contractsoutline_shupack_reallyhuge

CONTRACTS OUTLINE, 2005-2006Professor Shupack

SOURCES OF BLACK-LETTER LAW IN CONTRACTS Restatement of Contracts (Published by A.L.I.)

o Not binding, but very persuasiveo Restatement (First) of Contracts

1932o Restatement (Second) of Contracts

1981 Refined Restatement 1st and lined it up with U.C.C.

Uniform Commercial Code (U.C.C.)o Adopted by all states except for Louisiana

WHAT IS A CONTRACT? An oral or written agreement Involves 2 or more persons Is an exchange relationship (each party must give up something to get something in return = consideration) There has to be at least one promise = some commitment to the future by which liability is created Must be enforceable

I. REMEDIES FOR BREACH OF CONTRACT/ PROMISE GOALS OF CONTRACT DAMAGES – to provide an incentive for people to keep their promises, because

our economy runs on promises/contractso Election/ Choice of Remedies – the non-breaching party must choose which remedy to pursue at trial:

Monetary Damages Specific Performance Restitution of benefit conferred on breaching party Quasi-Contract/ Quantum Meruit (payment for work performed)

o Types of Damages Recoverable: Expectation, Reliance, Restitution (Restatement §344) EXPECTATION DAMAGES = meant to put the promisee in the same position that he would

have been in had the promisor performed Generally the 1st type of damages that courts will award for breach (often yields the

most $), unless the particular situation calls for reliance or restitution damages Calculation of Expectation Damages

o Restatement §347: “The injured party has a right to damages based on his expectation

interest as measured by (a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus (b) any other loss including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided by not having to perform.”

o E.g. Hawkins v. McGee, New Hampshire, 1929 A surgical procedure did not result in the restoration to plaintiff of a

“hundred per cent good hand” as had been promised, but rather, in a worse hand than the injured one with which the plaintiff had started out.

Holding: Pain and suffering are not the determinants of the amount of damages owed (that would be reliance damages, as in Sullivan), but rather, damages are based on difference in value between the contracted result and the result actually achieved.

o Calculating Expectation Damages in Construction Contracts

Remedies: Goals of Contract Damages – Expectation, Reliance, Restitution

Restatement (1st) §346: Courts may calculate damages according to either:

Cost of Repair/ Completion (when builder breaches), or; Difference Between Market Value of Uncompleted Project

and Market Value of Contracted Project (when buyer breaches)

o If the owner breaches after the builder has finished, builder may recover the contract price

Cost of Completion/ Repair – Groves v. John Wunder Co., Minnesota, 1939

Wunder contracted to lease land from Groves for 7 years and remove the gravel and sand from the property; Wunder agreed in the contract to “leave the property ‘at a uniform grade’” upon returning it to Groves; D breached contract deliberately, removing the gravel, but not at the uniform grade that had been agreed upon

Holding: P should recover the cost of repair (returning the land to uniform grade) even though that cost would be over 4x the market value of the property had the property been returned at uniform grade as per the contract

o Court explains that a “bad faith” breach may be compensated in this overgenerous way, though the general rule in contracts (as opposed to torts) is that the aggrieved party should be made whole and no more

Difference in Value - Peevyhouse v. Garland Coal and Mining Co., Oklahoma, 1962

Facts are almost identical to Groves, yet court’s holding is the exact opposite

Holding: Damages = the difference in market value between the property as left and the property as it should have been left according to contract

a person can’t “recover a greater amount in damages for breach of an obligation than he would have gained by the full performance thereof on both sides”

Louise Caroline Nursing Home, Inc. v. Dix Constr. Corp., Massachusetts, 1972

Abandonment of Construction Project: Dix failed to complete the nursing home within the time agreed upon in the contract (without justification); P hired another contractor to finish the project, and the cost came in under the original Dix contract price

Holding: The aggrieved party cannot recover excess damages if the cost of completion was within the contract price.

Note: P wanted to recover for the difference in market value between the unfinished property as left by Dix, and the market value of the property as it would have been had there been a nursing home there, as per the contract

o Court points out that what P wanted is only the case in a situation of defective construction, not abandonment

o Calculating expectation damages in contracts for sale of goods: Acme Mills & Elevator Co. v. Johnson, Kentucky 1911

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Johnson breached contract to deliver sacks of wheat to Acme Mills, which were to have been paid for upon delivery; Johnson promised to sell the wheat to another buyer for more $ than the Acme contract; the market price of wheat on the expected delivery date was actually less than the Acme-Johnson contract price Should Acme be able to recover the extra profit Johnson made from the later sale?

Holding: “In contracts for the delivery of personal property at a fixed time and at a designated place, the vendee is entitled to…the difference between the contract price and the market price of the property at the place and time of delivery.” (like U.C.C. §2-713)

o No damages where contract price exceeds market price at date of delivery

U.C.C. § 2-713. Buyer's Damages for Non-delivery or Repudiation. (1) …the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages…but less expenses saved in consequence of the seller's breach.

o Calculating expectation damages in land sale contracts Generally the same measure of damages as in contracts for sale of

goods (difference between contract price and market value of land at time of breach)

o In general, expectation damages are calculated so as not to turn the plaintiff’s loss from breach into a windfall of unexpected profits

RELIANCE DAMAGES = meant to put the promisee in the position she was in before the promise was made; damages incurred because the promisee relied on the promise (Restatement §349)

Sullivan v. O’Connor, Massachusetts 1973o Sullivan sues for expectancy damages because of botched nose jobo Holding: The proper measure of damages in most medical cases is reliance –

expectation damages are too uncertain to calculate in medical situations, while mere restitution of doctor’s fees is too little compensation.

o Because Sullivan was getting reliance damages, she was—unlike Hawkins—entitled to pain and suffering damages from the surgery (she suffered because she relied upon the doctor’s promise that she would have a better nose)

RESTITUTION DAMAGES = meant to prevent the promisor from unjust enrichment as a result of his breach; damages incurred because promisor induced promisee to confer a benefit upon promisor which promisor did not reciprocate

Lauren v. DeCarolis Constr. Co. Inc., Massachusetts, 1977o D removed gravel from the land that P had purchased from D without asking

P’s permission, however, the sale transaction had not yet closed (gravel was “converted” before P had ownership of the land)

o Holding: Restitution damages are appropriate because D’s breach was “deliberate and willful”, and the damages here are meant to deprive the defendant “of a profit wrongfully made, a profit which the plaintiff was entitled to make”.

Normally, the difference in value of the property pre-gravel removal and the value of the property as transferred would be the appropriate measure according to land sale contract expectation damages

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(above), however, that amount is not enough to adequately compensate P here

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Remedies: Limitations on Expectation Damages – Duty to Mitigate

LIMITATIONS ON EXPECTATION DAMAGESo Duty to Mitigate

The aggrieved party in a breach has an affirmative duty to exercise reasonable efforts to avoid the worst consequences of the breach by taking steps to mitigate damages:

Must not increase damages by further action, or by failing to take reasonable alternative action courts want to encourage efficient breach

Builder’s Duty to Mitigate – Construction Contracts A builder shouldn’t continue to build after the contract is breached, but is not under

duty to find an alternative construction job during the rest of the contract period (unlike in employment contracts)

E.g. Rockingham County v. Luten Bridge Co., U.S. Circuit Court, 1929o Action by Luten Bridge Co. to recover expectation damages (cost-of-

completion according to contract price) when Rockingham County repudiated the contract after Luten had begun building the bridge; Luten had continued to build the bridge after notification that Rockingham would not longer require the bridge to be built

o Holding: “after an absolute repudiation…by one party to a contract, the other party cannot continue to perform and recover damages based on full performance…the plaintiff must, so far as he can without loss to himself, mitigate the damages caused by the defendant’s wrongful act.”

Luten Bridge Co. is been entitled to recover $ spent on labor and materials before the notification of breach, and anticipated net profits for the rest of the project (i.e. the full contract price less anticipated labor and materials costs) because Luten did not mitigate, they lose the labor and materials $ that they spent on completing the bridge

Allocation of Overhead Overhead is by definition “fixed”, so the cost of overhead may not be deducted from

the contract price as part of P’s cost of completion when P has not finished performance at the time of D’s breach

E.g. Leingang v. City of Mandan Weed Board, N. Dakota 1991o City breached, giving some of the weed-cutting work that was part of

Leingang’s contract to another contractor; the City added Leingang’s overhead costs into Leingang’s cost of completion to be deducted from the net profits that the city owed as damages the court held that this calculation was wrong:

o Held: value of a contract is dependent on 2 items:1) the party’s reasonable expenditures toward performance, not including fixed

overhead costs2) the anticipated profits

The anticipated profits should be calculated by subtracting the cost to perform (not including fixed overhead) from the contract price.

E.g. Kearsage Computer, Inc. v. Acme Staple Co., New Hampshire 1976o After Acme breached, Kearsage took on new data processing business, but P

claimed that this new business should not be subtracted from the contract price as mitigated damages because Kearsage could have handled the new business whether or not the breach had happened (the breach didn’t save P any money, because P’s operation costs were fixed independent of P’s volume of business) the court agreed:

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o Holding: “In the absence of evidence to the contrary a data processing contract does not involve unique personal services to such an extent that when the provider of such services seeks new business after a breach of contract, the income from such new business mitigates the damages owed to him by the breaching party.”

Court here compared data processing to construction contracts

Wrongfully Discharged Employee’s Duty to Mitigate Wrongfully discharged employee must make reasonable efforts to find a position of

similar employment burden is on employer to show that such positions were available

Parker (MacLaine) v. Twentieth Century-Fox Film Corp., California 1970o When Fox informed MacLaine of their breach (they wouldn’t be making the

movie she had contracted to start in), it also offered her a starring role in another film, a western; MacLaine wasn’t given director and screenplay approval rights in the new film, and she would have to film in Australia instead of California new employment was both inferior and different

o Holding: Wrongfully discharged employee is under no obligation to accept inferior or different employment in order to mitigate damages

Billetter v. Posell, California 1949o Employee wrongfully discharged sues for and is awarded damages in the form

of her promised salary for the remainder of her contractual term (even though she received unemployment benefits and was offered to keep her job, but for less $), and for the remainder of a partially-paid contractual Christmas bonus.

o Holding: the employee “is not required to perform the same work for less pay” in order to mitigate damages

Collateral Source Rule: Unemployment, social security, insurance, etc. benefits (collateral sources) are now usually deducted from wrongfully discharged employees’ contract damages (while they wouldn’t be in tort damages) it would be overly punitive to employer to force employer to pay contract damages that, when added to the collateral source, would equal more than the original contract

Mitigation in Contracts for Sale of Goods (Limitations on Recovery under U.C.C.) U.C.C. §2-610: Anticipatory Repudiation. When either party repudiates the contract

with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may

o (a) for a commercially reasonable time await performance by the repudiating party; or

o (b) resort to any remedy for breach (Section 2-703 or Section 2-711), even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and

o (c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods (Section 2-704).

§ 2-723. Proof of Market Price: Time and Place.o (1) If an action based on anticipatory repudiation comes to trial before the time

for performance with respect to some or all of the goods, any damages based on market price (Section 2-708 or Section 2-713) shall be determined according to the price of such goods prevailing at the time when the aggrieved party learned of the repudiation.

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o (2) If evidence of a price prevailing at the times or places described in this Article is not readily available the price prevailing within any reasonable time before or after the time described or at any other place which in commercial judgment or under usage of trade would serve as a reasonable substitute for the one described may be used, making any proper allowance for the cost of transporting the goods to or from such other place.

o (3) Evidence of a relevant price prevailing at a time or place other than the one described in this Article offered by one party is not admissible unless and until he has given the other party such notice as the court finds sufficient to prevent unfair surprise.

Buyer’s Remedies in U.C.C., §§2-711, 12, 13o E.g. Missouri Furnace Co. v. Cochran, Pennsylvania 1881

Missouri Furnace Co. seeks to recover damages for breach of forward contract, by Cochran, to deliver coke to Missouri Furnace Co. at a fixed price every working day for a year; after Cochran breached, P signed a new forward contract for coke that was almost 4x the Cochran-contract price (market price at that time was high) P wants to recover the difference between the “cover” price of its new contract and the price it contracted with D

Holding: Damages are to be calculated as the “difference between the contract price and the market value of the article at the time it should be delivered.” P had a duty to cover in the “spot market”, not in the “future market” for undelivered goods on a forward contract (P should not have entered into such an unreasonable contract, but rather, should have bought coal on the spot market until the price of coal went down again)

o U.C.C. §§2-711, 2-712, 2-713, 2-723, would apply to Missouri Furnace today, though courts do have trouble making these sections all fit together in cases like Missouri Furnace The majority view is that the injured party has a duty to mitigate damages as much as reasonably possible when a contract for sale is repudiated; the minority view is more inclined to make sure that the injured party is compensated, whatever the cost to the repudiating party

E.g. majority view: Oloffson v. Coomer, Illinois 1973 Cover for the corn that D failed to deliver was easily and

immediately available at the time of D’s repudiation, and therefore, the court held that P should not have waited to cover until the actual delivery date, when the price of corn became much higher than the contract price

Under §2-610(a) P has the right to wait a “commercially reasonable time” to look for the best cover price, but in this case waiting until the actual contract delivery date was not commercially reasonable, and therefore P had to fulfill his duty to mitigate

E.g. minority view: Reliance Cooperage Corp. v. Treat, 8th Cir. 1952 Treat notified Reliance a few months before the contract time

was up that his costs were rising and that he would not make any barrel staves under the contract price = anticipatory breach by repudiation

Holding: “there is no duty to mitigate damages until there are damages to mitigate” Reliance was under no duty to cover until the actual date of the contract arrived

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o “The doctrine of anticipatory breach by repudiation is intended to aid the injured party, and any effort to convert it into a benefit to the repudiator should be resisted.”

o § 2-711. Buyer's Remedies in General; Buyer's Security Interest in Rejected Goods. (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).

o § 2-712. "Cover"; Buyer's Procurement of Substitute Goods. (1) After a breach within the preceding section the buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller. (2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (Section 2-715), but less expenses saved in consequence of the seller's breach. (3) Failure of the buyer to effect cover within this section does not bar him from any other remedy.

o § 2-713. Buyer's Damages for Non-delivery or Repudiation.(1) Subject to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller's breach. (2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.

Seller’s Remedies in U.C.C., §§2-708, 2-709, and 2-710o § 2-708. Seller's Damages for Non-acceptance or Repudiation.

(1) Subject to subsection (2) and to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2-710), but less expenses saved in consequence of the buyer's breach.

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(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

o § 2-709. Action for the Price. (when seller is unable to resell goods according to §2-708)(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price

(a) of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and (b) of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.

(2) Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold. (3) After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (Section 2-610), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for non-acceptance under the preceding section.

o § 2-710. Seller's Incidental Damages.Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach.

e.g. Neri v. Retail Marine Corp., New York 1972 Action by Neri to recover deposit he had put down on the boat;

Neri had repudiated the contract to purchase the boat. Counterclaim by D (seller) to recover damages as a result of Neri’s breach Even though D was able to resell the boat, D lost the profits of this sale, because D would have been able to sell 2 boats had P not breached, and D had to incur expenses to store the boat for longer

Holding: According to U.C.C. § 2-708 (2), even though the seller is usually entitled to only the difference between market price and contract price if the seller can’t recover the contract price on his/her own, if this would not place the seller in as good a position as he would have been in had the buyer not breached, the seller is entitled to recover lost profits and incidental damages.

o Market-based damages alone (as in 2-708(1))are “with mathematical certainty” never adequate in cases like these when the retail seller could have made multiple sales

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o See also §2-718 (below) on liquidated damages R.E. Davis Chemical Corp. v. Diasonics, Inc.

Clarifies Neri: in cases of multiple sales possibilities, the seller must establish both:

o That it could have sold more of the breached unit ando That it would have been profitable for the seller to have

produced and sold the breached unit as well as other units (because at some point producing extra units is no longer profitable to a seller)

o Consequential Damages/ Damages Arising from Special Circumstances Added to standard damages, the breaching party is liable for all losses resulting from the breach

which the parties should have reasonably foreseen at the time of contracting as likely to flow from the breach

Special circumstances: damages that are unique to the plaintiff are only considered recoverable if the breacher knew specifically of the plaintiff’s special circumstances

Hadley v. Baxendale, England 1854 Mill operator Hadley seeks to recover damages for lost profit incurred when defendant

carrier breached contract by negligently delaying delivery of mill operator’s broken crankshaft to manufacturer for repairs.

Holding: The plaintiff may recover only damages that were reasonably foreseeable to the breaching party at the time that the contract was made

Holmes “tacit agreement test” = a promisor’s liability in contract cases should be presumed to have been within the promisor’s contemplation at the time that he made the contract (the tacit agreement); therefore, if the liability is so large that a reasonable person cognizant of that liability would probably not have entered into such a risky contract, we can assume that the promisor was not cognizant of that liability, and made no sort of “tacit agreement” to be held liable for more than ordinary damages.

E.g. Lamkins v. International Harvester Co., Arkansas 1944o P contracted to by a tractor with lights on it; when the lights took more than a

year to arrive, P sued for lost profits incurred by not being able to plow at night.

Held: The lost profits don’t pass the “tacit agreement test” it is not “reasonable…to believe that the dealer at the time tacitly consented to be bound for more than ordinary damages in case of default on his part” – if D had known that exorbitant lost profits damages could result, he never would have taken on the liability for such a contract

E.g. Victoria Laundry (Windsor) Ltd. V. Newman Indus., Ltd., England 1949o Ps were launderers and dyers and had contracted with D to buy a large boiler

machine; D knew that Ps were launderers and needed to use the boiler for their business as soon as possible; the boiler accidentally broke and was delivered late

o Held: P could recover for regular lost laundry business profits, because those would have been “within the promisor’s contemplation”, but P could not recover for especially “lucrative” dyeing contracts, because D could not have been expected to know of those special circumstances

E.g. The Heron II, England, 1967o The ship Heron II was liable to sugar dealers for their lost profits when the ship

delayed in reaching port, by which point the price in sugar had gone down significantly the Heron II could have “reasonably foreseen” that because of the fluctuating nature of the sugar market, its delay could adversely affect P’s profits

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E.g. Hector Martinez & Co. v. Southern Pacific Transp. Co., 5th Cir. 1980o D was late in delivering a dragline to P; a dragline is a machine that has uses

on its own (as opposed to a machine part, like a crankshaft), and it can be considered foreseeable that P needed it for business uses and would lose business profits because of delay in delivery

o Held: “A plaintiff need not show that a harm was ‘the most foreseeable of possible harms’”, but rather, that the harm is not unforeseeable to a reasonable person at the time of the contract.”

U.C.C. § 2-715. Buyer's Incidental and Consequential Damages.(1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach. (2) Consequential damages resulting from the seller's breach include

(a) 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; and (b) injury to person or property proximately resulting from any breach of warranty.

o Restatement of Contracts, Second, §351 limits this by adding (along the lines of the “tacit agreement” reasoning in Lamkins) that “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.”

E.g. Prutch v. Ford Motor Co., Colorado 1980o P suffered losses from crop damage as a result of defective equipment provided

by Do Holding: It is not necessary, according to the U.C.C., to prove that D actually

knew at the time of contracting of the lost profits that might result, but that D might reasonably have known that such loss could result

o No Mental Distress Damages in Contracts Valentine v. General American Credit, Inc., Michigan 1984

P claims that losing the “peace of mind” that comes with the “job security” of having an employment contract can be expected to cause mental distress, and that because this distress is a “reasonably foreseeable” consequence of breach of employment contract, she should be able to recover mental distress damages as consequential damages

Held: Mental distress damages in contracts are awarded only in extenuating personal circumstances (e.g. marriage, birth, death, personal freedom), or when the contract was expressly made to prevent mental distress of the type suffered by the aggrieved party.

Hancock v. Northcutt, Alaska 1991 P could not recover emotional distress damages for breach of construction contract Holding: The cost of building housing would skyrocket if emotional distress breach of

contract suits had to be taken into account there must be a “principled limit” on contract damages

o Nominal Damages: Where a right of action for breach exists, but no monetary harm has been done or is provable, the plaintiff may get a judgment for nominal damages, i.e. a small sum in acknowledgement of the harm done

E.g. Freund v. Washington Square Press, Inc., NY 1974

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D merged with another publishing company and refused to publish P’s academic book, after having already paid the advance; P claims that D owes him the $10,000 D saved by not publishing the book in hardcover

Held: Damages should be measured not “by what the defaulting party saved by the breach [cost of publication], “but by the natural and probable consequences of the breach to the plaintiff”

o Therefore, P would be able to recover for proven lost royalties and lost reputation, however, since P could not prove any lost royalties, and waived his claim to lost reputation, the only damages recoverable were nominal

o Anticipated Profits Damages Fera v. Village Plaza, Inc., Michigan 1976

Ps had contracted to open a “book and bottle” shop in D’s proposed shopping center; D delayed the building, and gave P’s space to another tenant; D offered an alternative space, but P found the new space unsuitable to their business’s needs; P seeks damages as measured by their lost profits.

Lower court ruled that, as in Freund, the “lost profits” were too speculative to calculate because the business was new = New Business Rule

Held: P doesn’t need to prove lost profits damages for its new business with “certainty” but only needs to “lay a basis for a reasonable estimate of the extent of [harm], measured in money” (which the court believes that P did in this case)

Most judges prefer to use standards of reasonability rather than a rule when looking at lost profits of new businesses, because standards allow for flexibility, and govern by their reasoning rather than by their exact terms.

Restatement of Contracts, Second §352, Comment B (1981). “Proof of Profits”: “Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.”

It’s easy to prove the value of a lost sale to an aggrieved seller; more difficult to prove the value of resultant lost profits to an aggrieved buyer.

With established businesses, lost future profits are fairly easily based on previous profit records; with new businesses, speculative lost profits are more difficult to prove, but can be done with the aid of expert testimony.

RELIANCE AND RESTITUTION (ALTERNATIVE INTERESTS)o RELIANCE DAMAGES – generally appropriate in certain situations when expectation damages are

not suitable, such as indeterminate lost profits or an unenforceable contract: P cannot show lost profits with sufficient certainty

Chicago Coliseum Club v. Dempsey, Illinois 1932o Action to recover damages for D’s breach of contract to perform in a boxing

match that P expended much money in setting up and promoting both before and after the actual contract was signed; P also spent money in procuring an injunction against D that was never enforced

o Held: Only expenses incurred by plaintiff after the enactment of the contract until the date of breach may be recovered – reliance damages.

The lost profits from the upcoming match were considered too speculative for expectancy damages

Security Stove & MFG. Co. v. American Ry. Express Co., Missouri 1932o D shipped all but one crucial piece of P’s new stove invention to a trade show;

as a result, P couldn’t exhibit his new stove; P claims lost profitso Held: Lost profits of the new invention are too speculative, and so P’s

expenses in reliance on D’s shipping contract are the only damages that can be calculated—and thus awarded—with certainty

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o “In cases of this kind the method of estimating the damages should be adopted which is the most definite and certain and which best achieves the fundamental purpose of compensation.”

L. Albert & Son v. Armstrong Rubber Co., 2nd Cir. 19949o P contracted to have 4 rubber reconditioning machines delivered; seller

breached and only sent 2; P no longer needed the machines since the breach came after the war ended, so he sent the first 2 machines back, and sued for reliance damages (the money he spent preparing foundations for the machines in his rubber department)

o D claimed that if P had actually received the machines, P would have been operating at a loss, and that this loss should offset the amount of reliance damages owed by D

o Held: D owes the reliance damages, but has the right to reduce those damages by the amount of the P’s business loss if D can prove what that loss would have been (Judge Hand)

Burden of proof is on D if he wants to reduce damages See §333 in Restatement 1st

P relied on a void/ unenforceable contract (Statute of Frauds) Boone v. Coe, Kentucky 1913

o D breached an oral contract to allow Ps (who traveled from Kentucky, left their homes, etc.) to rent, live on, and farm D’s land in Texas; P seeks to recover the money spent in reliance on D’s oral promise

o Held: Because of the Statute of Frauds, P could only recover restitution damages—in quantum meruit—if D had become enriched in any way by P’s partial performance of the contractual obligations (unfortunately for P, this was not the case)

The newest draft of the Restatement has attempted to fix the “Boone problem”; it states that the performance of a service at the request of D, even if the service didn’t confer benefit on D, puts P in a position to claim restitution damages after D’s breach

Kearns v. Andree, Connecticut 1928o P had an oral contract with D that D would buy P’s house (unenforceable

according to the Statute of Frauds); D breached, but then said that if P fixed up the house according to certain specifications, D would buy it; relying on D’s statement (a new quasi-contract), P fixed up the house, which made it less salable to others, and D still wouldn’t buy

o Holding: P couldn’t recover on the unenforceable oral contract of land sale, but P could recover the cots of fixing up the house in reliance on D’s second statement

Restatement of Contracts, Second §349 – Damages Based on Reliance Interest Essential reliance = costs incurred by preparation for performance or actual

performance of the contract Incidental reliance = preparation for collateral transactions that the party plans to

carry out when the contract is performed

o RESTITUTION DAMAGES – generally appropriate when one party has performed to the benefit of the other party, who gave nothing in return the performing party may recover in quantum meruit = for the value of his services, which had generated a quasi-contract or implied contract when no explicit contract originally existed

United States v. Algernon Blair, Inc., 4th Cir. 1973 P had completed about 28% of the steel erection work it had been subcontracted to do

when D refused to pay P’s crane rental, claiming it had no contractual obligation to do so; P took the refusal to pay as breach and stopped working; P claims restitution of the

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labor and equipment costs it expended in doing 28% of the work (quantum meruit); D claims that had P completed the contract work, P would have lost more than P was claiming in restitution damages

Held: P is entitled to restitution in quantum meruit; because the total breach made the contract disappear and the claim is for quantum meruit, rather than suing for the contract price, P does not need to offset damages by what P’s loss would have been had P completed the contract

o This situation is different from Albert v. Armstrong Rubber P’s business losses could offset the damages there, because the damages were for reliance, not for restitution to P of the D’s wrongful profit from P’s labor

Oliver v. Campbell, California 1954 A client breaches on an employment contract with his lawyer after the trial, but before

the court announced its decision. P lawyer sued for restitution, claiming the value of his services was well beyond the contract price.

Held: P was limited to the unpaid balance of the contract price. Restitution was not available to him because he had, in effect, fully performed the terms of the contract.

Britton v. Turner, New Hampshire 1834 P brings action to recover wages for 9.5 months of work, when P had breached by not

working for the contracted year. Held: Even though P breached, P may recover the wages that he rightly earned, less

any damages the employer suffered as a result of P’s breach. (using the contract price as the upper ceiling for employer’s damages)

Pinches v. Swedish Evangelical Lutheran Church, Connecticut 1887 P completed building church for D with several changes (unintentional) from the

specifications in the contract (one of which was due to D’s error as well); the church was still useable, and D accepted the building and began to use it

Holding: When a builder completes a building in good faith and the defects that result cannot be remedied without destroying the whole structure and rebuilding, as long as the building is usable to the benefit of the aggrieved party, the builder is only responsible for paying the diminution of value between the building as planned and the building as resulted (or for the cost of fixing the building, if it is reasonable)

o Basically, the court is awarding P restitution damages for the building work P had done, offset by diminution of value or cost of repair

Schwasnick v. Blandin, 2nd Cir. 1933 D refused to pay an installment to P lumberman who D claimed had done defective

work; lumberman than left the job; lumberman sues in quantum meruit Held: The burden of proof is on P to prove how much D was enriched by his labor

the jury should have been instructed to award damages based on the “net benefit” of P’s work for D, i.e. labor and services less damages done to the D by P’s defective work

o Judge Learned Hand: “the promisor shall not profit at the promisee’s expense” Kelley v. Hance, Connecticut 1928

P was supposed to excavate the earth and construct a sidewalk for D; P abandoned the site after excavation; D cancelled the contract; P sues in quantum meruit for the excavation work

Held: No restitution damages for P because the work was of no value to D D did not accept the benefits of P’s labor as in Pinches

Vines v. Orchard Hills, Inc., Connecticut 1980 P Buyer breached contract for condominium sale, and seeks to recover down payment

from D (on theory of restitution); P claims that since the house was worth much more to D when D finally sold it than what the contract price was, D didn’t need the down payment to cover the damages that flowed from P’s breach

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Held: The defaulting buyers (P) are entitled to restitution of the down payment if the damages sustained by the seller (D) are found to be less than the amount by which the seller benefited from the breach (was “unjustly enriched”) at the time of the breach (not at the time of D’s later sale);

o Burden is on the breaching buyer to prove that the seller’s losses from the breach were less than that amount of the down payment. (If the seller was the breaching party, the seller would have the burden of that proof.)

The ruling here is an example of the modern view on restitution of down payments; the traditional view did not allow for any recovery of down payments when the buyer breached.

CONTRACTUAL CONTROLS ON DAMAGE REMEDY – Liquidated Damages, Down Payments, and Deposits

o Liquidated damages provisions may be enforced so long as they are not “in the nature of a penalty” (penalty clauses are deemed “unconscionable”), and the court determines that the stipulated damages were a good faith effort by the parties to determine the actual damages that would result in the event of a breach

o To be enforceable, a liquidated damages clause must meet two requirements: Damages difficult to estimate at time of contract The amount specified must have been a reasonable forecast of fair compensation at the time of

contracting o U.C.C. § 2-718. Liquidation or Limitation of Damages; Deposits.

(1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. (2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds

(a) the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or (b) in the absence of such terms, twenty per cent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.

(3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes

(a) a right to recover damages under the provisions of this Article other than subsection (1), and (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.

(4) Where a seller has received payment in goods their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer's breach before reselling goods received in part performance, his resale is subject to the conditions laid down in this Article on resale by an aggrieved seller (Section 2-706).

o Restatement, 2nd §356. LIQUIDATED DAMAGES AND PENALTIES: Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof or loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.

Changed from §339 in 1st Restatement, which only allowed reasonability to be compared to the anticipated losses, not the actual losses

o Unenforceable Liquidated Damages Clauses: An excessive liquidated damages clause often signifies that there was some unfair dealing

involved in making the contract (i.e. that the writer of the excessive clause was in more control of the contract-making process), and the courts do not wish to uphold unfair bargaining situations

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Pacheco v. Scoblionko, Maine 1987 P withdrew his child from summer camp on June 14 because she needed to go to

summer school instead; P had already paid the full amount of the camp fee; the liquidated damages clause said that for withdrawal after May 1, any money paid to the camp will be retained as liquidated damages.

Held: The clause was an “unenforceable penalty” because the damages required by it were “excessive” and did not pass the “reasonable forecast” and “difficult to estimate” test for enforceable liquidated damages clauses

o Unenforceable “penalty damages” clauses are called in terrorem clauses City of Rye v. Public Service Mut. Ins. Co., New York 1974

D was taking too long to complete buildings for the P, the City of Rye; P seeks to recover a $100,000 surety bond that was put up by D in order for P to secure timely completion of 6 buildings

o The main damages that P claims are that the city’s zoning ordinances are being violated as long as the buildings remain uncompleted these damages are not measurable in money, however

Held: The bond amount is considered a penalty that is “grossly disproportionate to the anticipated probable harm”, and its exactment is therefore unenforceable.

Massman Constr. Co. v. City Council of Greenville, Miss., 5th Cir. 1945 P was late completing construction of a bridge, but the highway connecting to the

bridge was finished even later, making the bridge unusable even at late completion time Held: The liquidated damages clause for delay was too excessive in this case, because

no revenue could have been collected from the bridge had it been completed by the fixed time anyway, and the inconvenience to the public was not made greater by P’s delay anyway, because the bridge was still unusable even at the late finish date

o Enforceable Liquidated Damages Clauses: Yockey v. Horn, 7th Cir. 1989

Yockey & Horn (former business partners) agreed by contract to refrain from voluntarily participating in any litigation against each other (even litigation brought by others); this agreement included a liquidated damages clause of $50,000 in case of breach; Horn breached.

Held: Yockey gets the liquidated damages since the injury (to business reputation) that Yockey suffered as a result of Horn’s breach was (according to one prong of the test for enforceability of liquidated damages) “difficult to estimate”

Kelly v. Marx, Massachusetts 1999 Similar facts to Vines v. Orchard Hills buyer breached, and then the seller resold the

property a few weeks after the breach for $5K more than the original contracted price; Buyer wants to recover the 5% down payment.

Held: Court allowed seller to keep the 5% deposit as liquidated damages according to the “anticipation” of those damages at the time of the contract (not according to the “actual harm”, as in the U.C.C. 2-718) because the anticipated damages were reasonable and not in the nature of a penalty

o The court also wishes to prevent the costly litigation that would result from always allowing “second looks” into down payment clauses to determine what actual damages were when the amount in the clause seems just

o Liquidated Damages Clause as Limit on Recovery? Wilt v. Waterfield, Missouri 1954

Seller breached in sale of farm to P; seller argued that P’s damages should be limited to the $1,900 that was set out in the liquidated damages clause.

Held: A liquidated damages clause doesn’t limit recovery if it is an “undifferentiated” clause, i.e. applies to a variety of breaches, and therefore is not a “reasonable effort to estimate damages”

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o Because the liquidated damages clause was meant to cover damages in the event of the buyer’s breach, the amount did not apply to the case of the seller’s breach

o The correct measure of damages for P was calculated to be the difference between the contract price and the price at which the seller resold the farm (which was close to market price)

Fretwell v. Protection Alarm Co., Oklahoma, 1988 P seeks to recover as damages the value of the property that was burglarized from their

home after D alarm company was negligent in checking up on the system when D received a burglary signal; however, D’s contract limited D’s liability 50$ or P’s actual loss, whichever is less, and stated that “Protection is not an insurer; that the payments [for the alarm system] are based solely on the value of the services provided”

o P claims that D’s indemnity clause was unconscionable, as a liquidated damages clause for too much $ would be

Held: D’s clause is a “limiting” and indemnity clause, not a liquidated damages clause, and may therefore be upheld as long as its terms were “unequivocally clear” to the parties at the time of contracting

The 3rd Restatement tries to deal with situations in which liquidated damages clauses end up under-compensating for damages that flowed from the breach (since most of the cases tend to deal with clauses that over-compensate

ENFORCEMENT IN EQUITYo Requirements for Specific Performance

Contract terms are definite and certain so that the court may easily determine what it must order each party to specifically perform

Monetary damages/ remedy at law is inadequate Enforcement must operate equitably – no specific performance if enforcement will cause

undue hardship Enforcement must be feasible – no specific performance if enforcement is difficult to oversee

or will require extended judicial supervision Availability of equitable remedy is mutual to both parties (though courts don’t generally use

this requirement anymore)o Restatement of Contracts, 2nd, §360. FACTORS AFFECTING ADEQUACY OF DAMAGES

In determining whether the remedy in damages would be adequate, the following circumstances are significant:

(a) the difficulty of proving damages with reasonable certainty,(b) the difficulty of procuring a suitable substitute performance by means of money awarded as damages, and(c) the likelihood that an award of damages could not be collected.

o Specific Performance in Contracts for Sale of Goods U.C.C. § 2-716. Buyer's Right to Specific Performance or Replevin.

(1) Specific performance may be decreed where the goods are unique or in other proper circumstances.

Curtice Bros. Co. v. Catts, New Jersey 1907 (before U.C.C.) D farmer contracted to sell his entire tomato crop to P, a canning plant; D breached and

P seeks specific performance because at the time of D’s breach, P was faced with “the inability to procure at any price at the time needed and of the quality needed the necessary tomatoes to insure the successful operation of the plant” during that tomato season

Held: Because P’s situation is “extraordinary” (what the U.C.C. might call “other proper circumstances”), specific performance can be ordered against D

o Another consideration here is Restatement §360(c) – even though the court probably could calculate P’s monetary damages for lost seasonal canning

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profits, the likelihood that D could pay those damages is slim; specific performance gives P a much greater chance of recovery

Paloukos v. Intermountain Chevrolet Co., Idaho 1978 P wanted court to demand that D deliver a 1974 pickup truck after D returned P’s

deposit stating product shortage Held: According to U.C.C. §2-716(1), specific performance is not required here

because the item in question was not “unique”, nor did this qualify as “other proper circumstances”

o Also, “the courts will not order the impossible, such as ordering the seller to sell to the buyer that which the seller does not have”

Laclede Gas Co. v. Amoco Oil Co., 8th Cir. 1975 D and P contracted for D to supply propane gas to P on a yearly renewable contract for

10-15 years (i.e. until the subdivisions served by P converted to natural gas use); P could cancel contract with 30-day notice, or 30 days before the end of a year (there was no such provision for D = lack of mutuality)

D cancelled because of low gas supply, and claimed that specific performance couldn’t be demanded because P could buy gas on the open market—i.e. a remedy at law was available (D also claimed that the contract’s lack of mutuality in its cancellation provision was an issue, but the court said it wasn’t)

Held: P’s circumstances fit into the category of “other proper circumstances” in which specific performance can be demanded according to UCC §2-716(1), because even though propane gas was available on the open market at the time, P would not have been able to find another long-term supplier that would enable P to continue to serve its clients (other suppliers wouldn’t enter into a new long-term contract for propane because most ppl. were converting over to natural gas); D already had the propane-supply mechanism set up

Eastern Rolling Mill v. Michlovitz, Maryland 1929 D, a sheet steel manufacturer, contracted to sell all its scrap metal to P; the price to be

paid was variable; D repudiated the contract 4 years early. Held: Specific performance was proper because “how could a jury determine the

contract price, derived from a variable market price, during the years to come? Any estimate of damages would be ‘speculative’, not compensatory.”

o Specific Performance in Land Sales Contracts Gartrell v. Stafford, Nebraska 1882

D refused to convey a piece of Nebraska land that D had contracted (in writing) to sell to P

Held: P gets specific performance because it is “universally maintained” that in cases of sale of real estate, the remedy of specific performance is not limited to special circumstances, because every land sale is, in essence, a special circumstance

o A buyer picks out a piece of land based on circumstances (locality, soil quality, accommodations, etc.) that might not be present in another piece of land that has the same market value

Van Wagner Advertising Corp. v. S & M Enterprises, New York 1986 P seeks specific performance in the form of D’s continuance of a lease to P of unique

advertising space on the side of a building that D bought with P’s lease attached Held: If monetary damages are easily calculable, then monetary damages are an

appropriate compensation for breach of contract to lease a unique advertising space.o It is the “uncertainty of valuing” a property, not the property’s inherent

uniqueness, that really determines whether specific performance, rather than monetary damages, is appropriate in this case, the monetary value of the advertising space to P was easily calculable based on the amount of money P had made leasing the space to advertisers

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Equitable conversion = executory land sale contracts create immediate equitable interests in the land

The buyer is regarded as the beneficial owner of the property from the moment the land sale contract is executed

Constructive trust theory = the seller under an executory land sale contract holds title to the land in “constructive trust” for the buyer until the seller receives full payment the purchaser holds equitable title, while the seller retains legal title

o Specific Performance in Employment Contracts Fitzpatrick v. Michael, Maryland 1939

P was a nurse in D’s home for D’s wife until she died; after that, D asked P to stay on as a companion and housekeeper for 8$/week, room + board, title to D’s cars, and the promise of D’s home after D died (this was reiterated in D’s will); D suddenly breached and kicked P out of his home

P seeks specific performance by way of a receiver who would be appointed to make sure that she gets all that was promised to her as long as she continues to perform her end of the contract.

Held: No specific performance in employment contracts because if the personal servant is abhorrent to the employer, enforcement of specific performance would be too great a harm to the employer (“best interest of society” forbids this kind of enforcement).

o Also, as in Manchester Dairy below, enforcement of specific performance such as this would be too difficult to supervise generally, the courts will only enforce negative injunctions, not positive orders to perform

Dallas Cowboys Football Club, Inc. v. Harris, Texas 1961 D Harris had a contract to play for the Rams; the contract stipulated that D must play

for any team that the Rams might assign him to, and that since D had “special, exceptional, and unique knowledge, skill and ability as a football player,” the Rams could enjoin D from playing for anyone else for the duration of the contract; the Rams reassigned D to play with the Dallas Cowboys (P); D breached and signed with the Dallas Texans

Held: Court could enjoin D from playing for any other team but the Cowboys (negative injunction), but could not force D to play for the Cowboys (no positive injunction)

Anticompetitive covenants = when there is a provision in the contract stating that the employee will not perform the same service elsewhere for a period of time after leaving employer in order to prevent competition to the employer

Courts don’t like to enforce anticompetitive covenants (though U.C.C. §2-302, below, helps solve these problems) because:

o They often impair the employee’s ability to earn a livingo They go against the “general competitive mold of society”

E.g. ABC v. Wolf, NY 1981o P sough to enjoin D from working at CBS after leaving ABC because D

breached his contract with P to negotiate for contract renewal/ other employment in “good faith”

o Holding: Courts will not decree any specific performance after a personal service contract ends, and courts will carefully scrutinize any specific anticompetitive covenants, and enforce them only if they meet certain requirements here there was no specific anticompetitive contract breached, and while remedy at law may be available, specific performance is not

E.g. Fullerton Lumber Co. v. Torborg, Wisconsin 1955o D’s contract with P had included an anticompetitive covenant that enjoined

him from doing lumber business for himself or others for 10 years after

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termination of contract with P, and within a 15 mile radius of where he had worked for P; P sought to enforce the covenant when D started a lumber business of his own

o Held: An anticompetitive covenant was fair here because P’s successful business depended on the contacts that D would take with him to his new business, though 10 years was considered excessive, and the court remanded for a more fair determination of how long the covenant should last

U.C.C. § 2-302. Unconscionable contract or Clause.(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.

o E.g. Data Management, Inc. v. Greene, Alaska 1988 P sued D for breaching the anticompetitive covenant in their

employment contract that barred them from giving computer services to certain people for 5 years in all of Alaska

Court used the 3rd approach from §2-302(1) – the court can limit the unconscionable clause so as to make it conscionable (similar to outcome in Fullerton Lumber)

o Problem of Supervision in Specific Performance Manchester Dairy System v. Hayward, New Hampshire 1926

P Dairy System had a contract with D Hayward (identical to contracts the P had with other members of their dairy Association) in which D was to sell all his dairy products to the P for 3 years; the contract had a clause that provided for equitable relief in the form of an injunction for specific performance if D failed to deliver; D breached.

Held: An injunction for specific performance would not work here because supervision of D’s dairy operation by officers of the court would be “cumbersome and expensive”; however, a negative injunction that prevents D from selling his products to others would be appropriate

o Legal remedy would not be adequate here because of the structure of the dairy association and the effect that one member’s breach would have on all other members

Northern Delaware Indus. Dev. Corp. v. E.W. Bliss Co., Delaware 1968 P seeks court supervision of building project in order to ensure that more workers are

hired for round-the-clock hours so that the building project is completed on time; contract called for extended work-shifts during certain phases of the project, but did not specify how many, if any, extra workers were to be hired

Held: The contractual right is not specific enough to be understood in the way P wishes; enforcing such a request to order performance is impracticable – the court could not adequately supervise the hiring of an unspecified number of extra workers

City Stores Co. v. Ammerman, D.C. 1967 P agreed in a contract to write a letter to the Fairfax County, VA zoning board

supporting D’s building of a new mall at Tyson’s Corner because the zoning board was going to give construction rights to another builder for a mall nearby; in return, D promised to lease retail space in the new mall to P; after P performed, D refused to lease space to P; P seeks specific performance

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Held: The court did grant specific performance here, even though supervision of the leasing agreement would be difficult, because “relief ordering building construction should not be withheld ‘unless the difficulties of supervision by the court outweigh the importance of enforcement to the plaintiff.’”

o Use of Arbitration Modern statutes allow judicial enforcement of arbitration decisions, since many commercial

transactions include agreements to resolve disputes in arbitration, and this allows courts to leave equitable decisions to arbitrators who have more experience in specific commercial practices

Grayson-Robinson Stores v. Iris Constr. Corp., NY 1960 D could not continue its building contract with P unless P agreed to a rent increase;

Arbitrators ordered specific performance D must keep building The court upheld the arbitration decision in this case even though D had shown that it

would not financially be able to comply with the specific performance decree to continue building (it had been refused loans by 27 banks, and couldn’t continue building without more money)

o The existence of a liquidated damages clause does not bar the remedy of specific performance

II. GROUNDS FOR ENFORCING PROMISES – CONSIDERATION & RELIANCE FORMALITY

o Generally, in order for a promise to be enforceable, it must be supported by consideration = a bargained-for-exchange for something of legal value

o Historically, a promise that lacked consideration (like a donative or gratuitous promise), was enforceable if the promise was made under the formality of a seal; today, ½ of the states have enacted statutes against the enforceability of these types of sealed promises, and most courts will not uphold any promise that lacks consideration (or reliance):

U.C.C. § 2-203. Seals Inoperative. The affixing of a seal to a writing evidencing a contract for sale or an offer to buy or sell goods does not constitute the writing a sealed instrument and the law with respect to sealed instruments does not apply to such a contract or offer.

E.g. Congregation Kadimah Toras-Moshe v. DeLeo, Massachusetts 1989 Rabbi of P congregation, visited decedent during decedent’s illness; decedent made an

oral promise in the presence of witnesses to give P $25,000; promise was never put in writing; P planned to use the money to build a library in the synagogue named after the decedent, but there is no evidence that these library plans were what induced the decedent to make the promise

Held: In order for a promise of a gift to be upheld, it must be substantiated by a written agreement (Mass. law still allowed sealed promises to be upheld, and an oral promise for after death is barred by the Statute of Frauds), or contain elements of bargained-for-consideration or reliance

o P could not prove that it had spent any $ or effort building the library in reliance on decedent’s promise, nor had the decedent made the promise in order to get the named-library in return

EXCHANGE THROUGH BARGAIN – What constitutes consideration?o Courts vary in their approaches to what constitutes consideration, and as a result, there is not just one

“black letter law” that emerges the cases demonstrate how different courts have defined what is and isn’t consideration

o Restatement, 2nd §71: Requirement of Exchange; Types of Exchange(1) To constitute consideration, a performance or a return promise must be bargained for.(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promise in exchange for that promise.(3) The performance may consist of

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(a) an act other than a promise, or(b) a forbearance, or(c) the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.”

o Restatement, 2nd §81: Consideration as Motive or Inducting Cause(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.”o Oral Promise to Give a Gift ≠ consideration

E.g. Congregation Kadimah Toras-Moshe v. DeLeo, Massachusetts 1989 (above)o Legal Detriment/ Forbearance = consideration

E.g. Hamer v. Sidway, NY 1891 P, nephew of decedent, seeks to recover $5,000 from the D, executor of decedent’s

estate, that the decedent had promised P would receive on his 21st birthday if P refrained from drinking, smoking, swearing, or gambling until then

Held: “In general a waiver of any legal right at the request of another party is a sufficient consideration for a promise,” even if the waiving of that right is beneficial to the promisee.

o The more important meaning of consideration is that one party limits himself, rather than that one party profits from the other

E.g. Whitten v. Greeley-Shaw, Maine 1987 P and D had an extra-marital affair; D counterclaimed (against P’s claim for D’s

defaulted mortgage payment) that D had, in a written document specifying things that P would give D, agreed to refrain from calling P, and that this forbearance should be consideration for the money and gifts that P had promised to give D

Held: Because D’s forbearance was not “sought by the promisor” in exchange for the money and gifts, as in §71(2), it does not constitute consideration

o Love and Affection ≠ consideration; Nominal Consideration ≠ consideration E.g. Fischer v. Union Trust Co., Michigan 1904

P, mentally incompetent daughter of the late William Fischer, Sr., brings action to recover money that was foreclosed (in order to pay an outstanding mortgage) by D from property to which Fischer Sr. had given P the deed; Fischer Sr. had orally promised P that he would pay the mortgages on the gifted property; P gave D nominal consideration of 1$ as a joke in return for the deed

Held: The only consideration in the father’s promise to P to pay the mortgages was the father’s “love and affection” for his daughter, and love and affection are not legal consideration that can compel performance of the promise to pay the mortgages.

o The 1$ was not consideration because the court does not use nominal consideration as grounds for enforcing a gratuitous promise (because the promise was meant as a gift, it wouldn’t make sense to view the nominal consideration as true consideration, because a gift is meant to be given without exchange)

o Acceptance of Prize Money after Performance = consideration E.g. Simmons v. United States, 4th Cir. 1962

P caught a fish and later found out that prize money was being offered for it; P brought the fish in to collect the prize money, but didn’t want to pay income taxes on the money because he claimed that it was a gift

Held: P owes income tax, because his catching of the fish was in the nature of performance of an employment contract by taking the $, P was considered to have

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accepted the offer to catch a fish in exchange for money, even though he hadn’t set out to catch the fish for the purpose of that “contract”

Reward Cases in General: American View: If someone refuses a reward after performing, he is considered not to

have accepted, and may not later claim that he be given the award because he performed his half of the contract.

English View: The performance itself is considered acceptance of his half of the bargain, and even if he at first refuses the award, he may later claim it.

o Unequal Monetary Value in Exchange / Monetary “Inadequacy” of Consideration Batsakis v. Demotsis, Texas 1949

D borrowed money from P during WWII in Greece, and promised in a contract to repay P after the war $2,000 (U.S. dollars) with 8% interest. The Greek money that D actually borrowed was worth only $25 U.S. dollars at the time. P sues to recover the $2,000 + interest; D claims that she only owes the actual amount borrowed, because the actual amount was the consideration

Held: “Mere inadequacy of consideration will not void a contract.” – D owes the $2,000.

o Even though the monetary value of the exchange is unequal, the $ that D borrowed had great value to D at the time of borrowing, and therefore, the exchange was supported by consideration

Grubstake Contracts = an investment in a venture in return for a promise of a share of the venture’s profits, should the venture become profitable

E.g. Embola v. Tuppela, Washington 1923o Tuppela, who was in and out of mental asylums, wanted to pursue action to get

the back a gold mine in Alaska that his guardian had sold while he was committed; P took Tuppela in after Tuppella got out; Tupella promised P that if P gave him $50 to get up to Alaska to try to get the mine back, Tuppela would give the friend $10,000; Tupella got the mine back but was again committed, and his guardian doesn’t want to give P the promised $, stating that the 50$ wasn’t “adequate” consideration for Tupella’s promise

o Held: Though consideration was small ($50), the court sees the $50 as an investment, like a grubstake contract – P knew that Tupella was unlikely to get his mine back when P gave the $50; therefore, the promise had consideration

“If there be any legal consideration for the promise, the court will not inquire into its adequacy” consideration must be of some value to the promisor, but the value may be slight (Buckner v. McIlroy, Arkansas 1877)

o Forbearance from Asserting Good Faith Legal Claim = consideration Restatement, 2nd §74. Settlement of Claims

(1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless

a. The claim or defense is in fact doubtful because of uncertainty as to the facts or the law, or

b. The forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid.

(2) The execution of a written instrument surrendering a claim or defense by one who is under no duty to execute it is consideration if the execution of the written instrument is bargained for even though he is not asserting the claim or defense and believes that no valid claim or defense exists.

Duncan v. Black, Missouri 1959 D contracted to sell P a farm along with a 65-acre cotton growing allotment; However,

growing allotments are determined by the government and may not be sold away; the

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growing allotment was reduced after P bought the farm; P said that if D promised to pay him $1,500, P would not bring suit about the reduction of the growing allotment; D did not pay the $1,500 on his promissory note, however, and P sues to recover that $ on this alleged second contract.

Held: According to a two-part test, forbearance from bringing suit may be valid consideration if, 1) the forbearance contract was made in good faith, and 2) the claim from which plaintiff is forbearing has some foundation.

o The claim that P was forbearing from bringing here had no foundation, and therefore, P’s forbearance was not a valid form of consideration for the $1,500.

Military College Co. v. Brooks, N.J. 1929 P dismissed D’s son at the start of the semester (P alleges that the dismissal was for

good reason; D claims that it was wrongful), and P seeks to recover the full year’s tuition from D’s promissory note; D had renewed the promissory note in order to secure the peace of mind that would come with knowing that the school wouldn’t sue him for tuition

Held: Peace of mind secured by another’s forbearance from suit is considered “adequate consideration to support the [promissory] note.” D must pay the full value now that the note has run out, because P forbore from suit during the life of the note

o The claim that P forbore from pursuing was sufficiently “doubtful” according to §74(1)(a) – the case could have gone either way – and both D and P believed that P had a valid legal claim, according to §74(1)(b)

o Volunteered Services ≠ consideration for suit in quantum meruit/ quasi-contract Martin v. Little, Brown & Co., Pennsylvania 1981

P alerted D that P had found a book that infringed the copyright of one of D’s publications; P volunteered to send D the infringing book, in which P had highlighted all of the infringements; D later pursued the copyright suit; P sues D in quantum meruit to recover 1/3 of the profits of D’s copyright suit

Held: “As a general rule, volunteers have no right to restitution.” In this situation the services were voluntary and not solicited, therefore no quasi/implied-contract has been made nor breached, and P has no right to recover in quantum meruit.

Collins v. Lewis, Connecticut 1930 P sheriff cared for cows that Kinne was selling to D after P seized the cows (thinking

that they would pay for Kinne’s debt, and not realizing that they were already sold to D); P told D that he expected to be paid for the cows’ upkeep if P held onto them until D could take them; P sues to recover the upkeep $

Held: A quasi-contract was created by P’s stated expectation that he would be paid for his services, and D’s acquiescence to that expectation by not acting to stop P from providing the services, and further, by accepting the benefit of the services by selling the cows and keeping the profit. P’s services were explicitly not volunteered

Seaview Ass’n of Fire Island, N.Y., Inc. v. Williams, NY 1987 P provided maintenance services to all the homes in a particular Fire Island

development of summer homes; D owned homes for which P provided maintenance, but D claims that since D didn’t use the homes, D shouldn’t have to pay the maintenance fees

Held: D knew or should have known of the services (creation of implied contract) provided by P, and impliedly accepted those services by owning homes in Seaview P’s services were implicitly not volunteered

Difference between an action in quantum meruit and an action in restitution to recover for unjust enrichment:

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Quantum meruit: brought because there is neither an express nor implied contract, but services have been conferred and benefit accepted (this creates a quasi-contract that is “implied in law” but not in fact)

Restitution claim of unjust enrichment: relies on a “true” contract (not a quasi-contract) based on the parties’ intentions a contract that was “implied in fact”(Martin v. Campanaro, 2nd Cir. 1946)

PROMISES GROUNDED IN THE PAST/ MORAL OBLIGATIONSo Moral Obligation based on a past promise generally does not constitute consideration (a transient

feeling of gratitude is also not consideration) however, this area is a grey one, and many cases of moral obligation are enforced for various reasons (often because the moral obligation stems from what could be an actual restitution claim)

o Restatement of Contracts, 2nd §86 – Promise for Benefit Received(1) 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.(2) A promise is not binding under Subsection (1)

a. If the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or

b. To the extent that its value is disproportionate to the benefito Moral Obligation ≠ consideration:

Mills v. Wyman, Massachusetts 1825 P voluntarily cared for D’s son when D’s son was sick; when D later heard of P’s

kindness, D promised to repay P for his expenses in caring for D’s son; D never paid Held: Moral debt alone (without an underlying, “pre-existing obligation” which can

be characterized as consideration) is not sufficient consideration for a bargain.o D himself did not receive the benefit of P’s care here perhaps if D had

received the benefit, as in Webb, below, P could have recovered Harrington v. Taylor, N. Carolina 1945

D’s wife took refuge in P’s home when D was abusing her; D came to P’s home and D’s wife was about to kill D with an axe when P stopped her, severely injuring P’s hand in the process; D promised to pay for P’s medical expenses, but then didn’t

Held: No cause of action – “however much D should be impelled by common gratitude to alleviate the P’s misfortune, a humanitarian act of this kind, voluntarily performed, is not such consideration as would entitle her to recover at law.”

o A defense to this harsh ruling is that promises of the kind made by D are made at a great moment of trauma, and this sort of transient feeling of gratitude toward a Good Samaritan is not enough to constitute consideration

o Moral Obligation = Consideration Material benefit to the promisor makes the moral obligation enforceable Webb v. McGowin, Alabama 1935 – opposite result of Harrington, above

P saved D’s life by preventing a 75 lb. wooden block from falling on D; P’s action caused P to become crippled for life; D promised P that in consideration of P’s having saved D’s life, D would pay P’s medical expenses and support P during P’s life; after D died, P seeks continuation of the promised payment from D’s estate

Held: If P saved D from death or grievous bodily harm, and D subsequently agreed to pay P for the service rendered, “it became a valid and enforceable contract.”

o This case is distinguished from the usual moral obligation cases because a person’s life and limb have a high monetary value it’s not just moral obligation that forces D to fulfill his promise

Muir v. Kane, Washington 1909 P real estate broker found a buyer for D’ home, however, the real estate contract was

oral, and void according to the statute of frauds; to remedy this, P wrote into the

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contract of sale between D and the buyers that D would pay P for services rendered; D claims that since P rendered the services before the “real” contract was written, the services were voluntary and didn’t need to be paid.

Held: P may recover the fees D had a moral obligation to pay for P’s service that was fully as strong a moral obligation to pay a debt that is barred at law by a statute of limitations

o Also, D was unjustly enriched by not paying P as promised – P should recover in restitution

RELIANCE ON A PROMISE/ PROMISSORY ESTOPPELo Traditional View: One relied on another’s promise at one’s own risk if there was no bargained-for

legal consideration, a promise was not enforceable E.g. Boone v. Coe (above, though Statute of Frauds was involved) E.g. Kirksey v. Kirksey, Alabama 1845

After P’s husband died, at D’s (P’s brother-in-law’s) urging, P left her home and moved 70 miles with her children to a house that D promised her; D then moved her to a smaller house, and then completely kicked her off of his land; P seeks damages incurred as a result of relying on D’s promise

Held: “The promise on the part of the defendant, was a mere gratuity…an action will not lie for its breach.” P relied on D’s promise at her own risk

o Modern View = Doctrine of Promissory Estoppel: Reliance on a promise to one’s detriment acts as a substitute for legal consideration, making a promise enforceable that otherwise would not be the promisor is then estopped from denying his promise

Restatement 2nd, §90: Promissory Estoppel according to the Restatement(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance.”

Two ways of looking at inducement of promise using the Tramp example a man tells the Tramp, “if you get up and go into the store around the corner, I will buy you a new coat”:

o The man’s offer was a charitable promise, which induced the Tramp to get up and go get the coat, or;

o The man was induced by the Tramp’s undesirable presence in front of his store (driving away business) to make the offer of the new coat simply so that the Tramp would get up and move away from his store

Development of Promissory Estoppel Doctrine: Ricketts v. Scothorn, Nebraska 1898

o P’s grandfather gave P a promissory note to be paid to her if P stopped working; P did stop working for a year, but then had to take another job when her grandfather died and she no longer received interest on the note; P claims that she relied detrimentally on her grandfather’s promise, and that D (executor of grandfather’s estate) should be estopped from denying payment to P

o Held: Even though the grandfather’s promise was gratuitous, with no “condition, requirement, or request” attached such as would constitute consideration, because there was “expenditure of money or assumption of liability by the donee on the faith of the promise”, D is estopped from denying consideration.”

Allegheny College v. National Chautauqua County Bank, New York 1927

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o Mary Yates promised to donate money to P 30 days after her death; She stipulated that the money was to be used for scholarships and should be named after her. She made a partial payment, but repudiated before her death; P seeks payment of the rest of the donation from D

o Held: The duty assumed by P to name the fund after Mary Yates constitutes consideration. (Cardozo’s reasoning is similar to the doctrine of promissory estoppel, but he does not call it that)

Applications of Promissory Estoppel Doctrine Promise to Give Charitable Subscription

o Allegheny College v. National Chautauqua County Bank (above)o I. & I. Holding Corp. v. Gainsburg, NY 1938

D promised to give Beth Israel Hospital (rights assigned to P) $5,000 “to aid and assist…the Ass’n in its humanitarian work and in consideration of others contributing to the same purposes”; P sued on the D’s pledge claiming that it had kept doing its humanitarian work and obtained other subscriptions.

Held: D must honor his promise to give $; there no need to even invoke promissory estoppel here because a request or invitation to promisee to act based on the promise was implied

o Salsbury v. Northwestern Bell Tel. Co., Iowa 1974 D promised to give $15,000 to a new college, which shut down soon

after opening; D didn’t pay its pledge. Held: The promise must be kept, even though P hadn’t relied on it to

P’s detriment, because “a requirement of evidence of reliance might result in the enforcement of fewer charitable promises” public policy is concerned with helping charities collect money; “where a subscription is unequivocal the pledgor should be made to keep his word.” like §90(2)

Promise to Obtain Insuranceo Siegel v. Spear & Co., NY 1923

P stored furniture with D, and D promised to procure insurance for P’s furniture; D didn’t secure insurance, and P’s furniture was destroyed in a fire; P claims damages because he relied on D’s actions as bailee of his furniture as consideration for D’s promise to procure insurance

Held: Though D’s promise was gratuitous, it was accompanied by misfeasance of an assumed duty, and this misfeasance can be taken as consideration. (Whereas a gratuitous promise that results in nonfeasance is not enforceable.)

If a promisor takes action/ starts to perform as a result of a gratuitous promise, and that action is relied upon by the promisee, then that action is consideration

o East Providence Credit Union v. Geremia, Rhode Island 1968 D took out a promissory note from P using their car as collateral; a

condition of the loan was that D must take out insurance on the car. D was unable to make insurance payments, so P undertook to pay them, adding the amount to the principal of D’s loan; D’s car was totaled in an accident, and P hadn’t paid the insurance

P sues to recover the balance of the loan; D counterclaims to recover the cost of the car because D had relied on P’s promise to get the insurance

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Held: The interest that P would charge D on the money P paid for the insurance premiums = consideration; However, promissory estoppel would have operated even without the interest because D relied on P’s promise and forbore from trying to pay the insurance on their own, to D’s detriment.

Promise to Give Lando Seavey v. Drake, New Hampshire 1882

Seavy Sr. promised (orally) to give P land; P took possession of the land and spent money improving it (part performance), and also forgave Seavy Sr. a $200 promissory note; Seavy Sr. died without officially handing over the deed to P, and P brings a case in equity for specific performance of transferring the deed to the land that P already occupies.

Held: Part performance of an oral land contract lifts the bar of the statute of frauds against enforcing oral land contracts (or gifts). Also, P spent $ and labor on the land in reliance on the promise

The $200 promissory note that P forgave the father cannot constitute consideration, since the land was not given in exchange for that

Promise of Permanent Employment/ Employment At-Willo Forrer v. Sears, Roebuck & Co., Wisconsin 1967

D induced P to come back to work at Sears by promising P “continuing permanent employment” as a manager in consideration of P coming back to work full time and giving up his farming; P sold all of his farming stuff at a loss and came back to work; Sears then discharged P without cause.

P sues on a theory of promissory estoppel because P had relied on D’s promise of “permanent employment” to his detriment

Held: P may not recover because D kept its promise in that it employed P according to the usual meaning of “permanent employment” “continuing employment, terminable at the will of either party”

o Hunter v. Hayes, Colorado 1975 P quit her work at the telephone company in reliance on D’s promise to

employ her as a “flagger” on a construction project; D then did not employ P; P tried to look for work (mitigate damages), but was unemployed for two months anyway.

Held: The doctrine of promissory estoppel/ §90 applies here P should be compensated for her two months’ lost work in reliance on D’s promise

Different from Forrer because Hunter was never hired to begin with, and not hiring = breach, whereas termination at will after hiring = what is expected from the meaning of “permanent employment at will”

Promise of Franchise Granto Goodman (D) v. Dicker (P), D.C. 1948

P applied to D for a “dealer franchise” to sell Emerson Radios; D represented to P that P’s application had been accepted, and that radios would be shipped; in reliance on D’s acceptance of the franchise application, P hired salespeople and solicited radio orders; D never shipped the radios and gave P notice that the franchise would not be granted; P seeks damages for breach of contract.

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Held: Equitable estoppel “he who by his language or conduct leads another to do what he would not otherwise have done, shall not subject such person to loss or injury by disappointing the expectations upon which he acted. Such a change of position is sternly forbidden…to promote the ends of justice”

D made misrepresentations to P on which P relied, and D is estopped from denying this (however, no lost profits damages, because P had not proved a contract)

Promissory Estoppel Can’t Override Statute of Frauds in Employment Promiseso Stearns v. Emery-Waterhouse Co., Maine 1991

By an oral contract (not enforceable under the Statute of Frauds) D offered P a management job that would last for 5 years; in reliance on D’s promise, P moved and took a pay cut; D reduced P’s salary and then dismissed him before the 5 years were up; P seeks enforcement through equitable estoppel

Held: Enforcement of an oral employment contract for a term longer than 1 year is barred by the Statue of Frauds unless there is clear evidence of fraud on the part of the employer.

Judge Posner on equitable estoppel: “Reliance is easily, perhaps too easily, shown in the employment setting. Agreeing to work for a particular employer, thereby giving up alternative opportunities for employment, can easily be described as reliance on the employer’s alleged oral promises concerning the terms of employment.” (Goldstick v. ICM Realty, 7th Cir. 1986)

Therefore, in employment situations like Stearns, the court must look not to the reliance of the promisee, as in promissory estoppel, but instead the court must look at whether the promisor intended to defraud the employee using the bar of the Statue of Frauds for protection

o Difference between equitable and promissory estoppel: Equitable estoppel = looks to behavior of the promisor (has the

promisor made misrepresentations?), which the promisor is now equitably estopped from denying

Promissory estoppel = looks to the behavior of the promisee has the promisee relied on the promise?

o Legal Duty Rule = a promise to do what one is already legally bound to do is not a promise supported by consideration

a lesser sum can never satisfy an agreement for a greater sumo Reliance on Adjustment to Contract

Generally the rule is that adjustments to contracts are not enforceable unless there is consideration

Exception: Fried v. Fisher, Pennsylvania 1938o P leased space to D and Brill for a florist shop; D wanted to get out of the lease

in order to start a restaurant, and P told D that if Brill took over the lease, P was fine with D dropping it, and said to D, “I release you”; when Brill defaulted on the lease, P sued both Brill and D to enforce the lease

o Held: P is estopped from taking back his promise to release D; D does not have to cover the lease

o See Restatement §89 – Modification of Executory contracts Executory contract = a contract that has yet to be performed/executed §89(c): A promise modifying a duty under a contract not fully

performed on either side is binding…to the extent that justice requires

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enforcement in view of material change of position in reliance on the promise.

U.C.C. § 2-209. Modification, Rescission and Waiver.(1) An agreement modifying a contract within this Article needs no consideration to be binding.

o The legal duty rule will sometimes override §2-209(1), as in Levine, below Levine v. Blumenthal, New Jersey 1936

o P agreed orally to let D the 2nd year’s rent on D’s clothing store lease at the 1st year price until D’s business improved”(i.e. P intended for D to pay the difference later on); D did not renew the lease after the 2nd year and left the premises without paying the last month’s rent; P sues for recovery of the last month’s rent + the unpaid monthly increases for the 2nd year

o Held: D must pay up there is no consideration to the oral modification of the lease – P has not benefited, and D has suffered no detriment.

According to the legal duty rule, D’s lesser rent payments cannot satisfy his contractual obligation to pay rent at a higher rate

PROMISES OF LIMITED COMMITMENT: Conditional and Illusory Promiseso If the promisor is limited in some way, there is probably considerationo The law does not want to enforce conditional or illusory promises in which the promisor hasn’t really

promised anything/ is in total control over the promiseeo Mutuality of Obligation = both parties must be bound by the bargain, or neither will be bound by the

courts Required in bilateral contracts = an exchange of promises under which the performance of

each promise must be legally sufficient consideration for its counter-promise in order for both parties to be bound by a bilateral contract (there must be mutuality of obligation)

E.g. Nat Nal Service Stations v. Wolf, NY 1952o D had promised P that if P purchased its gas through D, and D accepted P’s

offer of purchase and sold to P, D would pay P a discount on each gallon purchased; P bought a lot of gas through D, and D did not pay the discount

o Held: The agreement described above was not a contract at all since neither party was obligated to do anything after D made its statement (an illusory promise); However, once P offered to buy gas on D’s terms, and D accepted the offer and sold gas to P, then a new separate, enforceable contract was formed based on P’s performance, and D was obligated to give the promised discount in consideration of P’s performance once P was bound, both were bound

Obering v. Swain-Roach Lumber Co., Indiana 1927o P and D signed a contract that stated that “in event Swain-Roach Lumber Co

(P)” buys the Buhner land, P “agrees to sell” to D (Obering), and D “agrees to pay” P $8,000 for the land; P bought the land and D refused to buy.

o D contends that P cannot get specific performance because there was no mutuality in the contract because neither party was bound to it unless P did a specific act—purchase the Buhner farm

o Held: The mutuality of obligation here does not occur at the original time of contracting (i.e. when the document was signed), but rather, once the purchase of the land occurred this act put the contract into effect, and from purchase-point onward the contract was mutually binding; neither was bound until both were bound

Illusory promises = a statement that seems like a promise, but isn’t a promise in substance since the promisor is not bound because his promise is illusory (it leaves

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the promisor a free way out of the “deal”), there is no mutuality of obligation and neither party is bound

o E.g. Davis v. General Foods Corp., NY District Court, 1937 P wrote to D that she had an idea and recipe for a food product; D

wrote back saying that they would be glad to look at the idea, but that “the use to be made of it by us, and the compensation, if any, to be paid therefore, are matters resting solely in our discretion”; P sent in the recipe; D did not pay; P sued on the contract and in quantum meruit

Held: D’s letter is not a binding agreement because it constitutes an illusory promise = “too indefinite for legal enforcement” because the “promisor retains an unlimited right to decide later the nature or extent of his performance”

P’s actions were those of a volunteer P couldn’t recover in quantum meruit either, because reliance

on an illusory promise is not even reliance on an implied contract

o Restatement 2nd, §77: Illusory and Alternative PromisesA promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless

(a) each of the alternative performances would have been consideration if it alone had been bargained for; or

(b) one of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration.

Alternative Promises = promises in which the promisor has made the promise conditional on several options

Not illusory because the promisor is still bound, though it is by several options (one of which will definitely occur, even if the promisor gets to decide which one – there is still a limit on the promisor)

These promises often rely on “good faith” obligation

Mutuality of obligation not required in unilateral contracts = an exchange of action for a promise the promisee’s action is acceptance of the promise, and the only obligation left is for the promisor to perform

o Conditional Promises = promises contingent on a specific event or occurrence these types of promises are enforceable as long as the condition is not within the promisor’s full control (i.e. the promisor could cancel at any time), and the promisor has undertaken something that might result in legal detriment to him

Wood v. Lucy, Lady Duff-Gordon, NY 1917 – An Implied Obligation D contracted with P to give him exclusive rights to place her label on clothing designs

and to market her designs; in return, D would get half of P’s profits; D put her label on goods without P’s knowledge and kept the profits

D claims that P’s promise was not enforceable because he didn’t assume a duty to use reasonable efforts to promote D’s goods, and therefore, there was no guarantee that D would get her half of the bargain P’s promise was conditional on P’s using reasonable efforts

Held: The promise is enforceable because P’s promise to pay D half the profits was also a promise to use reasonable effort to market the goods (P would not choose to opt out of the condition to use reasonable effort, since marketing clothing was P’s business)

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o As soon as D was bound not to put her endorsements elsewhere, P became bound to place D’s endorsements on the market to the best of his ability the mutuality of obligation occurred at the moment of signing/ trading promises

Omni Group, Inc. v. Seattle-First Nat’l Bank, Washington 1982 D and P signed an earnest money agreement for P to purchase a property; the

agreement stated that P would purchase contingent upon obtaining the results of a feasibility report that would be satisfactory to P; the agreement stated that if P did not send notice of acceptance of D’s offer to purchase within 15 days of the report, the contract to purchase could be considered cancelled; P sent notice of acceptance of D’s offer; D refused to proceed with the sale

D claims that the contract is not enforceable in the first place because P’s promise to purchase was illusory in that it was conditional on P’s satisfaction with the feasibility report

Held: A promise to purchase conditional upon the purchaser’s good-faith approval based on a “feasibility report” is not illusory.

o One party’s contractual power to cancel/ void the contract is a valid component of a contract so long as the option to cancel can only be exercised according to specified conditions we rely on the good faith of P to cancel only on true dissatisfaction with the report

o Output Contracts U.C.C. § 2-306. Output, Requirements and Exclusive Dealings.

(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. (2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

Lima Locomotive & Mach. Co. v. National Steel Castings Co., 6th Cir. 1907 The agreement stated that D would furnish all of P’s steel requirements as long as P

furnished D with P’s orders by the 15th of each month; D would fill the orders and deliver the steel

P claimed that the agreement was void for lack of mutuality because P was under no obligation to buy anything

Held: “A contract to buy all that one shall require for one’s own use in a particular manufacturing business is a very different thing from a promise to buy all that one may desire or all that one may order” these kinds of supplier exclusivity contracts are beneficial to both parties involved, and it makes sense that both the buyer and the supplier are mutually invested in the agreement

Feld v. Henry S. Levy & Sons, Inc., NY 1975 D contracted with P to sell to P all of the breadcrumbs that D produced; D stopped

breadcrumb production, stating that it had become uneconomical, and that it would continue production if P paid a higher price; P declined and brought suit against D for breach

Held: The seller under an output contract is under a good faith duty to continue production for the full contract term “according to commercial standards of fair dealing in the trade” (the contract doesn’t have to specify amounts to be considered definite)

o Under U.C.C. §2-306, a “good faith cessation of production” must show that either bankruptcy or imperilment of D’s business would have resulted from

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http://straylight.law.cornell.edu/ucc/2/2-106.html#sale_2-106









continuing to produce less profit than expected (or even no profit) is not good faith grounds for cessation

o Power of Termination/ Cancellation Distribution of Goods Contracts

Corenswet, Inc. .v. Amana Refrigeration, Inc., 5th Cir. 1979o P and D had a distribution agreement that was of “indefinite duration” but was

“terminable by either party ‘at any time for any reason’ on ten days’ notice to the other party”; D gave termination notice to P after 7 years because D wanted to give distributorship to another company; P claimed that D’s termination should be enjoined because it was “arbitrary and capricious”

o Held: The termination was permissible under the terms of the contract and under the U.C.C. §2-309(2)

Under §2-309(2), the contract had been valid for a reasonable time Under §2-309(3), reasonable notice of termination had been given

the contract had specified reasonable notice as 10 days, and as there was no “bad faith” on the part of D, the termination did not violate the U.C.C.’s general “good faith” requirement

U.C.C. § 2-309. Absence of Specific Time Provisions; Notice of Termination.(2) Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party. (3) Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.

Employment Contracts Sheets v. Teddy’s Frosted Foods, Inc., Connecticut, 1980 – Retaliatory termination

of employment contracto P, a quality control director for D, was discharged after pointing out to D that

D was in violation of the Food and Drug act; D claims that it had a right to terminate P’s employment at will, without showing just cause, like in any permanent employment situation

o Held: For public policy reasons, an employee should not be made to choose whether to risk criminal sanctions (for not speaking up about violations) or to keep his job

The court is not saying that D must show just cause, but that sometimes public policy considerations will allow a court to put limits on an employer’s right to terminate at will

III. THE MAKING OF AGREEMENTS/ CONSENSUAL BASIS OF CONTRACT Mutual Assent

o Restatement, 2nd, §22: The first requirement of a contract is that the parties manifest to each other their mutual assent to the same bargain, usually in the form of an offer and acceptance:

o Objective Theory of Intent in Contracts: Would a reasonable person in the shoes of the offeree feel that, if he accepted the proposal, a contract would be complete, and that no further negotiations would be necessary to bind both parties? outward manifestations of contract

The courts will consider the following factors in applying the “objective theory” test (no one factor is conclusive):

The words used Surrounding circumstances To whom the proposal is made (a proposal to the public is generally an invitation, not

an offer to contract) Definiteness and certainty of terms

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http://straylight.law.cornell.edu/ucc/2/2-106.html#Termination_2-106



Written contract contemplated Embry v. Hargadine-McKittrick Dry Goods Co., Missouri 1907 – (Subjective Intent

Irrelevant) P’s employment contract with D ended, and P went to D several times demanding a

new year-long contract, or else P would leave; President of D responded to P after much urging (when D was busy), “Go ahead, you’re alright”; P kept working, but was dismissed 2 months later

Held: D’s subjective intent was irrelevant; if a reasonable man would have believed D’s words and actions – outward manifestations of assent – to mean that D assented to a new contract , then a new contract was formed (regardless of whether D actually intended to form one)

Kabil Developments Corp. v. Mignot, Oregon 1977 - Testimony of P’s belief in D’s intent to contract is permissible as evidence of objective intent to contract

P alleged that he had contracted with D for D’s helicopter business to perform services for P’s construction contract; D’s helicopters didn’t perform, and D claimed that it hadn’t contracted

At trial, an officer of P was permitted to testify that he felt his company was bound to hire helicopter from D after a meeting with an officer from D P testified that he did feel that there was mutual obligation after that meeting

Held: The jury may use P’s testimony of belief in D’s intent to contract as evidence of the overall objective intent, based on the circumstances, of both parties to contract with each other.

Objective theory applied to employee handbooks (are they contracts?) McDonald v. Mobil Coal Producing, Inc., Wyoming 1991 – employee handbook

might be a contracto P had an employment-at-will agreement with D; however, D gave P an

employee handbook that gave termination procedures to be followed in the case of dismissal; the handbook contained a disclaimer stating that it wasn’t an employment contract, but the disclaimer was not conspicuous; P was dismissed after having been accused of sexual harassment; P sues for wrongful termination according to the terms of the handbook, which P claims is a valid contract; D claims it never intended to contract through the handbook

o Held: A trial court must determine whether the employee handbook, viewed along with D’s dealings with P—i.e. D’s outward manifestations--constituted assent to a modification of P’s terms of employment such that a new employment contract was created between them

Kari v. General Motors Corp, Michigan 1977 – conspicuous disclaimer = no contract

o P wanted severance pay from D according to D’s employee handbook; D’s handbook had a conspicuous disclaimer in red ink and italicized emphasizing that the handbook was not a contract

o Held: As a matter of law, the handbook’s disclaimer was conspicuous enough so as to have not created a contract

o Offer = includes intent to enter into a bargain, as well as definite terms Requirement of Definite and Certain Terms

Restatement, 2nd §33. Certainty(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain(2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.

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(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.

U.C.C. § 2-204. Formation in General.(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. (2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. (3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

Advertisements:o Letter in the Nature of an Advertisement: Moulton v. Kershaw, Wisconsin

1884 D sent P a letter listing salt prices and shipping arrangements, which

ended “shall be pleased to receive your order”; P sent an order, but D withdrew their original letter

Issue: Does this correspondence = offer and acceptance? Held: No – D’s letter was in the nature of an advertisement.

No particular quantity offered in D’s letter terms not certain enough to constitute an offer

o Lefkowitz v. Great Minneapolis Surplus Store, Minnesota 1957 – distinguished from Moulton because the ads here were “clear, definite, and explicit, and left nothing open for negotiation”

D advertised fur coats on successive Saturdays at $1 each to “first come, first served”; P was first each Saturday, but D didn’t give him the deal

Issue: Was a contract created by this kind of ad? Held: Yes – the test is “whether the facts how that some performance

was promised in positive terms for something requested” the ad was aimed at a specific person (“first come”), and for a specific item at a specific price (the terms were not left “open and uncertain”)

Agreements to Agree/ open-price agreementso Courts don’t like to fill in gaps in uncertain contractso Joseph Martin, Jr. Delicatessen v. Shumacher, NY 1981

P leased store space from D on a renewable lease agreement that stated that the rent for the renewal period was “to be agreed upon” by both parties; D raised the rent by almost $300 at renewal, and P sued for specific performance of the lower rent

Held: “A mere agreement to agree, in which a material term is left for future negotiations, is unenforceable.”

The agreement must be more definite it didn’t have to state exactly what the renewal rent would be to achieve the requisite definite-ness; it could have just provided a “methodology for determining the rent”

o U.C.C. allows open-price arrangements/ “agreements to agree” to be enforceable (in sales of goods)

§ 2-305. Open Price Term(1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if

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(a) nothing is said as to price; or (b) the price is left to be agreed by the parties and they fail to agree; or (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.

(2) A price to be fixed by the seller or by the buyer means a price for him to fix in good faith. (3) When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as cancelled or himself fix a reasonable price. (4) Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract. In such a case the buyer must return any goods already received or if unable so to do must pay their reasonable value at the time of delivery and the seller must return any portion of the price paid on account.

Letters of Intento Empro Mfg. Co. v. Ball-Co Mfg., Inc., 7th Cir. 1989

D offers the assets of its valve-component business for sale on the market; P sends a letter of intent to D setting out the terms on which it would buy D’s assets; the letter of intent states that the terms of P’s proposal is “subject to” both a “formal, definitive” agreement and P’s “satisfaction of certain conditions”; D began negotiations with another co. after P and D haggled over security interests; P seeks specific performance

Held: The letter of intent is not enforceable (even though some may be, under certain conditions, this one was not):

The “subject to” clauses “manifested an (objective) intent not to be bound”

Though P argued that subjective intent of the parties should be considered, subjective intent can’t change a letter of intent (which by most definitions is not a binding agreement) into a binding contract

o Bilings v. Wilby, North Carolina, 1918 P and D negotiated by correspondence over laying sewer lines; P sent a

final wire saying “will accept. Send contract signed at once”; no written agreement was ever made

Held: The actual binding agreement occurred before the request for a written instrument, so it is the agreement itself (P’s acceptance of D’s offer), not the writing, that binds “the contract will not be avoided because of their intent and purpose” to have the contract drawn up formally in writing, even if it was never written

Lack of Definite Terms ≠ Contract (but promissory estoppel may still apply)o Wheeler v. White, Texas 1965

D and P entered into a written “contract” whereby D would procure a loan for P to be able to build on a property; the terms of the contract left the amount of the monthly installments and interest on the loan indefinite; in reliance on D’s promise to procure the loan, P knocked down the existing building on the property and began to prepare the land for building

Held: The contract is too indefinite to be binding, but the elements of inducement and reliance on a promise are present, and P can assert

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promissory estoppel in order to recover “foreseeable, definite and substantial reliance” damages

D is estopped from using the indefiniteness of the contract as a defense

o Bentzen v. H.N. Ranch, Inc., Wyoming 1958 P wanted restitution of down payment after deal fell apart because P

claimed that the contract terms were too indefinite to be enforced; D counterclaimed for losses it incurred in reliance on P’s offer to buy

Held: P’s down payment achieved the goal of optioning D’s land (so that D wouldn’t negotiate with others), and D lost money because of this, so there was a quid-pro-quo, and P can’t recover restitution

Even though the alleged contract was too indefinite to be enforced, another “deal” was made by P benefiting from D’s detriment, and therefore P can’t get back the down payment, because P received D’s detriment in return

o Subjective Intent may Be Relevant when there is ambiguity in the contract: Restatement 2nd, §20, Effect of Misunderstanding 2 types of ambiguities, latent and patent:

Latent ambiguity: The offer/ acceptance appears unambiguous when it is made, but it later turns out that a term is ambiguous (i.e. could have referred to more than one thing)

o Latent ambiguity = no mutual assent Raffles v. Wichelhaus, England 1864

P and D agreed that P would sell to D a quantity of cotton arriving from India on the ship “Peerless”; D didn’t accept the cotton that P offered because D had meant that D would buy cotton from P that arrived on a different ship Peerless, not the one that P got the cotton from

Holding: Judgment for D -- When there is latent ambiguity, if D and P don’t agree on one meaning for the ambiguity, then there was no contract to begin with

o If both parties are unaware of the ambiguity, and both parties’ interpretations of the ambiguous term are reasonable, then the contract can only be binding if both parties’ subjective intent about the meaning of the ambiguous term is the same

Flower City Painting Contractors v. Gumina Constr. Co., 2nd Cir. 1969

D Contractor is in the trade, but the subcontractor is a newcomer to the trade is not aware of the trade meaning of “paint the walls” – trade meaning is inside and outside; newcomer thought that it meant just inside and demanded extra payment to paint the outside; D took P’s demand as a repudiation and removed P from the job

Held: The contract is unenforceable because “No contract ever came into existence for lack of a ‘meeting of the minds in the first instance.’”

o Since both the trade interpretation and the ordinary interpretation of “paint the walls” are reasonable, and each party intended a different meaning, the contract cannot stand (the trade interpretation doesn’t rule)

o Once one party learns of the ambiguity it is that party’s obligation to inform the other party of the mix-up in interpretation, otherwise the contract isn’t binding:

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Dickey v. Hurd, 1st Cir. 1929 D wrote to P, “I will give you till 7/18 to accept this offer” of

price for land that D was selling; P telegraphed an acceptance, and said that he would send money soon; D repudiated, saying that the acceptance wasn’t effective because P didn’t pay by 7/18

Held: When D realized that P thought that acceptance meant saying “I accept” by 7/18 and not sending full payment by 7/18, D had a duty to inform P of D’s real meaning

Patent ambiguity: the ambiguity is obvious when examining the words of the contract Control Over Contract Formation

o Offeror is “master of the offer”: offeror has power to determine substance of the offer, identity of the offeree, and time, place, and mode of acceptance of the offer (but this “power” is subject to limitations, as in Allied Steel, below); in general, any offer is revocable

o Prize/ Award Offers Offeror controls the method of acceptance, and must adhere to its offer when accepted as

such Cobaugh v. Klick-Lewis, Inc., Pennsylvania 1989 – Unilateral contract

acceptance = performance of the offer as described by the offeroro P hit a hole in one on the 9th tee, where D had advertised for a charity event that

D would give a car to whoever hit the hole in one; the charity event was over and D hadn’t taken the sign down; the sign didn’t specify that the offer was only for the charity event; P claims his prize

o Holding: The manifest intent of the offeror (D) was to give a car to whoever hit a hole in one on the 9th tee. The hidden intent (that the prize was only for the charity event) is irrelevant

o Mistake by the offeror in not revoking the offer will not void this contracto This contract is also supported by consideration =D benefited from the

advertising gained by leaving its sign up Offeree must know that he is accepting an offer in order for it to be enforceable if

someone fulfills an act for which an award is offered, he cannot claim the reward if “the performance was rendered in total ignorance of the offer”

o Life Span of an Offer If no time for expiration of a power of acceptance is specified in the offer, the power terminates

at the end of a reasonable time (which is a case by case question of fact) Life span of a time-limited offer begins when it is received by the offeree An oral offer generally terminates at the end of the relevant conversation

o The offer must “clearly and definitely express an exclusive mode” of acceptance, in order for the mode of acceptance to be deemed exclusive

Allied Steel & Conveyors, Inc. v. Ford Motor Co., 6th Cir. 1960 D contracted for P to assemble machinery in its plant; D’s contract included an

amendment that P would indemnify D against any negligence by employees of both P and D in installing P’s machinery; D’s contract stated that “acceptance should be executed on acknowledgment copy which should be returned to buyer”; P didn’t return the acknowledgment copy until after P began work, by which time a P employee had been injured by a D employee’s negligence.

Holding: P’s acceptance of the contract was that P began to work, and therefore, P is bound by its terms and must indemnify D

o Though D’s contract included a method of acceptance, it was not clearly and definitely the only method of acceptance, and so P’s alternate method of acceptance—beginning work—constituted the finalization of a binding contract

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U.C.C. §2-206 – Offer and Acceptance in Formation of Contract(1) Unless otherwise unambiguously indicated by the language or circumstances

(a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances; (b) 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 conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.

(2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

Similar to Restatement 2nd, §62 (below) Carlil v. Carbolic Smoke Ball:

o D advertised a one hundred pound reward for anyone who contracts influenza

after using its product for two weeks. The ad stated D had deposited the money in a bank in good faith. P saw the ad, used the product and contracted D refused it pay.

o Is the ad for reward an offer that can be accepted by doing what the ad says?

Yes. D deposit shows good faith. Binding promise- offered reward to anyone who performed the

conditions By the nature of the transactions, the acceptance of the offer need not

be shown.

Unilateral contracto Acceptance in Unilateral Contracts v. Acceptance in Bilateral Contracts

Bilateral Contracts: Acceptance is indicated by a promise Unilateral Contracts: Acceptance is indicated by performance; the contract is created once the

act has been performed Presumption of Bilateral Contract

Restatement 2nd, §32: “In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests [offer of bilateral contract] or by rendering the performance [offer of unilateral contract], as the offeree chooses.”

o There is a presumption of offeror-indifference as to the mode of acceptance when the form of acceptance (return promise or beginning of performance) is not made clear.

o Davis v. Jacoby, California 1934 D’s decedent promised to leave everything to Ps if Ps would come take

care of his sick wife (Ps aunt) until she died, and help him with his business; Ps sent word of acceptance by letter [acceptance if the contract was bilateral]; uncle committed suicide before Ps arrived, and Ps came and took care of aunt until she died; uncle’s will left everything to his nephews

D claims that the contract was unilateral, and uncle’s death revoked the offer before Ps performed

Holding: According to Restatement §31 (now §32), when it is doubtful whether the contract offer is uni or bilateral, it is presumed to

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be bilateral, because that protects both parties therefore, D must honor the contract and allow Ps to inherit against the written will

Acceptance of a unilateral contract: Brackenbury v. Hodgkin, Maine 1917

o D1 = Sarah Hodgkin: owned a farm in Maine, widow; D2 = Walter Hodgkin: son of Sarah; Ps = daughter + son-in-law of Sarah, from MO

o D1 wrote to Ps that if they would come and take care of her and her farm until her death, D1 would allow Ps to use and profit from the farm during D1’s life, and to own the farm when D1 died; Ps came and began to run the farm and care for D1; Troubles arose between D1 and Ps, and D1 ordered Ps to leave and gave the deed to the property to D2

o Held: The contract between Ps and D1 is a valid unilateral contract – the terms of the offer were clearly stated in the written instrument, and the offer was accepted by Ps’ beginning of performance.

Restatement 2nd, §62. Effect of Performance by Offeree Where Offer Invites Either Performance or Promise (i.e. when the contract is either uni or bilateral)

(1) Where an offer invites an offeree to choose between acceptance by promise and acceptance by performance, the tender or beginning of the invited performance or a tender of a beginning of it is an acceptance by performance(2) Such an acceptance operates as a promise to render complete performance

Similar to U.C.C. §2-206o Methods of Termination of the Offeree’s Power of Acceptance (listed in Restatement 2nd, §36)

Death or incapacity of both offeror or offeree Jordan v. Dobbins, Massachusetts 1877

o D promised to be guarantor for Moore; D died; Moore bought goods on credit from P after D’s death

o Held: Because D (offeror) died before the purchase on credit, D’s offer to be guarantor died with him; D’s estate does not pay for Moore’s default

Lapse of time Rejection or counteroffer by offeree

Once the offeree makes a counteroffer, the original offer dies Express or implied revocation by the offeror:

Traditional View of Retraction Once Performance Has Beguno Petterson v. Pattberg, New York 1928

D agreed to take money off of P’s total mortgage payment if P paid in cash by a certain date; P was walking up to D’s door with the $ by the date decided when D revoked the offer and said that that he had already sold the mortgage to another

Held: The completed act of payment—i.e. the acceptance of the unilateral contract—can’t be completed “unless assented to by the person to be paid”, i.e. D; D could revoke his offer at any time before performance

No option contract created There is a very grey area between when preparation for performance ends and the beginning of performance starts; the majority felt that P’s actions did not constitute the beginning of performance that is necessary to create an option contract

OPTION CONTRACTS - Modern View of Retraction Once Performance Has Begun/

o “Option Contract” Replaces Unilateral Contract Options are now always irrevocable as a matter of law the very act

of making an offer that can only be accepted by an act includes the

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subsidiary promise to keep the offer openo Restatement 2nd, §45: Option Contract Created by Part Performance or

Tender(1) Where an offer invites an offeree to accept by rendering a performance [unilateral contract] and does not invite a promissory acceptance [bilateral contract], an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.(2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.

“tendering” a payment = the formal act of giving over a paymento Brooklyn Bridge Example: A offers B $100 to walk over the BK Bridge;

once B starts walking, A says that the offer has been revoked the moment B sets put on the bridge, A’s offer becomes irrevocable because B’s beginning of performance constitutes an acceptance of the offer (since the contract was unilateral – capable of being accepted only by performance or beginning of performance)

The obligation here is also unilateral B has no obligation to continue the walk once he has begun performance, since A hasn’t yet paid, and B gave no return promise

Pre-contractual Obligationo Firm Offer = one that by its terms is to remain open until a fixed date

General rule: a firm offer can be revoked prior to the end of its term, terminating the offeree’s power of acceptance, since the promise to leave the offer open is not supported by consideration the offeror retains power of termination

e.g. Dickinson v. Dodds, England 1876o D (Dodds) sent word to P that D’s offer to sell land to P would be open until

Friday; P heard that D had sold the land to another on Thursday, but sent word of his acceptance to D anyway before Friday; P requests specific performance of the sale

o Holding: D’s offer was not binding, and could be revoked at “any moment before a complete acceptance by P of the offer”

U.C.C. § 2-205. Firm Offers. are not revocable in sales of goodsAn offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

The signed writing is necessary:o E.A. Coronis Associates v. M. Gordon Constr. Co., New Jersey, 1966

Though promissory estoppel (see Drennan, below) applied here to the sub-contractor’s bid to supply structural steel for a project for the Port Authority of NY (on which the general contractor relied in its bid to the city), §2-205 doesn’t apply because the sub’s “offer” was just a price sheet, not a signed offer

o Option Contract = a completed contract in which the offeror has bound himself not to revoke the offer, which effectively destroys both his right and power to do so

Traditional general rule: if the offeree has given any consideration (even nominal value) for the offer, it becomes an option

Marsh v. Lott, California 1908o D’s writing of an option for P to buy land contained an acknowledgment that D

had received 25 cents from P; D revoked the option and withdrew the property

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from saleo Holding: P gets specific performance Any amount of consideration—even

a tiny sum of $--in exchange for an option to purchase within a specified time period constitutes adequate consideration to keep the option open during the specified time period.

Exceptions to the general rule (binding option without actual consideration): Option under seal = binding without consideration (in states where a seal still

operates at common law)o Thomason v. Bescher, North Carolina, 1918

D signed a writing under seal that stated: “in consideration of the sum of one dollar to us in hand paid by C.E. Thomason, the receipt of which is hereby acknowledged,” D would convey a tract of land to P if P demanded a deed and tendered the $ on or before 8/18; P never actually gave the 1$; D withdrew the option

Held: P is entitled to specific performance The option contract is binding for the specified time period because it was made under seal

A bilateral contract is formed when the offeree accepts the offer by making a promise in turn to perform (i.e. pay) within the designated option period (and demonstrates ability to perform)

Option with recital of considerationo Smith v. Wheeler, Georgia, 1974: Even the recital of consideration is adequate

to keep the option open and binding on the offeror (even if the small consideration is never paid)

Oral promise to act = consideration for an optiono Matter of Estate of Jorstad, 1989: Even an oral promise by the offeree to do

something as consideration for the option constitutes consideration for the option contract

Promissory Estoppel o General contractor/ subcontractor option situations:

Old view: No liability when subcontractor withdraws offer James Baird Co. v. Gimbel Bros., 2nd Cir., 1933

o D (a subcontractor who provided linoleum) put out a miscalculated offer, which D then had to revoke, to 30 contractors who were bidding on a city project, stating that D would offer its bidding price guaranteed to the general contractor who accepts; P used D’s erroneous bid to the city, and won the general contract

o Held: Judgment for D there was no contract between them; the language of the offer indicates the mode of acceptance, and P can only accept “after the general contract has been awarded”; simply placing a general bid is not acceptance

o promissory estoppel doesn’t apply either “an offer for an exchange is not meant to become a promise until a consideration has been received, either a counter-promise or whatever else is stipulated”; there was nothing in D’s offer that indicated that P ought to rely on it

Modern view: subcontractor is liable for withdrawing a bid where the general contractor’s reliance is foreseeable and reasonable

Drennan v. Star Paving Co., California, 1958

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o P’s general bid had to include the names of the subcontractors that P would be using, and P also had to provide a bidder’s bond as a guarantee that he would enter the contract if awarded it; D’s bid for paving was lowest, and P used it; D then realized that it had made a mistake in its calculations, and doubled its price

o Holding: Judgment for P P’s reliance makes D’s offer irrevocable: “As between the subcontractor who made the bid and the general contractor who reasonably relied on it, the loss resulting from the mistake should fall on the party who caused it.”

o reference to §90 (promissory estoppel) in comment (b) to §45 shows that consideration isn’t always necessary substantial and foreseeable reliance will bind the offeror

no reciprocity in the general contractor/sub-contractor relationship, according to the Drennan view:

o Southern California Acoustics Co. v. C.V. Holder, Inc., California, 1969

D won a general contract on a project for the school district; P saw in a trade paper that it was listed as a sub on the project; P took this as D’s acceptance of P’s offer to sub-contract for acoustic tiling; D asked the school district if it could substitute another sub-contractor instead of P, and the school district granted permission

Held: Judgment for D no promissory estoppel – listing P on its contract bid does not constitute D’s acceptance of P’s offer

a sub-contractor is considered bound to the general contractor by promissory estoppel, but a general contractor is not bound to the sub in the same way

o Promissory estoppel can create an option even without a clear offer: Hoffman v. Red Owl Stores, Inc., Wisconsin, 1965

P incurred many expenses in reliance on D’s promises that P could be set up in one of D’s Red Owl stores for a start-up price of $18K (P sold his bakery business, moved, rented a house, bought and sold a new business in order to gain grocery-business practice on the advice of D, etc.); D kept raising the price from $18K

Held: Promissory estoppel does apply here, and the test for promissory estoppel are those elements set out in §90 – foreseeability of promisee’s detrimental action in reliance on promisor’s promise, and the necessity of avoiding injustice by enforcing the promise

Though D’s promises did not constitute a clear and definite offer, under the theory of estoppel, D’s promise did not have to fulfill the same elements of clear and definite terms as those required of a binding offer to contract which is supported by consideration

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Skycom Corp. v. Telstar Corp., 7th Circuit, 1987 “even when a contract fails to become effective as a whole,

particular terms may bind under promissory estoppel…[A] promise that is designed to induce commercially reasonable detrimental reliance will be enforced to the extent necessary to compensate the relying party for his injury in relying…”

Modern View of Options (all of the above exceptions to the general rule, codified): Restatement, 2nd, §87: Option Contract(1) An offer if binding as an option contract if it

a. Is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

b. Is made irrevocable by statute(2) An offer which the offeror should reasonably expect to induce action or forbearance of a

substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice

Conduct Concluding a Bargaino Counteroffer

An acceptance must be unqualified in order to be effective a qualified/deviant acceptance doesn’t necessarily = acceptance it might operate as

a counteroffer, which works as an implied rejection of the original offero the question to ask about a deviant acceptance is whether it is a counter-offer

or just an inquiry if it’s a counter-offer, then the original offer has died if it’s just an inquiry that doesn’t insist on changing the terms of the

offer, then the original offer still stands General Rule: a counteroffer = a rejection (and therefore a termination) of the original

offer Livingstone v. Evans, Alberta, 1925

o D wrote to P offering to sell land for $1800; P then wired back saying, “send lowest cash price, will give $1600 cash. Wire.”; D wired a reply saying, “cannot reduce price.”; P then wrote accepting D’s offer; in the interim, D had sold to someone else

o Holding: Specific performance for P: P’s counteroffer was a rejection of D’s original offer, and would not

require by itself a specific performance from D, however; D’s reply, “cannot reduce price,” implied that D’s original offer was

still open for P to accept, and therefore D was bound by that offer by P’s subsequent acceptance of it

U.C.C. §2-207 view of counteroffer: the offeree’s injection of different terms does not necessarily constitute a rejection of the offer

o Battle of the Pre-Printed Forms Traditional Rule / the Mirror Image rule = the contracts must look the same, include the

same terms, etc. in order to be upheld When there is a battle of the forms, U.C.C. §2-207 has replaced the previous mirror-

image rule with a standard to apply on a case by case basiso §2-207 turns a common law counter-offer (i.e. an “acceptance” that changes or

adds to terms of the agreement) into an acceptance it gets rid of the mirror-image rule

U.C.C. § 2-207. Additional Terms in Acceptance or Confirmation.

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(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.

*acceptance by silence ≠ assent here(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.

o This is a “first shot” doctrine: consequent changes to the contract often don’t carry weight

the common law used to view successive revisions of contract as a “last shot” doctrine (i.e. the last revision wins)

o The question that guides the application of §2-207(1) should be “whether the offeror could reasonably believe that in the context of the commercial setting in which the parties were acting, a contract had been formed”

Idaho Power Co. v. Westinghouse Electric Corp., 9th Cir., 1979 – application of §2-207 to pre-printed forms

battle of the forms:o D’s form: D responded to P’s request for a price for its 3-phase voltage

regulator with a price quotation form that stated that the prices were subject to the terms and conditions printed on the back of the form, which limited D’s liability

o P’s form: P responded to D’s price quotation/offer with a purchase order form that didn’t state anything regarding D’s liability specifically, but stated that: “acceptance of this order shall be deemed to constitute an agreement upon the part of the seller to the conditions named hereon and supersedes all previous agreements”

P received the voltage regulator, which failed and caused a fire and damage; D paid for the cost of repairing the regulator, but nothing more because of its limited liability terms, which D claims that P assented to by sending in a purchase order

Holding: P’s purchase order was an acceptance of D’s offer including D’s limit on its own liability

o §2-207(1) does not apply because P’s purchase order did not “expressly” indicate that its acceptance was “conditional on [D’s] assent to the additional or different terms”

o §2-207(2) –the “knockout rule” – does not apply because P’s form did not specifically contest D’s disclaimer of liability (it just purported to “supersede all previous agreements”) the “additional” terms in the acceptance must be materially different from the terms in the offer and show a specific contradiction to specific terms in order for §2-207(2) to kick in

knockout rule (Comment 6 to §2-207(2)) = conflicting –“different”, as opposed to “additional”—terms in pre-printed contract forms cancel each other out and the court will read in a new term instead (if it appears that the parties had otherwise both assented to the contract)

o End-User Licenses

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http://straylight.law.cornell.edu/ucc/2/2-104.html#Between%20Merchants_2-104



ProCD, Inc. v. Zeidenberg, 7th Cir. 1996 P created a CD-ROM database of phone #s, for which it charged more to commercial

users than general public users; P included a “shrink-wrap license” or “end user license” in the package bought by D, stating that its use must be limited to non-commercial purposes; D used the product for commercial purposes, but claims that because D didn’t get to read or agree to the terms of the license until after the conclusion of the sale—which was the conclusion of the contract, in D’s eyes—the terms of the license don’t apply

Holding: The end user license is enforceable acceptance in this situation occurs not when D makes the initial purchase, but when D uses the product, before which D has the opportunity to read the terms of the license, after which D may return the product if D does not assent to the terms of the agreement

§2-204(1) applies: “A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.”

o “a vendor, as master of the offeror may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance”

§2-606(1)(b) applies as well §2-606: What Constitutes Acceptance of Goods

(1) Acceptance of goods occurs when the buyer (a) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity; or (b) fails to make an effective rejection (subsection (1) of Section 2-602), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or (c) does any act inconsistent with the seller's ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.

(2) Acceptance of a part of any commercial unit is acceptance of that entire unit. Hill v. Gateway 2000, Inc., 7th Cir. 1997

Ps bought a Gateway computer system by mail that contained an offer to return the product within 30 days if unsatisfied with the product and its terms; the terms in the package included a clause that any disputes must be submitted to arbitration; the package also included a warranty for the product (limited for 30 days), and lifetime service; Ps claim that they don’t have to submit the dispute to arbitration, because they are not bound by the terms of the end user license that came in the computer package

Holding: All of the terms contained in the box are binding for the reasons cited in the ProCD case – just as the vendee holds the vendor to the warranty contained in the box, the vendor holds the vendee to the license contained in the box keeping the product beyond 30 days was Ps’ assent to the terms contained in the box

Ps also claimed that the arbitration clause was not conspicuous enough, but the court explains that “a contract need not be read to be effective”

o Silence as Implied Consent Restatement, 2nd §69. Acceptance by Silence or Exercise of Dominion(1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only:

Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation

Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer

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http://straylight.law.cornell.edu/ucc/2/2-105.html#Commercial%20unit_2-105



http://straylight.law.cornell.edu/ucc/2/2-602.html#2-602(1)











Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept

(2) An offeree who does any act inconsistent with the offeror’s ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him. “silence will not constitute acceptance of an offer in the absence of a duty to speak” Silence = binding consent when part of a course of dealing

Hobbs v. Massasoit Whip Co., Massachusetts, 1893o P had sent eel skins to D 4 or 5 times and D accepted and paid for them; this

time, when P sent the skins D simply held onto the skins until they were spoiled, but did not send notice to P that he was not accepting the skins; P brings action for the price of the skins

o Holding: The relationship between P and D was in the nature of a standing offer, and therefore, D’s silence, combined with D’s retention of the skins without notifying P that he would not use them, constitute an acceptance based on the circumstances of their business relationship and previous dealings this conforms to §69 as well as principles of mutual assent

Unsolicited merchandise Austin v. Burge, Missouri, 1911

o D’s father-in-law signed him up for a 2-year newspaper subscription with P’s paper; after 2 years, D paid the subscription price a few times, but sent instructions to cancel the paper; P kept sending the paper, and D stopped paying, but would take the paper home from the post office and read it

o Held: Even if D didn’t order the items, “if he continue to receive and use them, under circumstances where he had no right to suppose they were a gratuity, he will be held to have agreed by implication, to pay their value.”

Subsequent to Austin, federal statutes have been passed regarding unsolicited merchandise so that a recipient of unsolicited merchandise is not responsible to send the merchandise back, or to even refrain from using it a merchant sends unsolicited merchandise at his own risk

Marriage ≠ implied consent Morone v. Morone, NY 1980

o P (“wife”) and D (“husband”) lived together as a married couple for almost 30 years and had two children together, but were never formally married; P performed “housewifely” duties for D and also helped with his business; D forbad P from having a job of her own and promised to support her

o P claims that she can recover either on an implied contract between the two that P performed these services for expected compensation, or on an express contract (oral) between the parties in which D had promised to “support, maintain and provide for P in accordance with his earning capacity and that D further agreed to take care of P and do right by her”

o Holding: No implied contract between couples living together, however, an express contract between such a couple = enforceable “an express agreement between unmarried persons living together is as enforceable as though they were not living together”

o This is a case of not only silent acceptance, but a silent offer the terms of the contract must be figured out from behavior

o When Acceptance Takes Effect: Limits on Offeror’s Power of Revocation Restatement of Contracts, 2nd, §63. Time When Acceptance Takes Effect

Unless the offer provides otherwise,(a) an acceptance made in a manner and by a medium invited by an offer is operative and

completes the manifestation of mutual assent as soon as put out of the offeree’s possession,

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without regard to whether it ever reaches the offeror; but(b) an acceptance under an option contract is not operative until received by the offeror

Mailbox rule: acceptance of an offer for a bilateral contract is effective when properly dispatched by an authorized means of communication

Morrison v. Thoelke, Florida, 1963o D mailed an offer to P for purchase of P’s land; P executed the contract and

mailed it back to D; before D had a chance to receive the contract, P telephoned D’s lawyer to cancel the contract; when D received the deed to the land with the contract in the mail, D recorded the deed; P brings action to quiet title to the land, claiming that his repudiation of his mailed acceptance by phone had invalidated the contract

o Holding: Acceptance is effective when the letter of acceptance is deposited in the mail, and therefore repudiation after that point is ineffective and doesn’t un-bind the offeree

o with mail acceptances, “concurrent knowledge of assents” is impossible, and the choice of the point of assent is essentially arbitrary; the court had to just choose some point

Restatement, 2nd §40: “Rejection or counter-offer by mail or telegram does not terminate the power of acceptance until received by the offeror, but limits the power so that a letter or telegram of acceptance started after the sending of an otherwise effective rejection or counter-offer is only a counter-offer unless the acceptance is received by the offeror before he receives the rejection or counter-offer”

Restatement 2nd §64: Applies to email – instantaneous communication that occurs when he parties are not in each other’s presence is governed by the rules of acceptance that apply when the parties are in each others’ presence

point of acceptance in option contracts Kibler v. Caplis, Michigan, 1905

o D wrote a letter to P giving P an “option” (no seal or consideration) to buy hides, and that the option would expire at noon on Tuesday; P telegrammed acceptance by Monday, and sent a letter to confirm, but the telegram was never sent, and the letter arrived after noon on Tuesday

o Held: “The parties had in mind that the offer to sell would be good only until noon of the 8th. Unless actually notified by that time of its acceptance, we do not think D could be held”

The mailbox rule does not apply here because there was a specific point of acceptance given in the offer; offers to which the mailbox rule applies generally are missing an exact point of acceptance, which the mailbox rule supplies

Effects of Adopting a Writing: Parol Evidence Rule (PER)/ doctrine of integration/mergero The Parole Evidence Rule = when an agreement has been reduced to a writing that the parties intend

as the final and complete expression of their agreement—an integration—evidence of any earlier expressions of the agreement (oral or written) is not admissible to vary the terms of the writing

Such evidence = parol evidence The PER is both procedural and substantive:

Procedure: it operates as a rule of evidence to exclude parol evidence at trial Substance: it sends bounds regarding what constitutes the action contract between the

partieso Different views on what constitutes an integration:

“4 Corners Rule”/ “Face of the Instrument” Test (the more traditional view): “when a contract is clear in and of itself, circumstances extrinsic to the document may

not be considered [and] where the intention of the parties may be gathered from the

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four corners of the instrument, interpretation of the contract is a question of law and no trial is necessary to determine the legal effect of the contract”

o It is sufficient if the written agreement appears to be a complete and final expression of the parties’ agreement

o Unless there is alleged fraud or mistake, courts will not look beyond the face of the instrument

NY still uses a very strict “4 Corners Rule” Any Relevant Evidence Test (the growing minority rule)

Evidence of the circumstances surrounding the execution of the writing may be admitted in order to show if the parties intended for the document to be integrated

Merger Clause If a writing contains a “merger clause” (e.g. “this is our entire agreement”; “no other

representations have been made”, etc.), the writing will be presumed to be integrated unless fraud or mistake is alleged

Comment e. of Restatement 2nd, §216: if the writing contains a “merger clause” which states that the writing is completely integrated, this is usually evidence that no other terms, even if consistent with the writing, were intended by the parties (though the parties may still present evidence as to whether the parties did or didn’t assent to the writing as an integrated agreement)

Levels of Integration: Restatement 1st

o The Restatement 1st is an inquiry into whether the writing is integrated, or not, as a whole (Mitchell v. Lath)

o The “4 corners rule” fits in with this approach Restatement 2nd

o Uses a much more “textured” inquiry into integration there is the possibility of a “partially integrated” document, as shown by the use of the terms “integrated” v. “completely integrated”

o Written with U.C.C. §2-202 in mindo §209. Integrated Agreements:

(1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement.

(2) Whether there is an integrated agreement is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule.

(3) Where the parties reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence that the writing did not constitute a final agreement.

o §213. Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)(1) A binding integrated agreement discharges prior agreements to the extent

that it is inconsistent with them.(2) A binding completely integrated agreement discharges prior agreements to

the extent that they are within its scope.(3) An integrated agreement that is not binding or that is voidable and avoided

does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement if it had not been integrated.

o §214. Evidence of Prior or Contemporaneous Agreements and Negotiations

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Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in establish(a) that the writing is or is not an integrated agreement;(b) that the integrated agreement, if any, is completely or partially integrated;(c) the meaning of the writing, whether or not integrated;(d) illegality, fraud, duress, mistake, lack of consideration, or other

invalidating cause;(e) ground for granting or denying rescission, reformation, specific

performance, or other remedy.o §216. Consistent Additional Terms

(1) Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.

(2) An agreement is not completely integrated if the writing omits a consistent additional term which is

a. Agreed to for separate consideration, orb. such a term as in the circumstances might naturally be omitted

from the writing. U.C.C.

o Breaks the agreement down even further than Restatement 2nd, into its individual terms:

A court may decide whether each term is integrated or not, while Restatement 2nd, §213 has categories of “agreements”: “binding integrated”, “binding completely integrated”, and “integrated that is not binding”

o § 2-202. Final Written Expression: Parol or Extrinsic Evidence.Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in 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 .

o Example of strict enforcement of the PER Hayden v. Hoadley, Vermont 1920

D promised, as part of a written agreement to exchange properties, to make certain repairs upon the house to be conveyed to P; P brought suit to recover damages for nonperformance of those repairs; D claims that they had orally agreed that the repairs didn’t need to be completed until a specific date, which hadn’t yet occurred

Held: Evidence of parole agreement excluded “the legal effect of the contract before us—it being silent as to the time of performance—was to require the repairs specified to be completed within a reasonable time”; as such, the contract was considered fully integrated

o since D claims that the parol agreement specifies a date that is beyond a reasonable time period, D’s oral agreement conflicts with the written agreement and evidence of it may not be admitted

o Exceptions to the PER (Reasons for which extrinsic evidence may be admitted): To demonstrate the existence of a “collateral” oral agreement or terms

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Parol evidence is admissible to show a collateral (i.e. related, but not inextricably connected) oral agreement only if:

o The agreement does not contradict express or implied provisions of the written contract

o The agreement is one that the parties would not ordinarily be expected to embody in the writing (it is the “natural subject of a separate agreement”); it must not be so closely connected with the written agreement as to be inextricably bound to it

Mitchill v. Lath, New York, 1928 – Agreement too close to the writing to be collateral

o P and D executed a written contract for the sale of D’s land to P; P claims that the parties made an oral agreement pre-purchase—as an inducement for P to purchase the land—for D to remove an unsightly ice-house from an adjoining property within a year of the sale

o Held: “were such an agreement made it would seem most naturally that the inquirer should find it in the contract. Collateral in form it is found to be, but it is closely related to the subject dealt with in the written agreement—so closely that we hold it may not be proved.”

This is a “4 corners” approach, as it doesn’t consider the surrounding circumstances

o Dissent: the parol agreement was made as an inducement for P to enter into the written contract of sale, and P relied on that parole agreement when she decided to enter into the written agreement; the agreements are separate, and their only connection is that one induced the other

“the limits of the integration are determined by the writing, read in the light of the surrounding circumstances”

Hatley v. Stafford, Oregon, 1978 – Writing only “partially integrated” (as in Restatement, 2nd §216); evidence of existence of consistent additional terms allowed

o D rented P a farm for a year with an option that D could buy out the farm before the lease was up (but not specifying the length of the buy-out option); D entered the land 3 months before the lease was up; P claims that the agreement between P and D also included an oral provision that D’s buy-out option only applied for 2 months after the lease began, and that D no longer had the right to exercise it

o Holding: Evidence of the parol agreement may be written as the parol agreement satisfies the conditions of a collateral agreement:

The oral time limitation is not inconsistent with the terms of the writing since there was no time limit specified in the writing

The oral agreement might naturally have been made as a separate oral agreement based on the surrounding circumstances (i.e. that the parties were not experienced businesspeople used to putting contracts in writing, and that counsel did not advise either party)

To prove existence of a condition precedent to the written agreement (when the condition is not inconsistent with the integrated agreement)

Long Island Trust Co. v. International Inst. For Packaging Educ., Ltd., NY, 1976o Ds were guarantors on IIPE’s loan from P, but made their guarantee

conditional on P obtaining signatures of all 5 guarantors for all loans and renewal loans (in an oral agreement); when the loan was renewed, only 4 guarantors signed; P sues the guarantors on the promissory note when IIPE defaults; Ds claim that they are not the guarantors because the condition was not fulfilled

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o Held: “Among the conditions precedent which may be proved by parol evidence is that the instrument was not to take effect until the payee had procured other signatures… and, if proved, would make the note unenforceable against the guarantors whose delivery was conditional upon the procurement of all such endorsements”

o Dissent: According to the illustration to Restatement, §241, “the parol evidence rule does not bar proof of every orally established condition precedent but only of those which in a real sense contradict the terms of the written agreement”

Varying terms of the written agreement should also be banned (and the alleged pre-conditions here are varying terms of the written agreement)

Luria Bros. & Co. v. Pielet Bros. Scrap Iron & Metal, Inc., 7th Cir., 1979o P had ordered scrap metal from D; the companies exchanged forms; D’s

confirmation form included the statement, “this order constitutes the entire agreement between the parties”; D didn’t perform; D claims that evidence of his oral pre-contract statements—to the effect that D would only perform on condition that he received a shipment of the scrap that P needed—should be admitted

o Held: No admission of parol evidence – D claimed that his oral statements “explained or supplemented” the written agreement, but according to §2-202(b), D’s extra terms are not “consistent” with the “terms of the language and respective obligations of the parties” because D’s own form contains a merger clause

“where writings intended by the parties to be final expression of their agreement call for an unconditional sale of goods, parol evidence that the seller’s obligations are conditioned upon receiving the goods from a particular supplier is inconsistent and must be excluded”

To show fraud Fraud, duress, or mistake may be asserted as a defense to enforcement of the written

instrument or in a separate action in equity to reform or rescind the written agreement; parol evidence may be introduced to prove a parol promise made with fraudulent intentions

o Seeking to enforce the contract admits the existence of it, which is the opposite of what a party claiming fraud wants to do, since once a person admits that the contract exists, he is bound by the terms of that contract, which may include a merger clause or disclaimer; however, if one seeks only to rescind the contract—claiming that it doesn’t exist in the first place because of the fraud involved—then if one can prove that fraud, one successfully repudiates the contract and isn’t bound by it

Lipsit v. Leonard, NJ, 1974o P claims that he was induced into employment (and then into continued

employment) with D under oral agreements (accompanying the written employment contract) of eventually gaining an equity interest in the business “in consideration of past and future services”

o Holding: NY allows parol evidence to be introduced “where the relief sought is rescission [of the contract] or restitution [of any monies spent on enacting the contract], i.e., repudiation or avoidance of the contract as distinct from affirmation and enforcement of it”

NY (unlike most courts) also allows tort damages (the “out of pocket rule”) when fraud is alleged, however, expectancy/contract damages

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are not allowed, since a ruling of fraud destroys the contract and any expectancy damages that would flow from it

Bank of America Nat. Trust & Sav. Ass’n v. Pendergrass, California, 1935o P brings action on a promissory note; D claims that the promissory note was

only signed after fraudulent promises were made by the bank’s representativeo Held: parol evidence of the alleged fraudulent promises is barred because it

was meant to prove the existence of a promise “directly at variance” with the promise of the written note

existence of merger and disclaimer clauses may operate to bar claims of fraud:o LaFazia v. Howe, Rhode Island, 1990

Ps represented to Ds that the delicatessen that Ps were proposing to sell to Ds was a profitable business, even though the tax returns suggested otherwise; Ds, after looking into things, were convinced by P, and agreed to buy the business; the Memorandum of Sale included merger and disclaimer clauses:

“the Buyers rely on their own judgment as to the past, present or prospective volume of business or profits...and does not rely on any representations of the Seller”

“no Representations or warranties have been made by the seller…”

“this agreement constitutes the entire agreement between the parties”

Ds argue that they should be awarded rescission of the contract because of the fraudulent representations that Ps made

Holding: PER does operate to bar fraud claim The merger and disclaimer clauses are effective because of their specificity: the clauses referred specifically to what was disclaimed, and the contract was reviewed by counsel on both sides

the right to rescind for fraud must be exercised with “reasonable promptness”, which the Howes did not do: they continued to act on the contract even after they realized that they had been taken

o U.C.C. § 2-316. Exclusion or Modification of Warranties.(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this Article on parol or extrinsic evidence (§2-202) negation or limitation is inoperative to the extent that such construction is unreasonable.

To reform contracts in cases of Mutual Mistake General Rule: “a court of equity will reform a written instrument to make it conform to

the real intention of the parties, when the evidence is so clear, strong and convincing as to leave no reasonable doubt that a mutual mistake was made in the instrument contrary to their agreement”

Hoffman (D) v. Chapman (P), MD, 1943o D bought a part of Lot 4 from P, with full understanding that D was only

purchasing a part of Lot 4; the deed that D received mistakenly included the whole of Lot 4: D refused to give back the unsold portion of Lot 4 from the deed; P sues in equity to reform the deed so that it doesn’t include the whole of Lot 4

Holding: Where the mistake in drafting the contract is mutual (not unilateral), the court of equity will fix the mistake so that the contract (here the deed of sale) reflects the true intentions of the parties.

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To explain or interpret ambiguous terms of the written agreement Explicit theory of contract interpretation – the strict “4 corners rule”

o According to this theory, a judge can decide what the contract means as a matter of law

o Judge Posner: we start with the presumption that contracts are “usually enforced in accordance with the ordinary meaning of the language used in them and without recourse to evidence, beyond the contract itself, as to what the parties meant”; however, this presumption is rebuttable by two principles of contract interpretation:

Don’t interpret words literally if the literal interpretation would produce absurd results

Must look at the words in the context of the contract as a whole Implicit theory of contract interpretation: there are intended or trade meanings of

words that aren’t apparent when taken at face valueo According to this theory, meanings of words are a question of fact to be

decided by a jury A court must first determine the meaning of the words in order to

determine what evidence is prohibited by those words if there is an ambiguity in the meaning of words in the document, extrinsic evidence may be brought in to show that several possible meanings apply

o Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., California, 1968

D contracted to perform work on P’s steam turbine; D agreed to perform the work “at [its] own risk and expense” and to “indemnify” P “against all loss, damage, expense and liability resulting from …injury to property, arising out of or in any way connected with the performance of this contract”; P’s turbine was damaged in the course of D’s work; D claims that the above indemnity clause was a standard 3rd party indemnity clause, not meant to cover injury to P’s property, even though the literal meaning of the clause might lead one to believe that P was covered

Holding: “The intention of the parties as expressed in the contract is the source of contractual rights and duties. A court must ascertain and give effect to this intention by determining what the parties meant by the words it used. Accordingly, the exclusion of relevant, extrinsic evidence to explain the meaning of a written instrument could be justified only if it were feasible to determine the meaning the parties gave to the words from the instrument alone.”

Here, there are two possible meanings of “indemnify” the “dictionary” meaning, and the meaning of standard 3rd party indemnity clauses

o Restatement 2nd, §212. Interpretation of Integrated Agreement(2) A question of interpretation of an integrated agreement is to be determined by the trier of fact if it depends on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence. Otherwise a question of interpretation of an integrated agreement is to be determined as a question of law.

Assent to Standardized Formso Though standardized forms make the contracting process more efficient, they do present problems of

mutual assent and unconscionability when the parties to the agreement occupy unequal bargaining

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positions Contract of adhesion = the weaker party must adhere to the stronger party’s terms or there will

be no agreement There is a tension between the common law “duty to read” a contract before signing, and the

contracts of adhesion inherent in monopoly-type situationso Fine print/ obscure terms – a disclaimer must be prominent in order to be effective

Weisz v. Parke-Bernet Galleries, Inc., NY, 1971 Ps bought paintings at an art auction that later turned out to be forgeries; there was a

disclaimer in the auction catalogue in the “Conditions of Sale” section that the gallery makes no warranties as to the authenticity of the objects at auction; one of the Ps knew of the disclaimer, the other didn’t

Holding: The disclaimer is effective because it was in a “leading and prominent place”, and the auction situation is one in which Ps are required to act “with the caution of one in circumstances abounding with signals of caveat emptor”

Mundy v. Lumberman’s Mut. Cas. Co., 1st Circuit, 1986 Ps’ silverware was stolen; D wouldn’t pay out for the loss beyond $1,000; Ps’ original

insurance contract with D covered the full value of the silver; the renewal contract changed the terms so that only $1,000 was covered; Ps claim that the change in policy was “buried in the fine print”; D’s renewal policy, however, has several notifications of the change printed in various sections of the policy and a warning in large print of the changes

Holding: The terms of the renewal policy, including the change in coverage of the silver, was clear and should have been known to P when he signed the renewal contract

Acceptance of tickets/ receipts Agricultural Ins. Co. v. Constantine, Ohio, 1944

o Bova had parked her car in the same public lot for years, and was given the same parking ticket; the ticket had a release of liability on the back, which Bova had never read; one day, Bova’s car was stolen

o Held: D could not be released from liability based on the “not-liable-for-loss” provision printed on the ticket

the parking ticket given to Bova was a “mere token for identification” and not part of the bailor-bailee contract there was no evidence of Bova’s assent to the terms written on the back of the ticket; she only assented to the bailment of her car by the lot

this attempt by the bailee for hire to the public to relieve itself of liability for its negligence is against “law and public policy”

NY General Obligations Law includes a statute specifically addressed to parking garages which precludes parking garages from contracting themselves out of their own negligence, because NY common law doesn’t have a policy against it, as OH does

o Implied Warranty of Merchantability Henningsen v. Bloomfield Motors, Inc., NJ, 1960

Ps’ car was totaled soon after purchase when the steering wheel spun in Mrs. Henningsen’s hands – Ps claim that this was a breach of the implied warranty of merchantability inherent in every contract of sale of an automobile

Ds had placed a disclaimer on liability for injury in fine print on the contract of sale in the “warranty” area, stating that the warranty only covered parts replacement thus, what was supposed to have been a warranty had instead become a limit on liability

Holding: “The disclaimer of an implied warranty of merchantability by the dealer, as well as the attempted elimination of all obligations other than replacement of defective

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parts, are violative of public policy and void”o The implied warranty of merchantability is inextricable from this contract

Henningsen, though a landmark in NJ jurisprudence, does not sweep across jurisdictions as such because the torts concept of strict liability covers this type of situation – there is strict liability for negligence in the manufacture of cars, and so there is no need to go to the contract or warranty

o Exculpatory Clauses Richards v. Richards, Wisconsin, 1994

P was injured while riding as a passenger in a trunk belonging to Monkem Co., for which her husband was a truck-driver; P had signed a contract entitled “Passenger Authorization” which gave her permission to ride along with her husband on the company truck, but also released the company from all liability for her injuries

Held: this particular exculpatory contract void as a matter of public policyo the fact that this is an exculpatory contract does not alone make it

unenforceable it is void as against public policy because of the combination of 3 factors (each of which alone wouldn’t necessarily make the contract unenforceable):

the contract serves 2 purposes—authorization and release from liability—that are not clearly identified or distinguished

the release is unreasonably favorable to the drafter the contract is a standardized contract adhesion

Exculpatory contracts are generally disfavored because they “tend to allow conduct below the acceptable standard of care applicable to the activity” courts will therefore closely examine these contracts strictly against the party seeking to enforce it as a matter of public policy

o “Reasonable Expectations” approach to contracts of adhesion Restatement, 2nd, §211. Standardized Agreements(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

Broemmer v. Abortion Services of Phoenix, Arizona, 1992 P went to get an abortion and had to fill out 3 documents before receiving treatment,

including an agreement to arbitrate any disputes arising from the procedure under an Ob/Gyn arbitrator; P did not have higher education, was inexperienced in commercial matters, didn’t know what arbitration was, and didn’t receive any explanation of the documents or counseling

Holding: According to the facts of this case, “the contract fell outside plaintiff’s reasonable expectations and is, therefore, unenforceable.”

o Though contracts of adhesion like this one are not, in and of themselves, unenforceable, a court can refuse to enforce a contract of adhesion if it does not conform with the reasonable expectations of the adhering party or is unconscionable

IV. POLICING THE BARGAIN: DEFENSES TO ENFORCEMENT AND DISCHARGE OF CONTRACTUAL DUTIES

Competency to Contracto 2 types of incompetence

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Statutory incompetence – below legal age Doctrine of necessities = exception to lack of statutory competence

o If someone is too young to contract, but needs to in order to obtain food, shelter, etc. because the minor has no other means, then the doctrine of necessities intervenes

Mental incompetenceo Contracts made with a party who is not competent to contract cannot be upheld

Revisions of Contractual Dutyo U.C.C. § 2-209. Modification, Rescission and Waiver.

(1) An agreement modifying a contract within this Article needs no consideration to be binding. (2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party. (3) 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. (4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver. (5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

o Restatement 2nd, §89:A promise modifying a duty under a contract not fully performed on either side is binding

(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or(b) to the extent provided by statute; or this refers to U.C.C. §2-209(c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise

o Modification because of unforeseen circumstances Brian Constr. & Dev. Co. v. Brighenti, CT, 1978

P subcontracted with D to do excavation and grading work as well as “everything requisite and necessary to finish the entire work properly” in preparation for P’s contract to build a post office; during excavation, D discovered underground conditions that neither P nor D was aware of before they entered into the subcontract; removal of this unanticipated rubble was necessary to completing the building and excavation work; P and D made an oral agreement, which P confirmed in writing, bur D never signed, to remove the rubble for D’s costs + 10%

Holding: “Under these circumstances, the subsequent oral agreement…was binding as a new, distinct contract, supported by valid consideration…D’s failure to comply with this agreement constitutes a breach of contract”

o when the “modification” to the agreement is beyond the scope of the original contract, it becomes a separate, binding contract when supported by new consideration

o Waiver because of changed circumstances The problem with following a strict rule of “no oral modification of contracts without

consideration” is that it is over-inclusive – there are many legitimate situations in which a contract needs to be changed as the parties work with one another to fulfill it, and new consideration shouldn’t be required for every change that takes place as the circumstances call for

Waiver helps to get around the general “no oral modification of written contracts” rule, because a waiver ≠ a modification:

o a modification permanently changes the contract

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http://straylight.law.cornell.edu/ucc/2/2-104.html#Between%20Merchants_2-104





o a waiver of a contractual provision can be rescinded with notice Universal Builders, Inc. v. Moon Motor Lodge, Inc., PA, 1968

P’s sub made a minor error, which D magnified into a material breach, by way of which D induced P to sign a new contract under terms less beneficial to P, including liquidated damages for delay and a “no modification unless in writing” clause; as P was working on the job, D’s agent requested additional work, was told that it would cost extra by P, and D promised orally to pay the extra money and saw that P did the work; D claims that it doesn’t have to pay because doing extra work with the expectation of payment was a modification that had to have been in writing

Holding: “When an owner requests a builder to do extra work, promises to pay for it and watches it performed knowing that it is not authorized in writing, he cannot refuse to pay on the ground that there was no written change order…performance of the condition requiring change orders to be in writing was excused by implication”

o Waiver D has waived the contract provision that all extras must be approved in writing by allowing extras to be performed without requiring a writing first

According to §2-209(4) and (5), once the waiver is given—implied though it may be—the waiving party must give the other party reasonable notification before retracting that waiver

o Modification in cases of duress: Economic Duress

Austin Instrument, Inc. v. Loral Corp., NY, 1971o D had a contract with the Navy to produce radars; D subcontracted with P to

buy some of the gear needed to manufacture the radar equipment, which P would deliver monthly; P changed the terms of the agreement after part performance P demanded that D pay more for the gear AND sign a 2nd contract for delivery of future gear for the higher price, or P would stop delivery (breach) on the 1st contract; P sues D for the $ left to be paid on the 2nd

contract; D sues for the extra money that it paid on the 1st contract as a result of economic duress

o Holding: This is a “classic case” of economic duress as a matter of law: “the record before us demonstrates that D agreed to the price increases in consequence of the economic duress employed by P.

o Requirements to void a contract under duress: “it is established that the party making the claim was forced to agree to

it by means of a wrongful threat precluding the exercise of his free will”

There is “proof that one party to a contract has threatened to breach the agreement by withholding goods unless the other party agrees to some further demand”

“the threatened party could not obtain the goods from another source of supply and that the ordinary remedy of an action for breach of contract would not be adequate”

Smithwick v. Whitley, North Carolina, 1910o P contracted in writing to buy land from D for 35$ an acre, but went into

possession before getting the deed; P worked the land for 3 years, at which time D refused to convey the deed unless P would pay $50/acre; P paid it, fearing to lose the land he had worked hard preparing to farm, and then sued for the overpayment

o Held: “duress exists only where the unlawful act of another has deprived one of free will” P voluntarily paid the extra money; there was no

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economic duress because P could have sued D for specific performance of the written contract when D demanded the higher price

Wolf v. Marlton Corp., NJ, 1959o Ps wanted to back out of their deal to buy a house from D; P threatened that if

D didn’t return a substantial amount of their down payment, P would go through with the purchase deal and then resell to an undesired-able tenant; D then resold the house to other purchasers; P sues for recovery of the down payment

o Held: D can’t be held in default of contract for refusing to go forward with the sale contract with Ps in the face of Ps’ threat

“duress is tested, not by the nature of the threats, but rather by the state of mind induced thereby in the victim”

Economic Duress Leading to Settlement of Claims Hackley (D) v. Headley (P), Michigan, 1881 – the harsher perspective

o P did log cutting, hauling, and delivery work for D; according to the scale in customary industry use at the time that the contract was formed, D owed P $2,000 more than D claimed to owe P according to a different scale; D got P to sign a receipt for payment of less than D owed, which was offered as a full and complete settlement of claims; P would have been financially ruined if he had not accepted the settlement money; P sues for payment, claiming that he signed under financial duress

o Held: (Judge Cooley) No economic duress – D’s actions constitute only “failure to meet promptly their pecuniary obligation”; if P had not been in financial straits at the time, D’s actions would not have constituted duress

Capps v. Georgia Pacific Corp., Oregon, 1969o D owed P a commission in return for P’s efforts in finding a lessee for D; D

knew of P’s adverse financial situation and threatened P that even though P was entitled to the commission, P would receive nothing unless P signed a release of claims and accepted a lesser amount, and that P could never succeed in court against D anyway because D was such a strong and powerful corporation; P alleged that he was deprived of his free will in this situation = duress

o Held: Duress based on financial straits is now a valid cause of action or defense

Also, there is lack of consideration for the settlement agreement, since the $ that D paid P for the “release” was $ that D undisputedly owed P anyway (i.e. there was no valid lawsuit for P to refrain from)

The general view today is still that “financial difficulty by itself will not justify setting aside a settlement” generally a lack of consideration argument, i.e. the settlement money was already owed (legal duty rule/ a lesser sum cannot satisfy a greater sum), needs to be coupled with the economic duress argument

o Legal Duty Rule Duty Apart from Contract

Denney v. Reppert, Kentucky, 1968 – official dutyo Bank employees (including Ps) gave information that lead to the apprehension

and arrest of bank robbers; 2 policemen from the bank’s jurisdiction assisted in the arrest, as did D, a policeman from another jurisdiction; the policemen from the bank’s jurisdiction don’t claim the award, because it is their job and duty to arrest criminals

o Held: “To the general rule that, when a reward is offered to the general public for the performance of some specified act, such reward may be claimed by any person who performs such act, is the exception of agents, employees and public

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officials who are acting within the scope of their employment or official duties”

Ps may not claim the award because they were performing their duties as bank employees, but D may claim it because he was acting out of jurisdiction, which was not his official duty

Spousal dutyo RE Estate of Lord v. Lord, New Mexico, 1979 –

Husband (D) entered into an oral agreement with now-dead wife in which she promised to leave him her whole estate if he would marry her and “be a loyal, faithful husband” and “take care of her like a husband would” until her death; after they were married, the wife made a will leaving the bulk of her estate to her sister, P; D claims that he fulfilled his part of the oral agreement and should inherit the whole estate as promised

Held: the oral agreement is void as against public policy “a contract whereby one spouse agrees to pay the other spouse for his or her care, which is part of the other’s duties as a spouse, is against public policy and void” because it is the state’s policy “to protect the marriage institution” by discouraging people from marrying for money

o Generally, nuptial contracts that change the legal relationship of parties already obligated to do certain things—such as remain faithful, etc.—as a result of legal marriage are considered void for want of consideration

Schwartzreich v. Bauman-Basch, NY, 1921 Parties may mutually rescind one contract, and then enter into a new binding

agreement where only one party’s terms/obligations have changed, and the legal duty rule is no obstacle, since mutual rescission of the old contract relieves the parties of what they would otherwise have been legally obligated to do as a result of the first contract

Holding: “the parties to a contract can rescind it by mutual consent. They can then proceed to make a new contract in which their mutual promises are consideration for each other.”

Alaska Packers’ Ass’n (D) v. Domenico (P), 9th Circuit, 1902 Ps signed a contract to crew and sail from San Francisco up to Alaska on D’s ship and

catch and can fish for D for an agreed upon seasonal wage; once Ps got up to Alaska, they refused to work unless they were given a new contract with higher pay; the superintendent signed the new contract under duress in order that Ps would go back to works

Holding: “When a party merely does what he has already obligated himself to do, he cannot demand an additional compensation therefore; and although, by taking advantage of the necessities of his adversary, he obtains a promise for more, the law will regard it as nudum pactum, and will not lend its process to aid in the wrong”

o Both the legal duty rule and bad faith operate to nullify the later contracto Discharge of Debt by Accord and Satisfaction

Definitions: Accord = when a different performance or goods (i.e. consideration) is substituted for

that which was included in the original agreement Satisfaction = the performance of the accord agreement

o Performance of accord + satisfaction = discharge of the prior contractual duty as well

An accord executed = “accord + satisfaction” an executory accord (not yet executed/ a pending accord) ≠ “accord + satisfaction”

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effect of an accord/ accord + satisfaction on the existing contract: unless it is shown that the parties intended immediately to discharge the existing duty, the accord merely suspends the promisee’s right to enforce that duty

checks rendered as “payment in full”: If A owes B $, and A gives B a check for less than that amount marked “payment in full” (with notice to B that this it is A’s intention to discharge his debt in this way), and B cashes the check, has there been an accord and satisfaction such that B will no longer be able to recover the balance from A?

Liquidated debts (i.e. undisputed debt that is due): there is no accord + satisfaction (legal duty rule)

o E.g. School Lines, Inc. v. Barcomb Motor Sales, Vermont, 1985 Held: when there is no “bona fide dispute” over the price owed, then

the debt is considered “liquidated”, and acceptance of a lesser sum than is due does not constitute an accord and satisfaction because there has been no consideration for the “accord” at this point the creditor may still maintain a suit for the balance owed

Un-liquidated debts (i.e. there is a bona fide dispute as to the amount due): there is an accord and satisfaction – A’s tender of the lesser sum is valid consideration for B’s promise to forgive A’s debt

o Even if B crosses out the words “payment in full”, or tells A that he is accepting the check “under protest” or “in part payment”, and then cashes the check, B’s retaining of A’s $ = assent to B’s terms anyway

o E.g. Marton Remodeling v. Jensen, Utah, 1985 P did remodeling work for D on a “time and materials” contract; D

claimed that P’s bill was excessive and offered to pay only $5K, which P said it could not accept; D sent a check for $5K anyway with the following endorsement condition on it: “endorsement hereof constitutes full and final satisfaction of any and all claims payee may have against Mark Jensen”; P wrote a letter saying that it would not accept the check as full payment and filed a mechanic’s lien on D’s property, and then P cashed the check after writing “not full payment” underneath the condition

Holding: Cashing the check with the “release of claims” condition did constitute an accord and satisfaction “when a bona fide dispute arises (the existence of which P admits) and a check is tendered in full payment of an un-liquidated claim as we have here,…the creditor may not disregard the condition attached.”

o U.C.C. §1-207 view: the U.C.C. does allow B to cash the check in defiance of A’s conditions as long as B notifies A that the $ was accepted “under protest” or “without prejudice”, etc.

Most states have adopted provisions stating that §1-207 doesn’t apply to checks the common law accord and satisfaction is still fulfilled by cashing a check, even “under protest”

NY and SC are the only states that haven’t adopted this provision Mistake

o constructive fraud = “a breach of legal or equitable duty which…the law declares fraudulent because of its tendency to deceive others, to violate public or private confidence, or to injure public interests. Neither actual dishonesty of purpose nor intent to deceive is an essential element of constructive fraud…constructive fraud may be interred from the intrinsic nature and subject of the bargain itself”

Jackson v. Seymour, VA, 1952 – grossly inadequate consideration P (sister) sold D (brother) land for $275 when she was in financial straits, and D then

cut timber from the land worth almost $5,000; P claims that D fraudulently

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misrepresented the value of the land when she consulted D about selling it to him; D denies fraud, claiming that he didn’t know of the existence of the timber on the land at the time that he agreed to purchase the land from P; when P found out about the timber, she asked D if she could refund the purchase price, and he refused

Neither party had been on the land before the sale, or knew of its character – there was truly a mutual mistake as to the existence of the timber, however, P based her complaint on fraud only

Held: P is entitled to relief (rescission + an accounting of the timber that was sold) on grounds of constructive fraud + inadequacy of consideration

o the relationship of the parties—they were brother and sister, and he was a successful businessman who she relied on for advice—was such that equity should dictate the result

“Courts, though they have long arms, cannot relieve one of the consequences of a contract merely because it was unwise…but where inadequacy of price is such as to shock their conscience equity is alert to seize upon the slightest circumstance indicative of fraud, either actual or constructive”

o Mutual Mistake Restatement 2nd, §152 - WHEN MISTAKE OF BOTH PARTIES MAKES A CONTRACT

VOIDABLE(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 s 154.(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.

Aluminum Co. of America (ALCOA) v. Essex Group, PA, 1980 ALCOA and Essex had a long-term contract for refining aluminum, and they tried to

set the price in the contract in an escalation clause according to a price index that turned out to have been completely inadequate in terms of contemplating for the unexpected inflation that occurred; the seller stood to loose over 60$ million as a result of the parties’ mistaken dependence on this price index during the remaining term of the long term contract

Held: When there is mutual mistake in the contract, and the consequences are material, the remedy is rescission or reformation of the contract

o Here the judge ordered reformation of the contract ALCOA still had to perform, but at a changed price index

o Even though there was some calculable risk involved in relying on a price index, the escalation in price that actually happened is beyond the scope of the contemplated risk

Sherwood v. Walker – “Rose 2d of Aberlone”, Michigan, 1887 P chose the cow “Rose 2d of Aberlone” from among cows that D was selling because

D believed them to be barren; barren cows were worth only their meat value, which was the price at which D agreed to sell Rose to P (D would never have intended to sell Rose at that rate if Rose were not barren); D telegraphed P the day before P came to pick up Rose to say that Rose was found to be pregnant and that D would now not sell; P brought over $80 (the agreed-upon beef price) and demanded the cow; D would not take the $ nor deliver Rose

D claims mutual mistake of fact – both parties believed that Rose was barren at the time that the sale agreement was made; the contract was made on the assumption that Rose was being bought for her beef value, not for her value as a breeding cow

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Held: “The mistake affected the substance of the whole consideration, and it must be considered that there was no contract to sell or sale of the cow as she actually was”

o A difference in substance—as we have here—is distinguished from a mere difference “in some quality or accident”:

difference in quality – no rescission (usually) difference in substance – rescission

Dissent: no mistake because from what P was told by D, D believed that the cow was barren, but was aware of the possibility—as was P—that perhaps Rose could be made to breed both parties took their chances here, and D lost out

Smith v. Zimbalist, California, 1934 D—an internationally prominent violinist—visited P’s home (P was an 86 year old

collector of rare violins) and asked to see P’s collection; D asked P how much money he would take for “this Stradivarius” and “this Guarnerius”; D and P agreed upon a price, and D paid part of the price, after signing a bill of sale, and left; it turned out that both violins were imitations and worth much less than the agreed-upon price

Held: Judgment for D there was no fraud; an honest mistake as to the “identity of the subject matter” of the sale contract was made by both parties, and it should be rescinded so that P cannot sue for the contract price

o Unilateral Mistake Restatement 2nd, §153. WHEN MISTAKE OF ONE PARTY MAKES A CONTRACT

VOIDABLEWhere a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in s 154, and

(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or(b) the other party had reason to know of the mistake or his fault caused the mistake.

Elsinore Union Elementary School Dist. V. Kastorff, CA, 1960 D mistakenly calculated its construction bid by leaving out the plumbing estimate while

tabulating its final bid in haste (since subs submit their bids at the last moment); D’s bid for the contract was then several thousand dollars less than it should have been; D (of course) won the bidding, and when P asked D if a mistake had been made right after the bidding ended, D said “no”, though D did not have its worksheets at the time; as soon as D got home, D realized its mistake and quickly asked P if it could be released from the bid P said no and awarded D the contract anyway

Holding: “Because of an honest clerical error in the bid and D’s subsequent prompt rescission he was not obligated to execute the contract”

o when an offer is “too good to be true” because of unilateral mistake of the offeror, reliance on that offer by accepting it is not reasonable

o Allocation of Risk of Mistake Restatement, 2nd, §154. WHEN A PARTY BEARS THE RISK OF A MISTAKE

A party bears the risk of a mistake when(a) the risk is allocated to him by 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.

Misrepresentation + Warranty (more below in unconscionability)o Express Warranty

Tribe v. Peterson, Wyoming, 1998

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D owned the horse “Moccasin Badger”, who had always been gentle, had never bucked, and was certified by a vet as gentle and kind; Ps were inexperienced riders and wanted to buy a gentle horse; Ds described Badger as a gentle horse in the sale listing, and told Ps that Badger was gentle and had never bucked yet; P bought Badger, and Badger threw both Mrs. and Mr. P from the saddle soon after purchase

P claims that D breached an express warranty of “no bucking” D claims that there was no guarantee because it would be impossible for anyone to

make any guarantee’s about an animal’s future behavior; what D said was merely descriptive of Badger’s behavior as he, others, and the vet knew it

Holding: There was no express “no-buck” warranty made in this situation, and therefore, no breach; also, no negligent misrepresentation claim, as the evidence shows that D’s representations about Badger’s character were true

o A representation of “opinion, belief, judgment, or estimate” ≠ an express warranty

Johnson v. Healy, CT, 1978 – express warranty of habitability When P asked D about the quality of construction of the house that D was building for

P, D made representations as to its quality on which P relied; after P moved in the house settled and became damaged as a result of improper fill below the lot on which the house was built that was put there before D bought the lot to build on;

P claims breach of express warranty of habitability; D claims innocent misrepresentation (mistake)

Held: D did make an express warranty to P, on which P reasonably relied, and therefore P should be awarded contract damages as a result of the breach

o if the court had ruled mistake, then P could not have recovered contract damages (the remedy would have been rescission – see below)

U.C.C. § 2-313. Express Warranties by Affirmation, Promise, Description, Sample.(1) Express warranties by the seller are created as follows:

(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise. (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description. (c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(2) It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.

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

(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale. (3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of dealing or usage of trade.

New York: Even in the absence of knowledge by the seller, and the absence of capacity to have the knowledge, NY merchants are held to the implied warranty of merchantability

The merchant takes on the “risk of mistake”, if we choose to look at the warranty problem through the Restatement lens of mistake

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

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Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

The advent of implied warranties has led the old doctrine of caveat emptor to fall out of favor with the courts

Implied warranty of habitability Hinson v. Jefferson, North Carolina, 1975

o P bought land from D that was restricted by deed to residential use; P planned to construct a house on the land; there was no covenant or warranty written in the deed that guaranteed that the land would be suitable for construction of a residence; P would need to install a septic system for her home, but because of land conditions of which neither party knew (mutual mistake) at the time of sale, P found out that it would be impossible to install a septic system, and therefore impossible to build a functional residence

o Held: there is an implied warranty of habitability in this deed “where a grantor conveys land subject to restrictive covenants that limit its use to the construction of a single-family dwelling, and…the property cannot be used by the grantee…for the specific purpose to which its use is limited by the restrictive covenant, the grantor breaches an implied warranty arising out of said restrictive covenants”

o Generally courts are reluctant to imply a warranty of habitability in the sale of raw land; the court here made an exception because:

the land—with its restrictive covenants—was rendered valueless to P P is a consumer, not a developer like D, and can’t judge land as well as

D cano Difference in remedy for mistake and warranty:

Mistake: remedy = only rescission Breach of warranty: remedy =

consequential damages + rescission; or consequential damages + difference in value

o Partial Disclosure/ Non-Disclosure Cushman v. Kirby, VT, 1987

When Ps were looking at D’s home in anticipation of buying it, P inquired about the quality of the water; Mrs. D said that it was only “hard water” that could easily be taken care of by putting Clorox into the water treatment system; Mr. D remained silent; after Ps moved in, they discovered that the water was actually sulfur water from a well, was not suitable for drinking, and smelled awful

Ds claim that they cannot be liable for fraud because they didn’t make intentional affirmative misrepresentations

Holding:o Mrs. D’s partial disclosure = fraud

“Where one has full information and…discloses a part of this information only, and by words or conduct leads the one with whom he contracts to believe that he has made a full disclosure and does this with intent to deceive and overreach and to prevent investigation, he is guilty of fraud…if his words and conduct in consequence of reliance upon them bring about the result which he desires”

o Mr. D’s silence/ non-disclosure = fraud Silence ≠ fraud unless there is a duty to speak Duty to speak standard: “where material facts are accessible to the

vendor only, and he knows them not to be within the reach of the

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diligent attention, observation and judgment of the purchaser, the vendor [of real estate] is bound to disclose such facts and make them known to the purchaser”

Justified Nonperformanceo Impossibility

Objective Impossibility = the performance cannot now be done by anyone; only an objective impossibility will excuse the promisor’s performance

Many “impossibility” cases fail because they are not truly, objectively, impossible Subject matter of the contract is destroyed

o Taylor v. Caldwell, England, 1863 P and D made a contract for D to rent the Surrey Gardens and Music

Hall to P on 4 nights for a series of “grand concerts”; essential for the fulfillment of the contract was that the Music Hall be in a state fit for a concert; before the performance, the Hall burnt down through no fault of either party

Held: “In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or things shall excuse performance.”

o Even though courts will imply risk allocation schemes into a contract if the situation justifies it (as in Taylor), parties are certainly allowed to guarantee a performance, and thereby claim all the risk, if they choose to write this guarantee into the contract

American repair doctrine: if the contract is for repairs to an existing building, and the building is then destroyed, the contract dissolves, because the subject is gone (see Carroll v. Bowersock, below)

Subjective Impossibility = the performance cannot be done by the promisor (perhaps because of an intervening “Act of God”), but could be done by someone

General rule: the promisor is not excused from performing, as he assumed the risk of liability when he contracted to perform (and had the option to allocate the risk differently within the contract)

Tompkins v. Dudley, NY, 1862o Ps, trustees of a school district, sue Ds, who guaranteed the builders

performance of a schoolhouse; the schoolhouse was not fully completed on time according to the contract, and it burned down before D offered it as completed to P

o Holding: “The defense [of Act of God] interposed by the Ds constitutes no justification to…the builder, for the non-performance of his contract with Ps and that, having guaranteed for an adequate consideration, expressed therein, its performance, they are liable to respond to Ps for the damages which they have sustained by reason of such non-performance”

the contract was to build a schoolhouse from scratch, and D could presumably still have done that after the fire the subject of the contract—building a schoolhouse—was not destroyed

Kel Kim Corp. v. Central Markets, Inc., NY, 1987o P rented a property from D for use as a roller skating rink; part of the lease

contract was that P had to at all times maintain a million dollar insurance policy; for 6 years P complied with the contract and operated the roller rink without incident; there was a liability insurance crisis, and P’s insurance policy was cancelled; P tried to get the requisite coverage, but was only able to find an insurer for $500K; D sues for breach of the insurance maintenance clause

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o The contract contained a force majeure clause that did not specifically list this incident as an excuse for avoiding a contractual provision during the period of delayed performance, but included the phrase “or other similar causes beyond the control of such party”

o Holding: No impossibility the parties must perform, even in the case of unforeseen circumstances; performance must be “objectively impossible” (i.e. the subject matter of the contract must have been destroyed, or the “unforeseen circumstance” must have been impossible to foresee or guard against in the contract) in order to excuse contract obligation

in this case, the parties could have guarded against this situation by specifically allocating the risk for it in the contract (perhaps by drafting a more specific force majeure clause)

Bunge Corp. v. Recker, 8th Circuit, 1975o P and D entered into a written contract under which D was to sell a specified

quantity of soybeans to P; nothing in the contract required D to grow the beans on his own land, or to grow them himself—they only needed to be grown in the U.S. to satisfy the contract; severe winter weather made it impossible for D to harvest most of his beans for the January contracted delivery, and D never delivered; P visited D’s farm, saw that the beans were indeed un-harvestable, and extended D’s delivery time until the end of March; D did not deliver then, either; the market price of beans rose dramatically from the end of Jan. to the end of March; P sues for the difference between the contract price for beans and the market price for beans at the end of March

o Holding: The act of God defense is not allowed because the goods were not identified in the contract as those which were destroyed in the field, according to U.C.C. §2-613; D could have found beans elsewhere with which to fulfill the contract.

The court did remand on the issue of damages, because it was possible to say that P showed bad faith in extending delivery time in order to increase his damages (since the bean prices rose so much)

o U.C.C. §2-615 (below) does not help D either because D did not try to “allocate production and deliveries among his customers” (§2-615(b)) D didn’t deliver any beans at all to P (and it appears that some beans were harvestable after the severe weather)

o U.C.C. § 2-613. Casualty to Identified Goods.Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a "no arrival, no sale" term (Section 2-324) then (a) if the loss is total the contract is avoided; and (b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.

Whitman v. Anglum, Connecticut, 1918o P and D made an expressly unconditional contract for milk delivery, with a

cover clause; D couldn’t supply milk to P as contracted for because the government first quarantined D’s cows and then ordered them killed to prevent spread of “hoof and mouth disease”

o Held: Judgment for P because this contract was an “absolute and unconditional” agreement for D to deliver milk daily; D could have gotten

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milk elsewhere despite the quarantine and fulfilled his obligation to P as long as performance is still possible and legal (though difficult), the

parties must perform their obligations Minority View (promisor is excused for subjective impossibility): Snipes Mountain

Co. v. Benz Bros. & Co., Washington, 1932o Similar facts as in Bunge, but with opposite result the trial court reformed

the contract to add the clause that P would only deliver potatoes grown on his own land after P couldn’t deliver 36 of the 100 tons promised to D under the contract because the crop was prevented by bad weather

o Held: because of mutual mistake, reformation of the contract was proper it was clear that both parties intended that it was a contract for sale of potatoes grown by P on his land, and no other

“the contract, in the absence of an express provision controlling the mater, being considered as subject to an implied condition in this regard”

o Amount of Recovery in cases of impossibility Carroll v. Bowersock, Kansas, 1917

P contracted to construct a reinforced concrete floor in D’s warehouse; after P had completed partial performance, the warehouse was destroyed by fire

Holding: If D has benefited from any of P’s labor before the fire, then D must pay for the benefit received “the liability of the owner in a case like this should be measured by the amount of the contract work done which, at the time of the destruction of the structure, had become so far identified with it as that but for the destruction it would have inured to him as contemplated by the contract”

D was in fact benefited by P’s work to the extent that the warehouse had become improved by P’s labor before the fire, and D should pay for this benefit; P cannot be compensated for supplies or temporary devices that were destroyed by the fire, however

Olsson v. Moore, Indiana, 1992 Ps answered D’s advertisement for sale of house; before they had signed a contract for

sale, Ds gave Ps permission to work improvements on the house; Ps worked on the house, all the while still negotiating the price with Ds; the house was destroyed by accidental fire before the contract of sale was completed; Ds collected on the insurance; Ps then gave Ds a bill for labor and materials spent on improving the house; D refused to pay

Held: Ds must pay for Ps’ work “the fact remains that D was the legal and equitable owner on the day of the fire…Ps’ work increased the value of the home…the conclusion that Ds benefited from the improvements is inescapable”

o Prevention by Government Regulation or Order Restatement, 2nd, of Contracts §264. Prevention by Government Regulation or Order

If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.

Therefore, the contract disappears when governmental order makes its performance impossible

Louisville & Nashville R.R. Co. v. Crowe, Kentucky 1913 P gave D a strip of land through his farm for use as a railroad right of way, in return for

a promise by P to issue D a lifetime annual pass on the railroad between Kentucky and Tennessee; in 1911, D recalled P’s pass in reliance on a federal statute that forbid issuance of these passes under interstate commerce; D offered to issue P a pass until the Tennessee border, but no more

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Held: When “a contract which is lawful when made is terminated by a later governmental regulation or order which renders its performance unlawful…a party who has received a performance under such an agreement should not be permitted to retain it without payment”

o the contract itself is rescinded as a result of the government order, but because P is keeping the right of way, P must pay D for the value of the right of way (not for the value of the nullified pass) minus the monetary benefit that D has already received by using the pass

o The court writes a new contract for the parties in this situation, because there is no other solution

The Isle of Mull, 4th Circuit, 1921 D, a British corporation, chartered the steamship “Isle of Mull” to P, a NY corporation;

because of WWI, the ship was commandeered by the British government for the remainder of the charter period, and the government gave D, as compensation, more $ than D had been charging P for use of the ship; P claims that D should not be the one to profit from this situation, because D is being unjustly enriched by keeping the excess paid by the British government

Held: The contract was discharged as a result of the government order, and therefore D is not required to account to P for the profit it received.

o Doctrine of Impracticability (impracticability = “subjective” impossibility): if a contract is turning out much different than the parties contemplated, involving unforeseen extreme difficulty or expense, a court may still discharge the contract even though there is no objective impossibility

This is the minority view, but is gaining authority American Trading & Prod. Corp. v. Shell Int’l Marine, Ltd.

D chartered P’s ship to bring cargo from Texas to India, and the parties agreed on a shipping rate, which D paid; the price included a toll for the Suez Canal, but did not specify that the ship had to travel through the Canal; because of war in the Middle East, the Suez Canal shut down, and the ship is forced to take the longer route around the Cape of Good Hope

P claims that because the contracted route though the Suez Canal was made impossible because of the war, the contract had dissolved and P is now claiming compensation for use of its ship around the Cape in quantum meruit (more $ than specified in the contract)

Holding: No impracticability – the contract was not formed with the condition that the ship had to travel through the Suez Canal (it was expected, but not a condition of performance), and therefore, using the well-understood alternative route around the Cape was not an “extreme difficulty” that would warrant dissolution of the contract (as in Restatement §454)

Mishara Constr. Co. v. Transit-Mixed Concrete Corp., Massachusetts 1974 P contracted with D to supply concrete for a housing project; a labor dispute broke out

at the worksite and a picket line remained until the end of the project; D was only able to deliver some of the concrete as a result of the strike

Held: the doctrine of “strict impossibility” should not apply here, but rather, the “commercial impracticability” test of U.C.C. §2-615, which takes “circumstances drastically increasing the difficulty and expense of the contemplated performance” into account as “within the compass of ‘impossibility’”

U.C.C. § 2-615. 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

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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.

o Doctrine of Frustration Restatement 2nd §265 – definition of frustration of purpose: “where, after a contract is made, a

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

Krell v. Henry, England, 1903 – foundation of frustration doctrine D had agreed to rent a flat from P for 2 days at the price of ₤75 in order to view the

coronation ceremony of Edward VII; D put down a ₤25 deposit; Edward got sick and the coronation procession didn’t take place, and D didn’t use the rooms

Holding: the contract fails for frustration of circumstances – the foundation on which the contract was made was that the coronation procession would take place on those days along the route that passed by this particular flat; when the foundation of the contract disappears, the contract disappears (following from the rule of Taylor v. Caldwell, above)

If the following 3 questions are answered in the affirmative, then the contract is discharged for frustration:

o With regard to all of the circumstances, what was the foundation of the contract? Is it now missing?

o Was performance of the contract thereby prevented?o Was the event which prevented the performance of the contract of such a

character that it cannot reasonably be said to have been in the contemplation of the parties at the date of contract?

Chase Precast Corp. v. John J. Paonessa Co., Massachusetts, 1991 The city entered into contracts with D to resurface and improve certain stretches of

highway; D contracted for P to provide the concrete median barriers; D’s contract with the city contained a standard provision that the city could eliminate items or portion of the work that it later found unnecessary; D’s contract with P had no such provision, though P knew of the provision because it was a standard industry contract; residents of the city protested the concrete barriers (they preferred grass median strips) that P was to supply, and then the residents filed a lawsuit against the city; D notified P to stop producing barriers in anticipation that the city would yield to the residents’ demands; D paid P for what P had produced and delivered up until that point, so P lost nothing; P sues for its anticipated profit on the contract

Holding: judgment for D there was frustration of purpose because “even if the parties were aware generally of the department’s power to eliminate contract items…they did not contemplate the cancellation for a major portion of the project of such a widely used item as concrete median barriers, and did not allocate risk of such cancellation”

o This fits in with the Restatement 2nd §265 approach – look at each case of alleged frustration in the light of its surrounding circumstances

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Relief in situations of frustrated contract: Use a compromise: reliance losses of one party can be deducted from the restitution

claims of another (this is similar to the “benefit” test/ incorporation into the structure test for frustrated building contracts)

Commercial frustration = “performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration”

Lloyd v. Murphy, CA, 1944o D rented the premises from P under a conditional lease that stated that the

premises were to be used “for the sole purpose of conducting thereon the business of displaying and selling new automobiles”; the government prohibited the sale of new cars because WWII broke out; as a result, P waived the lease restrictions; D breached anyway by vacating the premises, though D still operated car businesses at two other locations during this time; D simply claimed that he wasn’t making a go of the business at that location

Held: Commercial frustration not applicable here D has not met his burden of proof as to showing the requirements for application of the frustration doctrine: unforseeability, or destruction of the value of the lease

o Acts of the government, like acts of God, don’t automatically discharge contractual duty

Unconscionabilityo U.C.C. § 2-302. Unconscionable contract or Clause.

(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.

o Restatement 2nd, §205. Duty of Good Faith and Fair DealingEvery contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

o Unconscionability is generally considered a matter of law for the judge to decide (and not a matter for juries) because unconscionability cases started out in equity, which doesn’t use juries

o Two major strands for dissolving or not enforcing a contract for unconscionability (as explained in Brower, below):

Procedural – problems with the procedure through which the contract was made, e.g.: Setting of the transaction Experience and education of the party claiming unconscionability Fine print involved? High-pressured tactics used? Disparity in the parties’ bargaining power

Substantive – generally, when there is gross disparity in value, the substance of the contract is found to be unconscionable

Mere inadequacy of consideration won’t cancel a contracto Woollums v. Horsley, Kentucky, 1892

D = Woollums, uneducated farmer; P = Horsley, man of business who was buying up mineral rights to land in D’s vicinity; P bought mineral rights to D’s land through P’s agent for $.40/acre; P did not pay the purchase price as stipulated because D refused to survey the land; P then sues for specific performance, demanding the deed to D’s mineral rights; D’s land is really worth 15$/acre because of its mineral content, of which D knew nothing; P did know that it was

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worth much more than he had offered to pay, as he was in the business of buying up mineral rights in the area

Holding: “The contract was not equitable or reasonable, or grounded upon sufficient consideration, and no interest has arisen in any third party. A court of equity should, therefore, refuse its specific enforcement.”

“courts of equity will not proceed to decree a specific performance where the contract is founded in fraud, imposition, mistake, undue advantage, or gross misapprehension; or where, from a change of circumstances or otherwise, it would be unconscientious to enforce it”

o Clean-up principle/ principle of completeness Courts will often deny specific performance of a contract because of unconscionability when

sitting in equity, while the contract may still be upheld at law, i.e. damages may still be awarded (denial of equitable relief does not necessarily defeat a claim at law)

The clean-up principle allows a judge sitting in equity to tie up all of the legal issues as well by assessing damages after refusal of specific performance for unconscionability

Federal courts use this sparingly, though, because, assessing damages in equity takes away a party’s jury rights

o Williams v. Walker-Thomas Furniture Co., D.C. Cir. 1965 “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.”

o Arbitration clauses: Companies like to use them to avoid class action suits A solution to the Brower problem is to require, for smaller disputes, that the arbitration take

place in small claims court in the city in which the consumer lives this is a reasonable arbitration clause for situations when the parties will be, necessarily, in unequal bargaining positions (big company v. little consumer)

o Adhesion contracts: Adhesion contracts are not necessarily unconscionable; but the existence of an adhesion

contract is generally evidence of inequality of bargaining powero Brower v. Gateway 2000, Inc., NY 1998

Consumers bring a class action suit against Gateway involving its (lack of) advertised tech support; Gateway moves to dismiss because of the arbitration clause included in its Terms and Conditions

Ps claim that D’s arbitration clause is invalid because according to §2-302, it is unconscionable in both:

o Procedure-- it was obscure, hidden in fine print, etc., and o Substance – the arbitration clause chose the I.C.C. as the forum for arbitration,

which was so costly a forum as to be prohibitive (the cost of arbitration under the I.C.C. is more than most Gateway products cost)

Holding: The case should be dismissed because the arbitration clause is not unconscionable procedurally, however, the substance of the arbitration clause is unconscionable, and should be modified (according to §2-302)

Because under NY law a contract must be both procedurally and substantively unconscionable in order to invalidate the contract for unconscionability, and this contract is not procedurally unconscionable, the contract as a whole cannot be declared void for unconscionability

o Gianni Sport Ltd. V. Gantos, Inc., Michigan, 1986 P and D contracted in the summer that D would buy an order of women’s holiday clothing for

the Christmas season, to be delivered in mid-October; D cancelled the order in late September, and subsequently agreed to accept the goods anyway if P would agree to sell the goods at a 50% price reduction; the cancellation clause on D’s purchase order form read as follows:

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“Buyer reserves the right to terminate by notice to Seller all or any part of this Purchase Order with respect to Goods that have not actually been shipped by Seller…”

P claims that the cancellation clause is unconscionable; D claims that the clause merely allocated the risk (a common clause among fashion industry big buyers)

Held: the cancellation clause is unconscionable because the parties were in unequal bargaining positions and the clause is unreasonable

Under the U.C.C., the basic test of unconscionability is “whether, in the light of the general commercial background and commercial needs of the particular trade, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract”

o purpose of this principle of unconscionability = “prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power”

bad faith: if not for D’s “agreeing” to buy the goods at a 50% price reduction right after cancelling the order, the court might not have been so ready to see this cancellation clause as unconscionable – it might have agreed that it was simply an allocation of risk upon the manufacturer

V. THE MATURING AND BREACH OF CONTRACT DUTIES The effects of Express Conditions

o Promise v. Condition Restatement §261. Interpretation of Doubtful Words as Promise or Condition

Where it is doubtful whether words create a promise or an express condition, they are interpreted as creating a promise; but the same words may sometimes mean that one party promises a performance and that the other party’s promise is conditional on that performance”

Sometimes, even when a contract uses the word “condition”, a court will interpret it as a promise, and not a condition

Howard v. Federal Crop Ins. Corp., 4th Circuit, 1976 P sues D—P’s insurance company—to cover rain damage that occurred to P’s tobacco

crop; P tried to mitigate damages, but in doing so destroyed the evidence of the depleted tobacco crop that was needed by the insurance adjuster and required by paragraph 5(f) of the contract

“5(f) The tobacco stalks on any acreage of tobacco of types 11a, 11b, 12, 12, or 14 with respect to which a loss is claimed shall not be destroyed until the Corporation makes an inspection.”

D denies coverage to P, claiming that by spoliating the evidence, P violated the contractual condition that was precedent to recovery under the contract

Holding: The clause at issue, because it was not clearly specified as a condition precedent, is considered a promise, and the contract has therefore not been forfeited by P’s violation of this clause.

o Because the term “condition precedent” was used in another paragraph of the contract, but not in 5(f), there is evidence that 5(f) was not intended to be a condition precedent

o Conditions “subsequent” and “precedent” The terms “condition subsequent” and “condition precedent” are not actually useful, as a

contractual condition may be called either “subsequent” or “precedent” depending on how one interprets the facts what is more useful to ask in cases of condition, is “who has the burden of proof in demonstrating that the condition has or has not been fulfilled?”

Restatement, 2nd, §224: “A condition is an event, not certain to occur, which must occur, unless its nonoccurrence is excused, before performance under a contract becomes due.”

The Restatement deals with the “subsequent”/ “precedent” problem by getting rid of the terms

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Gray v. Gardner, Massachusetts, 1821 – condition subsequent D had paid P for a certain quantity of sperm oil; D gave P a note that promised to pay P

$5K additional “on the condition” that if a greater quantity of sperm oil arrived in Nantucket “on or between the 1st day of April and the 1st day of October” than had arrived the year before, D would not pay P the extra $5K

The problem: It was unclear whether or not the Lady Adams arrived in Nantucket on the 1st day of October before midnight, so as to have fulfilled the condition subsequent to D’s note

Holding: Because D’s promise to pay P depended on a condition subsequent, the occurrence of which stood to benefit D, D bears the burden of proof to show that the condition did indeed occur

o Doctrine of conditions/ doctrine of prevention: one is not to benefit legally from an act aimed at defeating the other’s contractual rights; “an express promise to perform on the happening of an event warrants implication of a promise to refrain from activity impeding its happening, and breach of the implied promise is legally as serious as the breach of the express”

Parsons v. Bristol Dev. Co., California, 1965 P was the architect for an office building that D was building; P was paid 25% for his

design work, but payment for P’s work on Phase 2 of the project was conditioned on D’s being able to obtain construction loans to fund the project; the contract specified that P would be paid for Phase 2 “provided…that this payment shall be made only from construction loan funds”; D made a good faith effort to obtain the loans, but was prevented, and gave P notice; P claims that because he worked on 95% of Phase 2, D must pay

Holding: “When payment of money is to be made from a specific fund, and not otherwise, the failure of such fund will defeat the right of recovery.”

o D did not violate the general rule that “a party who prevents fulfillment of a condition of his own obligation…cannot rely on such condition to defeat his liability” D did try to make the condition happen, and the risk that D wouldn’t be able to make the condition happen was foreseeable (and therefore assumed) by P

o “Pay-when-paid” clauses: Is this clause a condition of payment, or just a set time for payment? General rule: “If there is no express language to the contrary in the written document (and

no extrinsic evidence),…where payment is stipulated to occur on an event, the occurrence of the event fixes only a time for payment; it is not…a substantive condition of the legal responsibility to pay”

Restatement 2nd, §227. Standards of Preference with Regard to Conditions(1) In resolving doubts as to whether an event is made a condition of an obligor’s duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee’s risk of forfeiture, unless the event is within the obligee’s control or the circumstances indicate that he has assumed the risk

Mascioni v. I.B. Miler, Inc., NY, 1933 – goes against the general rule because P has assumed the risk

D (general contractor) contracted with P (subcontractor) to build the concrete walls for a housing project for the Owner; the promise to pay contained the words “payments to be made as received from the Owner”; the Owner never paid D, and D never paid P

Held: Though P contends that, following the general rule, this “pay when paid” clause only sets a time for payment, and is not a condition precedent to payment, on its face, the contract could reasonably be interpreted as containing a condition precedent, which has not occurred.

o in this case, P knew of the condition and chose to assume the risk by signing to it after investigating the situation; P’s work did not benefit D – it was done

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solely for the benefit of the Owner, and P knew that if the Owner didn’t pay, D wouldn’t pay

o Ct. says that it doesn’t matter whether the K said they’d get paid “if” they got paid or “when” they got paid.

o Condition of notice to insurance companies within a certain time period Possibility of forfeiture of the insurance policy’s coverage generally will not bar the operation

of the condition (unless P has a good estoppel claim) Royal-Globe Ins. Co. v. Craven, Massachusetts, 1992

P was in a car accident with a hit-and-run driver; P’s non-insured driver coverage required that P notify both the police and D within 24 hours of the accident; P was in the ICU during the 24 hours after the accident, and back to functional life by approximately 3 months after the accident; P didn’t notify the insurance company until 4 months after the accident; D denies coverage because notice was not prompt, as per the notice clause

Holding: Though the notice clause is lifted during P’s period of disability, and even the 24 hour notice requirement is not re-instated, there is still time pressure on P, once she has recovered, to notify the insurance company promptly because P did not do so, P did not fulfill the condition that was precedent to her recovery under the policy, and D is not liable to P

Civil War Cases – all agree that the war is a valid excuse for not fulfilling contractual obligations

Semmes v. Hartford Ins. Co., SCUS, 1871o P lost property to fire several months before the Civil War began; P did not

bring suit on the insurance policy until several months after the war ended; P’s fire insurance policy with D contained the clause “no suit…should be sustainable in any court unless such suit should be commenced within the term of twelve months next after any loss or damages should occur”

o Holding: “the disability to sue imposed on the P by the war relieves him from the consequences of failing to bring suit within 12 months after the loss, because it rendered a compliance with that condition impossible and removes the presumption which that contract says shall be conclusive against the validity of P’s claim. That part of the contract, therefore, presents no bar to P’s right to recover”

The court substitutes a reasonable time limit (found in the statute of limitations) for the time limit imposed by the contract in this situation, even though the 12 months had cumulatively accrued (before and after the war) by the time P brought suit

New York Life Ins. Co. v. Statham, SCUS, 1876o The war prevented Ps from paying the premiums on their life insurance policy,

but they seek to recover on the policy after the war; because of Semmes, it is assumed that Ps were not liable to D for not paying the premiums – but must D pay Ps on their policies?

o Holding: The insurance contract was excused by the war—because of an act of government, with no fault on either party—so both parties are excused from their contractual obligations P doesn’t have to pay the premiums, and D doesn’t have to pay out on the policy

However, Ps are entitled to restitution of the “equitable values” of their policies, as measured by the premiums already paid minus whatever was the “value of the assurance enjoyed by Ps” during the time that the policy was in existence

Gilbert v. Globe & Rutgers Fire Ins. Co., Oregon, 1919

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P’s fire insurance policy with D contained the clause that “no suit or action on this policy for the recovery of any claim shall be sustainable in any court…unless commenced within twelve months next after the fire”; P notified D of the loss within a week of the fire, and D came out to inspect, but before 12 months had passed, D gave notice to P that it intended to deny liability

Holding: An insurance policy’s time limitation for making a claim or bringing suit will be upheld if it is reasonable, and 12 months is a reasonable time period P’s action was not commenced within a “reasonable time” after D notified P that it would contest his claim and deny liability

Waiver v. estoppelo P claims that D—by its conduct—waived the time condition of the policy, and

that because a condition, once waived, cannot be reinstated without the consent of the other party, and since P did not consent to this condition’s reinstatement, it is permanently removed from the contract

o The court explains that D did not waive this condition, but was merely estopped from asserting its rights under the condition until D gave notice that it intended to deny the claim; with estoppel, the other party does not need to consent to D’s resumption of its rights the bar of estoppel is simply lifted once D has given notice to P of its intent to assert its rights under the contract

Note on waiver v. estoppel: many courts define these terms interchangeably, and define the consequences of waiver and estoppel situations differently therefore, it is important to define these terms and their consequences when using them, since the terms themselves are open to many interpretations

Aetna Casualty & Surety Co. v. Murphy, Connecticut, 1988 D terminated his lease in 1982, but in moving out of the space D damaged the property,

and the property owner’s insurance company—P—sued D for damages in 1983; D didn’t notify his own insurance company—Chubb—of the suit until Jan. 1986; D moved to implead Chubb in May 1986; Chubb claims that it should get summary judgment because D failed to notify Chubb promptly as a condition precedent to recovery required by D’s policy; D claims that absent a showing of prejudice to Chubb resulting from the lat notice, D should not be expected to forfeit coverage

Held: The insured, i.e. the one who seeks to be excused from the reasonable timely notice provision, bears the burden of establishing lack of prejudice on the part of the insurer in order to avoid a forfeiture (here D did not establish Chubb’s lack of prejudice)

o Modern approach to forfeiture as a result of failure to fulfill a conditional provision in contracts of adhesion = the condition may sometimes be excused in order to avoid disproportionate forfeiture, as determined by a balancing test that considers:

Purpose to be served by the condition the desire to be gratified the excuse for the deviation from the condition the relative cruelty of enforced adherence

o where the insurer was not materially prejudiced by the insured’s delay in giving notice, the insured should be excused from fulfillment of the condition rather than allowing forfeiture

o Waiver of Conditions Use of waiver to prevent forfeiture:

Though courts do not like to make decisions in contract cases that will result in forfeiture, if a condition is clear and shows the express intention of the parties, a court

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will enforce the condition even if it will result in forfeiture to the party who did not fulfill the condition

o Doctroman v. Schroeder, NJ, 1921 (p.748) P and D contracted for P to buy land, on condition that P would pay

the balance on a certain date, and stating expressly that “time was of the essence” to the contract; D agreed to extend the time period on a new condition that P pay the balance at an exact date and time; P was ½ hour late with the payment, and D refused to sell

Held: P was in default by arriving late—and “time was of the essence”, a condition clearly expressed in the contract—and D then had no duty to perform by delivering the land

Porter v. Harrington, Massachusetts, 1928 P and D contracted for D to sell land to P on condition that P pay in installments on

time, and that the contract would be void if P was late in payments; D accepted a succession of late payments from P without objection or warning that future late payments would not be accepted; when P tried to make another late payment, D said that it had closed its account with P because P had defaulted on payment; P claims specific performance because D waived the time condition by accepting late payments consistently and without objection

Held: D has waived the time condition by accepting overdue payments without insistence on rigid adherence to the contract the waiver is implied from D’s actions

o Even though “time was of the essence” in this contract, such conditions may be waived by words or actions

Clark v. West, NY, 1908 P contracted to write a law treatise for D, and was to be paid 2$/page as an advance,

and 4$/page later on condition of sales, etc., including a condition that P abstain completely from drinking alcohol; P didn’t fully abstain, but P did fulfill all other requirements of the contract, and claims that his drinking didn’t affect his work, and that D waived the drinking condition anyway; D claims that P’s not drinking was consideration for the extra 4$/page, and that since P didn’t fulfill the no-drinking obligation, D doesn’t owe P the extra $

Holding: The no-drinking stipulation was a condition precedent to P’s being paid the total 6$/page, which could be waived it was not the subject matter of or separate consideration for the contract (which cannot be waived, of course)

o The court here requires D to have made an express waiver of the no-drinking condition for P to be owed the extra $, which the court finds D could have made by saying to the P that he was entitles to the $4.

Schultz v. Los Angeles Dons, Inc., California, 1951 P’s contract to play pro football for D stated that if P were injured during play, D would

pay P’s full contract salary on condition that P give written notice of the injury to D within a certain time period; P was injured and gave notice orally to D; D had P checked out by the team doctor, trainer, etc., and the doctor notified D’s insurance; because P never gave formal written notice to D, D claims that it does not owe P the full year salary

Held: Because the purpose of the written notice condition—that D would be promptly and fully informed of any injury to P—was fulfilled, and D indicated that it was fulfilled by acting on the written reports of the doctor, trainer, etc., D has waived the condition of written notice by P personally (which would have been a silly formality at that point anyway)

o Conditions adverse to public policy general rule: when an expressed condition is clearly a violation of public policy, the courts

will not enforce it

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Inman v. Clyde Hall Drilling Co., Alaska, 1962 P had an employment contract with D; the written contract stated that as a condition

precedent to bringing suit against D, P had to give D 30 days notice of any claim arising under the contract, and to wait 6 months before filing suit; D fired P and P sued for breach of contract without first giving notice of suit

Held: Employment contract provisions making notice a condition precedent to bringing suit are not unenforceable as against public policy, as long as the purpose of the contract provision is reasonable and disclosed to P

o The provision here was reasonable because the purpose was to allow D time to investigate the merits of any claims brought against it

Conditions of Satisfaction and Timelinesso General Rule: when performance is conditional on the satisfaction of a 3rd party, the condition of

satisfaction is met only when the 3rd party is personally satisfied, so long as the 3rd party’s opinion is rendered honestly and in good faith

The condition of 3rd party satisfaction cannot be excused merely by a showing that a reasonable person would have been satisfied, so long as the 3rd party is shown to have exercised her honest judgment

Subjective v. objective satisfaction: When the parties have specified that satisfaction refers to “subjective personal

satisfaction” (i.e. personal satisfaction, whether reasonable or unreasonable), the courts will uphold the condition regardless of how unreasonable the dissatisfaction seems

If the parties have not specified whether satisfaction should be objective or subjective:o Subject matter not personal: condition of satisfaction will be interpreted to

mean “performance that would satisfy a reasonable person”o Subject matter personal (i.e. contract involves personal taste or judgment):

condition of satisfaction is fulfilled only if there is personal satisfaction, whether reasonable or unreasonable

o Grenier v. Compratt Construction Co., Connecticut 1983 Ps—subcontractors—were to have completed subdivision roads for D by June 30;

“completion” in the contract meant obtaining a certificate of occupancy from the City Engineer for the subdivision lots that the roads serviced; after completing the roads, Ps could not get a certificate by June 30 because the Engineer claimed to not write such letters; only by Sep. 7 did the Engineer swear that the roads were approved for certificates

Held: A condition of satisfaction may be excused in the event of impracticability so long as the condition—in this case the certificate—was not the material part of the exchange, and P has fully performed.

Here, the material part of the exchange was what the certificate represented—lots that were certified for occupancy based on satisfactory completion of the roads that serviced them—and not the certificate itself, and so the condition of obtaining the certificate could be excused

o Nolan v. Whitney, NY, 1882 P contracted to do masonry work on D’s buildings, payment in installments as the work

progressed; the final payment was to be made 30 days after the work was complete and accepted—conditioned upon the satisfaction and certificate of the architect; P fully performed, with a few trivial defects, but the architect didn’t issue the certification

Held: Substantial performance will excuse the condition of satisfaction when P substantially performs in good faith

The architect was unreasonable in his refusal to issue the certificate, as the defects were trivial and P had substantially performed – therefore the condition of the architect’s satisfaction is no longer necessary

P should be paid in full, with deductions for the trivial defects Constructive/ “Implied-in-Law” Conditions: The Order of Performance

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o Restatement, 2d: §234. Order of Performance

(1) Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary

Comment b. 5 categories in which simultaneous performance is possible:o Where the same time is fixed for the performance of each partyo Where a time is fixed for the performance of one of the parties and no time is

fixed for the othero Where no time is fixed for the performance of either partyo Where the same period is fixed within which each party is to performo Where different periods are fixed within which each party is to perform

This is the only category in which simultaneous performance is not required; it is required in the first 4

§238. Effect on Other Party’s Duties of a Failure to Offer PerformanceWhere all or part of the performances to be exchanged under an exchange of promises are due simultaneously, it is a condition of each party’s duties to render such performance that the other party either render or, with manifested present ability to do so, offer performance of his part of the simultaneous exchange.

o Independent v. dependent covenants, conditions precedent Nichols v. Raynbred, England, 1615

This case established the (now seemingly ridiculous) idea that each promise in a bargain was independent of the other, and could be sued upon separately if P promised to sell D a cow, P could sue for the $ promised by D even if P hadn’t yet delivered the cow because the promises—one to give $ and one to deliver a cow—were considered independent

Kingston v. Preston, England 1773 P and D had an agreement that if P worked for D for a year and a quarter, D would sell

P D’s business, so long as P –before delivery of the deed for D’s business was delivered – would obtain good security for the loan that D would give to P to buy the business; P worked for the time period, but didn’t get the security for the loan, and demands that D deliver the business because the promises were independent; D refuses to sell the business because P didn’t get the loan security

Holding: Judgment for D “The essence of the agreement was, that the D should not trust to the personal security of the P, but, before he delivered up his stock and business, should have good security for the payment of the $. The giving such security, therefore, must necessarily be a condition precedent.”

3 categories of covenants – the order of the time of performance intended by the words of the transaction will determine which category a particular transaction falls into:

o Mutual and independent – either party may recover damages from the other by breach of covenant, whether or not the suing party himself breached

o conditions and dependent – the performance of one depends on the prior performance of another; until the prior condition is performed, the other party isn’t liable to action on his covenant

o mutual conditions to be performed at the same time – if one party was ready to perform and the other party is not, the ready party may sue

Price v. Van Lint, New Mexico, 1941 D agreed to deposit a sum of loan $ into P’s account by 2/1/1940; P agreed to give D

the mortgage deed to the property as security for the loan; both parties knew that the mortgage deed would not arrive in P’s possession until after 2/1/1940; D notifies P that D won’t be able to deposit the loan $ by 2/1, but P won’t excuse D from the contract,

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and begins construction work in assumption that he will receive the loan; D claims that P getting the deed was a condition precedent to D giving the loan $

Held: the contract clearly states that the loan $ was to be deposited in P’s account by a certain date, and both parties knew that the date would arrive before P had the deed therefore, these promises were mutual independent covenants (the 1st Kingston category), and D is liable for consequential damages

o like Hadley – D is liable for the foreseeable damages that P would incur based on the special circumstances—needing the loan to begin building—that D had knowledge of (since breach of contract to loan $ doesn’t usually incur liability for damages)

Conley v. Pitney Bowes, 8th Circuit, 1994 The employment contract, which the court reads as bilateral, required both that: P

exhaust all administrative procedures after being denied his disability benefits before going to court, and that D send to P a written explanation of the administrative appeals procedure when it sends a denial of benefits; P did not exhaust all administrative procedures before going to court, but D did not send the required written explanation

Holding: The necessary order of performance in this process created a constructive condition precedent in this bilateral contract; in order for P to be responsible for exhausting all administrative procedures, D must have first sent the written notice, which D did not do

o Determining who breached/ when payment is due Ziehen v. Smith, NY, 1896

P contracted to buy land from D; P put a down payment on the purchase; D discovered that there was a mortgage on the land that he did not know of; D does not continue to go through with the purchase process, and sues to recover the down payment, claiming that D breached because there was a mortgage on the land that had not previously been revealed to P (P assumed that D couldn’t pay it, and therefore wouldn’t have been able to sell)

Held: Judgment for D there was no evidence that D was in default (i.e. that D would not have been able to deliver the deed), and therefore P breached by not attempting to perform his part of the contract (i.e. offering payment), nor demanding D’s performance

General Rule: “In cases where by the terms of the K, the acts of the parties are to be concurrent, it is the duty of him who seeks to maintain an action for a breach of the contract…not only to be ready and willing to perform on his part, but he must demand performance from the other party”

o If the other party is clearly unable to perform at the time of performance provided by the contract (i.e. is clearly in default), a formal tender is then not necessary in order to enable to party seeking to maintain an action for breach to maintain that action for damages

Minority view for real estate purchases: “the existence, at the date fixed for performance, of liens or encumbrances upon the property is sufficient to sustain an action by the vendee to recover the part of the purchase $ paid upon the contract”

Stewart v. Newbury, NY, 1917 D and P contracted for P to build a concrete mill building for D’s pipe-fitting business;

P’s offer included two price alternatives; D’s reply neither specified which price alternative to use, and neither piece of writing included times of payment; the parties are in dispute as to whether times of payment were orally agreed upon or not; P sent a bill to D after completing some performance; D refused to pay until all work was completed; P left the project, claiming that D breached

Holding: “Where a contract is made to perform work and no agreement is made as to payment, the work must be substantially performed before payment can be

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demanded”o P breached, because payment by D was not yet owed since P had not yet

substantially performed Kelly Constr. Co. v. Hackensack Brick Co., NJ, 1918

P was the contractor to build Englewood School; P contracted with D to furnish and deliver brick as required by the plans for the school, “brick to be delivered as required by P and sufficient brick to be kept on the job so that P will always have [a certain amount] until completion”; the agreement was silent as to the time for payment; D refused to proceed when P did not pay for several deliveries of bricks

Held: Judgment for P “Where the sale is of a specified quantity of goods, the contract is entire, and a failure to pay when a part delivery has been made does not excuse the seller from completing delivery, no time for payment being stated in the contract.”

o This holding seems at odds with U.C.C. §2-307 and Tipton (below), however, the court explains that payment with each delivery is not required where “deliveries are pursuant to an ‘entire contract,’ which, because of the large quantity involved, must necessarily be performed in installments. Being ‘entire,’ the contract by its terms does not require any payment until D’s performance is completed in full.”

Remedy for seller when buyer breaches Generally, when the seller breaches, the remedy for the buyer is specific performance;

when the buyer breaches, however, the traditional remedy required the seller to find another purchaser, with damages limited to the difference (if any) in the new purchase price

Osborne v. Bullins, Mississippi, 1989 – modern approach = mutuality of remedy for seller and buyer

o The seller performed all of his pre-sale obligations, but the buyer refused to close, claiming that he couldn’t obtain financing (however the buyer had assumed the risk of being unable to obtain financing in the contract)

o Holding: the remedy should be “a judgment for the seller in the amount of the purchase price, secured by a vendor’s lien, all of which leaves buyer with the burden of marketing the property to a possible third party purchaser”

o Separate deliveries of goods purchased under one contract U.C.C. §2-307. Delivery in Single Lot or Several Lots.

Unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot.

Restatement §233:(1) Where performances are to be exchanged under an exchange of promises, and the

whole of one party’s performance can be rendered at one time, it is due at one time, unless the language or the circumstances indicate the contrary.

(2) Where only a part of one party’s performance is due at one time under Subsection (1), if the other party’s performance can be so apportioned that there is a comparable part than can also be rendered at that time, it is due at that time, unless the language or the circumstances indicate the contrary.

Tipton v. Feitner, NY, 1859 P and D contracted for P to sell D an order of slaughtered hogs at one price, and an

order of live hogs—to be delivered at a later date, when they arrived in NY—at another price; P delivered the slaughtered hogs, but not the live hogs (P slaughtered them and sold them to another); D refuses to pay for the hogs that P did deliver, claiming that

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payment for the whole lot was conditional on P’s delivery of the live hogs (condition precedent)

Holding: though “it would not be unreasonable for the parties to have agreed that payment for those first delivered should be postponed until the others came to hand, so that there should be one settlement for the whole…it would be a more probable mode of adjustment for the purchaser to agree to pay for the parcel which he was to receive at once, and for the other when he should receive it”

Protecting the Exchange on Breacho When performance doesn’t conform to the contract on delivery:

U.C.C. §2-601/ “Rule of Perfect Tender” + U.C.C. §2-508/ “cure” section §2-601 must be read in conjunction with §2-508 – §2-508 modifies the rule of perfect

tender § 2-601. Buyer's Rights on Improper Delivery.

Subject to the provisions of this Article on breach in installment contracts (Section 2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2-718 and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may

(a) reject the whole; or(b) accept the whole; or(c) accept any commercial unit or units and reject the rest.

§ 2-508. Cure by Seller of Improper Tender or Delivery; Replacement.(1) Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.(2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.

§ 2-602. Manner and Effect of Rightful Rejection.(1) Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.

Non - U.C.C. cases: Jacob & Young v. Kent, NY, 1921 – performance substantially conforms

o P constructed a house for D; a year later, D refused to pay the balance of the contract price because D discovered that P used a different brand of pipe than D had specified in the contract; D demanded that the walls be torn out so that the right brand could be installed; the pipe that P had used was substantially the same as the pipe that D requested

o Held: Since P’s default was “unintentional and trivial”, and the rest of P’s performance was “substantially what D had bargained for”, P was entitled to recover the unpaid contract price less D’s damages, measured by the difference in value of the house with the other pipe brand (if any)

“an omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting damage, and will not always be the breach of a condition to be followed by forfeiture” considerations of justice and “presumable intention” will help decide in these cases

Although the contract had an explicit provision that would have indicated forfeiture in this situation, the court allows justice to decide that the pipe provision was an “independent promise” as opposed to a “condition”

Reynolds v. Armstead, Colorado, 1968 – performance fails to substantially conform

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o P contracted to apply a brick veneer to D’s house that was meant to match the color of the old brick on D’s house as closely as possible; P used bricks of sound construction, but they did not match

o Held: P’s breach was material because the result failed to substantially conform to the contract, and therefore P couldn’t recover the contract price (however, P recovered half of the contract price under quantum meruit)

Damages: With acceptance of non-conforming goods, buyer pays the contract price less any

difference in value caused by nonconformity With revocation of acceptance because of substantial nonconformity, buyer owes

nothingo The Stages of Inspection, Acceptance, and Revocation of Acceptance

Inspection Acceptance: § 2-605. Waiver of Buyer's Objections by Failure to Particularize.

(1) The buyer's failure to state in connection with rejection a particular defect which is ascertainable by reasonable inspection precludes him from relying on the unstated defect to justify rejection or to establish breach

(a) where the seller could have cured it if stated seasonably; or(b) between merchants when the seller has after rejection made a request in writing for a full and final written statement of all defects on which the buyer proposes to rely.

§ 2-606. What Constitutes Acceptance of Goods.(1) Acceptance of goods occurs when the buyer

(a) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity; or(b) fails to make an effective rejection (subsection (1) of Section 2-602), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or(c) does any act inconsistent with the seller's ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.

(2) Acceptance of a part of any commercial unit is acceptance of that entire unit. § 2-607. Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After

Acceptance(1) The buyer must pay at the contract rate for any goods accepted.(2) Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a non-conformity cannot be revoked because of it unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured but acceptance does not of itself impair any other remedy provided by this Article for non-conformity.(3) Where a tender has been accepted

(a) the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy…(4) The burden is on the buyer to establish any breach with respect to the goods accepted.

§ 2-714. Buyer's Damages for Breach in Regard to Accepted Goods.(1) Where the buyer has accepted goods and given notification (subsection (3) of Section 2-607) he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would

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have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.(3) In a proper case any incidental and consequential damages under the next section may also be recovered.

Overlap between inspection stage and acceptance stage – Plateq Corp. of North Haven v. Machlett Labs., Inc., Connecticut, 1983

D (buyer) contracted to buy steel tanks for testing x-ray tubes that had to be constructed by P according to D’s specifications and government radiation standards; P undertook in the contract the responsibility of correcting any deficiencies after delivery to and testing by D; P’s performance was late (P and D kept needing to make changes, etc.), but substantially complete when D indicated that the tanks were acceptable and that D would send trucks to pick them up; D then cancelled, claiming that P breached by not finishing on time

Held: Judgment for P according to the relevant U.C.C. provisions D, by signifying its willingness to accept the goods despite their nonconformities, which D had discovered by inspection (§2-606(1)), and by failing to make an effective rejection (§2-606(2)) within a reasonable time (§2-602), had effectively accepted the goods, and could only rightfully reject them by showing substantial impairment of their value (§2-608), though D may even be precluded from rejecting the goods in this case if D did not give P a chance to cure the defects by specifying what they were (§2-605)

o the post-installation testing provision was meant to give D opportunity to discover defects and to allow P to fix them, as does §2-508 (the “cure” provision), since P was ready to make tender

Revocation: § 2-608. Revocation of Acceptance in Whole or in Part.

(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it

(a) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or(b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances.

(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.(3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.

Fortin v. Ox-Bow Marina, Inc., Massachusetts, 1990o Ps revoked acceptance of a boat from D 4 months after delivery when they had

had many problems with the boats engine and weren’t able to sufficiently fix them; Ps sue for a refund

o Held: None of the defects were minor or cosmetic, or could be considered insubstantial and when there is a “substantial impairment of value (§2-608) according to an objective, totality of the circumstances test, the buyer may revoke acceptance

The “reasonable time” for revocation is also a question of fact, and when the buyer is in constant communication with the seller about the defects, the buyer doesn’t “use up” the reasonable time period

o “Willful” Breach – Does a party’s own nonperformance preclude a restitution remedy? Massachusetts (minority) view:

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When D is the willful defaulter: “The plaintiff is entitled to be made whole and no more”; if D had performed substantially before willfully abandoning performance, P is not entitled to restitution of the $ that P had paid D for work that D actually performed (Ficara v. Belleau, Massachusetts, 1954)

When P is the willful defaulter: P might be barred from any recovery by the rule denying both contract and quasi-contract remedies to the willful defaulter

o However, if P substantially performs in good faith, but still doesn’t completely perform, P can recover in quantum meruit

o Willfulnes = evidence of bad faith (good faith = absence of intentional departures from the contract)

New York (general common law) view: “If the party in default has substantially performed, the other party’s performance is not excused”; this view does not condone the defaulting action, nor does it disregard the fact that the breach was willful willfulness is simply treated as “one of several factors to be considered in determining whether [the breaching party’s] performance is substantial” enough to prevent the non-breaching party from being excused from its duties (Hadden v. Consolidated Edison Co. of New York, NY, 1974)

o Anticipatory Breach Restatement, 2nd §251. When a Failure to Give Assurance May be Treated as a

Repudiation(1) Where reasonable grounds arise to believe that the obligor will commit a breach by non-

performance that would of itself give the oblige a claim for damages for total breach…, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.

(2) The obligee may treat as a repudiation the obligor’s failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case.

Comment b: If an obligee believes that the obligor won’t or can’t perform without breach, the obligee is free to act on that belief if he can prove that his belief would have been confirmed; however, if the obligee is wrong in his belief, his own failure to perform on the basis of that belief may subject him to a claim for damages for total breach

Restatement, 2nd §240. Part Performances as Agreed EquivalentsIf the performances to be exchanged under an exchange of promises can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents, a party’s performance of his part of such a pair has the same effect on the other’s duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised.

Comment b. Separate Contracts Distinguished – the pairs of corresponding parts are not to be treated as separate contracts

Restatement, 2nd §253 – Effects of Anticipatory Breach(1) Where an obligor repudiates a duty before he has committed a breach by non-performance and

before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach. [unilateral contract]

(2) Where performances are to be exchanged under an exchange of promises, one party’s repudiation of a duty to render performance discharges the other’s remaining duties to render performance. [bilateral contract]

Repudiation may also excuse non-occurrence of a condition § 2-611. Retraction of Anticipatory Repudiation. (see also §2-610 – Anticipatory

Repudiation)(1) Until the repudiating party's next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.

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(2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article (Section 2-609). (3) Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

Standard rule of breach: a breach occurs when it is reasonably certain that a party is not going to meet its obligations under the contract

Greguhn v. Mutual of Omaha Ins. Co., Utah, 1969 P, a bricklayer, became disabled on the job and Ds (P’s insurers) paid P only as long as

his disability kept him “confined”, even though P would never again be able to work at his job because of the permanence of the disability; when Ds informed P that they would no longer make payments, P sued for the lump sum of what his future payments would be under the policy, claiming anticipatory breach by repudiation

Held: Ds must make the payments, but P’s remedy cannot be a lump sum of the future payments; D must keep paying in installments as it is obligated to under the contract, and if D doesn’t do this, P can bring another suit

o “the doctrine of anticipatory breach has not ordinarily been extended to unilateral contracts” Restatement 1st, §318: “In a unilateral contract for the payment of money in installments after default of one or more, o repudiation can amount to an anticipatory breach of the rest of the installments not yet due”

Dissent: “where there is a failure to pay one installment, coupled with an announcement by the insurer that no future payments will be made, then damages for the partly anticipatory breach should be allowed.”

Acceleration clause = a clause stating that “the money debt shall fully and automatically (or at the creditor’s option) become due in the event of the obligor’s default

this is a good solution to the problem of having to wait until the actual date by which an anticipated breach will have officially occurred (i.e. having D make payments in installments, as Greguhn decided)

o Preserving the Exchange in the Face of Breach Reigart v. Fisher, MD, 1925

D saw P’s property, liked it, and contracted to purchase it; P represented that the property was 7 acres, but it turned out that it was actually 4.75 acres; D then demanded his down payment back, and refused to proceed with the sale; P sued for specific performance

general rule: “a vendee in an unexecuted contract is entitled to have that for which he contracts before he can be compelled to part with the consideration he agreed to pay” but that “where there is a substantial defect with respect to the nature, character, situation, extent, or quality of the estate, which is unknown to the vendee, and in regard to which he is not put upon inquiry, specific performance will not be decreed”

Held: the defect was not substantial, and therefore D must go through with the sale, with a deduction for the amount of property that wasn’t actually included in the sale

VI. THE RIGHTS AND DUTIES OF NONPARTIES Third Party Beneficiaries

o Third party beneficiary contract = where a 3rd party’s rights spring from the original contracto Common law/ traditional rule = in order to maintain an action on a contract, the moving party must

have been in privity of contract with the party against whom he is seeking to enforce the contract Under this rule (still used in England), a 3rd party beneficiary can’t enforce the promise made

for his benefit Exceptions:

o The 3rd party is the beneficiary of a trust, and is suing the trusteeo The 3rd party is an agent of one of the contracting parties

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o Modern rule = 3rd party beneficiary contracts are enforceable by the 3rd party, subject to certain rules: The 3rd party beneficiary must be more than an incidental beneficiary; he must be either a

creditor beneficiary or a donee beneficiary (i.e. have standing to enforce the promise) Creditor beneficiary = if the promisee’s primary intent was to discharge a duty he

owed to the 3rd party, then the 3rd party is a creditor beneficiaryo Lawrence v. Fox, NY, 1859

Holly loaned $ to D and stated at the same time that he owed the same amount of $ to P; In exchange for Holly’s loan, D promised to repay P the amount that Holly loaned D; P sues to enforce D’s promise

Held: The consideration of D’s promise to pay P was Holly’s loan to D. Once a promise is made to one party for the benefit of another, that 3rd party may bring action for breach

Dissent: Insisted on the privity requiremento If the promisor agrees to pay a sum of money to a 3rd party, to whom the

promisee says that he is indebted, it is immaterial whether the promisee is actually indebted to that amount or at all the 3rd party may still enforce the promise

Donee beneficiary = if the promisee’s primary intent in contracting was to confer a gift upon a 3rd party (i.e. to confer some performance or $ neither due to nor asserted to be due by the 3rd party), the 3rd party is a donee beneficiary

o Seaver v. Ransom, NY, 1918 The Judge’s wife was dying, and the wife had wanted her house to go

to P—her niece by marriage; the judge drafted her will providing that her home would go to him; the wife signed her will in exchange for the judge’s promise that he would leave $ for P in his own will amounting to the value of the house; the judge died before adding this into his will; P sues the administrator of the judge’s will to enforce the judge’s promise as a 3rd party donee beneficiary

Held: although there was no privity between P and D, because P was a family member (even though not an immediate family member) of the judge and his wife, an exception to privity will be made

o The modern tendency is that there is no family relationship requirement for donee beneficiaries

Public beneficiaries (class of beneficiaries)o E.g. when a company contracts to build or install something for a city, which

will benefit its citizenso Rule: individuals (e.g. citizens of the city) cannot bring suit as 3rd party

beneficiaries unless an intention appears that the contracting parties are answerable to individual members of the public

The contract must be “primarily” for the benefit of the 3rd party The promisee’s intent is determinative of whether the contract was made “primarily”

for the benefit of the 3rd partyo E.g. with Lawrence v. Fox, D promised Holly that he would pay P

D = promisor; Holly = promisee; P = 3rd party beneficiary It is Holly’s (promisee’s) intent that the $ should go to P that is

determinative Restatement, 2nd §302. Intended and Incidental Beneficiaries (encompasses the above 3rd

party beneficiary requirements)(1) Unless otherwise agreed between the promisor and promisee, a beneficiary of a promise is an

intended beneficiary if recognition of a right to performance is appropriate to effectuate the intention of the parties and either

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(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or

(b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance

(2) An incidental beneficiary is a beneficiary who is not an intended beneficiaryo Variation of Duties to the Beneficiary by a Contracting Party

Restatement 2nd, §311. Variation of a Duty to a Beneficiary(1) Discharge or modification of a duty to an intended beneficiary by conduct of the promisee or by

subsequent agreement between promisor and promisee is ineffective if a term of the promise creating the duty so provides.

(2) In the absence of such a term, the promisor and promisee retain power to discharge or modify the duty by subsequent agreement.

(3) Such a power terminates when the beneficiary, before he receives notification of the discharge or modification, materially changes his position in justifiable reliance on the promise or brings suit on it or manifests assent to it at the request of the promisor or promisee.

(4) If the promisee receives consideration for an attempted discharge or modification of the promisor’s duty which is ineffective against the beneficiary, the beneficiary can assert a right to the consideration so received. The promisor’s duty is discharged to the extent of the amount received by the beneficiary.

o Promisor’s Defenses to Claims by a 3rd Party Rouse (D) v. United States (P), D.C. Circuit, 1954

D bought his home from Winston, and in the deed of sale agreed to take on the payments that Winston owed for installment of a heating plant in the house; Winston had given a promissory note to the installment company, however, on which she defaulted; P (the government) had guaranteed Winston’s note, so P paid the note, took it, and now sues D for payment as a 3rd party beneficiary of the contract between D and Winston for D to pay Winston’s debt; D raises as a defense that Winston misrepresented the condition of the heating tank, that it was improperly installed, and that Winston did not tell D of the promissory note

Held: “One who promises to make a payment to the promisee’s creditor can assert against the creditor any defense that the promisor could assert against the promisee”

o Since D was liable on his promise to pay Winston’s creditor only to the extent that he was liable to Winston, D may assert against P that he is no longer liable to Winston because Winston was fraudulent

THE END

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