contracts restricting discovery in litigation as well as arbitration. Similarly, a rule characterizing
arbitration agreements as unconscionable because they are not subject to the Federal Rules of Evidence nor
final disposition by a jury would adversely impact such arbitration agreements where there are neither juries nor
traditional rules of evidence. The court further found that the Discover Bank rule interferes with arbitration since
a switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—informality—thereby
making the process slower, more costly and more likely to generate procedural morass. Class arbitration
requires procedural formality as manifested in the AAA’s rules governing class arbitrations that mimic the
Federal Rules of Civil Procedure for Class Litigation. Class arbitration also greatly increases the risks to the
defendants who are willing to accept the costs of errors in the relatively informal arbitration proceeding because
the risk is limited to the individual dispute. Potential damages to thousands of claimants, however, may make
the risk of such errors unacceptable.
While the Discover Bank holding was limited to consumer adhesion contracts where the damages were small
and there was an allegation of cheating, the court was not persuaded by them. The pervasive adhesive
character of consumer contracts led the court to conclude, “the times in which consumer contracts were
anything other than adhesive are long past.” The limitation to small damages were “toothless and malleable”
(citing Oestreicher v. Alienware Corp., 2009 U.S. App. LEXIS 7259, at *5–*8 (9th Cir. 2009) (unpublished),
where the court found $4,000 sufficiently small). As to the “requirement” that the consumer allege that the
defendant had a scheme to cheat consumers, the court found no limiting effect at all since a mere allegation
would suffice.
The Supreme Court affirmed its fidelity to Concepcion in DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 193 L. Ed.
2d 365, 2015 U.S. LEXIS 7999, 84 U.S.L.W. 4018, 25 Fla. L. Weekly Fed. S 567, 166 Lab. Cas. (CCH)
P61,659 (U.S. 2015): “The Federal Arbitration Act is a law of the United States, and Concepcion is an
authoritative interpretation of that Act. Consequently, the judges of every State must follow it.”
Page 4 of 7
The holding in Concepcion has been viewed as preempting precedent concerning classwide arbitration in both
New Jersey and Pennsylvania in Quilloin v. Tenet HealthSystem Phila., Inc., 673 F.3d 221 (3d Cir. 2012). In
AT&T Mobility LLC v. Smith, 2011 U.S. Dist. LEXIS 125367 (E.D. Pa. 2011), the defendant was one of over a
thousand parties who, represented by the same law firm, filed essentially identical arbitration demands, all
seeking the same non-individualized relief—injunction to preclude the merger. The court noted that the
Concepcion case discussed several hallmarks of class arbitration that are particularly troublesome, such as
undermining the informality of arbitration which makes the process slower and more costly. Moreover, multiple,
functionally identical arbitrations filed by the defendant and others would likely result in a procedural morass
rather than final judgment. The Concepcion opinion was also concerned that absent parties would not be
effectively represented. An arbitrator’s decision would profoundly affect many absent parties’ interests. Finally,
Concepcion teaches that arbitration is poorly suited to the higher stakes of class litigation. Class arbitration
poses greatly enhanced risks to defendants. Faced with only a small chance of devastating loss, they are more
likely to enter into in terrorem (“blackmail”) settlements. The court held that ATTM was likely to succeed on the
merits of its claim that individual arbitration in this fashion constitutes a “form of a representative or class
proceeding” that is banned by the arbitration agreement.
While the Supreme Court has again enhanced its strong support for the enforcement of arbitration agreements
as written under the FAA, the Concepcion holding does not suggest that arbitration agreements prohibiting
classwide arbitration are per se enforceable. Rather, it suggests that such an agreement is not per se
unenforceable. Even more recently, however, the Supreme Court has held that a waiver of class arbitration is
not invalidated simply because the cost of individually arbitrating a federal statutory claim exceeds the potential
recovery from a successful prosecution of such a claim. Am. Express Co. v. Italian Colors Rest., ___ U.S. ___,
133 S. Ct. 2304, 186 L. Ed. 2d 417 (2013). Cf. Feeney v. Dell Inc., 466 Mass. 1001, 993 N.E.2d 329 (2013).
Beyond class action waivers, other provisions in an arbitration agreement may make the agreement
unconscionable. See Barras v. Branch Banking & Trust Co. (In re Checking Account Overdraft Litig. MDL No.
2036), 685 F.3d 1269 (11th Cir. 2012). In general, see § 2 .0 supra, discussing unconscionability in
arbitration agreements.
[3] Forum Selection Agreements

Up until 1950, courts generally refused to enforce forum selection agreements on the footing that courts not
chosen under the agreement were ousted of jurisdiction. In particular, no United States citizen would be
required to litigate in a foreign court, regardless of a provision to that effect in the contract. Even that changed
when the Supreme Court of the United States upheld a provision requiring adjudication in a “London Court of
Justice” under a contract involving an American company. M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92
S. Ct. 1907, 32 L. Ed. 2d 513 (1972). The notion that such agreements oust courts of jurisdiction was relegated
to a fiction as the court warned United States parties against a parochial view that only their courts could
adjudicate disputes in an international marketplace.
This case went a long way in convincing other courts to enforce forum selection clauses. The prevailing view is
stated in Restatement (Second) of Conflict of Laws § 0 “The parties’ agreement as to the place of the action
will be given effect unless it is unfair or unreasonable.” The party resisting the clause has the burden of proving
that it is unfair or unreasonable. See also, O'Keeffe's Inc. v. Access Info. Techs., Inc., 2015 U.S. Dist. LEXIS
141928 (N.D. Cal. Oct. 16, 2015) where the court explained that if a forum selection clause is not invalid due to
fraud or similar reasons, there is an “extremely high bar” to unenforceability.
Bremen recognized two grounds that would make enforcement of a forum-selection clause unreasonable.
First, “[a] contractual choice-of-forum clause should be held unenforceable if enforcement would
contravene a strong public policy of the forum in which suit is brought.” Bremen, 407 U.S. at 15. Second,
“[c]ourts have also suggested that a forum clause even though it is freely bargained for and contravenes no
important public policy of the forum, may nevertheless be “unreasonable” and unenforceable if the chosen
forum is seriously inconvenient for the trial of the action.” Id. at 16.
The party opposing transfer pursuant to a forum selection clause must show that it is unreasonable under the
circumstances. It is unreasonable where: “(1) the inclusion of the clause in the agreement was the product of
fraud or overreaching; (2) the party objecting to the clause would effectively be deprived of his day in court if the
Page 5 of 7
clause is enforced; and (3) the enforcement of the clause would ‘contravene a strong public policy of the forum
in which suit is o ht. Forum selection clauses are also evaluated for fundamental fairness. Specifically,
courts consider the absence of a bad-faith motive, the absence of fraud or overreaching, and notice of the
forum provision. Clause v. Sedgwick Claims Mgmt. Servs., 2016 U.S. Dist. LEXIS 5933 (D. Ariz. Jan. 15, 2016).
See also, Victory Mgmt. Solutions, Inc. v. Grohe Am., Inc., 2015 U.S. Dist. LEXIS 62644 (D. P.R. 2015) (forum
selection clause calling for litigation in Illinois held unreasonable and unjust under Bremen given the
agreement’s close connection with Puerto Rico).
Am. First Fed. Credit Union v. Soro, 359 P.3d 105, 2015 Nev. LEXIS 83, 131 Nev. Adv. Rep. 73 (Nev. 2015)
held the following forum selection clauses were permissive, not mandatory: “Jurisdiction. The parties agree and
submit themselves to the jurisdiction of the courts of the State of Utah with regard to the subject matter of this
agreement.” And: “If there is a lawsuit, Borrower(s) agrees to submit to the jurisdiction of the court in the county
in which Lender is located.”
[4] Choice of Law Provisions

If parties do not express agreement as to the law to be applied to their contract, conflict of laws principles will
govern a court’s choice. It is common for courts to choose the law of the place where the contract was made or
the place where the contract was to be performed as the governing law. Parties, however, may be domiciled in
States A and B; the place of making the contract may be State C, and the place of performance may be State D
and numerous other jurisdictions. To alleviate the uncertainty in determining the applicable law, the parties may
agree on which jurisdiction’s law will apply to their contract. Choice of law provisions are not contrary to public
policy, but the chosen jurisdiction must have some reasonable relation to the parties or the transaction.
Restatement (Second) Conflict of Laws § 1 . Even then, however, if the choice would contradict a
fundamental policy of a jurisdiction with a “materially greater interest” in the transaction, the court should apply
the law of the state with the “materially greater interest.” Id.
Revised Article 1 of the Uniform Commercial Code (UCC) changed this traditional view by permitting merchant
parties to choose the law of a jurisdiction whether or not the transaction bears a relation to the State
designated. At the time of this writing, 30 jurisdictions had adopted the new Article 1, but 29 rejected this
change, prompting an official change in this recommendation.
A conflict in the public policies of the chosen law and the forum state may also override the parties’ selection. A
Wisconsin court considered a contract that contained forum selection and choice of law provisions requiring
adjudication in Ohio where Ohio law would be applied in a case involving the enforceability of a post-
employment restraint of trade. Ohio law permitted selective enforcement or judicial modification of such
restraints, but a Wisconsin statute viewed such restraints as opposed to public policy. The court found that the
choice of law provision violated the public policy of Wisconsin and struck both the choice of law and choice of
forum clauses, leaving the employment agreement to be interpreted under Wisconsin law. Beilfuss v. Huffy
Corp., 274 Wis. 2d 500, 685 N.W.2d 373, 2004 WI App 118.
On the other hand, a court will not deny enforcement of a provision simply because it would not be enforced if
the contract were a local one. Thus, if a contract would be enforced in a French court under the doctrine of
“sufficient cause,” enforcement will not be refused in an American court because of the absence of
consideration.
The scope of the choice of law provision will determine if it encompasses extra-contractual disputes or is limited
to disputes arising out of the contract. For example, a choice of law provision stated: “This Agreement shall be
construed in accordance with, and be governed by, the laws of the State of New York applicable to contracts
made and to be performed wholly within such State, without giving effect to its conflicts of laws provisions.” The
court construing this provision noted that while a broadly worded choice of law provision can extend to extra-
contractual torts between the parties to the contract, this provision was narrow—limited to the contract's
construction and governance—and it did not extend to tort claims. DelMonaco v. Albert Kemperle, Inc., 2014
Conn. Super. LEXIS 2965 (Conn. Super. Ct. Nov. 26, 2014). In contrast, a contractor sued defendant claiming
the latter refused to pay properly billed sums. The contractor sought recovery under a statute governing
payments to suppliers. The court construed the following provision as broadly covering all disputes—even
extra-contractual disputes—involving payment: “Any controversy or claim arising out of or relating to this
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contract, or the breach thereof, including, but not limited to, contract interpretation; scope of work and other
obligations; performance; negligence (including design negligence); warranty; indemnity; payment; or back-
charges, shall be governed, interpreted and construed by, and in accordance with, the laws of the
Commonwealth of Pennsylvania (without regard to principles regarding conflicts of law).” Heyl & Patterson v.
T.E. Ibberson Co., 2015 U.S. Dist. LEXIS 31128 (W.D. Pa. Mar. 13, 2015).
Where a transaction involves a sale of goods between parties whose places of business are in different
countries and those countries are parties to the CISG, the transaction automatically is governed by the CISG.
Thyssenkrupp Metallurgical Prods. GmbH v Energy Coal, S.p.A., 2015 NY Slip Op 31922(U) (2015) involved
parties from Italy and Germany. Both countries are signatories to the CISG. The court noted: “The CISG is a
self-executing treaty; unless parties explicitly opt out of it, it is binding on them . If parties do not want the
CISG to govern their transaction, they must clearly and unequivocally say so in their contract . The court
explained that, as a treaty, the CISG is incorporated into United States federal law and is thus part of New York
law. t ti only that a contract will be governed by a particular jurisdiction's laws is generally insufficient to
opt-out of the CISG when the CISG has been incorporated into that jurisdiction's s . Since the choice of
law provision did not expressly exclude the CISG, the CISG applied.
[5] Agreements Limiting Remedies

The earlier exploration of liquidated damages in Chapter 58 explained the enforcement of agreed damages
clauses that are reasonable in light of anticipated or actual harm and which do not constitute a penalty. Parties
may also agree to limit or forgo certain remedies as well. The parties may agree to exclude specific
performance as a remedy. Courts, however, will not enforce a remedy limitation that is unreasonable so that
there is no fair remedy for a breach.
The UCC allows parties to provide for remedies in addition to or in substitution for those provided for breaches
of contracts for the sale of goods. The buyer’s remedies may be limited to return of the goods and repayment of
the price or to repair and replacement of nonconforming goods. UCC § 2- 1 1 . Unless the parties agree that
the substituted remedy is exclusive, it is construed as optional. UCC § 2- 1 2 .
[6] Agreements Modifying Limitations Periods

Parties may agree to a shorter period of limitations than the period provided by statute so long as the limitation
does not effect a practical abrogation of the cause of action. Courts may establish a minimum threshold. The
UCC allows the reduction of the normal four-year statute of limitations to no less than one year. UCC § 2-
725(1). Axios, Inc. v. Thinkware, Inc., 2015 U.S. Dist. LEXIS 113167, 87 U.C.C. Rep. Serv. 2d (Callaghan) 569
(S.D. Ohio 2015). If the reduction is the product of overreaching in a contract of adhesion, it will not be
enforced. Krohn v. Felix Indus., 226 A.D.2d 506, 641 N.Y.S.2d 77 (1996).
The reasonableness of the limitation will depend upon the facts. For example, a one-year period may be
reasonable for a claim against an insurer relating to uninsured motorist insurance, but it may not be reasonable
if the claim relates to underinsured motorist insurance. The underinsured situation requires time to discover the
tortfeasor’s insurance coverage, the extent of the insurance, and the extent of damages, making the one-year
limitation unreasonable. Worley v. Ohio Mut. Ins. Association/United Ohio Ins. Co., 76 Ohio App. 3d 531, 602
N.E.2d 416 (1991).
Since a principal purpose of a statute of limitations is to avoid bringing stale claims, courts do not enforce
lengthening the statutory period. Agreements to waive the statute of limitations are also deemed to be opposed
to public policy unless the agreement is made after the statute has run.
Practice Resources:
• Corbin § . (agreements to oust courts of jurisdiction); § . (agreements to arbitrate); § .
(forum selection agreements); § . (agreements limiting remedies); § . (agreements
modifying limitations periods); § . (choice of law agreements).
Page 7 of 7

End of Document
§ 3.03 Champerty and Maintenance
[1] Modern Courts Tend to View the Champerty Doctrine with Disfavor
In medieval England, if wealthy John Ames with no interest in a certain litigation nonetheless agreed to pay the
litigation expenses of poor Charles Barnes in exchange for Barnes’s promise to share the recovery of land or
money with Ames, Ames may have been guilty of a misdemeanor. The practice called “maintenance” denoted a
party’s officious intermeddling by paying the expenses of litigation in which the payor had no legitimate interest.
“Champerty” was maintenance plus an agreement that the payor would share in the proceeds of the litigation.
“Barratry” was the offense of continuously stirring up litigation in connection with maintenance and champerty.
All of these offenses were clearly seen as violating public policy.
The early public policy concerns over champertous agreements have been significantly reduced. Criminal
statutes and tort actions have fallen into disuse and some jurisdictions now enforce contracts involving
champerty. In abolishing champerty as a defense, the South Carolina Supreme Court concluded that other
principles of law can prevent speculation in groundless lawsuits or the filing of frivolous claims. Osprey, Inc. v.
Cabana Ltd. Pshp., 340 S.C. 367, 382–383, 532 S.E.2d 269, 278 (2000). A similar view was previously stated
by the Supreme Judicial Court of Massachusetts in Saladini v. Righellis, 426 Mass. 231, 687 N.E.2d 1224
(1997).
Elsewhere, the doctrine against such agreements is applied narrowly by insisting that the alleged champetor
must truly be an officious intermeddler. Thus, where a sister loaned money to her brother to proceed with
litigation in exchange for a share of the proceeds, the court found no officious intermeddling. Kraft v. Mason,
668 So. 2d 679 (Fla. Dist. Ct. App. 1996). Even if the champerty doctrine is not applied, a court may still refuse
to enforce an agreement to pay litigation expenses in exchange for a share of the proceeds on the footing that it
violates the public policy against gambling and speculation in litigation. Wilson v. Harris, 688 So. 2d 265 (Ala.
1996).
[2] Attorneys’ Contingent Fees Are Not Viewed as Champertous

Though agreements for an attorney to share the proceeds of litigation in exchange for legal services would fit a
general definition of champerty, courts have long recognized that such agreements are enforceable. Codes of
professional responsibility allow contingency fees for attorneys only in certain types of cases, and the fee must
be reasonable and it must be evidenced by a writing. Attorneys may not have any proprietary interest in the
cause of action or subject matter of litigation other than a lien to secure the attorney’s fee. A contingency
contract violating rules of ethics would be unenforceable as against public policy. Ethics rules allow attorneys to
advance court costs and the expenses of litigation.
The champerty doctrine obviously does not apply where the alleged champetor has an interest in the subject
matter of the lawsuit. Nor does it apply where money is advanced to pay for litigation expenses as a charitable
gift or as a matter of friendship rather than for the purpose of making a profit from winning a lawsuit.
[3] Effect of Champertous Agreement on Defendant’s Liability

When a plaintiff has been enabled to bring a lawsuit through a champertous bargain with a third party, the
champertous agreement is unenforceable. It is not a defense to the liability of the defendant on the plaintiff’s
cause of action, however. If the plaintiff is an assignee of a claim and the assignment is part of a champertous
bargain, there is a defense against such a champetor.
Page 2 of 3
[4] Effect of Champerty on Attorney’s Right to Compensation

When an attorney entered into a contingent fee agreement in a type of case where such agreements were
champertous, First Restatement of Contracts § precluded any recovery for services rendered by the
attorney. The Restatement (Second) does not retain this rule though some jurisdictions may continue to follow
it. Other courts allow a quantum meruit recovery of the reasonable value of the benefit conferred by the
attorney so as to avoid unjust enrichment by the client. In such cases, courts may apply the distinction between
agreements malum in se and malum prohibitum. (See the discussion in Chapter 79 above.) If the champertous
agreement is deemed only malum prohibitum, a quantum meruit recovery will be permitted.
[5] An Assignment Is Void if It Is Part of a Champertous Bargain

An assignment of a right may result from the purchase of the right, satisfaction of a preexisting debt, or a gift.
To enforce the right, the assignee will have to pay litigation expenses to which no badge of champerty is
attached. Assignments such as the assignment of wages of public officers or the assignment of tort claims,
however, violate public policy as we noted earlier. (See Chapter 47 above.) If an assignment is an inseparable
part of a champertous bargain, a court will not enforce it. If, for example, an assignor assigns a claim and
receives the assignee’s promise to share the proceeds of the litigation, the transaction will be viewed as
champertous and the champertous assignee has no rights against the assignor.
[6] Bargains to Procure Clients and Promote Litigation

In the past, champerty and maintenance often accompanied barratry, the offense of stirring up litigation
between other individuals. In modern times, however, ethics rules forbid attorneys from paying anyone for a
referral or splitting fees with a nonlawyer.
[7] Bargains to Split Fees

A bargain to split fees between the holder of a public office and a party who was instrumental in securing the
first party’s appointment is against public policy because it leads to the use of improper influence and an overall
breach of the public trust.
If a lawyer agrees to share fees with public officials or parties who occupy fiduciary positions with clients for
recommending clients to the lawyer, there is a breach of trust that makes the fee sharing arrangement
unenforceable. Lawyers may not pay nonlawyers for recommending clients. Fee splitting involves an incentive
for a nonlawyer to recommend the services of a lawyer. Thus, lawyers may not split fees with nonlawyers.
Ethics rules for lawyers require a client’s prior consent to fee splitting between lawyers. In one case, prior
consent was not given, and the trial court held that the fee splitting agreement was unenforceable. On appeal,
the court reviewed the criteria to determine whether an agreement violated public policy: the nature of the
subject matter, the extent of the violation, whether the violation was material or only incidental, the strength of
the public policy violation, how far effectuation of the public policy would be defeated by denial of the sanction,
and the seriousness of the forfeiture. Though recognizing that the professional responsibility rule was designed
to protect clients from paying unreasonable fees, but noting that the client had later ratified the fee sharing
arrangement, under these facts, the court concluded that there was no violation of public policy. Saggese v.
Kelley, 445 Mass. 434, 837 N.E.2d 699 (2005).
[8] “Mary Carter” Arrangements

Private settlements of lawsuits are favored in the law. Consider, however, a plaintiff agreeing to settle with one
or more defendants, who then agree to remain in the case, guarantee the plaintiff a minimum recovery
regardless of the outcome, and have their own liability decreased in proportion to the increase in liability of the
non-settling defendants. Such transactions, are known as “Mary Carter” agreements. Booth v. Mary Carter
Paint Co., 202 So.2d 8 (Fla. Dist. Ct. App. 1967). (For a recent illustration of a Mary Carter agreement, see
Nieman v. Interstate Distrib. Co., 2010 U.S. Dist. LEXIS 61870 (D. Or. June 21, 2010)). They tend to promote
rather than settle litigation since the settling defendant typically has the power to reject any settlement with the
Page 3 of 3
non-settling defendants. Moreover, the settling defendants simply change sides in the litigation against the
defendants with whom they were aligned for the sole purpose of securing a substantial judgment for the
plaintiffs and either further reducing or exonerating the settling defendant.
Courts are rightly suspicious or such arrangements and several courts have refused to enforce them because
they are against public policy or because they are champertous. Most courts, however, analyze such
agreements on case-by-case basis.
Practice Resources:
• Corbin § .10 (champerty and maintenance—history); § .11 (present day law of champerty and
maintenance); § .12 (agreements historically not champertous); § .1 (a champertous
bargain with another does not affect the plaintiff’s right against the defendant); § .1 (effect
of champerty on an attorney’s right to reasonable compensation); § .1 (an assignment is
void if it is part of a champertous bargain); § .1 (bargains to procure clients and promote
litigation); § .1 (bargains to split fees); § .1 (Mary Carter assignments).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 84 BARGAINS HARMFUL TO PUBLIC OR
PERFORMANCE OF FIDUCIARY DUTY
CHAPTER 84 BARGAINS HARMFUL TO PUBLIC OR PERFORMANCE OF

FIDUCIARY DUTY
§ .01 o yi Agreements for Influencing Legislative Action
§ .02 ims Against the Government
§ .0 The e Is a Presumption that Contracts Are Legal and Enforceable
§ .0 i s for Services in Procuring Government Contracts
§ .0 i s for Inducing Appointments and Pardons
§ .0 i s to Procure the Location of Railways and Public Buildings
§ .0 i s Varying the Salary of Public Officials
§ .0 i s for the Vote of a Corporate Shareholder
§ .0 i s That Impair the Fiduciary Obligations of Corporate Directors

End of Document
CHAPTER 84 BARGAINS HARMFUL TO PUBLIC OR PERFORMANCE OF

FIDUCIARY DUTY
the subject matter.

End of Document
§ 4.01 Lobbying Agreements for Influencing Legislative Action
The practice of inducing legislation has become a fine art practiced by professional lobbyists. Because this activity
has always been suspect, it has been regulated. The 1946 Regulation of Lobbying Act contained registration and
disclosure requirements, but its ambiguities severely weakened its thrust. In the 1970’s, the Ethics in Government
Act (2 U.S.C. § 01 et seq.) addressed conflict-of-interest issues where the lobbyist is a former government official.
The 1995 Lobbying Disclosure Act (2 U.S.C. § 1 01 et seq.) requires registration and disclosure by organizations
employing lobbyists and by outside lobbyists who are paid for lobbying on behalf of others. Many states have
lobbying legislation.
In the rare cases that have arisen outside such legislation, lobbying contracts have received special scrutiny as
courts recognize that lobbying is often on the cusp of bribery. Any contract that induces a public official to act for
reasons other than the public interest is viewed as questionable and perhaps unenforceable. Lobbying contracts,
however, are not contrary to public policy per se. Indeed, lobbyists who bring information and arguments to
legislators or other public officials perform a service although they are advocates for a cause whose arguments
should never be accepted as conclusive. There are many lawful purposes pursued by lobbyists, including keeping
track of bills introduced, analyzing the content and effect of bills, collecting information on the effect of bills, and
making arguments for and against certain bills. A lobbyist employed for this purpose is entitled to be compensated
for such service and the contract should be enforceable.
If the services rendered by a lobbyist are unlawful or clearly contrary to the public interest, the bargain is
unenforceable. An agreement for the exercise of personal or political influence on a public official may well be
unenforceable; but an agreement to use personal influence to gain access to a public official to whom facts and
arguments can be presented on the merits of an issue is enforceable.
Practice Resource:
• Corbin § .1 (lobbying agreements for influencing legislative action).

End of Document
§ 4.02 Claims Against the Government
An attorney who is to be compensated on a contingent fee basis in representing an individual must resist the
temptation to pursue unethical means to achieve that compensation. When the claim is against the government,
temptations such as improper influence to assure compensation in the form of a share of the proceeds are even
greater. Some cases suggest that contingent fee bargains in cases against the government are invalid, but there
are many cases that enforce such bargains, thereby allowing an impecunious claimant to sue. When a claim is just
and reasonable, a contingent fee agreement to secure a judicial remedy or legislative action to obtain relief will
generally be enforceable.
Practice Resource:
• Corbin § .2 (claims against the government—contingent fees).

End of Document
§ 4.03 There Is a Presumption that Contracts Are Legal and Enforceable
Because contingent fee contracts with lobbyists create such obvious temptations to use improper methods to
achieve legislation for a client, earlier cases often resolved doubt against the lobbyist absent proof that any such
methods were contemplated or used. Modern courts, however, have modified this stance considerably. If
inappropriate methods were in fact contemplated or used, the bargain is not enforced. The presumption, however,
is one of lawfulness. The party opposing enforcement of the contingent fee bargain has the burden of proving that
improper methods were contemplated or used.
It is not improper to bring issues to the attention of legislators and government officials or to advocate a position
concerning legislation or other decisions. Even the use of personal influence to simply secure a hearing where facts
and arguments will be presented is not improper. If a lobbyist agrees to use an improper method such as bribery of
a public official to secure an appropriation or other goal, the agreement is invalid and unenforceable even if the
lobbyist’s honest presentation achieves the desired end without the bribery. If the lobbying contract does not
contemplate any improper methods but the lobbyist’s honest presentation fails and the lobbyist resorts to bribery,
the contingent fee arrangement will not be enforced.
Practice Resource:
• Corbin § . (presumption in favor of legality and enforceability).

End of Document
§ 4.04 Bargains for Services in Procuring Government Contracts
A body of statutes and regulations now surrounds the process of obtaining a contract with the government. These
statutes may expressly prohibit the use of “influence” in procuring contracts. Thus, there is a limitation on use of
appropriated funds to pay any person for influencing or attempting to influence Federal officers, employees or
members of Congress with respect to the awarding of any Federal contract, grant, loan, or cooperative agreement.
31 U.S.C. § 1 2.
A plaintiff assisted the defendant to obtain a contract with the Navy. The defendant refused to pay the plaintiff on
the footing that it was a contract to have the plaintiff influence the Navy in violation of the statute. The burden of
demonstrating the illegality was on the defendant, who proved that the plaintiff claimed inordinate influence over the
allocation of federal funds and naval officers. The court, however, found that these claims were made to make the
plaintiff’s services appear invaluable to the defendant. They were insufficient to constitute a violation of the statute.
The court also noted an exception in the statute for payments made for professional or technical services rendered
in the “preparation, submission, or negotiation” of any proposal for a federal contract, and held that the plaintiff was
entitled to be paid for his services. Imprimis Int’l v. Fraidenburgh, 2007 U.S. Dist. LEXIS 39408 (E.D. Cal. May 31,
2007).
In general, courts honor contracts involving the appropriate use of agents to obtain contracts on their merits. Again,
however, contingent fee contracts with agents are particularly suspect. Since 1941 the federal government has
required any entity contracting with the government to warrant that no party has been employed or retained to solicit
or secure such contracts on a contingent fee basis, but even this requirement exempts agents who are “bona fide
established commercial or selling agencies maintained by the contractor for the purpose of securing business.” 41
U.S.C. § 2 . The purpose of the required warrant is to protect government agencies against corrupting
influences, and the warranty is not necessary if an agent fits within the bona fide exemption category.
Practice Resource:
• Corbin § . (bargains for services in procuring government contracts).

End of Document
§ 4.05 Bargains for Inducing Appointments and Pardons
An agreement by an official or a candidate for office that he or she will sell his or her appointing or pardoning power
for a price is a crime and will not be enforced. When applicants for pardons or parole hire an attorney to aid them in
the preparation, application, and presentation of their parole arguments, such agreements are enforced.
Professional responsibility rules preclude the recovery of contingent fees in criminal matters and a court would
typically regard such rules as an expression of public policy. Contingent fee agreements with agents hired to secure
official action such as reduction in taxes, however, may be enforceable absent the contemplation or use of improper
methods.
Practice Resource:
• Corbin § . (bargains for inducing other forms of administrative action).

End of Document
§ 4.06 Bargains to Procure the Location of Railways and Public Buildings
Bargains with public officers to induce them to use their official powers to cause a road, railway, or public building to
be located to serve a private interest rather than the public interest are not enforceable. They are corrupt practices
that obviously violate public policy. Even if the final location turns out not to harm the public interest, an agreement
influencing official discretion is contrary to public policy. A hired agent, however, may perform lawful services
relating to the location or procurement of roads, railways, and public buildings, and a bargain for such services will
be enforced. Absent a showing of improper conduct, even a contingent compensation in such matters will be
enforced.
Practice Resource:
• Corbin § . 2 (bargains to procure the location of railways and public buildings).

End of Document
§ 4.0 Bargains Varying the Salary of Public Officials
When a public officer or candidate for office agrees to accept payments in excess of the salary or fees prescribed
by law to be paid by members of the public, courts generally regard those agreements as violations of public policy
because they tend to influence public action. There is a recognized exception for officials who perform duties
beyond those required of their office and not inconsistent with their officially prescribed duties.
Courts also refuse to enforce agreements for a salary or fees less than the amounts prescribed by law. Here, the
essential evil is found in allowing a candidate for office to obtain appointment or election or allowing a sitting official
to entrench his or her position, which would sanction the auctioning of such positions to the lowest bidder resulting
in the least effective or efficient government employees. See Lemper v. Dubuque, 24 N.W.2d 470, 474 (Iowa 1946)
(policewoman). In extreme economic situations where public money is limited, courts will honor reduction in salary
agreements for public officials.
Practice Resource:
• Corbin § . (bargains varying the salary or fees of a public official).

End of Document
§ 4.0 Bargains for the Vote of a Corporate Shareholder
Shareholders of a corporation may agree to exercise their voting powers for the election of certain corporate officers
or they may transfer their voting power to a committee or trustee. Agreements by a corporate shareholder to sell
corporate office or management control unaccompanied by the shares that control represents, however, is contrary
to public policy. The shareholder has an obligation to other shareholders.
Courts have not enforced agreements where a shareholder has promised the election or retention of a certain
individual as a corporate officer, that corporate property would be bought or sold, that the corporation would make a
loan, that it would not reduce salaries, or that the shareholder would vote as directed by another. Such bargains
would be enforceable if all of the shareholders consented and there was no fraud on creditors. Moreover, an
agreement to sell one’s shares, albeit contemplating a change in corporate control or in directors, is enforceable.
Practice Resource:
• Corbin § . (bargains for the vote of a corporate shareholder).

End of Document
§ 4.0 Bargains That Impair the Fiduciary Obligations of Corporate

Directors
A court may not honor any contract that violates the fiduciary obligation of a corporate director. Any agreement for
personal gain could cause a director to violate that duty. An agreement by directors acting for their personal interest
rather than the interest of the corporation that they will vote in a particular manner would be unenforceable.
In one case, a plaintiff controlled 17 percent of a corporation for which he also served as chief executive officer and
chairman of the board. He resisted selling the corporation to the defendant until he made a side deal with the
defendant in which he promised to put the corporation up for sale in exchange for $10 million. The corporation was
sold and the defendant refused to pay the $10 million. The plaintiff admitted that he would not have put the
corporation up for sale absent the $10 million agreement. The court held that the agreement was unenforceable
since the plaintiff had committed a classic and egregious breach of the fiduciary duty of a director and corporate
officer. He violated his duty of loyalty requiring him to act in good faith and honest belief that action taken is in the
best interests of the corporation. Roberts v. Fin. Tech. Ventures, L.P., 2007 U.S. Dist. LEXIS 78448 (M.D. Tenn.
Oct. 23, 2007).
Even agreements that do not involve personal gain may violate directors’ fiduciary duties. Hostile takeovers of
corporations sometimes involve “no shop” agreements limiting corporate directors from exploring alternative
transactions that could benefit shareholders. To the extent that such agreements do, in fact, limit directors’ exercise
of their fiduciary responsibilities, they are not enforced.
Practice Resource:
• Corbin § . (bargains that impair the fiduciary obligations of corporate directors).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 85 BARGAINS TO DEFRAUD OR OTHERWISE
INJURE THIRD PERSONS
CHAPTER 85 BARGAINS TO DEFRAUD OR OTHERWISE INJURE THIRD

PERSONS
§ .01 i s to Defraud Others Will Not Be Enforced
§ .02 i s Involving Breach of Trust
§ .0 i s for a Conveyance in Fraud of Creditors
[1]A Transfer by a Debtor Made with the Intent to Defraud Creditors Is Void Against the Creditors
[2]Effect of Conveyance Under a Fraudulent Bargain
[3]Enforcement of Transferee’s Promise by Precluding Evidence of Fraud
[4]Parties to the Transfer May Not Share Equal Fault
§ .0 i s by a Creditor for a Preference over Other Creditors
§ .0 eeme ts to Suppress Competition Among Bidders
§ .0 i and By-Bidding at Auctions
§ .0 i s to Induce a Breach of Contract with a Third Person
§ .0 i s to Indemnify Against Consequences of Tort or Criminal Action
§ .0 i s for Exemption from Liability for Negligence
[1]A Party May Agree to Exempt Another Party from Tort Liability if That Liability Results from Ordinary
Negligence
[2]Courts Have Not Enforced Exculpatory Agreements if the Party Who Is Released from Liability
Renders a Public Service
[3]Contracts of Adhesion
[4]Strict Construction of Exculpatory Provision
[5]Limitation of Liability
§ .10 ect of Sham Bargains to Deceive Third Persons

End of Document
CHAPTER 85 BARGAINS TO DEFRAUD OR OTHERWISE INJURE THIRD

PERSONS
the subject matter.

End of Document
§ 5.01 Bargains to Defraud Others Will Not Be Enforced
Fraud has an impact on contractual matters in several ways. Chapter 28 explored fraudulent representations
inducing another to assent to a bargain; fraud provides the innocent party with the power to avoid the contract. In
another situation, parties contract to defraud one or more third parties. In general, such agreements violate public
policy and will not be enforced. Thus, where two parties to a will make a contract that would deprive a legatee of
part of the estate, the contract will not be enforced because it is against public policy. Kopasz v. Wymer, 118 Cal.
App. 2d 119, 257 P.2d 707 (1953).
In some instances, the contract, itself, may constitute a tort or even a crime, but it will not be enforced even when it
is neither tortious nor criminal. Agreements to affect the market price of shares of stock will be unenforceable as will
agreements not to make disclosures of damaging facts about a corporation if it is designed to promote the sale of
corporate shares. In one case, a well-known entertainer allegedly requested a party to write a book that would be
published under the entertainer’s name and the parties would share the profits equally. The court held that the
agreement was void as against public policy. It noted that “palming [the book] off under the false pretense that it is
his own” was distinguishable from writing a book under non de plume since such books are actually written by the
party using the pen name. Roddy-Eden v. Berle, 202 Misc. 261, 108 N.Y.S.2d 597 (Sup. Ct. 1951). Bargains to
deceive third persons through misrepresentations are unenforceable regardless of whether any third person was
actually deceived.
The myriad forms of fraud are impossible to enumerate since new schemes appear on a regular basis. The sections
that follow illustrate the kinds of agreements that may be deemed unenforceable because of their effect on third
persons.
Practice Resource:
• Corbin § .1 (bargains for the purpose of defrauding others).

End of Document
§ 5.02 Bargains Involving Breach of Trust
If a trustee or other fiduciary enters into an agreement that may compromise the trustee’s fiduciary duties, the
agreement is unenforceable. A bargain between a corporate officer and a third party that the officer would receive
compensation if the corporation merged with the third party was unenforceable because it encouraged the officer to
place his own interests above the interests of the corporation he was obligated to serve, regardless of the absence
of any provable injury to the corporation or its shareholders. Geller v. Allied-Lyons PLC, 42 Mass. App. Ct. 120, 674
N.E.2d 1334 (1997). Even an agreement to affect other fiduciaries will be unenforceable as where a sale agent’s
employment included “bonuses” to be used to attempt to bribe purchasing agents of other companies in breach of
their fiduciary obligations. Smith v. David B. Crockett Co., 85 Conn. 282, 82 A. 569 (1912). If such agreements
occurred with purchasing agents, they would clearly be unenforceable. There is a fiduciary relationship between an
agent and a principal. Any bargain under which an agent is promised extra compensation for personal advantage
for advising or influencing the principal is fraudulent and cannot be enforced. See S.E.L. Maduro (Florida), Inc. v.
M/V Santa Lucia, 116 F.R.D. 289 (D. Mass. 1987). In some jurisdictions such “commercial bribery” is tortious and in
others it is criminal, but it need not be tortious or criminal to make the bargain unenforceable.
Practice Resources:
• Corbin § .2 (bargains involving breach of trust); § . (bargains of an agent in fraud of the principal).

End of Document
§ 5.03 Bargains for a Conveyance in Fraud of Creditors
[1] A Transfer by a Debtor Made with the Intent to Defraud Creditors Is Void Against the Creditors
Bargains in fraud of creditors are among the most common bargains made to defraud third parties. Centuries
ago, the Statute of 13 Elizabeth was the first statute proscribing fraudulent transfers of property made to hinder,
delay, or defraud creditors. Such transfers were deemed null and void as against creditors.
The modern replacement of that statute is the Uniform Fraudulent Transfer Act (UFTA). It was originally
enacted in 1918; the 1984 revised version has been enacted in 44 jurisdictions. The UFTA continues the
original purpose in declaring transfers void as against present or future creditors if the debtor made the transfer
“with actual intent to hinder, delay, or defraud any creditor of the debtor.” UFTA § 1 . UFTA § provides
a non-exhaustive list of factors relevant to determining actual intent: whether the transfer was to an insider;
whether the debtor retained control of the property after the transfer; whether the transfer was disclosed or
concealed; whether the debtor was sued or threatened with suit before the transfer was made or obligation
incurred; whether the transfer involved substantially all of the debtor’s assets, and whether the debtor
absconded or removed or concealed assets.
The UFTA, however, adds another dimension: a transfer is also fraudulent as to creditors if the debtor did not
receive a “reasonably equivalent value” in exchange for the transfer and the debtor was engaged or about to
engage in a business or transaction for which the debtor’s remaining assets would be unreasonably small, or
the debtor intended to incur or believed that he or she would incur debts beyond his or her ability to pay as they
became due. UFTA § 2 . The federal bankruptcy act also protects creditors against fraudulent transfers.
Thus, a trustee in bankruptcy may avoid transfers that are voidable under state fraudulent transfer law. 11
U.S.C. § . Section 548 also allows the avoidance of fraudulent transfers made within one year of the filing
of the petition in bankruptcy.
Courts often state that the debtor-transferor is not entitled to any equitable relief because that party does not
come into court with clean hands. Such a rationale allows the parties to be left where they are. The transferee
is not compelled to hold any transferred property in trust or to reconvey the property. Such a broad
generalization, however, ignores varying circumstances that may suggest that a remedy should be granted in a
given case.
The UFTA characterizes certain types of transfers as fraudulent and avoidable by creditors absent any intention
to defraud. UFTA § 2 . The purpose of the statute is to protect creditors and not to invalidate the
agreement between the debtor and the transferee. As suggested in Corbin, courts should not deprive a debtor
transferor of a remedy against the transferee absent an actual purpose to defraud.
Many courts suggest that, where a debtor transfers property to another to protect the property from creditors
and the transferee promises to reconvey it, if the debtor bases a claim for rescission on the fraudulent nature of
the transaction, the debtor will lose. If the debtor merely asks the court to enforce the transferee’s promise to
reconvey without mentioning the fraudulent purpose, the debtor should prevail. Like other mechanical rules, this
rule fails to consider a number of important factors, such as the mores of the time, the character of the
impropriety, the comparative fault of the parties, and the effect of refusing a remedy in proportion to the harm
done.
[2] Effect of Conveyance Under a Fraudulent Bargain

Page 2 of 2
If a bargain in fraud of creditors is wholly executory, a court should not enforce either party’s promise. If the
fraudulent transfer has been fully executed, the result of the parties’ bargain stands as between themselves.
Adjudicated bargains, however, are rarely executory or fully executed. The paradigm is the case involving a
transfer by the debtor to protect property against creditors, who then seek a remedy against the transferee who
refuses to return it. The debtor, who does not wish to reveal unclean hands, will often seek relief by simply
alleging that the transferee holds property belonging to the debtor and asking the court to declare that the
transferee is holding the property as a constructive trustee for the debtor. Courts will almost invariably detect
such unclean hands and reject the debtor’s prayer for relief. No thought is given to the amount of forfeiture
suffered by the debtor. If the creditors do not follow the property into the hands of the transferee, the transferee
may keep it. If they do follow it into the transferee’s hands, they are only entitled to the value of their debt, and
the transferee retains the balance. If the debt is greater than the value of the transferred property, the
fraudulent conveyance statutes typically grant the transferee a credit for value given to the debtor.
[3] Enforcement of Transferee’s Promise by Precluding Evidence of Fraud

While fraud is an evil, denying any remedy to the debtor transferor, regardless of the circumstances, may
unjustly enrich the transferee while causing a disproportionate forfeiture for the transferor. It is sometimes
suggested that while the fraudulent transfer is voidable by creditors, the bargain between the transferor and the
transferee is valid. That statement, however, rings hollow since the transferor may not generally enforce the
express or implied promise by the transferee to return the property. If the debtor-transferor may not rely on its
own fraudulent purpose to avoid the contract it made with the transferee, a court may hold that neither should
the transferee be able to rely on a fraud in which the transferee participated to avoid its obligations under the
contract. See Bouton v. Beers, 78 Conn. 414, 62 A. 619, 620 (1905).
[4] Parties to the Transfer May Not Share Equal Fault

Where the parties to a fraudulent transfer are not equally at fault (not in pari delicto), a court may grant relief to
a transferor whose fault is less than the transferee. Such cases typically occur where the transferee has
induced a transfer by fraud, duress or undue influence or otherwise took a leading role in the transaction. Cf.
Arcidi v. NAGE, Inc., 447 Mass. 616, 856 N.E.2d 167 (2006). When a transferee takes advantage of weakness,
fear, or inexperience, courts may grant relief to a transferor who has done wrong.
Practice Resources:
• Corbin § . (bargains for a conveyance in fraud of creditors—equity, common law, and modern
statutes); § . (transfers voidable by creditors even though no actual purpose to defraud—
effect on enforcement of the bargain by the debtor); § . (does enforcement by the debtor
depend on which party proves the fraudulent nature of the bargain?); § . (statute of frauds
no defense as against a trust by operation of law); § . (effect of conveyances and other
performance under the fraudulent bargain); § . (denial of all remedy is variable in effect and
often unjust); § .10 (enforcement of transferee’s promise by preventing the transferee from
asserting the fraudulent nature of the transaction as a defense); § .11 (enforcement of
restitution when the transferor is in greater fault or the intended fraud is not actually
consummated); § .12 (consistency with statements of the law of trusts).

End of Document
§ 5.04 Bargains by a Creditor for a Preference over Other Creditors
It is not a fraudulent transfer when a debtor pays one creditor in full despite the fact that the debtor does not have
sufficient funds to pay all of its other creditors. Under the federal bankruptcy law, however, it is a preferential
transfer that may be set aside. 11 USCS § allows a trustee in bankruptcy to avoid a transfer made within 90
days preceding the filing of the petition in bankruptcy. If the transfer is to an “insider,” the time is extended to one
year preceding bankruptcy. The Uniform Fraudulent Transfer Act also allows a transfer to an insider to be avoided.
The definition of “insider” is found in § 1 which is consistent with the bankruptcy code. Different descriptions of
an insider under this definition are suggested for individuals, corporations and partnerships.
If the debtor has made a secret bargain with one or more creditors while leading others to believe that all creditors
are being treated equally in a workout or similar agreement, such a preference is fraudulent and the workout
agreement is voidable. A bargain with a creditor who, for consideration, secretly agrees to withdraw opposition to
the discharge of a debtor in bankruptcy is a fraud on other creditors.
Practice Resource:
• Corbin § .1 (bargains by a creditor for a preference over other creditors).

End of Document
§ 5.05 Agreements to Suppress Competition Among Bidders
Agreements to suppress competitive bidding for contracts at auction sales or otherwise are species of agreements
in restraint of trade. Courts find these agreements to be against the public interest in the prevention of fraud even if
only one party is affected in a private sale. If there is a sale of public property or competitive bidding in a public
construction project, the same evil is exacerbated. While the suppression agreement itself is not enforceable, the
innocent third party may avoid the fraudulently bid contract if he or she so desires. If independent contractors
combine resources to make a single bid that no one of the contractors could have otherwise made, the agreement
is enforceable since it enhances competition.
Practice Resource:
• Corbin § .1 (agreements to suppress competition among bidders).

End of Document
§ 5.06 Puffing and By-Bidding at Auctions
At an auction sale, the seller has a right to assume that bidders will not conspire to chill the bidding. Bidders have
the right that the seller will not puff up the price with false bids. An agreement under which a seller employs a puffer
or by-bidder is a fraud on bona fide bidders. Where the seller expressly reserves the right to bid at the auction,
other bidders are not misled. In an auction sale of goods, absent such a notice from the seller, where the auctioneer
receives the seller’s bid which is negated by a higher bona fide bid, the buyer may avoid the sale or take the goods
at the last good faith bid prior to the completion of the sale. Uniform Commercial Code (UCC) § 2- 2 .
Where an auction was announced to be without reserve but the auctioneer had previously agreed to a $10,000
reserve on the owner’s painting, to assure that the painting would not be sold below the reserve price, the
auctioneer proposed a private agreement with another professional auctioneer to bid, if necessary, to achieve that
result. The second auctioneer entered a bid at $9,500. The owner gestured to the auctioneer that he was waiving
the reserve, but the auctioneer may not have been aware of that intention. There were no further bids and the
auctioneer announced that the painting was sold. When the owner was told that no actual sale had been made, he
filed a complaint with the state board of auctioneers who found that the bidder had engaged in unprofessional or
dishonorable conduct. The bidder claimed that UCC § 2- 2 permits an auction participant to bid on the seller’s
behalf. Assuming this interpretation is correct, the court found that it was of no assistance to the bidder since the
owner of the painting did not bid on his own property or procure such a bid. Rather, the auctioneer procured the bid
without the owner’s knowledge or consent and without notice to other bidders at the auction. Appeal of French, 162
N.H. 223, 27 A.3d 659 (2011).
Another disapproved tactic is “sharp bidding,” where a closed (confidential) bid is in the form of a certain dollar
amount “in excess of the highest bid.” Such a bid is designed to make all other bids ineffective, guaranteeing the
sharp bidder’s victory. It has a chilling effect on competition. See Short v. Sun Newspapers, Inc., 300 N.W.2d 781
(1980).
Practice Resource:
• Corbin § .1 (puffing and by-bidding at auctions).

End of Document
§ 5.0 Bargains to Induce a Breach of Contract with a Third Person
If without cause, Ames intentionally induces Barnes to breach a contract with Carr, and to enter a new contract with
Ames, Ames commits a tort, and Ames’s agreement with Barnes is unenforceable as against public policy. Ames,
the inducer, commits the tort. Barnes, the induced party, has not committed a tort, but Barnes’s bargain with the
tortfeasor is unenforceable. If a party has already repudiated a contract, there is no tort involved in entering into a
contract with another party. If the original contract included a power of termination, inducing a party to exercise such
a power is not tortious since the exercise of that power is within the sole discretion of the party holding it. A court
may apply the same analysis when the contract was unenforceable because of the statute of frauds or when a
contract is voidable because of infancy or other lack of capacity.
Practice Resource:
• Corbin § .1 (bargains inducing breach of contract with a third person).

End of Document
§ 5.0 Bargains to Indemnify Against Consequences of Tort or Criminal

Action
Courts treat any agreement indemnifying a party for the consequences of criminal or tort activity with great
suspicion. A promise of indemnity will be against public policy if the promise is given with the purpose of inducing
criminal or tortious action. Thus, a promise of indemnity to a public officer to breach his or her duty in arresting or
not arresting a party would be unenforceable. A promise to indemnify a party against an intentional breach of trust
or breach of contract would also be unenforceable. A promise of indemnity made to a party who believes that his or
her action is lawful although there is some risk that it may be unlawful is enforceable. For example, a promise made
to indemnify a printer against libel is enforceable if the material is printed in good faith on the assumption that the
material is not libelous. If, however, the printer is aware that the material is libelous, the printer may not enforce the
indemnification promise.
In relation to the April 20, 2010 explosion and fire of an oil rig that discharged millions of gallons of oil into the Gulf
of Mexico, Transocean moved for partial summary judgment on the footing that its contract with BP required BP to
indemnify Transocean from claims of liabilities even if the pollution was caused by Transocean’s gross negligence
as contrasted with indemnity against intentional or willful misconduct in excess of gross negligence. BP claimed that
indemnity clauses purporting to include gross negligence are void as against public policy. The court noted that an
indemnity does not release a party from liability but simply shifts the source of compensation. Discovering no
controlling case law or distinguishing precedent that could be viewed as precluding the enforceability of an
indemnity against gross negligence, the court weighed reluctance to encourage misconduct by permitting the
wrongdoer to be indemnified against a refusal to enforce an indemnity clause that could result in an injured party
not being compensated. It concluded that the indemnity provision in the contract with BP was enforceable, but BP
did not owe Transocean indemnity for any punitive damages for which Transocean may be liable. Nor did BP owe
Transocean indemnity for civil penalties under the Clean Water Act (33 U.S.C. § 1 21 . In re Oil Spill by the
Oil Rig, 841 F. Supp. 2d 988 (E.D. La. 2012).
Practice Resource:
• Corbin § .1 (bargains to indemnify against consequences of criminal or other wrongful action).

End of Document
§ 5.0 Bargains for Exemption from Liability for Negligence
[1] A Party May Agree to Exempt Another Party from Tort Liability if That Liability Results from Ordinary
Negligence
The general rule is that an agreement to exculpate a party from tort liability resulting from a party’s own ordinary
negligence is enforceable, but not from a party’s gross negligence, recklessness, or intentional conduct.
Restatement (Second) of Contracts § 1 . See Brooten v. Hickok Rehab. Servs., LLC, 348 Wis. 2d 251, 831
N.W.2d 445, 2013 WI App 71. The great majority of jurisdictions view “recklessness” as akin to intentional
conduct. Tayar v. Camelback Ski Corp., 616 Pa. 385, 47 A.3d 1190 (2012). This general rule, however, does
not apply to certain types of contracts discussed below. The rule that an indemnity against a party’s gross
negligence is not enforceable must also be distinguished from a waiver of subrogation under an insurance
policy. When the Abacus bank suffered losses in a robbery, it claimed that Diebold was guilty of gross
negligence in its security duties. Diebold raised a clause in the contract under which the bank was required to
obtain insurance against such losses and further provided that Abacus would look solely to its insurer to cover
losses in the event of theft (a subrogation waiver). While continuing the usual distinction between indemnity for
ordinary versus gross negligence, the court upheld the subrogation waiver which, in effect, simply requires a
party to provide insurance. By allocating the risk of loss to the insurer, no party is left uncompensated. Abacus
Fed. Sav. Bank v. ADT Sec. Servs., Inc., 18 N.Y.3d 675, 944 N.Y.S.2d 443, 967 N.E.2d 666 (2012).
Indemnity agreements that promise to save another party harmless from third losses or liability are not
controversial when the losses or liability are attributable to the indemnifying party. Such promises are typically
express, but some courts hold they may by implied. Frabizzio v. Hendry, 2015 Del. C.P. LEXIS 63 (2015)
(contract to indemnify may be inferred from parties’ conduct, e.g., where they buyer of gems has an on-going
professional relationship with a lab that appraises stones). Sometimes express indemnity provisions are drafted
so broadly that courts hold they are triggered not just by third party claims but by losses suffered by one of the
parties to the contract. Starbrands Capital LLC v. Original MW Inc., 2015 U.S. Dist. LEXIS 121454 (D. Mass.
2015).
[2] Courts Have Not Enforced Exculpatory Agreements if the Party Who Is Released from Liability
Renders a Public Service
When the released party provides a public service, courts have not enforced exculpatory agreements. The
classic illustration is the common carrier. A provision exculpating the carrier or its servants is contrary to public
policy because it lowers the standard of care below the standard required by the public interest. When
passengers ride on free passes or when the carrier otherwise receives no compensation for the public service,
an exculpation of negligence will be upheld.
Beyond common carriers, whether a party fits the public service category will typically be determined by the
following factors:
(1) whether the business is of a type generally suitable for public regulation;
(2) the importance of the service to the public;
(3) whether the party performing the service holds itself out as willing to perform for any member of the
public or any member within established standards;
Page 2 of 3
(4) whether the nature of the service and economic setting create decisive superior bargaining power for
the service provider;
(5) whether the superior bargaining power is exercised through contracts of adhesion that do not permit the
removal of the exculpatory clause for an additional fee;
(6) whether those who seek the service are placed under the control of the provider, thereby becoming
subject to the risk of carelessness by the provider.
These factors were first listed in Tunkl v. Regents of University of Cal., 60 Cal. 2d 92, 32 Cal. Rptr. 33, 383
P.2d 441 (1963) and have been repeated in numerous cases. See, e.g., Chauvlier v. Booth Creek Ski Holdings,
Inc., 109 Wn. App. 334, 35 P.3d 383 (2001), citing Wagenblast v. Odessa School Dist., 110 Wn.2d 845, 758
P.2d 968 (1988).
A public school required students and parents to agree to an exculpatory provision to allow students to play
interscholastic athletics, and the court found all six factors present. The exculpatory provision was contrary to
public policy. Wagenblast, id. A hospital, house inspection service, or even an automobile repair service may
constitute a public duty, but a ski resort or a service providing recreational boats are not within the “public
service” category that would preclude a clause exculpating the provider’s ordinary negligence.
Courts tend to enforce exculpatory clauses in recreational activities, particularly risky activities such as car
races, snow skiing, skydiving, roller skating, and ice skating. Banking services are viewed as public service
oriented, precluding the enforceability of exculpatory provisions. Exculpatory provisions in employment
contracts may be prohibited by statute, but even in the absence of a statute, the common law rule precludes
their enforceability. See Restatement (Second) of Contracts § 1 2 . Leases may exempt lessors from
liability for harm caused by the negligence of the landlord or the landlord’s employees.
[3] Contracts of Adhesion

Even where exculpatory clauses are permitted, courts are particularly concerned that parties agreeing to such
exculpations from liability be fully informed by sufficiently clear and conspicuous language that they are
surrendering an important right. Standard printed forms may not sufficiently call attention to the exculpating
provision or otherwise apprise the party of its meaning. Whether an exculpatory release is effective is a
question for the court to decide. The release should be clear, unambiguous, and both physically and
substantively conspicuous. Brooks v. Timberline Tours, 127 F.3d 1273 (10th Cir. 1997).
[4] Strict Construction of Exculpatory Provision

In many courts, the strict construction of provisions exempting a party from liability for ordinary negligence will
not be satisfied by the use of general language. Where a limitation of liability clause purports to relieve the
defendant of even intentional misconduct, it will be deemed unenforceable as a violation of public policy. See,
e.g., All Bus. Solutions, Inc. v. NationsLine, Inc., 629 F. Supp. 2d 553 (W.D. Va. 2009). In another case, a
provision stated:
I agree to assume all liability for myself without regard to fault . I further agree to hold harmless
Swimfest Fitness Center or any of its employees for any conditions or injury that may result to myself while
at the Swimfest Fitness Center.”
The court found the waiver to be unenforceable because the language was overly broad in that “fault” includes
both ordinary negligence and intentional or reckless conduct. Although precedent did not require the term
“negligence” to be used, the court noted that it would have been helpful. Atkins v. Swimwest Family Fitness
Ctr., 2005 WI 4, 277 Wis. 2d 303, 691 N.W.2d 334. A number of cases in other jurisdictions require such
provisions to express the exculpation of the actor’s “negligence.”
[5] Limitation of Liability

Limitation of liability clauses are commonly enforced by modern courts. Even where exculpating provisions are
not permitted because of the nature and importance of the public service, common carriers and other providers
of such services may limit their liability for negligence so long as the basic rate is reasonable and the party
Page 3 of 3
contracting for the service is given a choice between two forms of liability and different reasonable rates for
each form.
In an action to recover damages to reenter data which had been erased during the installation of new software,
the defendant raised a clause in the contract that excluded consequential damages. On appeal, the plaintiff
argued strict liability under § 02 of the Restatement (Second) of Torts, which includes a comment stating that
it is not affected by any disclaimer or other agreement. While agreeing that parties to a contract may not
generally exempt a seller from strict liability for harm to a user or consumer, the court cited § 1 of the
Restatement (Second) of Contracts stating that such an exemption is enforceable if it is fairly bargained for and
consistent with the policy underlying strict liability. Finding no gross negligence or reckless conduct, the court
upheld the limitation of liability clause. Blaisdell v. Dentrix Dental Sys., 2012 UT 37, 284 P.3d 616.
Practice Resource:
• Corbin § .1 (bargains for exemption from liability for negligence).

End of Document
§ 5.10 Effect of Sham Bargains to Deceive Third Persons
When parties execute a writing that purports to evidence a contract and the parties’ purpose is to deceive or
defraud a third person, the writing does not evidence a contract between the defrauding parties. Parol evidence
should be admissible to prove that the purported bargain was a sham. If the third party in good faith relies to its
detriment on such an instrument, that party may enforce it under an estoppel theory. If performance has occurred in
accordance with the sham agreement, a promise to reconvey will not be enforceable if the plaintiff is in pari delicto.
Practice Resource:
• Corbin § .1 (effect of a sham bargain intended only to deceive others).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 86 WAGERING BARGAINS
CHAPTER 86 WAGERING BARGAINS
§ .01 ei Agreements Are Aleatory Contracts That Generally Are Not Enforced
§ .02 ect of Public Policy on Legal Operation of Wagering Bargains
§ .0 o ci Wagering Debts
§ .0 otte ies and Betting Pools
§ .0 ec ti e Investment Distinguished from Wagering
[1]Investing in a New Business Is Not a Wager
[2]Futures Contracts
[3]Hedging Contracts Are Valid
[4]Option Contracts
§ .0 omises to Pay a Specified Price on the Occurrence of an Uncertain Event
§ .0 e i Short
§ .0 e to y Commercial Bargains
§ .0 e to y Contracts of Indemnity Are Not Wagers

End of Document
CHAPTER 86 WAGERING BARGAINS
the subject matter.

End of Document
§ 6.01 Wagering Agreements Are Aleatory Contracts That Generally Are Not
Enforced
Aleatory contracts contain a promise that is conditioned on the occurrence of a fortuitous event that may never
occur. For the performance that is conditionally promised, there is no agreed equivalent exchange. The paradigm
aleatory contract is the insurance contract where the insurance company promises to pay if the insured sustains a
certain loss due to a fortuitous event such as fire, flood, tornado, or other event that may never occur. The
consideration paid for the assumption of such risk by the insurer is not an agreed equivalent. After paying a
premium of $2,000, the casualty event may occur causing a loss of $200,000 for which the insurance company will
be liable. Contracts of insurance are enforced as clearly promoting public policy.
Wagering or gambling contracts are also aleatory contracts, but they are not enforceable unless they are within the
legally recognized gambling statutes of a given jurisdiction. Like all aleatory contracts, wagering contracts include a
promise conditioned on a fortuitous event that may never occur and there is no agreed equivalent exchange. Unlike
enforceable aleatory contracts, however, wagering contracts contain a third element that makes them hostile to
public policy. The risk to a party in a wagering agreement is created by the wager itself.
When a homeowner pays premiums for fire and other casualty insurance on her home, she is paying the insurer to
assume her pre-existing risk. She has an insurable interest in the property. If a stranger takes out a casualty
insurance policy on the same home, however, he has no pre-existing risk to transfer. He had no prior interest in the
property. He is simply betting that the house will suffer a casualty that will require the insurer to pay him much more
than the premiums he has paid on the casualty policy. He is assuming a risk that was created by the agreement
itself since he had no such risk prior to making the agreement. Such a bet is a wagering agreement that will not be
enforced. Similarly, where a life insurance policy is acquired without a substantial economic interest in having the
life, health or bodily safety of the insured continue as contrasted with an interest that would arise only by the death
or disabling injury of the injured, it is a “wager policy” that is against public policy. Sun Life Assur. Co. v. Moran,
2009 U.S. Dist. LEXIS 76289 (D. Ariz. Aug. 11, 2009).
Among other public policy reasons why wagering agreements are not enforced, betting that another house will
suffer a fire or other casualty may induce more than mere hope that such an event occurs. Betting on a baseball
game or other athletic contest may induce efforts to assure the result that the wagerer desires.
Although the early common law contained reports of cases where wagering contracts were enforced, it gradually
manifested a negative view of gambling as frivolous and counterproductive to human welfare. Jurisdictions within
the United States have viewed gambling with disfavor. It may be prohibited under a state constitution and many
states have criminalized gambling. All states had a generic public policy opposed to it on the footing that it
promoted shiftlessness, poverty, and immorality.
The mores of society have changed, but the proliferation of legalized gambling through lotteries, horse racing,
casinos, and other forms are still officially viewed as exceptions to the general rule. Courts, however, have difficulty
denying that substantial modifications of the underlying policy concerning the morality of gambling have occurred. In
a case involving the sharing of the proceeds of a winning lottery ticket, the court stated that it made no sense to
hold that denying recovery would serve the public interest when the jurisdiction “is spending money to encourage
people … to gamble on the Lottery in order to serve the public policy behind the Lottery.” Pearsall v. Alexander,
572 A.2d 113, 116 (D.C. 1990).
Page 2 of 2
Practice Resources:
• Corbin § .1 (when is an aleatory agreement a wagering or gambling agreement?); § .2 (insurance
contracts and wagers); § . (statutory and common law bases of the public policy against wagers).

End of Document
§ 6.02 Effect of Public Policy on Legal Operation of Wagering Bargains
Unless it is specifically authorized by law, a wagering contract will not be enforced. The winner of a bet cannot
recover against the loser even if the wager is not a crime in the jurisdiction. Where parties purchase lottery tickets in
a jurisdiction encouraging their sale, an agreement to share the proceeds of a winning ticket in another jurisdiction
may not be enforceable, although some courts would enforce such an agreement.
When a party has lost a bet and paid the winner or paid a stakeholder who paid the winner, the general rule is that
the winner may keep the gains, although some states would allow the loser to recover the losses against the
winner. Such a recovery may be limited to certain classes of wagering bargains. The loser typically has no quasi
contractual right against the winner. When a loser is allowed to recover his loss, courts typically refuse to allow the
winner to set off prior losing bets against such losses.
If a principal entrusts money to an agent or trustee for non-gambling purposes but the agent or trustee gambles and
loses the money, courts may allow the principal to recover against the winner for money received.
In some instances, a third party holds the amounts wagered and is directed to pay the winning party. If the
stakeholder follows that order and pays the winner, the stakeholder is not liable. If, however, either party clearly
announces its withdrawal from the bet and demands repayment of the bet in the hands of the stakeholder, the
amount must be returned. If the losing party demands a return of its money before the stakeholder pays the winner,
the stakeholder must return the loser’s money. Restatement (Second) of Contracts § 1 cmt. b. If the stakeholder
pays the winner after a demand for the loser’s share, the stakeholder is liable to the loser. Where the wager is a
criminal offense, there are some cases holding that the loser will be entitled to no relief against the stakeholder.
A stakeholder who agrees for compensation to hold stakes or a broker who renders services in negotiating
wagering contracts are assisting in an improper activity and courts will not assist them in recovering promised
compensation for their services. A broker who in good faith without knowledge that he is rendering services to
facilitate a wager can obtain a judgment for his services and for any principal he may have advanced. Historically,
operators of “bucket shops” were conducting wagers on the future prices of commodities. Such contracts were
unenforceable. Any commissions or other compensation earned with respect to bona fide transactions on a
sanctioned exchange, however, are enforceable.
Practice Resources:
• Corbin § . (effect of public policy upon the legal operation of a wagering bargain—enforcement by
winners); § . (effect of public policy upon the legal operation of a wagering bargain—enforcement
by losers and others); § . (effect of public policy upon the legal operation of a wagering bargain—
rights of stakeholders); § . (compensation of stakeholders and brokers who negotiate wagers).

End of Document
§ 6.03 Enforcing Wagering Debts
Contracts representing gambling loans have been unenforceable since the Statute of Anne, 9 Anne. c. 14 (1710). A
loan made with the purpose of assisting a party to gamble is unenforceable as against public policy. In states
prohibiting gambling, courts naturally refused to enforce contracts for gambling loans. Since 1983, however,
Nevada has enforced such contracts and the proliferation of legalized gambling in other jurisdictions has clouded
the issue of whether a court will enforce a gambling loan. Nevada (Nev. Rev. Stat. § . and New Jersey (N.J.
Rev. Stat. § 12-101) have statutes permitting the enforcement of contracts for gambling loans.
Some jurisdictions with legalized gambling continue to have statutes stating that gambling contracts are void, and
courts in such jurisdictions may refuse to enforce gambling debts on that basis. Though recognizing the erosion of
public policy against all forms of gambling, other jurisdictions may still regard gambling on credit to be clearly
against public policy. A California resident wrote checks in a Nevada casino, lost the chips purchased with the
checks, and stopped payment on the checks. A California court would not allow a recovery on the debt since the
enforcement of gambling loans was against the public policy of California. The court noted that if a judgment on this
debt had been obtained in Nevada, California would have given full faith and credit to the judgment notwithstanding
the California public policy concerning the enforcement of gambling loans. Metropolitan Creditors Service v. Sadri,
15 Cal. App. 4th 1821, 19 Cal. Rptr. 2d 646, 651 (1993). See Holiday Casino, Inc. v. Breedwell, 581 So. 2d 474
(Ala. 1991).
Practice Resource:
• Corbin § . (lending money—enforcing wagering debts).

End of Document
§ 6.04 Lotteries and Betting Pools
A lottery is a wager, regardless of the purpose for which the wagered money is to be used. It is a wager if
conducted by a church, a hospital, or any other charity for charitable purposes. In a lottery, a bettor pays for a
chance to win a great deal more money or something of much greater value than the price paid for the chance. As
state-run lotteries have proliferated, courts have been called upon to enforce agreements among shareholders of a
winning lottery ticket. The cases have often dealt with lottery tickets purchased in another jurisdiction. The forum
jurisdiction may have statutory or other manifestations of public policy against the enforcement of such contracts.
See, e.g., Hughes v. Cole, 251 Va. 3, 465 S.E.2d 820 (1996). Other courts, however, may find no benefit to the
citizens of the forum state in prohibiting the agreement to share in the proceeds of a winning lottery ticket
purchased in another jurisdiction. Kaszuba v. Zientara, 506 N.E.2d 1 (Ind. 1987) (Indiana Supreme Court enforcing
agreement concerning a lottery ticket purchased in Illinois).
Lotteries are different from prize contests requiring effort on the part of the contestants who are competing for the
prize. Where a prize is offered to the contestant who will compete for that prize in terms of skill, knowledge,
strength, or other capacities, the prize announcement is typically the offer that is accepted by each contestant. The
bargain is a valid contract and not a wager. If the competitors pay entrance fees that are reasonable in relation to
the expenses of the competition, they are not wagers. If the entrance fees exceed those amounts, the competitors
are betting against each other on the outcome of the event and it becomes a wager.
A contest does not become a wager, however, simply because the offeror charges fees to spectators in the hope of
making a profit. Such an endeavor is an investment risk. The offeror may gain a profit or suffer a loss. A wager is
not such an investment. But simply calling an event a prize contest does not prevent it from being a wager. A
pooling arrangement in which each party pays an amount that will make up the prize going to the party whose
prediction of the final score of a contest is closest to the actual score is a wager. Such betting pools are similar to
lotteries. Pari-mutuel race track betting pays prizes from the money contributed to a pool by the bettors. Except for
the commission paid to the racing association for its service in running the pool, the total amount of the pool is paid
to those who pick the winning horses. Absent statutes authorizing such gambling, it would be as unlawful as any
other form of betting pool.
Practice Resources:
• Corbin § . (lotteries); § .10 (betting pools—pari-mutuel gambling); § .11 (bargains for a prize to
the winner of a competition).

End of Document
§ 6.05 Speculative Investment Distinguished from Wagering
[1] Investing in a New Business Is Not a Wager

Investing in a new business carries risks. If the business flourished in the past, it may have been due to factors
over which the new investor has no control. New competitors may arise. Scientific discoveries may make the
product of the business obsolete. Changes in laws or regulations may have an adverse effect on the business.
These and many other risks are assumed by the investor, but such investments are not wagers. These risks
were present before the investment was made. A wager creates its own risks and the wager bargain is not
intended to be an exchange of equivalent performances.
[2] Futures Contracts

A contract for the sale of property for future delivery was enforceable, whether or not the seller owned the
goods at the time the contract was made. A contract for the sale of goods, however, could be a disguise for a
speculative transaction where the parties did not intend any delivery of the goods to be made. On the day fixed
by the contract for delivery and payment, one of the parties agreed to pay the other the difference between the
contract price and the market price. Thus, the contracts were not contracts for the sale of goods; they were
“difference contracts” The buyer does not agree to pay the contract price and take the goods. Instead, he
promises that if the market price declines below the contract price, he will pay the difference on the specified
amount he purported to buy. On the other hand, the seller promises that she will pay the difference if the market
price rises above the agreed price. The bargain itself creates a new risk that did not previously exist. Thus the
transaction is a wager on the uncertain future price of the commodity.
Common law courts regarded such speculative contracts as a form of wagering and employed a delivery test. If
the parties intended delivery of the goods, the contract was valid; otherwise it was an unenforceable wagering
contract. States codified the test in so-called “bucket shop acts” such as the following:
(a) All contracts of sale for the future delivery of any commodity, article, personal property, stock or bond,
wherein the parties thereto do not intend a delivery of the article contracted for, but do intend to gamble on
the difference between the contract price and some subsequent market price, shall be illegal and void, and
no action shall be maintained in any court to enforce such contract or to compel payment of any note or
security given in payment or settlement of the same.
Ala. Code § -1-121.
Whether the parties intended a genuine contract for the sale of delivered goods or a “difference” contract was
not always easy to determine. The mere fact that the parties settled the difference between the contract and
market prices would not necessarily be sufficient evidence that they violated such a statute. The absence of
any such goods in the seller’s inventory would be relevant but, again, not conclusive. If only one of the parties
had the intention that the contract was a “difference” contract, the other party would be entitled to enforce the
contract for the sale of delivered goods.
The Commodity Exchange Act of 1936 prohibited all contracts of future delivery of commodities not made on an
organized exchange. In 2000, Congress enacted the Commodity Futures Modernization Act which preempted
state bucket shop provisions concerning any transaction covered by the Act. 7 U.S.C. § 1 e . The earlier act
covered only specified agricultural commodities, but by 2000, it covered all other goods and articles including
services, rights, and interests. Futures transactions not on an exchange and not intended to be settled by actual
delivery were deemed to be criminal. 7 U.S.C. § 1 .
Page 2 of 2
[3] Hedging Contracts Are Valid

A miller buys wheat to make flour and pays the prevailing market price. The market price, however, may decline
and the miller will be selling flour at wheat prices at the time it made the contract. To “hedge” against that
possibility, the miller may engage in a “difference” contract based on the sale of the same amount of wheat it
required to make flour. If the market price of wheat falls, the miller loses on the manufactured flour, but its
hedging bargain pays it the difference between the contract and market prices, ameliorating the loss. If the
price of wheat goes up, the miller must pay the difference to the other party, which it charges against the profit it
is making on the flour. Though the miller’s hedging bargain is not designed for the delivery of wheat and its
payment, neither it is a wagering contract since the risk the miller hedged against was a pre-existing business
risk, which it had every right to hedge against. It is not a wagering contract where the contract itself creates the
risk.
In light of the federal preemption of futures transactions, however, the distinction between hedging and simple
contracts for the payment of difference may have little import.
[4] Option Contracts

An option contract may state the price as the market price on a future date or it may allow the option holder to
pay the market price on any day he chooses during the option period. Neither arrangement creates a wager
since it neither creates a new risk nor prevents the price and the property from being agreed equivalents.
Similarly, there is no wager if the parties agree that the price shall be paid in one year since that agreement
merely shifts the risk of depreciation in the value of the property to the seller while the buyer assumes the risk
of a changing value of the dollar.
An agreement to pay a small sum for a 30-day option to purchase land, goods, or shares for $2,000 is not a
wagering contract. Neither party is promising to give something for nothing.
Practice Resources:
• Corbin § .12 (speculative investment compared with wagering); § .1 (commodity futures—
the interaction of federal and state law); § .1 (traditional view of speculative transactions—
the delivery requirement and bargains for the payment of differences); § .1 (traditional view
of speculative transactions—hedging contracts are valid); § .1 (traditional view of
speculative transactions—futures); § .1 (traditional view of speculative transactions—
options).

End of Document
§ 6.06 Promises to Pay a Specified Price on the Occurrence of an Uncertain

Event
If Ames promises to buy Barnes’s house with a market value of $250,000 for a first payment of $150,000 and a
second payment of $150,000 conditioned on the governor of the state appointing a particular party as state attorney
general, the contract is a wager. The conditioning event has no effect on the value of the house. If, however, Ames
agreed to pay the second $150,000 only if a building permit for the construction of a nearby rendering plant was not
granted since such a business would reduce the value of Barnes’s property to roughly $150,000, there is no wager
because the conditioning event is one that affects the value.
Practice Resource:
• Corbin § .1 (contracts to pay a specified price on an uncertain event).

End of Document
§ 6.0 Selling Short
If a seller makes a contract but cannot make a present delivery of all of the goods, it is selling short. If the seller
expected to make a delivery of what it promised to sell but makes a payment to the buyer because it cannot make a
full delivery, the contract is not a wager. The seller is still selling an agreed commodity for a price.
A buyer may agree to buy stocks or commodities by paying only a portion of the price. The buyer is buying partially
on credit, which is typically supplied by the broker effecting the purchase. Buying on margin is speculating, but it is
not a wager if the bargain is for the actual purchase and sale of the stock or commodities the buyer agreed to
purchase. Though the buyer has deposited only a part payment, the promise to make full payment is not conditional
on any fortuitous event. It is an absolute promise for a full performance for which the buyer is liable.
In part because of the concerns over speculation, the Securities and Exchange Act of 1934 limited a stock trader’s
ability to obtain loans to fund stock transactions. 15 U.S.C. § .
Practice Resources:
• Corbin § .1 (selling short); § .20 (purchase and sale on margin).

End of Document
§ 6.0 Aleatory Commercial Bargains
A surety agrees to pay the debt of the principal debtor if the debtor does not pay the creditor. The surety receives
consideration for the promise. If the principal debtor pays the debt, the surety is discharged from its duty but keeps
the consideration. If the principal debtor does not pay, the surety must pay that debt, which far exceeds the
consideration the surety received for assuming that risk. Suretyship is similar to insurance contracts. Just as an
insurance company assumes the risk of paying the total replacement cost of valuable property for a much smaller
premium, the surety assumes the risk of paying the principal debt for a very small premium.
Neither the insurance contract nor the suretyship contract are wagers. The risk that is being assumed by the insurer
and the surety was not created by the contract. The creditor contracted with the surety to assume the creditor’s risk
that the principal debtor would repay the loan. The property owner contracted to have the insurance company
assume the risk of paying for casualties to the property.
Practice Resource:
• Corbin § .21 (common types of aleatory commercial bargains—suretyship).

End of Document
§ 6.0 Aleatory Contracts of Indemnity Are Not Wagers
Indemnity contract are aleatory contracts. A contract of suretyship is one form of a contract of indemnity. By
promising to pay the debt of another, a surety is promising the creditor to save the creditor harmless from the failure
of the principal debtor to repay the debt. Similarly, casualty insurance contracts are contracts of indemnity against
losses. As noted in the previous section, they are not wagers because such contracts do not create new risks. They
shift existing risks.
There are other indemnity contracts that are aleatory in character such as a contract assuring a farmer that his field
will produce a certain size crop or that land or corporate shares will have a certain future value. Selling agents may
guarantee that property will sell for a specified price or that it will produce certain income. Where there is an
assurance of a future harvest or profit or resale, it is an assurance to a party that the party’s wealth will increase.
The promisor is assuming a risk of defeated expectations. It is not a risk created by the aleatory contract; the risk
existed before the promise was made. Nonetheless, the difference between such an aleatory contract and a
wagering contract may be seen as particularly thin. To this point, however, courts have not held such contracts to
be contrary to the public interest.
Practice Resource:
• Corbin § .22 (aleatory contracts of indemnity are not wagers).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 87 USURY BARGAINS
CHAPTER 87 USURY BARGAINS
§ .01 isto y and Purpose of Usury Laws
§ .02Te sio Between Protecting Borrowers and Promoting the Availability Loans
§ .0 s io s Loans May Be Disguised as Sales, Leases, or Service Contracts
§ .0 o ti e t Promises Are Not Usurious
§ .0 e ctio of Interest in Advance
§ .0 te t to Charge a Usurious Rate
[1]Violations of the Usury Laws Require an Intent to Charge a Rate of Interest in Excess of the
Statutory Maximum
[2]Inclusion of Savings Clauses
§ .0 o t y Payment Before Maturity
[1]Prepayment Penalties
[2]Acceleration Clauses
[3]Loan Extension or Renewal
[4]Compound Interest
§ .0 eme ies Available
§ .0 s y Statutes and Conflict of Laws

End of Document
CHAPTER 87 USURY BARGAINS
the subject matter.

End of Document
§ .01 History and Purpose of Usury Laws
The dislike of interest for the use of money has biblical roots. Originally, usury meant charging any interest for the
use of money. Gradually, it meant charging excessive interest for the use of money. Parliament set maximum rates
of interest that could be charged, but in the middle of the nineteenth century, the usury laws were repealed to allow
a free market for the price of money.
From the early days of the United States, states regulated interest rates, sometimes through state constitutions.
The federal government has also regulated interest rates, sometimes preempting state laws. Thus, usury means
the charging of interest rates in excess of rates permitted by state or federal laws. The Restatement (Second) of
Contracts does not deal with usury.
Practice Resource:
• Corbin § .1 (history and purpose of usury laws).

End of Document
§ .02 Tension Between Protecting Borrowers and Promoting the

Availability Loans
The goals of protecting borrowers from excess interest rates and promoting the availability of loans to enable the
poor person to get the advantages of another’s wealth are quite worthy, but they exhibit considerable tension. When
the market rate of interest exceeds the statutory ceiling on interest rates, the lender does not wish to lend and the
borrower cannot borrow. As result, the overall rate ceiling may contain a complete exemption for small loans or
retail installment contracts. Corporate loans or even business loans to entities that are not corporations may be
exempt from usury laws.
Federal legislation has supplanted state usury laws in some areas. The National Bank Act (12 U.S.C. § 21 et seq.)
sets the maximum interest rate for national banks. Other statutes have broadened federal control of maximum
interest rates. Depositary Institutions Deregulation and Monetary Control Act of 1980; Financial Services
Modernization Act of 1999. Controlling interest rates, however, does not insure economic health. Recently, another
evil became apparent. Recently, a major cause of the financial crisis of 2008 was the desire to lend amounts for the
purchase of homes that borrowers could not repay on the unwarranted assumption that real estate market prices
would continue to rise.
Practice Resources:
• Corbin § .2 (tension between the goals of protecting borrowers and furthering loans—state statutes
and exceptions); § . (tension between the goals of protecting borrowers and furthering loans—
federal statutes).

End of Document
§ .03 Usurious Loans May Be Disguised as Sales, Leases, or Service

Contracts
Loans can be disguised to avoid usury laws. Usury laws apply to loans; they do not apply to sales. When a sale is
on credit, however, the line between a sale and a loan may be blurred. The time-price doctrine allows a seller to
charge a higher price for a credit sale than a cash sale and that credit sale is not a loan. The differential between
the cash and credit sale prices may exceed the maximum interest that could have been charged for a loan, but the
usury law is not violated. The doctrine has been applied to sales of goods, services, and intangibles.
To determine whether a transaction is a loan or a sale, lease, or service contract not subject to usury laws, courts
consider a number of factors. One court listed the following considerations:
(1) the prior negotiations of the parties;
(2) the financial distress of the grantor;
(3) the advanced amount compared to the needed amount;
(4) the advance amount compared to the value of the item;
(5) the contemporaneous agreement to repurchase; and
(6) subsequent action of the parties.
SAL Leasing, Inc. v. State ex rel. Napolitano, 198 Ariz. 434, 10 P.3d 1221 (2000).
There is a presumption that such transactions are valid. The party claiming usury (a question of fact) must sustain
the initial burden or pleading and proof and the lender must then disprove the allegation.
A loan can be usurious even though the interest is paid in goods or services that are worth more than the maximum
rate of interest allowed. Among other disguised usurious bargains is the repurchase option. For example, Ames
transfers property to Barnes at a price of $80,000 with an option to repurchase the property from Barnes at
$120,000 within one year, payable over two years. The $40,000 differential far exceeds the allowable maximum
interest rate. Where such a transaction is designed to avoid the usury laws, a court should find that the transaction
was a cloak for usury. See McElroy v. Grisham, 306 Ark. 4, 810 S.W.2d 933 (1991).
Reasonable and legitimate fees accompanying a loan, such as fees for brokerage, credit appraisals, and
inspections, or credit card annual fees, attorneys’ fees, and insurance premiums are not counted as interest on the
loan. Loan origination fees are often treated as interest and subject to usury laws, but late payment and default
charges are not counted as interest since they are not incident to making the loan itself. Acceleration clauses
allowing the lender to collect unearned interest, however, may run afoul of usury maximums.
Practice Resources:
• Corbin § . (sales on credit—the time-price doctrine); § . (usurious loans may be disguised as
sales, leases, or service contracts); § . (additional costs surrounding a loan).

Page 2 of 2
End of Document
§ .04 Contingent Promises Are Not Usurious
In promising to lend money to enable a party to carry on litigation or search for gold or to pursue another financially
risky enterprise in exchange for a promise to repay an amount in excess of maximum interest rates if the venture is
successful, the promisor is assuming the risk of receiving nothing. It is an aleatory contract, like a casualty
insurance policy or a suretyship contract, because it is based on the occurrence of an event that may never occur.
In assuming the risk of receiving nothing, the promisor asks for a return much greater than the maximum rate of
allowable interest if the fortuitous event does occur. The promise is not usurious since usury laws only address
charges for the use of money the borrower intends to repay in full. If the bargain only appears to be aleatory, and, in
fact, the lender is assuming no such risk, a court will penetrate that disguise.
Practice Resource:
• Corbin § . (contingent promises are not usurious).

End of Document
§ .05 Deduction of Interest in Advance
Where a lender deducts the maximum rate of interest in advance so that the principal received by the borrower is
the amount of the loan minus the prepaid interest, the loan is usurious because the borrower never had the use of
that money for the prescribed loan period. See Tuition Plan, Inc. v. Zicari, 70 Misc. 2d 918, 923, 335 N.Y.S.2d 95,
102 (Dist. Ct. 1972). Such efforts are now regulated by statute. Calculation of interest using a 360-day-year at one
point was approved by courts to ease computation burdens. Such approval was later withdrawn.
Practice Resource:
• Corbin § . (deduction of interest in advance and 360-day calculations.)

End of Document
§ .06 Intent to Charge a Usurious Rate
[1] Violations of the Usury Laws Require an Intent to Charge a Rate of Interest in Excess of the
Statutory Maximum
Violations of the usury laws require an intent to charge a rate of interest in excess of the statutory maximum.
The required intent may be characterized as “corrupt intent.” Argento v. Reynolds, 452 So. 2d 135 (Fla. Dist. Ct.
App. 1984). Or the intent may simply have to be one that manifests bad faith. Trapp v. Hancuh, 530 N.W.2d
879 (Minn. Ct. App. 1995). Lenders may testify as to their intentions, and good faith is a defense as when an
unintentional miscalculation occurred. Courts necessarily consider corroborative evidence with respect to such
questions of fact.
[2] Inclusion of Savings Clauses

To protect against findings of intended usurious interest rates, the lending contract may include a savings
clause stating that the lender had no usurious intent. Under a savings clause, if a court finds an unintended
violation of usury laws, the interest rate is to be reduced to the maximum legal rate and any additional interest
already paid will be deducted from the principal amount of the loan. Some courts enforce savings clauses
unless there is a usurious intention manifested at the outset of the transaction. Other courts reject such clauses
as violating public policy since usury statutes place the burden on the lender to observe the law with which
lenders rather than borrowers should be particularly familiar. “A ‘usury savings clause,’ if valid, would shift the
onus back onto the borrower, contravening statutory policy and depriving the borrower of the … statute’s
protection and penalties.” Swindell v. Federal Nat’l Mortg. Ass’n, 330 N.C. 153, 160, 409 S.E.2d 892, 896
(1991). In general, savings clauses are not conclusive but will often be viewed as a factor in determining the
requisite intent in violating a given usury statute.
Practice Resources:
• Corbin § . (intent); § .10 (savings clauses).

End of Document
§ .0 Voluntary Payment Before Maturity
[1] Prepayment Penalties

There is no right to prepay a loan and avoid liability for interest accruing after the payment date and before
maturity. A loan contract may grant the borrower the privilege of prepaying the loan, or the lender may
subsequently agree to allow the borrower to prepay. In either case, the lender may insist on prepayment
penalties. Courts hold that it is not usurious to condition the exercise of this privilege upon the payment of
interest to the date of payment plus a “bonus” or “penalty.” Courts have traditionally viewed such penalties as
consideration for the right to prepay. Chrisman v. M&T Bank, 2009 U.S. Dist. LEXIS 24658 (M.D. Tenn. Mar.
24, 2009). Some jurisdictions, however, may prohibit such penalties or subject them to certain limitations.
[2] Acceleration Clauses

If a borrower fails to pay in accordance with the payment schedule, the contract may include an acceleration
clause that states that the lender is entitled to immediate payment of the principal and interest or the principal
and part of the interest. If the enforcement of the clause would result in a usurious rate of interest, some courts
refuse to enforce it. Other courts may not characterize such payments as usurious, but may still view the
accelerated interest as an otherwise prohibited penalty.
[3] Loan Extension or Renewal

When a usurious loan is extended or renewed, it is still a usurious loan unless the new contract eliminates the
interest charge that caused the original loan to be usurious. The renewal or assumption of a valid debt may be
invalid because of usurious interest.
[4] Compound Interest

Historically, courts have been wary of compound interest. Modern courts permit such interest only if the parties
specifically agree to such compounding and it is not otherwise prohibited by statute.
Practice Resources:
• Corbin § .11 (effect of voluntary payment before maturity and acceleration clauses); § .12
(effect of renewals of usurious loans and of new promises eliminating the excessive interest);
§ .1 (compound interest is sometimes illegal).

End of Document
§ .0 Remedies Available
Usury statutes vary with respect to maximum rates of interest and their application to different classes of persons or
entities. They also vary in the extent to which usury can be used as a defense to actions by lenders. A court could
declare a forfeiture of both principal and interest, all interest, or only the excessive portion of the interest. Usury is a
defense against the lender or even the lender’s assignee. The defense of usury is personal to the borrower. Other
creditors of the borrower cannot attack a loan on the ground of usury, though a claim for usurious interest in the
borrower’s bankruptcy will be denied.
Many cases have allowed borrowers to recover usurious interest in restitution actions. Usury statutes are designed
to protect borrowers. Thus, borrowers are not precluded from recovery because they are not in pari delicto with
lenders. Some statutes may permit not only the borrower’s right to restitution but a right to a penalty as well. The
penalty is assignable and a debtor’s trustee in bankruptcy could enforce the penalty. In many jurisdictions, only
statutory remedies are currently available.
Although loan agreements violating the usury laws are unenforceable, the borrower remains under a moral
obligation to repay the loan actually received with lawful interest. A court granting equitable relief to a borrower may
condition such relief on the borrower’s repayment unless a statute requires the forfeiture of principal and interest.
Practice Resource:
• Corbin § .1 (legal effects of usury).

End of Document
§ .0 Usury Statutes and Conflict of Laws
Because of the differences in state usury laws, the determination of which state’s law applies could decide the
ultimate question of whether an agreement is usurious or enforceable. Many courts follow a policy recognized in
Restatement (Second) of the Conflict of Laws:
The validity of a contract will be sustained against the charge of usury if it provides for a rate of interest that is
permissible in a state to which the contract has a substantial relationship and is not greatly in excess of the rate
permitted by the general usury law of the state of the otherwise applicable law under the rule of § 1 .
Restatement (Second) of the Conflict of Laws § 20 . Under § 1 the law of the jurisdiction with the most
significant relation to the transaction will apply.
The parties may expressly choose the applicable law in their contract, but courts generally require that the
jurisdiction have a substantial relation to the transaction as required by § 20 absent any such express provision.
The underlying rationale is to prevent a lender from obtaining a more favorable maximum rate by choosing the law
of a jurisdiction with little or no connection to the transaction.
The National Bank Act permits a national bank to charge the interest rates of its home state. 12 U.S.C. § . The
Depositary Institutions Deregulation and Monetary Control Act of 1980 provides the same for all federally insured
lenders.
Practice Resource:
• Corbin § .1 (usury statutes and the conflict of laws).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 88 MISCELLANEOUS BARGAINS CONTRARY TO
PUBLIC POLICY
CHAPTER 88 MISCELLANEOUS BARGAINS CONTRARY TO PUBLIC POLICY
§ .01 ect of Bargains Made Without Compliance with Licensing and Registration Statutes
[1]Licensing Statutes Often Affect Questions of Contract Enforcement
[2]Licensing Statutes Commonly Do Not Address the Issue of Contract Enforceability
§ .02 e se Contracts in Violation of Housing Codes
§ .0 t t tes Pertaining to Foreign Corporations, Trade Names, and Sales of Securities
[1]State Laws Often Require Foreign Corporations to Obtain a Certificate of Authority
[2]Trade Names
[3]Bulk Sales
[4]Blue Sky Laws
§ .0 The Power to Waive or Bargain Away Rights and Defenses
§ .0 o ts Will Not Enforce Clauses in Contracts That Prohibit Challenges on the Basis of Fraud
§ .0 i s in Aid of Countries Hostile to the United States

End of Document
PUBLIC POLICY
CHAPTER 88 MISCELLANEOUS BARGAINS CONTRARY TO PUBLIC POLICY
the subject matter.

End of Document
PUBLIC POLICY
§ .01 Effect of Bargains Made Without Compliance with Licensing and

Registration Statutes
[1] Licensing Statutes Often Affect Questions of Contract Enforcement

Statutes requiring some sort of license, certificate, or registration as a prerequisite to carrying on various kinds
of businesses and professional activity permeate the United States. These statutes vary greatly in their
purposes, their penalties, and in their language. The purpose of a statute may be the generation of revenue
which operates as an excise tax on the party performing the activity. It is not concerned with regulating the
activity. Other statutes, designed to assure the public of the character and competence of the parties engaging
in a particular business or profession, are often called “regulatory” statutes.
In one case, the plaintiff had not applied for a license to conduct a nursing agency as required by an Illinois
statute before contracting to supply nurses to an Illinois hospital. The plaintiff claimed that the statute was not
regulatory, that its purpose was business-related, and no public policy interest was furthered by refusing to
enforce its contract with the defendant hospital. The court, however, discovered that the statute and regulations
issued in pursuance of the statute imposed various public health-related requirements on nurse staffing
agencies, including CPR training and screening for communicable diseases. The court held the contract to be
unenforceable. U.S. Nursing Corp. v. Saint Joseph Medical Ctr., 39 F.3d 790 (7th Cir. 1994).
In addition to any fines or imprisonment, statutes seldom address the enforcement of contracts. In one
instance, the West Virginia Contracting Licensing Act included only administrative and criminal consequences
for its violation. The court considered other jurisdictions and cited Corbin on Contracts in holding that the
unlicensed contractor should not recover compensation. Timber Ridge, Inc. v. Hunt Country Asphalt & Paving,
LLC, 2008 U.S. Dist. LEXIS 5784 (N.D.W. Va. Jan. 14, 2008).
[2] Licensing Statutes Commonly Do Not Address the Issue of Contract Enforceability
The remedies in a statute may be expressed as exclusive, but courts have to discern appropriate reactions to
contract enforcement from the purpose of the statute, the evil involved in noncompliance with the statute, and
the cruelty of forfeitures. A contract made by an unlicensed party is not void since the innocent party is entitled
to enforce such a contract, although the party may also be able to pursue a separate count in tort. Some courts
adhere to the rigid distinction between statutes that have a regulatory purpose and those that have only a
revenue raising purpose.
A contractor met all licensing requirements and received a license. Six days before receiving it, however, he
had accepted a down payment on an improvement project, which he later completed. The court held he was
not entitled to compensation for his work for two reasons: (1) obtaining the license was a simple administrative
task, and (2) “anything but an unyielding rule would put temptation in the way of unqualified (and unscrupulous)
contractors and invite recurrence of the same abuses that underlay enactment of the regulatory scheme.”
Cevern, Inc. v. Ferbish, 666 A.2d 17, 20 (D.C. 1995). Where additional monies were claimed upon the
completion of a single family residence, the defendants questioned the validity of the contract which had been
signed by a person who was not a licensed general contractor. The house had been constructed by a party with
a general contractor’s license who was not a party to the contract but sought to recover on a quantum meruit
basis. The court held that the defendant could not recover because he was unlicensed. When a legislature
invokes its police power to provide statutory protection to the public from fraud, incompetence, and
irresponsibility, making contracts unenforceable produces a salutary effect in causing obedience to the
Page 2 of 2
licensing statute. Neither could the general contractor recover that which the defendant was prohibited from
recovering. Ron Medlin Constr. v. Harris, 199 N.C. App. 491, 681 S.E.2d 807 (2009).
Many courts, however, recognize that, even when a statute has a regulatory purpose, the promisee may
recover for services or goods delivered. Noncompliance with a statute may be relatively harmless. There may
be no fraud or incompetence and the recipient of the services or goods will be unjustly enriched at the
unlicensed party’s expense. Where a licensed home improvement contractor utilized the services of an
unlicensed masonry subcontractor on residential projects, the subcontractor sought payments for its work. The
licensed contractor raised the defense that the contract with the unlicensed subcontractor violated the Maryland
Home Improvement Act which had a regulatory purpose. The court quoted the Corbin treatise and § 1 of the
Restatement (Second) of Contracts in suggesting a more flexible approach than the rigid revenue/regulatory
dichotomy in holding that, though the Maryland statute was a regulatory measure, it was not designed to protect
general contractors from unlicensed subcontractors. Alcoa Concrete & Masonry, Inc. v. Stalker Bros., 191 Md.
App. 596, 993 A.2d 136 (2010).
The Restatement (Second) of Contracts § 1 1 suggests that a promise to compensate an unlicensed promisee
is against public policy and unenforceable if the requirement has a regulatory purpose and the interest in the
enforcement of the promise is clearly outweighed by the public policy behind the requirement. Vanguard
Constr. & Dev. Co. v. Polsky, 24 Misc. 3d 854, 879 N.Y.S.2d 300 (Sup. Ct. 2009). Thus, a court held that
voiding a contract because the plaintiff did not have a farm laborer contractor’s license would have provided a
windfall to the defendants, who would have been saved some $171,000 advanced by the plaintiff. Moreover, it
would undermine the statute designed to protect workers and insure their compensation. Mayfly Group, Inc. v.
Ruiz, 208 Or. App. 219, 144 P.3d 1025 (2006).
Even with such balancing, however, a contract will not be enforced if the weight of public policy cannot be
overcome. Licenses are always required for the practice of law or medicine. Fees for such licenses are not
designed to raise revenue. These professions require investigations of character and examinations of
knowledge and skills based on substantial periods of prescribed study. An unlicensed practitioner of law or
medicine will not recover compensation on any alleged contract or in quantum meruit. State Farm Mut. Auto.
Ins. Co. v. Newburg Chiropractic, P.S.C., 683 F. Supp. 2d 502 (W.D. Ky. 2010). An unlicensed engineer or
architect will meet the same fate and even a teacher will not be aided in recovering compensation of any kind.
Practice Resources:
• Corbin § .1 (licensing and registration statutes); § .2 (the penalty of unenforceability may be
expressly included by the terms of the statute); § . (the purpose of the statute—collection of
revenue or protection against wrongdoing and incompetence); § . (various types of
businesses or professions requiring licenses, certificates, or registration).

End of Document
PUBLIC POLICY
§ .02 Lease Contracts in Violation of Housing Codes
Courts equate violations of housing codes with violations of public policy where the effect is to provide a tenant with
a power to avoid the lease. This is consistent with the underlying policy of housing codes, which are designed to
protect the health, safety, and welfare of tenants rather than landlords. If the violation is minor, however, the tenant
will not have a power of avoidance.
If the premises are in substantial violation of the housing code at the time the lease is made, it will be
unenforceable. If the violations occur after it is made, however, the lease will not be unenforceable. This
inconsistent treatment is based on the possibility that the tenant is in violation of the housing code. Tenants cannot
defend on the basis of housing code violations they cause. The tenant, however, may defend on the basis of
violations caused by other tenants whose wrongs are more attributable to the landlord.
The proper remedy may not always be a complete elimination of the obligation to pay rent. Circumstances will
control whether a tenant will be provided with an indefinite rent-free arrangement until the housing code violation is
cured. The degree of a landlord’s willfulness or cynicism will be factors in this determination. The court may also
consider the financial ability of the landlord to make the cure. A court may issue a conditional decree that the
landlord will be entitled to the rental value only if he promptly acts to bring the property into compliance with the
code.
If the failure to meet housing code requirements is viewed as a breach of contract, the tenant will be entitled to
contract remedies that include bringing the contract to an end if the violation amounts to a vital breach. This would
allow a tenant to vacate the premises with no further liability. The tenant may also have a cause of action for breach
of the implied warranty of habitability, which courts treat as separate, although it is an overlapping doctrine.
Practice Resource:
• Corbin § . (lease contracts in violation of housing codes).

End of Document
PUBLIC POLICY
§ .03 Statutes Pertaining to Foreign Corporations, Trade Names, and Sales

of Securities
[1] State Laws Often Require Foreign Corporations to Obtain a Certificate of Authority
Many state corporation laws forbid foreign corporations from transacting business within the state until they
obtain a certificate of authority from the state. Model Business Corporation Act § 1 .01. Other states have
different statutes. The statutes have different purposes, including the collection of revenue, the availability of a
corporate agent for service of process, assurance that the foreign corporation will perform its contracts, and
concomitant protection of citizens against fraud. A statute may announce the penalty for violation but say
nothing about enforcement of contracts by the foreign corporation; other statutes explicitly bar any action.
Failure to satisfy the statutory requirement will not make the contract void since the foreign corporation should
be subject to suit by a citizen of the state. Moreover, unless prohibited by the statute, states have permitted
foreign corporations to pursue actions by finding that the statutory penalty is exclusive. An action, however,
may be tolled until the corporation complies with the certification of authority.
[2] Trade Names

A failure to comply with state statutes making it unlawful to carry on a business under an assumed or trade
name without filing a certificate stating the true name does not make contracts unenforceable by either erring or
innocent entities. Rather, the statutes make the contract voidable for the benefit of creditors.
[3] Bulk Sales

Bulk sales statutes were originally designed to prevent a merchant from acquiring its stock in trade on credit
and then selling its entire inventory (“in bulk”), absconding with the proceeds of the sale and leaving his
creditors unpaid. To avoid such fraud, a buyer in bulk was required to notify creditors of the seller or subject
what it had purchased to the rights of such creditors. Uniform Commercial Code (UCC) Article 6 constitutes the
modern bulk sales statute. Requiring buyers to incur costs and risks in notifying the seller’s creditors with whom
they had no relationship and then subjecting a good faith buyer to remedies of creditors, however, led to
considerable criticism of bulk sales statutes. The National Conference of Commissioners on Uniform State
Laws (NCCUSL) withdrew its support of Article 6 and urged its repeal as no longer necessary, but leaving a
modified version for states that insisted on retaining a bulk sales law. Only three jurisdictions adopted the
revised version. The remaining jurisdictions followed the recommendation to repeal Article 6.
[4] Blue Sky Laws

Beyond extensive federal regulations, buyers of securities are protected against fraud by state “blue sky” laws
that prohibit their sale unless they are registered along with a statement of certain facts. The making or
solicitation of a sale of unregistered securities is a crime, although a buyer who was not in pari delicto could
choose to enforce the contract. The bargain, however, is not enforceable by the seller against a buyer who is
entitled to restitution of any amounts paid upon the return of any securities received.
Practice Resource:
Page 2 of 2
• Corbin § . (statutes as to foreign corporations, trade names, and sales of securities).

End of Document
PUBLIC POLICY
§ .04 The Power to Waive or Bargain Away Rights and Defenses
Statutes may expressly allow a defense such as the statute of frauds in certain types of litigation or cases of
unconscionability. The law confers a power of avoidance on minors and on other parties having diminished
capacity. Generally, such defenses, rights, and privileges may not be waived or bargained away. The enforcement
of an oral bargain not to plead the statute of frauds would undermine the statute by promoting fraudulent claims that
a promisor agreed not to plead it in defense. If a party with superior bargaining power were entitled to prove that the
weaker party waived the unconscionability defense as part of the original contract, unconscionability would be
emasculated. A minor who is provided with a power of avoidance because he or she lacks capacity also lacks
capacity to make a judgment to waive or bargain away such a lack of capacity.
While a minor may choose to ratify a contract upon reaching majority instead of disaffirming it, the minor is making
that decision when he or she no longer lacks capacity. A party to an oral contract within the statute of frauds may
choose not to raise that affirmative defense, but the decision is made when that party confronts the real and final
choice of raising the defense instead of considering its waiver when the contract is made.
A similar situation exists with respect to the statute of limitations, which courts will not allow to be extended in the
original contract, although a promise to pay a debt barred by the statute of limitations will be enforced. The decision
to make a new promise to restart the statute is made with relevant information and sufficient reflection as contrasted
with bargaining this defense away or waiving it at the inception of the contract.
A waiver of class actions embedded in an arbitration clause was held to violate the public policy because class
actions are a critical piece of the enforcement of consumer protection laws. Scott v. Cingular Wireless, 160 Wn.2d
843, 161 P.3d 1000 (2007). Special statutory rights of employees designed to promote industrial peace and the
protection of workers may not be waived. Thus, workers may not waive rights created in collective bargaining
agreements or bargain away statutory rights to minimum wages or other rights created for their benefit. Debtors
may not bargain away the right to usury defenses or statutory exemptions from execution of specified property.
Practice Resource:
• Corbin § . (power to waive or bargain away rights and defenses conferred by law).

End of Document
PUBLIC POLICY
§ .05 Courts Will Not Enforce Clauses in Contracts That Prohibit

Challenges on the Basis of Fraud
Courts will not enforce clauses in contracts that prohibit challenges to the contract on the basis of fraud. Such a
provision itself may have been induced by fraud. Courts generally refuse to enforce clauses in contracts exculpating
a party for an intentional or reckless act. Courts are also highly skeptical of clauses that would restrict a challenge
on the basis of fraud for a limited period. One exception involves insurance policies, where state statutes limit the
time for insurance companies to challenge the policy on the basis of fraud by the insured in the formation of the
contract. Regardless of the kind of insurance involved, courts uniformly uphold incontestability clauses against
insurers on the footing that the protection of the insured is a weightier public policy than the antifraud public policy.
Practice Resource:
• Corbin § . (effect of a provision in a contract that it shall be incontestable for fraud).

End of Document
PUBLIC POLICY
§ .06 Bargains in Aid of Countries Hostile to the United States
In time of war or hostilities, making a bargain across the line of hostilities without permission is a crime. The Trading
With the Enemy Act, 50 U.S.C. App. § et seq., forbids commercial arrangements that would aid a hostile country.
The International Emergency Economic Powers Act, 50 U.S.C. § 1 01 et seq., allows the President to protect
national security and regulate commerce.
Even where such acts are not criminal, the common law proscribes any bargain that may aid a hostile country.
Such agreements are forbidden even if they would do no harm and even if the party with whom the contract is
made is not an enemy alien or both parties are citizens of the United States but one is a resident of a state or nation
with which the United States has embargoed commercial activity. Even if the bargain does not cross hostile lines
but could have the effect of enhancing the military, economic, or psychological resources of the adverse country or
diminishing those of the United States, such a bargain might be treasonous. At a minimum, it would be
unenforceable.
If a bargain is enforceable when made but, before it is fully performed, hostilities make it unlawful, if the unexecuted
portion is only a simple money debt, the hostilities do not discharge the debt but it may not be enforceable until
hostilities cease. A bargain with a citizen of a hostile nation who is a resident of the United States will be
enforceable unless the bargain aids the enemy or injures the United States. Such an alien may sue and be sued. A
United States citizen in a hostile country may make enforceable contracts for subsistence that do not aid the enemy
or harm the United States.
A citizen of a hostile country residing in that country may not access United States courts during the hostilities even
for contracts made prior to the hostilities. The statute of limitations, however, is suspended as against that party.
Practice Resource:
• Corbin § . (bargains with or in aid of countries hostile to the United States).

End of Document
Corbin on Contracts Desk Edition > CHAPTER 89 EFFECTS OF BEING CONTRARY TO PUBLIC
POLICY—AVAILABILITY OF RESTITUTION
CHAPTER 89 EFFECTS OF BEING CONTRARY TO PUBLIC POLICY—

AVAILABILITY OF RESTITUTION
§ .01 o ceme t of Bargains Contrary to Public Policy
§ .02 o ceme t of Lawful Bargains in Furtherance of a Purpose Contrary to Public Policy
§ .0 ti Enforcement of Bargains Contrary to Public Policy
[1]Divisibility and Severability Generally
[2]Unenforceable Provision Is Not an Essential Part of the Bargain
[3]Restrictive Covenants
[4]Unenforceable Provisions Concerning Remedies
[5]Collateral or Remote Bargains
§ .0 cco ti of Proceeds of a Partnership or Agency Pursuing Ends Contrary to Public Policy
§ .0 oce t Agents or Depositaries
§ .0 ect of a Change in the Law upon an Improper Bargain
§ .0 i ity to State a Case Without Proving an Improper Bargain
§ .0 eme y of Restitution
[1]Restitution under the Restatement (Second)
[2]Serious Moral Turpitude
[3]Recovery by Parties the Public Policy Was Designed to Protect
[4]Ignorance of Facts or Law
[5]Withdrawal Before Attainment of Improper Purpose

End of Document
CHAPTER 89 EFFECTS OF BEING CONTRARY TO PUBLIC POLICY—

AVAILABILITY OF RESTITUTION
the subject matter.

End of Document
§ .01 Enforcement of Bargains Contrary to Public Policy
There is no possibility of enforcing a bargain contrary to public policy where a statute expressly prohibits such
enforcement. If part of a performance is prohibited but the statute does not explicitly address the enforceability of a
contract involving that performance, courts traditionally state that they will not aid a party in attempting to enforce
such a contract. The court leaves the parties where they are. Notwithstanding such pronouncements, courts will
enforce such bargains if it is just to do so under the circumstances. Where, for example, a loan solicitor failed to
meet a statutory requirement that an agreement for his compensation had to be evidenced by a writing, the court
stated:
We are therefore unpersuaded that the purpose of [the statute] was to allow those contracting with loan brokers
to avoid fulfilling their contractual obligations by providing them with a “technical escape from a fair and definite
agreement.” Further, [the defendant] has not shown that “the factors that argue against enforcement clearly
outweigh the law’s traditional interest in protecting the expectations of the parties.”
Felland v. Sauey, 248 Wis. 2d 963, 637 N.W.2d 403, 2001 WI App 257.
A physicians services agreement (PSA) among three partners, one of whom was not a physician, violated a state
medical practice act since it constituted a fee-splitting arrangement. Under a settlement agreement, the three
partners dissolved the PSA and assigned any liability equally among them. When a creditor brought an action
against the partnership, one partner paid the creditor and then sought payment from the other partners under the
settlement agreement. The trial court granted summary judgment for the defendant partners because the original
agreement was void and unenforceable. On appeal, the court recognized that where a new contract follows an
illegal bargain, its enforceability depends upon whether it is modification of the illegal fee-splitting arrangement or
whether illegal agreement was totally abandoned. The court found the settlement contract dissolving the original
arrangement was a clear abandonment of the old contract, thereby allowing the settlement agreement to be
enforced. Ritacca v. Girardi, 2013 IL App (1st) 113511, 996 N.E.2d 236, 374 Ill. Dec. 789.
The Restatement (Second) of Contracts § 1 provides that a court should refuse enforcement when the public
policy against enforcement outweighs the interest in enforcement. This balancing effort includes the parties justified
expectations, any resulting forfeiture if enforcement were denied, any special public interest in enforcement, the
strength of the public policy against enforcement, the likelihood that refusal to enforce would further the policy, the
seriousness and deliberateness of the conduct, and the directness of connection between the misconduct and the
term. While the partners’ settlement agreement described above did not require the court to apply the balancing
test, the court noted that the agreement would have been enforceable under that test since refusal to enforce that
agreement would have had little or no effect on the policy behind the relevant statute.
Practice Resource:
• Corbin § .1 (enforcement of bargains involving performances contrary to public policy).

Page 2 of 2
End of Document
§ .02 Enforcement of Lawful Bargains in Furtherance of a Purpose

Contrary to Public Policy
A perfectly lawful contract may be against public policy and unenforceable if a party intends to use the
consideration received from an improper purpose. Buying a bar is lawful, but if the buyer intends to use it to sell
liquors in violation of the law, the buyer will not be able to enforce the contract. If the other party to the contract
neither knew of the improper use intended by the purchaser nor had any participation in such use, the party can
enforce the contract. Even if a party knows of an improper use but does not participate in that use and the use does
not involve grave social harm, the contract is enforceable. Take, for example, the lawful sale on credit of a hunting
rifle. If the seller knows that the buyer intends to hunt game without a license required by law, a court will enforce
the buyer’s promise to pay for the rifle. If the seller knows that the buyer plans to use the gun to assault others, the
buyer’s promise will be unenforceable because the potential harm is grave. Restatement (Second) of Contracts
§ 1 2 and illus. 1.
In what appeared to be an ordinary real estate transaction, the buyer failed to pay the stated consideration for the
property. It turned out that the property had been used for prostitution and was sold by one madam to another
madam. The court agreed with other cases holding that the sale of property that may or may not be used for an
illegal purpose remains enforceable absent evidence further implicating the seller in the unlawful purpose for which
the buyer purchased the property. Carroll v. Beardon, 142 Mont. 40, 381 P.2d 295 (1963).
Intoxicating liquors were sold in Massachusetts with a view to their being resold by the buyer in Maine in violation of
Maine law. An action for the price of the liquor would not lie. Graves v. Johnson, 156 Mass. 211, 30 N.E. 818
(1892). In a second trial, it was determined that the plaintiff, although aware of the defendant’s intention to resell the
liquor in Maine, was indifferent as to what the defendant did with it. Justice Holmes suggested that mere knowledge
might be sufficient depending upon the gravity of the apprehended evil. Here, absent such a potentially grave evil,
and due to the lack of any evidence that the seller would further the purpose of illegal sales in Maine, the bargain
could be enforced. Graves v. Johnson, 179 Mass. 53, 60 N.E. 383 (1901).
The Cricket pest control company leased a computer marketing system that made automated sales solicitations by
telephone in violation of a Florida statute. Cricket stopped using the system and stopped payments. When sued,
Cricket argued that the use of the system that violated Florida law made the contract void. The court, however,
found that there were legal uses for the system and, quoting Corbin on Contracts, it held that the use of the subject
matter of a contract for illegal purposes does not preclude enforcement of a contract if the subject matter could be
used for lawful purposes. De Lage Landen Fin. Servs. v. Cricket’s Termite Control, Inc., 942 So. 2d 1001 (Fla. Dist.
Ct. App. 2006).
Practice Resources:
• Corbin § .2 (enforcement of bargains involving lawful and proper performances in furtherance of a
purpose contrary to public policy—generally); § . (enforcement of bargains involving lawful and
proper performances by a party with knowledge of another’s wrongful purpose).

Page 2 of 2
End of Document
§ .03 Partial Enforcement of Bargains Contrary to Public Policy
[1] Divisibility and Severability Generally

It is not rare to discover an opinion stating that divisible portions of a contract untainted by a purpose contrary to
public policy will be enforced or that an unlawful part of the bargain is “severable” from the remainder of the
bargain. Often, however, the meaning of “divisible” or “severable” is unclear. The Restatement (Second) of
Contracts enhances the clarity by providing that when the bargain can be divided into pairs of performances of
agreed equivalents, the pairs not offending public policy may be enforced. Restatement (Second) of Contracts
§ 1 . If pairing is not possible, partial enforcement is still possible if the offending portion is not an essential
part of the exchange and the party seeking enforcement is not guilty of serious misconduct. Restatement
(Second) of Contracts § 1 . See Prusky v. Reliastar Life Ins. Co., 2005 U.S. Dist. LEXIS 1284 (E.D. Pa. Jan.
26, 2005) (the conduct offensive to public policy was an essential part of the contract and it could not be
enforced).
This approach abandons the earlier consideration-based rules that precluded enforcement of a promise if any
part of the consideration was invalid. Thus, if a contract to sell a business contained a covenant restraining the
seller from competing in the same business for life, the buyer could enforce the promise to sell the business,
but the seller could not enforce the seller’s promise of payment because the buyer’s promise was indivisible
and the seller’s consideration was in part invalid since the covenant not to compete in the same business for life
is against public policy. Modern courts, however, reject these consideration-based rules and recognize that the
harm to the public may be small and the court should not inflict the penalty of severe forfeiture.
The Restatement (Second) approach was explicitly adopted in Thunderstik Lodge, Inc. v. Reuer, 2000 SD 84,
613 N.W.2d 44. In that case, a lease contained a 10-year term with options for two 10-year renewals. A statute,
however, prohibited agricultural leases for longer than 20 years. Following the Restatement (Second) analysis,
the court noted a distinct consideration for each option and the amounts were agreed equivalents. The
remaining portion was not opposed to public policy and the party requesting enforcement was not guilty of
serious misconduct.
[2] Unenforceable Provision Is Not an Essential Part of the Bargain

When a bargain cannot be apportioned into agreed equivalents, courts will enforce the bargain if the offending
part of the bargain is not essential to the agreed exchange. Restatement (Second) of Contracts § 1 . The test
is whether the parties would have made the bargain absent the offending portion. Although enforcement of the
remainder means that a party is not receiving all for which it bargained, if the party would have made the
bargain without the offending portion, the injustice is slight. When the offending portion is an essential part of
the bargain, the entire bargain is permeated with illegality.
[3] Restrictive Covenants

When a promise to sell a local business is attended by a promise not to compete in the same neighborhood “or
anywhere else,” the last phrase converts an otherwise lawful ancillary restraint of trade into a violation of public
policy since there is no legitimate purpose to such an absurdly broad geographic restraint. Courts will enforce
the ancillary restraint absent “or anywhere else.” (See Chapter 80 above.) The consideration moving from the
seller was partially invalid and, under old rules, the seller would be precluded from recovering the price of the
business. Modern courts will permit the seller to recover the price since the improper portion of the restraint of
Page 2 of 2
trade has been eliminated and there would be severe forfeiture to the seller if the price could not be recovered.
The Restatement (Second) of Contracts takes the position that even an unlawful promise can be consideration.
Restatement (Second) of Contracts § 2 cmt. d. This effectively removes consideration from any enforceability
question.
[4] Unenforceable Provisions Concerning Remedies

Contract provisions concerning remedies, arbitration, choice of venue, and waiver of claims may have been
unenforceable in the past but they are now generally enforceable. Even when they were unenforceable, the
validity of the bargain was not affected. The improper provision was simply disregarded. If an arbitration clause
is unenforceable because it is unconscionable, an otherwise lawful bargain is not affected though adjudication
of any dispute will have to occur in court. If a liquidated damages clause or a limitation of liability clause is
unenforceable, the contract is enforced without the clause.
[5] Collateral or Remote Bargains

A contract that is merely collaterally and not directly connected with an improper or illegal act is enforceable.
When competitors create a new corporation to restrain trade in violation of antitrust laws, their contracts for the
purchase of necessary supplies or services are still enforceable unless the improper purpose of the corporation
is furthered by such contracts.
The Mercures were officers in Midway Motors. They executed continuing guaranties to GMAC to assure
continuing GMAC credit. Midway began tampering with odometer readings on leased vehicles owned by
GMAC. Notwithstanding its innocence, GMAC, as owner, was strictly liable under an Ohio statute. The
Mercures refused to pay the guaranties and defended GMAC’s action on the footing that indemnifying GMAC
against criminal action was against public policy. The court, however, recognized that the misconduct was by
the Mercures, not GMAC, and held that public policy would not be offended by requiring the Mercures to honor
their obligations to GMAC. GMAC v. Mercure, 2007-Ohio-5708, 2007 Ohio App. LEXIS 5011 (8th Dist.).
Practice Resources:
• Corbin § . (partial enforcement—divisibility and severability generally); § . (partial
enforcement—traditional rules); § . (partial enforcement—agreed equivalents); § .
(partial enforcement—unenforceable provision is not an essential part of the bargain); § .
(partial enforcement—restrictive covenants); § . (partial enforcement—bilateral and
unilateral bargains); § .10 (unenforceable provisions with respect to remedies); § .11
(collateral or remote bargains or acts).

End of Document
§ .04 Accounting of Proceeds of a Partnership or Agency Pursuing Ends

Contrary to Public Policy
A participant in a partnership or agency that is pursuing ends contrary to law or public policy may still compel an
accounting and distribution of the receipts of the business even though the receipts were the proceeds of improper
transactions. The rationale is that the improper transactions are completed, the plaintiff is not seeking the
enforcement of the partnership bargain, but of a subsequent obligation implied by law, and allowing the defendant
to make an unlawful conversion of the funds to the defendant’s own use does not ameliorate the wrongs of the past.
If the transactions were criminal in character or involve great moral turpitude, courts will refuse an accounting and
distribution. Some courts refuse an accounting and distribution even where the impropriety is not extreme.
Practice Resource:
• Corbin § .12 (accounting of proceeds of a partnership or agency pursuing ends contrary to law or
other public policy).

End of Document
§ .05 Innocent Agents or Depositaries
Assume that Ames has a ticket to an illegal lottery and transfers the ticket to Barnes who agrees that he will collect
the prize of a new car for Ames if the ticket wins. The ticket wins; Barnes presents the ticket and receives the car.
He then resists Ames’s claim to the car on the footing that the lottery was illegal. Ames has an enforceable claim
against Barnes since the rule that the law will not enforce an illegal contract applies only between the immediate
parties to the illegal contract (here, the lottery). Stolz-Wicks, Inc. v. Commercial Television Service Co., 271 F.2d
586, 589 (7th Cir. 1959). One in possession of the fruits of an illegal transaction to which one was not a party may
not invoke the illegality defense. The bargain with Barnes is a new bargain, not the odorous illegal contract from
which the prize of a new car arose.
If a party gives money or property to an agent or depositary to be held for and delivered to another party such as
the agent’s principal, if the agent refuses to make the transfer because the property came from an improper
transaction, courts will enforce the principal’s right to the property. The improper transaction is past and completed.
Practice Resource:
• Corbin § .1 (innocent agents or depositaries).

End of Document
§ .06 Effect of a Change in the Law upon an Improper Bargain
In general, a bargain that is improper and void at the time of contracting does not become enforceable by a change
in the law. If a repealing statute expressly makes prior transactions valid, the statutory exception will be enforced. A
court may also find that the statute implies that effect. While usurious bargains are improper, payments of usurious
interest rates are not prohibited and usury statutes do not prevent creditors from receiving such payments. Thus,
where a usury statute is repealed, the repealing statute validates a previously unenforceable bargain, either
expressly or by implication. Some courts, however, disagree.
While it is often said that a void contract cannot be ratified, if a change occurs that would have allowed the bargain
entered into at a later time to be enforceable, a ratification at that later time may itself constitute an enforceable
contract.
Practice Resource:
• Corbin § .1 (effect of a change in the law or other circumstances upon an improper bargain).

End of Document
§ .0 Ability to State a Case Without Proving an Improper Bargain
Some courts state that a plaintiff can obtain a remedy only if a good case can be made for relief without either
alleging or proving the impropriety. It is as if any impropriety did not exist. The principle arises particularly in cases
where the improper bargain is collateral to or remote from the bargain the plaintiff seeks to enforce. In one instance,
a buyer of goods claimed it should not be required to pay the price it agreed to pay because the seller allegedly
gave discounts to sellers in violation of the Robinson-Patman Act, which proscribes price discrimination. The
transactions between the plaintiff and defendant, however, were perfectly proper and were not affected by the
subsequent alleged illegality of the alleged improper agreements with third parties. Bruce’s Juices, Inc. v. American
Can Co., 330 U.S. 743, 67 S. Ct. 1015, 91 L. Ed. 1219 (1947).
Nonetheless, a court cannot determine the effect of an improper element on a bargain without first knowing its
nature and character and ascertaining whether it is truly collateral or remote. The test should not be whether a case
sufficient to achieve relief can be stated by deliberately omitting any mention of improper elements. Rather, all of
the terms of the transaction should be made clear, including tacit as well as express understandings. If there is an
improper element, the court should weigh its effect on the bargain, which it may conclude should be enforced
notwithstanding the improper element. Even when a plaintiff can make what appears to be a perfectly good case by
alleging and proving the terms of a bargain without the improper element, the defendant is entitled to prove the
improper purpose or the court on its own may cause such proof to be made. “Properly speaking, of course, one
cannot estop a party from asserting the illegality of a contract. The court has a duty sua sponte to raise the issue in
the interest of the administration of justice.” California Pacific Bank v. Small Business Admin., 557 F.2d 218, 223
(9th Cir. 1977).
Practice Resource:
• Corbin § .1 (ability to state a case without alleging or proving improper factors relating to the
contract).

End of Document
§ .0 Remedy of Restitution
[1] Restitution under the Restatement (Second)

As earlier chapters suggest, a contract touching on public policy or even contradicting it is not necessarily void.
For example, the failure to obtain a signed permit before a septic system was installed in violation of an
ordinance did not preclude the enforcement of a contract for its price. The court explained that the contractual
rights of the parties involving some form of illegality should not be determined simply on the basis of the
administrative or criminal penalties in the statute. Other influential factors must also be considered, such as the
degree of illegality, the extent of public harm, and the moral quality of the parties’ conduct. In this case, the
proper county inspection had occurred and any departure from the proper standard of conduct as determined
by the mores of the community was negligible. Holmes Tiling, Inc. v. Allen, 2004 Iowa App. LEXIS 896 (July 28,
2004). Modern courts have been influenced by such a balancing analysis as suggested in Restatement
(Second) of Contracts § 1 .
If a bargain is wholly executory, courts very likely will refuse enforcement of the contract in the sense that it will
not come to the aid of either party, but rather leave the parties in status quo. Since neither party has performed,
no benefits have been conferred. There can be no unjust enrichment giving rise to the restitution remedy. When
some performance has been rendered, a court may very well provide a restitutionary remedy depending upon
the degree of moral turpitude it finds in the party requesting such relief. There will be no remedy of any kind if
the conduct involves serious moral turpitude.
The Restatement (Second) of Contracts provides that restitution may be granted under certain circumstances.
Restitution may be granted when:
• denial would cause disproportionate forfeiture (Restatement (Second) of Contracts § 1
• the party requesting relief was excusably ignorant of the facts or of legislation of a minor character
(Restatement (Second) of Contracts § 1
• the requesting party was not as wrong as the other party (Restatement (Second) of Contracts § 1
• the requesting party withdrew before the achievement of the improper purpose and engaged in no serious
wrongdoing prior to the withdrawal (Restatement (Second) of Contracts § 1 or
• granting restitution will end a continuing situation that offends public policy (Restatement (Second) of
Contracts § 1 .
Absent one of these exceptions, restitution will not be granted even though a defendant is permitted to retain ill-
gotten gains.
[2] Serious Moral Turpitude

Restitution is granted when the requesting party is not in pari delicto and is not guilty of serious moral turpitude.
Courts have not clearly defined “serious moral turpitude.” Earlier cases distinguished between offenses that
were malum in se (a wrong in itself upon principles of natural or moral law) and those that were merely malum
prohibitum (wrong because they are prohibited and not inherently immoral). That distinction may have created
an illusion of certainty, however, which more recent cases choose not to follow. Certainly, a contract to commit
a serious crime or tort would be included. Otherwise, case law results concerning the degree of improper
conduct demonstrates inconsistencies. Nonetheless, certain types of conduct are uniformly viewed as
Page 2 of 3
constituting serious moral turpitude, such as the bribery of public officials or agents, trustees, or other
fiduciaries, or payments to influence an election.
Just because a party is not guilty of serious moral turpitude, a restitutionary recovery is not guaranteed. The
requesting party must not be the comparatively guiltier party or in pari delicto (equally at fault). A requesting
party will not be in pari delicto if the party entered into the bargain as a result of fraud, duress, or influence
derived from superior knowledge, power, or position. A bargain to stifle a prosecution involves serious moral
turpitude, but courts have granted restitution when the party under duress is a relative who has been induced to
transfer money or property in exchange for the party applying duress to dismiss or prevent prosecution. See,
e.g., Woodham v. Allen, 130 Cal. 194, 62 P. 398 (1900).
[3] Recovery by Parties the Public Policy Was Designed to Protect

Statutes designed to protect innocent parties from investing in unregistered securities or other commercial
instruments should not prevent restitutionary recoveries by the innocent parties. When a bargain is made by a
public official for improper purposes, the governmental unit represented by that official should still be able to
enforce the bargain for the benefit of citizens. Courts recognize the importance of focusing on the purpose of
statutes and regulations that forbid certain conduct to ascertain that innocent parties they are designed to
protect are not unwittingly deprived of appropriate remedies.
[4] Ignorance of Facts or Law

When a bargain violates public policy only because of facts of which a party is justifiably ignorant, the innocent
party may recover in expectation damages or restitution. In one case, a contract to make a product was
contrary to government regulations during wartime. Nonetheless, the court held that the plaintiff was justifiably
ignorant of the regulations due to their number and complexity. The plaintiff’s damages were recoverable.
Maslo Mfg. Corp. v. Proctor Electric Co., 376 Pa. 553, 103 A.2d 743, cert. denied, 348 U.S. 822 (1954).
The maxim, “Ignorance of law is no excuse,” is generally true in criminal prosecutions and tort actions.
Nonetheless, the law does not always prescribe the same penalty or consequences for one who is ignorant or
mistaken regarding the law as it does against the willful wrongdoer. Ignorance of the law may allow
restitutionary remedies. Thus, when a party justifiably relies on the other party to the contract concerning
building and zoning regulations or other legal requirements, courts routinely award restitutionary remedies to
the comparatively innocent party under such circumstances.
The Restatement (Second) of Contracts recognizes such a recovery when the enforcing party is excusably
ignorant of the law that makes the contract improper and the legislation from which the policy is derived is of a
“minor character.” Restatement (Second) of Contracts § 1 0.
[5] Withdrawal Before Attainment of Improper Purpose

Even when a party is in pari delicto, if the conduct does not involve serious moral turpitude and the party
withdraws from the transaction before the improper purpose has been achieved, a court may grant restitution.
Restatement (Second) of Contracts § 1 . In effect, such a party is given a locus poenitentiae (time for
repentance). Allowing restitution in such cases encourages parties to abandon improper purposes, and granting
relief is not a misuse of judicial authority if the withdrawal is timely and complete.
Practice Resources:
• Corbin § .1 (restitution—introduction); § .1 (serious moral turpitude); § .1 (comparative
guilt rule); § .1 (when the requesting party is subject to fraud, duress, or other improper
influence); § .20 (recovery by parties the offended public policy is designed to protect);
§ .21 (ignorance of facts); § .22 (ignorance of law); § .2 (withdrawal before attainment
of improper purpose).
Page 3 of 3

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1 Corbin on Contracts Desk Edition Author(s)

Corbin on Contracts Desk Edition > Publication Information

JOHN E. MURRAY, JR. (1932–2015)

University Chancellor and Professor of Law

Duquesne University School of Law

Corbin on Contracts Desk Edition

James J. Motley, J.D.Legal Editor

Customer Services Department at......................(800) 833-9844

Fax Number......................(518) 487-3584

Customer Service Website......................http://www.lexisnexis.com/custserv/

For information on other Matthew Bender publications, please call

Your account manager or ......................(800) 223-1940

Outside the United States and Canada, please call......................(518) 487-3000

Corbin on Contracts Desk Edition

Corbin on Contracts Desk Edition

Corbin on Contracts Desk Edition

Preface to the 2017 Edition

Corbin on Contracts Desk Edition

About the Authors

Corbin on Contracts Desk Edition

Corbin on Contracts Desk Edition > CHAPTER 1 PRELIMINARY DEFINITIONS

CHAPTER 1 PRELIMINARY DEFINITIONS

Corbin on Contracts Desk Edition

Corbin on Contracts Desk Edition > CHAPTER 1 PRELIMINARY DEFINITIONS

§ 1.01 Sources of Contract Law

Corbin on Contracts Desk Edition

Corbin on Contracts Desk Edition > CHAPTER 1 PRELIMINARY DEFINITIONS

§ 1.02 The Meaning of “Contract”

[1] Agreement—Not All Agreements Are Contracts

[2] Contracts Are Plans for the Future Created by a Promise

[4] The Document Evidencing the Contract Is Not the “Contract”—“Obligation”

Corbin on Contracts Desk Edition

Corbin on Contracts Desk Edition > CHAPTER 1 PRELIMINARY DEFINITIONS

§ 1.03 The Purpose of Contract Law Is to Ascertain the Realization of the

[1] The Purpose of Contract Law—Reasonable Expectations

Corbin on Contracts Desk Edition

Corbin on Contracts Desk Edition > CHAPTER 1 PRELIMINARY DEFINITIONS

§ 1.04 Classification of Contracts

[1] Formal and Informal Contracts

[2] Void Contracts Have No Legal Effect

[4] Unenforceable Contracts That Are Not Invalid Contracts

Corbin on Contracts Desk Edition

Corbin on Contracts Desk Edition > CHAPTER 1 PRELIMINARY DEFINITIONS

§ 1.05 Meaning of “Offer”

Corbin on Contracts Desk Edition

Corbin on Contracts Desk Edition > CHAPTER 1 PRELIMINARY DEFINITIONS

§ 1.06 Unilateral and Bilateral Contracts

Corbin on Contracts Desk Edition

CHAPTER 2 OFFERS: CREATION AND DURATION OF POWERS OF

Corbin on Contracts Desk Edition

§ 2.01 Preliminary Negotiations

[1] “Preliminary Negotiations” Begin Bargaining Transactions

[2] No Particular Words Are Necessary to Create an Offer

[a] The Parties’ Intention to Be Bound Is a Critical Factor

[d] The Completeness of Terms Affects Whether an Offer Will Be Found

[e] Real Property Sales Usually Contemplate Formal Documentation

[f] A Party’s Reasonable Reliance on a Communication May Qualify It as an Offer

• Corbin § 2.1 (preliminary negotiations); § 2.2 (preliminary