1

University of Houston Law Center

Contracts

Section B

Peter Linzer

Syllabus for the Fall Term, 2009

Class Times and Office Hours

The class meets in BLB 209 on Wednesday from 10:20 to 11:50 a.m. and on Thursdays

and Fridays from 9:00 to 10:20 a.m. My office is Room 214 in the TUII second floor faculty

suite, and my office hours will be from noon to 1:00 p.m. on Wednesdays and from noon to 2:00

p.m. on Thursdays. Since I sometimes wander about the Law School premises, it’s probably

good to call and tell me you’re coming. My phone number is (713) 743-2176; the number of the

secretary of our suite, Ms. Sandra Hoffpauir, is (713) 743-0594. My e-mail address is

Plinzer@uh.edu.

Information About the Course

I expect all students to be prepared and on time for all classes, and you have a right to

expect the same of me, even though nine a.m. is the middle of the night to me. I make an effort

to be on time and fully prepared because that is what is due to you. You need to do the same

thing. You must be prepared in court and when dealing with clients, and now is the time to

internalize that ethic. I used to throw people out if they were unprepared, and to tell them not to

come in if they weren’t fully prepared, but I have mellowed slightly. I will allow you three

“passes,” but only if you give me a mercy note before class. There is nothing as annoying to

an instructor or to your classmates as someone saying “unprepared” or worse still, trying to fake

it or saying “would you repeat the question, please, professa.” If you have a serious excuse (sick

baby, dying relative, etc.) of course I’ll not count that, but don’t push this matter of grace and

don’t lie to me, and always tell me in advance. If I find too many people treating the three

passes as a right rather than a matter of grace, I will withdraw the privilege. No excuses are

needed, but I have been known to read excuses out to the class (anonymously) if they are funny

enough.

You must attend 80% of your classes, which works out to 8.4 missed classes. (Yes, I’ll

round it up to nine, but understand that that’s a lot of classes to miss.) Anyone unprepared after

the three passes, or without having first put in a mercy note (or after I withdraw the three passes

privilege), will be charged with an absence.

Class participation is very important; first year courses are like labs in that your

participation is a critical part of your education. Nonetheless, I find it too complicated to teach

and simultaneously to make notes on who is participating and how well, and too hard to put in

2

bonus points in an anonymous grading system (which, by the way, we all take very seriously).

As a result, I will not give a bonus for class participation. Despite this, and despite the jeers of

the duller students against “gunners,” I invite you all to raise your hands and take a strong role in

the class. Don’t worry about looking silly. I’ll try always to answer with respect.

The only time I get mean is when I think a student isn’t trying. Sometimes I’m wrong,

and I’m trying to correct that error, and to eliminate nastiness. When I went to law school,

professors were not expected to be kind, and several regularly ate students for breakfast. On the

other hand, some professors were polite and kind, and I think the students learned more in their

classes. Last year I used the royalties that I made by forcing you to buy my A Contracts

Anthology to provide pizza one afternoon and show the DVD of The Paper Chase, based on a

fictional Contracts class at Harvard. Professor Kingsfield is based on a legendary Property

professor named Edward “Bull” Warren. Bull Warren wrote an essay called The Spartan View

of Legal Education, which is a gem of the old school approach. (His view was that professors

aren’t here to be liked, and anyway, students opinions are based on ignorance. He said the only

compliments that meant anything to him were from graduates twenty years out who told him that

they had learned from him.) Warren supposedly said to a student in class, “Here’s a nickel, call

your mother and tell her to take you home.” In the movie, Kingsfield says it. There are those

who say that that is still the best way to teach, but most of our faculty is somewhat kinder.

The exam will consist of three to five short essays, with a word limit of either 400 or 500

words per essay. I enforce the word limit rigorously and take off a point for every 25 words or

fraction of 25 that the student goes over the word limit. I will give out old exams and sample

answers in advance of the exam.

We are required by the University to state at least three objectives of the course. For me

the aims of the course are to teach you the substantive law of contract, to get you to think about

why we have given rules (gulp, theory), to consider the ethics underlying the practice of law

generally, and of contract law in particular, and to integrate the theoretical and practical aspects

of substantive contract law with the transactional nature of contract practice (i.e. helping clients

plan, and negotiating and drafting the documents that will carry out that planning).

I have last year’s syllabus on my hard drive, and could just change the dates, but I prefer

to make changes as the term progresses. For that reason, I won’t give out the full syllabus at the

beginning of the term (although I attached most of last year’s syllabus by mistake, as you know.)

The basic point is that I will cover about 800 pages of the 1045 page casebook. (It is written for

a six-credit course.) I will almost definitely skip Chapter 9 on third-party beneficiary contracts

and assignments, so that disposes of about 45 pages, leaving about 200 to be culled.

About the Reading Assignments

The books in the course are:

Charles L. Knapp, Nathan M. Crystal and Harry G. Prince, Problems In Contract Law (6th

ed. 2007, Aspen Publishers/Wolters Kluwer Law and Business) (“KC&P”);

3

Charles L. Knapp, Nathan M. Crystal and Harry G. Prince, Rules of Contract Law, 2009

Statutory Supplement, Aspen Publishers/Wolters Kluwer Law and Business); (“Supp.”);

Thomas R. Haggard, Contract Law From a Drafting Perspective–An Introduction to

Contract Drafting (Thomson West 2003) (“Haggard”); and

Peter Linzer, A Contracts Anthology (2d ed. 1995 Anderson Publishing Co. (now Lexis))

(“Anthology”).

Knapp, Crystal & Prince (“KC&P”) is a very good casebook. I have used several other

books, but I keep coming back to KC&P. Please brief all principal cases (i.e., cases that aren’t

note cases), beginning with the case’s procedure, and read the note cases closely and carefully. I

will teach you how to brief cases for me in the second class.

Use the Rules of Contract Law (which I usually will refer to as the Supplement or just

“Supp.”) to read the full text and any Comments whenever there is a reference to a section of

the Restatement Second of Contracts (“Restatement Second” or if I get particularly hip, “R2K”);

the Uniform Commercial Code (“UCC”); the proposed revisions of Articles 1 and 2 of the Code

(“Rev. UCC”); recent statutes or proposed statutes on e-commerce (E-SIGN (the Electronic

Signatures In Global and National Commerce Act – get it?); UCITA (the Uniform Computer

Information Transactions Act)) or various transnational authorities like the United Nations

Convention on Contracts for the International Sale of Goods (“CISG”) or the UNIDROIT

Principles of International Commercial Contracts. (I will try to steer you, but it is your

responsibility to find the text of the section in question.) Not only is the Supplement valuable in

giving you the exact text of statutes and the Restatement, but it also has some very good little

essays on these important sources of contract law, several of which I have assigned for the first

day’s reading.

The Haggard drafting book. Even though we only have four credits for the whole

course, I want to sensitize you to the importance of planning and drafting. The only contracts

that get into court are contracts that are either breached or are so badly drafted that the parties

fight over what they mean. Good contract lawyers boast that they’ve never had a contract end

up in court. We learn contract law through the pathology of appellate cases, which means that

we focus on busted deals, not on well-executed transactions. It makes sense to teach the

substantive course this way, but I am going to try to give you the beginnings of the skills needed

to be good transactional lawyers. The Haggard book, despite its awful title (which violates all

the drafting principles that Professor Haggard does a good job in introducing) is a very good

starter. We will spend a little time learning the basics of drafting and do planning and

transactional problems from time to time throughout the course. This will be, of necessity,

superficial, but it will give you a start, and a little insight into what contract lawyers really do –

write contracts and help clients prepare for the future.

With respect to the Anthology, since I wrote it, I naturally think it’s important. I do, of

course, understand that your time is a very scarce resource. I will give references that indicate

4

how imperative it is that you read the article cited. “Read” or “Required” means that the

assignment is mandatory, and will be part of the class discussion. “Recommended but not

required” means that you don’t have to read it, but that I would like you to. “Available, but

not required” means that it’s purely your call.

With all the books, it’s not a sin to browse through them or to read something that isn’t

required or even assigned if you are curious about it, or it may help you with something that

leaves you dissatisfied.

From the Readings to the Classroom to the Practice of Contract Law

Contracts was for generations a six credit, two term course. The modern approach is to

reduce it to a one term, four credit course, a change that most contract teachers dislike, but that

the Law Center adopted about 2003, and probably won’t change. That is the reality. The

advantage is that you get an elective in the spring term. The disadvantage is two-fold: first, we

have to skip some topics or do them superficially; the second is that we don’t have the time to

delve quite as deeply into the topics we do cover. That is why I don’t require many of the

readings in my Contracts Anthology, though I think it has a lot of interesting and important stuff

in it.

I do think that the great thing about law in general and Contracts in particular, is that it

combines serious practical problems with philosophical and political aspects that make it into a

humanity as well. Contract is the central idea in the currently popular version of libertarianism.

For the most part, libertarians (at least of the right, as in the Cato Institute) believe that with few

exception, you shouldn’t be forced to do things unless you agree to do them. Contract is also on

the very cusp of e-commerce, increasingly the norm. Trying to put all these things together, in a

subject that has been in the forefront of law since the eighteenth century and earlier is a daunting

job, but also a very exciting and satisfying one.

I will try to put in some comments either to help you understand some confusing matter

or as background or to give you something to think about before we discuss it in class.

While I won’t always discuss the questions I put forth, they are there to give you a chance to

ponder them rather than giving a glib answer on the fly, so I will expect thoughtful responses in

class.

The Assignments

I

Contracts and Law

Wednesday, August 26, 2009: What Are Contracts? How Should We Enforce Them?

Sources of Contract Law. KC&P xxi-xxii, 1-12 (what the course is about and the sources of

contract law in general); Supp. 1-4 (on the Uniform Commercial Code), 101-03 (on the proposed

revisions of UCC Articles 1 and 2), 145-47 (on the United Nations Convention on the

5

International Sale of Goods (“the CISG”), and 171-73 (on the Restatement Second of Contracts).

The assignment is rather longer than most that I will assign, though most of the excess is

in these comments, which I, at least, think are important. Today’s readings aren’t that hard to

understand, though they raises many questions that are difficult to answer. Read the assignment

as closely as you can.

The late William L. Prosser, a great figure in torts and Dean of Boult Hall (the School of

Law at the University of California, Berkeley), once said that the trouble with law students is that

they only want one damn thing – to become lawyers. Those of us who teach you generally have

decided that we’d rather be teachers and thinkers about law than lawyers, so there are some who

say that we are the worst people to teach you to be lawyers. But I remember that when my dad

asked one of my teachers why he went into teaching, the professor’s answer was that he didn’t

have enough time to think about law when he was in practice. This professor was no ivory

tower type. He was later described by a major Wall Street litigator as the best expert witness the

lawyer had ever seen, and wrote a treatise that is widely used by practitioners and law students.

The point, I think, is that it’s important to know more than the rules; if rules were all that was

involved, paralegals (or computers) could practice law. (It would be like a slot machine: three

bells and plaintiff wins; three lemons and defendant wins.) While rules are essential, both when

they are clear and when they are not, much of the practice of law involves prediction,

compromise and nuance, analysis, theory and questions of right and wrong. Law is paradoxical

because people are paradoxical.

Should All Promises Be Enforceable?

After you complete the readings, consider the 1998 decision of the New York Court of

Appeals, that state’s highest court, in Kass v. Kass. Kass involves the disposition of frozen

“pre-zygotes” (which I am told, should be called blastospheres) after a couple get divorced. They

had both signed a well-drafted contract prepared and required by a very respectable hospital.

They were asked to check what should be done with the pre-zygotes if the parties became

estranged or divorced. They both checked the box directing the hospital to destroy the

pre-zygotes. They later signed a pre-divorce agreement that had a similar provision. Later,

Mrs. Kass wanted to have the pre-zygotes saved. Mr. Kass insisted that they be destroyed. The

Court of Appeals upheld the contract and ordered the pre-zygotes destroyed.

Bear in mind that men have a much longer opportunity to reproduce, that, at least for

some women, bearing a child is a critical part of their emotional makeup. (There are those who

find this statement sexist and patronizing toward women.) Mrs. Kass had been taking

gonadotropic (fertility) drugs, which are intended to cause hormonal imbalance, and made the

agreement about what to do with the “pre-zygotes” as an attempted in vitro fertilization had

failed, her sister had backed out of an agreement to be the surrogate mother and her marriage was

collapsing. Nonetheless, she agreed, quite clearly, to the promise that the court enforced.

Should these factors affect the enforcement of her agreement? What about her husband’s

desires? Should some “party” (some courts treat the pre-zygote as a party) have superior rights

to the other(s)? Should the Latin phrase pacta sunt servanda (agreements are binding) be

6

treated as absolute? Think for a bit about what it means to have a contract.

The Sources of Contract Law

You may be surprised to find out that most of contract law (and, for that matter, most of

all you will learn in your first term’s courses) is the product of judges deciding cases over the

past 250 years, rather than legislatures. During the twentieth century legislatures, working with

the National Conference of Commissioners on Uniform State Laws (“NCCUSL”), now called the

Uniform Law Commission, started to replace the common law with widely adopted “model” or

“uniform” statutes, generally dealing with specific aspects of commercial transactions (first the

Uniform Sales Act and the Negotiable Instruments Law and after World War II, a more general

Uniform Commercial Code). The common law is discussed in the casebook and the statutes are

discussed both there and in somewhat greater specificity in the Supplement. The revision of the

Uniform Commercial Code in the 1990s and early 2000s, and the attempt to write a law

governing software contracts (of which more later in the course) proved to be politically difficult,

with representatives of manufacturers and consumers fighting, and with controversy between the

cosponsors of the Uniform Commercial Code, NCCUSL and the American Law Institute. (One

controversial revision, Proposed Revised UCC 1-301, discussed on Supp. 101-02, has been

withdrawn since the publication of the Supplement. The discussion there gives you a pretty

good idea why.) Do understand that the UCC and the CISG are binding law, not just someone’s

opinion, like a law review article or a treatise.

Beginning in the 1920s a very important private body, the American Law Institute,

began producing “Restatements of the Law,” again discussed in both books. (The ALI, an elite

body, has been referred to as a private legislature. About a dozen members of our faculty are

ALI members.) The Restatements, though not binding on anyone, have collectively been one of

the greatest influences on American law, particularly the first Restatement of Contracts (1932),

perhaps the most prestigious of all the restatements, written by Samuel Williston of Harvard, the

most important figure of traditional (or “classical”) contract law, assisted by his friend and rival,

Arthur L. Corbin of Yale, the most important modern thinker on contracts. In the 1960s and

1970s a revision, the Restatement Second of Contracts, was written by Judge Robert Braucher,

formerly a professor at Harvard, and Professor E. Allan Farnsworth of Columbia, probably the

most influential contemporary writer on contracts. Both Judge Braucher and Professor

Farnsworth were middle of the road in their views and the Second Restatement, while it is highly

“Corbinized,” is by no means a radical document. There is now a third series of Restatements,

but the Second Contracts Restatement has been left alone.

Think hard about the stuff that you read, and come in prepared to discuss these various

sources of law. Come in prepared to discuss Problem 1-1, KC&P 1-4, giving serious

explanations for your answers. (If you’d like to work with friends or new acquaintances, feel

free. There’s nothing wrong, by the way, with arguing over your answers.)

Thursday, August 27, 2009: Legal Theory. What Lawyers Do. How to Brief a Case.

Why Are Contracts Enforced? Intention to Be Bound: KC&P 12-33.

7

How to brief a case

Law students learn how to brief a case, that is, to prepare an abstract of it. A brief is not

substitute for the opinion itself, but it can be a great help a) to understand the case; b) to enable

you to “state the case” in class; and c) to help you to review for exams. Upper-class students get

lazy and will tell you not to bother. Take it on faith that I can tell if you’ve briefed the case

while I have my back turned. It will take you a long time at first, but you’ll also learn the case

much better by writing out your brief. Write out a brief of Ray v. William G. Eurice &

Bros., Inc., KC&P 25-30, after carefully reading the case. Do it as follows:

First: write the name of the case (in Texas we call it “the style of the case”), the court

and date, and preferably the citation. (In Ray the first citation is the official report, volume 201

of the Maryland Reports, beginning at page 115. The second citation (the “parallel cite”) is the

regional reporter published by the West Publishing Company, now part of Thomson/West,

volume 93 of the Atlantic Reports, Second Series, beginning at page 272.) Many states no

longer have official reports; in Texas we just cite the Southwestern Reporter, Third Series; if the

Texas Supreme Court is involved, we follow the citation with “(Tex. 2008 )” or whatever. If the

Court of Appeals is involved, we cite it as “(Tex. Ct. App. – Fort Worth 2008,” and tell whether

a petition to the Supreme Court followed. You’ll get more of this in Legal Research and

Writing.

Second: Write out the procedure. Beginning law students always want to start witht he

facts, but the procedure is key to a lawyer. Who is suing whom, for what? How did the case

get started? What did the lower court do? Was there an intermediate appellate decision? How

did the case get to the court whose opinion you are briefing? Perhaps most important, what did

the appellate court do with the case? (Hint: the procedure is usually, though not always, at the

beginning of the opinion. Sometimes it’s at the very end. Usually the resolution of the case is

at the end.)

It is essential to understand that how the case got to an appellate court affects the standard

it uses to review the decision below. n appeal from a jury verdict is very deferential to the jury’s

findings; an appeal from a grant of summary judgment or a motion to dismiss for failure to state

a cause of action will be less deferential, since the losing party was deprived of its right to get to

a jury. If an evidentiary ruling is in question, you should ask yourself why it is relevant to

contract law. Etc., etc. The appellate court’s resolution of the case often gives real insight into

its holding. For example, I can’t tell you how often students will say that the court “found” that

a given fact occurred when the disposition of the case is to remand it for trial on the merits.

That means that the appellate court did not find the fact, but is returning it to a trier of fact (a jury

or the trial judge.)

Sometimes casebooks will skimp on procedure. That is, in my opinion, a mistake, but

do your best with what you have. Knapp, Crystal & Prince is good on procedure.

Third: State the facts. Put in only the relevant facts. (Was it important that Mrs. Ray

had to sign the contract separately because she couldn’t get a sitter? Is it important that Mr. Ray

8

was an aeronautical engineer? Is it important that the Eurice Brothers were experienced builders

but appear less sophisticated about specifications and contracts than Mr. Ray?) After you’ve

written out your entire brief, go back and try to cut out unnecessary facts.

Fourth: State the legal issue. This, turned from question into a declarative sentence, is

the rule of law that comes out of the case or “holding” of the case. While each case doesn’t

necessarily produce only one “holding,” and while some rules of law will come from other

sources (notes, comments, the Restatements and the Uniform Commercial Code), this part of

your briefs will help you to outline or “synthesize” the course as it develops.

Fifth: Paraphrase the court’s reasoning. Try to use your own words. Sometimes,

quoting the court makes sense, but usually you’d be better putting it into your words.

Distinguish between things the court says that are essential to the result in the case (the

“holding”) and things that it says that could be left out without changing the result. The latter

are called “dicta” (the Latin plural – the singular is “dictum.” They come from a Latin phrase,

“obiter dictum,” (said in passing). Do not ignore dictum, but recognize it does not bind lower

courts or later courts to the same degree as a holding. On the other hand, the holding/dictum

distinction is often more rhetorical than substantive. Much of law comes from dicta.

Sixth: Do the same with any concurrences or dissents. They can be very important,

because a later court may adopt the concurrence or dissent over the majority opinion. They may

also contain facts that are left out of the majority opinion (often referred to as the Opinion of the

Court) or may give a different perspective. A good example is Judge Irving Lehman’s dissent in

Petterson v. Pattberg, KC&P 53, in Thursday’s reading.

Seventh: Put in your own comments. Do you agree with the court? Can you justify

the decision and reasoning? Your own views are important. After class, go back and see if you

still agree with what you wrote. If not, explain to yourself why you changed your mind.

Thus,

Name: [You don’t have to label this item. Just use it as your heading, with the citation.]

Procedure:

Facts:

Issue:

Reasoning:

Concurrences and Dissents:

Comments:

Brief every principal case.

9

With respect to today’s reading assignment, should Skrbina v. Fleming Cos., KC&P 32,

have been decided the same way as Ray? Explain your answer in detail. Should all promises

be enforced? Consider Questions 6, 7, 9 and 10 in Problem 1-1 (b). What about the promises

in Notes 5 and 6 on pages 32-33?

Friday, August 28, 2009: Lawyers as People. Relying on “Technicalities” to Help Your

Client to Win. Offer and Acceptance. Anthology xvii-xviii,1-3. KC&P 33-44, 51-63.

Restatement Second § 45 (in Supp.).

The introduction to the Anthology and Lawrence Joseph’s poem, Any and All, focus on

the lawyer as a person. (Feel free to look at Banks McDowell’s The Lawyer As Manipulator,

which follows Joseph.) As you read the cases in today’s assignment, ask yourself if a lawyer’s

emotions should be a factor in his or her practice of law. Should you ask whether your client is

right? What does “right” mean in the context of contract law? When I first started in law

school my first teacher, a very thoughtful young guy, said rather casually, “You know that it isn’t

relevant whether a party is General Motors or a little old lady.” (Pardon the sexism and

“ageism.” Also, today GM may be the party more in need of help.) We all nodded sagely,

feeling that we were like doctors. But is that true? Should the teenager in Leonard v. Pepsico

(yesterday) be treated the same as Pepsico? Even more, what about Mr. Izadi and Machado

(Gus) Ford, Inc. and Messrs. Petterson and Pattberg? Should the relative sophistication of the

parties matter? Should the deepness of the defendant’s pocket matter?

But is careful drafting a “technicality?” Go through Lonergan v.Scolnick and figure out

which communications are offers and which are not? What is an “offer?” What legal “power”

does it give to an offeree? Is it important that we have a clear view of what an offer is? What

is an acceptance? Is there any intrinsic justification for the “mailbox rule?” (This casebook is

the only place where I’ve seen it called “the deposited acceptance rule.”) Or is it most important

just to have a definite rule? While the CISG has adopted the Anglo-American rule, most civil

law countries follow the opposite rule. (Civil law countries based their legal system on a Civil

Code enacted by their legislature, rather than judge-made common law like the United States and

other countries that used to be British colonies. Most of the world follows the civil law

tradition.)

Note how important the exact words used may be. That makes for a predictable system,

and one that is relatively easy to study and to apply. It also produces unfair results for people

who don’t know the rules, like consumers and less-well educated people. Should this matter?

Should those with lawyers be held to a higher standard? Are you happy with the rule that

advertisements are not normally offers? Why or why not? Are the exceptions to the general

rule justified, or are they favoring the little old lady against General Motors? Should they?

What do we mean by an offer of a unilateral contract? What should Mr. Petterson have

done when Pattberg “demanded the name of his caller?” By the time you read Petterson v.

Pattberg you’ll have read Maurice Wormer’s famous Brooklyn Bridge Hypothetical, one of the

classics of classical contract law. The majority opinion in Petterson of course follows the

Wormser approach, but Judge Lehman’s dissent does not. (It is interesting to note that the Chief

10

Judge of the New York Court of Appeals, then at the peak of its prestige, was Benjamin N.

Cardozo, later a Justice of the United States Supreme Court and considered by many to be

America’s greatest common law judge. Cardozo, though he was a progressive judge who helped

transform contract law, joined the majority in Petterson.) After reading Judge Lehman’s dissent,

briefing the case and thinking about the issues raised by it and Professor Wormser, read

Restatement Second § 45. Does this solve the problem? Is it applied correctly in Cook v.

Coldwell Banker? Section 45 was an important change in contract law and evidence of the

erosion of classical contract law, even back in the 1920s when Williston was writing the First

Restatement. Around 1950 Wormser wrote a little article in which “clad in sackcloth and ashes”

he conceded defeat on the question of offers of unilateral contracts. Note, however, that we still

read his 1916 Brooklyn Bridge Hypothetical as well as Judge Lehman’s dissent.

There is a brief note on remedies at the end of the assignment. We will return to

remedies in November, but it is important that you start to think in terms of remedies throughout.

The client wants results, not an essay on jurisprudence. Remedies are how she gets results.

II.

Consideration and Its Substitutes

Wednesday, September 2, 2008: How Article 2 of the UCC changes classical contract

law, and how the CISG trumps Article 2. Consideration. KC&P 63-78; 83-87. Supp.: CISG

Articles mentioned in the Problem at the foot of KC&P 70. Available, but not required:

Lon Fuller’s famous and influential article, summarized on pages 85-87, is reprinted at

Anthology 284-96.

The UCC, the CISG and classical contract law

Harlow & Jones, Inc. v. Advance Steel Co. involves an issue that we will study later this

term, the so-called “battle of the forms.” It is common when businesses buy and sell goods to

each other that they send out forms that have the details typed in identically, but have very

different and often contradictory provisions in their printed portions. Commonly, the buyer

sends out a purchase order, perhaps saying the “time is of the essence” and that “all warranties

under the Uniform Commercial Code apply,” while the seller sends a confirmation or order

acknowledgment saying “seller cannot guarantee time of delivery” and “the product is sold

without any warranties.” Classical contract law required the offer and acceptance to be mirror

images of one another and the battle of the forms caused a lot of litigation in the first half of the

twentieth century. UCC 2-207 attempted to deal with the problem, with mixed results; we will

come back to the problem later. Here, we see Advance not only relying on the text of its

purchase order to claim a breach of contract, but also claiming that there was no contract and that

it therefore was not obliged to take the third shipment of steel. Classical contract might have

found that there was no offer and acceptance and that a contract was never formed. How does

Judge Feikens deal with the dispute? What is the major change that Article 2 makes from

classical contract on the question of contract formation?

11

We then get a nice comment on the CISG, which would not apply here because a) it

hadn’t yet come into existence, and b) it wouldn’t apply because both parties were American

corporations. Nonetheless, it often will apply and could apply to a transaction that was entirely

intrastate in the United States, since it applies “to contracts of sale of goods between parties

whose places of business are in different States [which means countries].” Many American

lawyers are unaware of this and don’t realize that the CISG overrides state law (including the

UCC), under the Supremacy Clause of the Constitution, since it is a treaty of the United States.

American lawyers who do know about the CISG often exclude it under its Article 6. Now do

the CISG problem at the foot of page 70.

Consideration

What is consideration? What function does it play in contracts? Why do we require it?

In reading and thinking about Hamer v. Sidway, understand that the benefit/detriment theory of

consideration is not the dominant theory. Today, it almost is an idiosyncrasy of New York State

law, though it still is used in England. How does benefit/detriment differ from the “bargained

for and given in exchange” approach of Restatement Second § 71? (This section, then

numbered § 75, was the keystone of the First Restatement, but couldn’t even keep its number in

the Second.) One additional confusion is the fact that Hamer in fact is a perfect bargain and

exchange, though some of the cases it cites (particularly Shadwell v. Shadwell) are not.

Remember the distinction and apply it to cases we read in future classes that fail to find

consideration because of the absence of a bargain.

Because of our time constraints we skip Pennsy Supply, Inc. v, American Ash Recycling

Corp. In a nutshell, American Ash had some treated ash aggregate that it had been ordered to

dispose of as a hazardous material. It offered it for free for use on a construction project that

Pennsy was doing as a subcontractor. (Apparently the aggregate was okay for this use, since the

offer was called to Pennsy’s attention by the owner and the general contractor.) The aggregate

started cracking and Pennsy had to remove it at great cost and sued American Ash, which said,

“we didn’t have a contract with you, we gave it to you as a gift.” Pennsy argued that it was

given with the understanding that it would be used in a way that would satisfy American Ash’s

duty to dispose of it, but the trial court said that this condition, even if it existed, wasn’t a

bargain, quoting Williston’s famous Tramp Hypothetical:

If a benevolent man says to a tramp, “if you go around the corner to the clothing shop

there, you may purchase an overcoat on my credit,” no reasonable person would

understand that the short walk was requested as the consideration for the promise, but that

in the event of the tramp going to the shop the promisor would make him a gift.

Note 3 on page 83 picks up the story. (I really don’t think you need quite that as much tutoring

about the meaning of the word “tramp” as the editors feel obliged to give you, but Williston’s

Tramp is the best way to explain the difference between a bargain and a conditional gift.)

We then get a note on the practical effects of the different tests for consideration, and Lon

Fuller’s famous discussion of the functions of legal formalities, more of which is in the

12

Anthology on 284-96. While Fuller’s analysis has been a staple for nearly 70 years, you can see

that some contemporary writers of quality have attacked it.

Thursday, September 3, 2009: More on Bargain; Gratuitous or Donative Promises;

Structuring a Gratuitous Promise to Insure Consideration; The Concept of Promissory Estoppel.

KC&P 87-107. Transactional Problem. Available, but not required: Anthology 296-304

(Richard Posner on gratuitous promises).

How does Dougherty v. Salt differ from Hamer v. Sidway? Did Aunt Tillie not want

Little Charley to get the money? Would she have been happy that the $3000 will go to some

“laughing heir”? Why don’t we make donative promises enforceable? What does Professor

Mel Eisenberg have to say? How could Aunt Tillie have got around the consideration

requirement?

Why should Mrs. Batsakis have to pay so much for the drachmas? (There is

considerable dispute about exactly how many drachmas an American dollar would buy in Athens

while it was occupied by the Nazis? Can you see why? There is also dispute about how much

the 500,000 drachmas would have bought. It appears that it would have provided a few days’

worth of food, more than a single meal, but not a great deal more.)

Note that no lawyers were involved in any of our cases today. It’s generally agreed that a

lawyer can almost always structure a promise of a gift in a way to satisfy the consideration

requirement without materially increasing the promisee’s obligations. This raises a question

whether the requirement of consideration for donative promises is just a trap for the unwary and

those too poor to have a family lawyer around to structure gifts. While this may be a strong

argument for changing the law, the Transactional Problem, below, gives you an opportunity to

structure a transaction in light of the existing law.

Transactional Problem

You are consulted by the workers in Plowman v. Indian Ref. Co., KC&P 64, to write up

the company’s promise (as the workers described it in the second paragraph of the case) so as to

make it binding. Write out a short contract (one or two sentences should suffice) in the basic

form of “In exchange for by the employee, the Indian

Refining Company

agrees to [pick up the substantive promise

allegedly made from the cited paragraph].” Be prepared to read your draft in class.

Friday, September 4, 2009: Consideration and Reliance in Business Contracts. KC&P

235 n. 3. Anthology 338-49 (Williston’s defense of § 90 (then numbered §88) before the

American Law Institute, and note on the concept’s expansion). Restatement Second § 90

(in Supp.). KC&P 108-22.

So far, we have seen donative promise cases, in which for the most part, no consideration

was found, including Cardozo’s opinion in Daugherty v. Salt. The editors have removed

13

Cardozo’s opinion nine years after Daugherty in the famous and immensely influential (though

much criticized) Alleghany College Case, (Alleghany College v. National Chautauqua County

Bank), involving a promise of a gift to a charity, which is briefly summarized in Note 3 on page

235. In it, Cardozo performed an amazing act of juggling several concepts, apparently finding

bargained for consideration where none appeared, and perhaps suggesting that conventional

consideration could be found without a strict bargain. In the opinion, he also discussed the

concept of promissory estoppel, though he ended up saying it wasn’t necessary to reach that issue

in the Alleghany case. In 1926 Williston went before the ALI membership to defend Section 88

of the First Restatement, which eventually became its Section 90. The version in the First

Restatement is shown at the bottom of the first column on page 339 of the Anthology. Note

how the entire discussion at the ALI Meeting is about donative promises, including the famous

hypo(s) of Johnny and the Car. Then read § 90 in the Second Restatement. Note its second

section, which is discussed in the note on KC&P 235.

The question for many years after the First Restatement was published in 1932, was § 90's

effect, if any, on business promises. One of the great things about law is how a fact situation will

come up more than once, sometimes before two great judges writing a generation apart. James

Baird Co. v. Gimbel Bros. (KC&P 109) is written by the great Learned Hand in 1933, writing

just as the First Restatement is published. Learned Hand was a vice-president of the ALI and

took part in the discussion that we read earlier. His ruling that section 90 did not apply to

commercial promises was the dominant point of view for twenty-five years, until Justice Roger

Traynor of the California Supreme Court, wrote Drennan v. Star Paving Co. How does each

judge reason? Is Traynor conscious of Baird? How does he use § 45?

While the Drennan holding has been criticized as giving general contractors too much

power over subcontractors, it has carried the day and is by far the dominant rule. We then get a

note about business practices and contract law, focusing on the “Wisconsin School” and

particularly the famous 1963 American Sociology Rev. article by Stewart Macaulay. You can, if

you want, read more about him, and his more recent article, An Empirical View of Contract, in

the Anthology.

Wednesday, September 9, 2009: Expansion of the Reliance Concept. KC&P 122-43

(top). Do Problems 2-1 to 2-3 thoroughly.

We begin with Berryman v. Kmoch, a real estate brokerage case. How does the Kansas

Supreme Court deal with the recital of consideration? How does it deal with Mr. Kmoch’s

claimed reliance.

We then read a recent case applying §90, Pop’s Cones, Inc. v. Resorts International.

Pop’s Cones builds on a famous Wisconsin case, Hoffman v. Red Owl Stores, Inc., the facts of

which are almost literally tracked in Illustration 10 to Restatement Second § 90, KC&P 212, and

which is discussed in Note 2 on page 214. What kind of damages is Pop’s Cones seeking from

Resorts International? What would have been its expectation damages? Was there a promise at

all? What is the legal effect of the letter that Resorts signed? The court refers to it as “a written

offer” but what about the italicized words in the third block quotation on page 210? Did Pop’s

14

accept any offer? If not, what happened to create liability on Resorts’s part? Are Pop’s and

Hoffman v. Red Owl really tort cases? Explain. The notes following Pop’s are important and

useful.

Then do Problems 2-1 to 2-3.

III

Contract Formation

Thursday, September 10, 2009: The Battle of the Forms. KC&P 143-63, 165-67 (i.e.,

skip Problem 2-4.) Supp: UCC 2-207, Rev. UCC 2-206 and 2-207, all including

comments.

As I said in class, for at least the second straight year, we’ll start with the problems that I didn’t

get to at the end of yesterday’s assignment. So review your answers to the problems in light of

our class discussion.

Then go on to today’s assignment. Read my comments below before you do the rest of

the assignment, and then read the assignment in the following order: KC&P 143-53, UCC 2-207

and comments, KC&P 153-63, Revised UCC 2-206 and 2-207 and comments, KC&P 165-67.

The basic point is this: At common law, if A made an offer (“I’ll sell you 100 widgets

for $1000,”) and B replied with different or even additional terms (“I accept if you can have them

here by March 1"), the response was deemed a “counter-offer”and normally was also considered

a rejection of the original offer. As commercial practices developed in the late nineteenth

century, however, buyers and sellers frequently had many different deals going on at once, some

perhaps with each other, some with third parties. Sellers often got tens or hundreds of purchase

orders per day and buyers often got as many acknowledgments from sellers. Both buyers and

sellers put terms on the back of their forms favoring their position. Neither looked at the

boilerplate of the other’s form. (You saw this in Harlow & Jones v. Advance Steel Co., KC&P

64.) Since the forms disagreed, at common law there would be no contract at all, and

occasionally, this was the court’s decision, as in Poel v. Brunswick-Balke-Callender Co., KC&P

151 n.3.

UCC 2-207 attempted to change the battle of the forms, but it applies only to sales of

goods. Princess Cruises v. General Electric Co., is an admiralty case, and the Fourth Circuit

decides, quite rightly, that the contract is for services, but also insists on applying the common

law rule, which allows GE to save about $4.3 million, based on the boilerplate of its Final Price

Quotation. Maybe that’s not so silly, since this is not a routine transaction, but one for about a

quarter of a million dollars. Nonetheless, many large orders are routinely handled this way.

While it is true that the Brunswick-Balke-Callender case held in 1915 that no contract

was formed, more typically, courts treated the purchase order as an offer that the seller’s

acknowledgment rejected by making a counteroffer. Even though the buyer never formally

15

accepted the counteroffer, the courts often treated its receiving the goods as an acceptance of the

counteroffer by performance and an implied promise. This became known as the last-shot rule,

and is well-described by Professor John Murray in note 5 on page 151. It is critical to realize

that typically neither buyer nor seller ever looks at the other party’s form, except to check the

price, quantity and delivery terms. The boilerplate goes unread, and could not be read regularly,

since there is an enormous volume and the people dealing with the forms are not legally trained,

but rather are low-level clerks.

That brings us to the original 2-207. Karl Llewellyn fully understood that there was no

assent involved as far as the “non-dickered” terms were concerned. He came up with UCC

2-207, but this is probably the worst-drafted provision in the Code, and to the extent that it

requires a party to object to terms, ignores the fact that no one reads the boilerplate. After

you’ve read to page 153, read UCC 2-207 and its Comments. Then read Brown Machine v.

Hercules, and see how the court applies 2-207. Then read the notes following the case. What is

wrong with 2-207 as written and what have the courts done with it? Pay attention to the various

knock-out rules. If the court treats the conflicting boilerplate as knocking each other out, what

happens under 2-204, which you know from Harlow & Jones? Note that because the default

rules of Article 2 generally favor buyers, the knockout rules are greatly disliked by sellers, who

try to claim that the battle of the forms led to an agreement to eliminate things like warranties

and consequential damages (as in Princess Cruises).

I’m not assigning Problem 2-4 because the assignment is hard and fairly long without it.

Feel free to do it after you’ve done all that I assigned. It may help you to apply 2-207.

In the revision of Article 2 there was a lot of attention paid to 2-207, which obviously

didn’t work the way its drafters had intended. Read the proposed revision and its Comment, and

then read the Comment: Battle of the Forms under Revised Article 2, KC&P 165-67. What do

the proposed amendments of Article 2 do? Only the Virgin Islands has adopted Revised Article

2, and its future is, to say the least, doubtful.

Should legislatures even try to revise 2-207 or should they leave it alone where the

courts have left it? What should courts do in cases not covered by Article 2?

Friday, September 11, 2009: “Agreements to Agree”. KC&P 167-84 (bottom)

[skip the quotation from Prof. Knapp’s article, which you will read part of in the

Anthology], 185 last three lines-88 (top). Read Anthology 304-11 (top). Available but not

required: Anthology 311-27 (the remainder of the Knapp article and the Farnsworth

article discussed in both Quake Constr., Inc. v. American Airlines and in Note 3 on page

186). Note that I have given you two little drafting problems in connection with Walker

v. Keith and Quake.

The term “agreement to agree” is meaningless, and is one that almost always is used in a

sentence that claims, incorrectly, that “courts will not enforce agreements to agree.” The basic

point is that you can bind yourself without every detail being agreed upon. The excerpt from

16

Corbin on page 168 represents the older point of view. (That’s right. Corbin wasn’t perfect.)

Is the agreement in Walker v. Keith well drafted? How could a court enforce the words used?

Look at them carefully. Do you see that there are two parts to the “option”? (What are they

and is it really an option?)

In the middle of page 169 the court makes two “observations.” Isn’t the first half some

place between irrelevant and dumb? (How easy was it – in 1951 – to fix the rental from

1961-71? Is there any social or business purpose in giving the lessee the power to extend the

lease for a second ten years? But how can the lessor be protected against inflation? But what

about the court’s second point? Is the sentence ambiguous? How? What does it mean to you?

The bigger question is what is said in the four block quotation paragraphs on 169-70.

The broadest statement is from Williston’s third edition (revised by Professor Jaeger of

Georgetown, a very competent man, but not Williston), but the other three are from American

Jurisprudence and Corpus Juris Secundum, neither of which is highly regarded. On page 170

the court quotes Williston again. Is its second sentence (“either party . . . may refuse to agree to

anything the other party will agree to”) necessarily correct? Clearly, when an offer is made, the

offeree has the privilege (remember our discussion of Hohfeld) of refusing to accept, no matter

how fair the offer, but may a party to a contract give up some of his privilege with respect to

extending the contract? (We’ll see more in Quake and the excerpts from Knapp and

Farnsworth.) Is the court right in its dismissal of the reference in the clause to comparative

business conditions, etc? Suppose a testator had left a piece of property to two children, and

they could not agree on how to divide it. Courts might well appoint an appraiser or hear

testimony about its appraised value and order one to pay the amount to the other. (They also

might appoint a trustee to sell the property, but that might create more transaction costs.)

This is a very fussy opinion, and pretty clearly wrong on its notion that courts can’t

decide reasonable prices, or determine what comparative business conditions were, and in its

implicit dictum that parties must fix a number ten years into the future. This is certainly shown

by cases like Edwards v. Tobin, and the cases in the notes following Walker. But the Walker

court is surely right that the actual clause wasn’t well drafted. What could the parties have done

to make the provision enforceable without giving the landlord an effective veto by just refusing

to agree? Think hard about this and come in with a short, written sentence or two that would

help with the problem.

The Ohio Supreme Court’s opinion in Oglebay Norton Co. v. Armco, Inc. (p. 176 n. 4) is

particularly intriguing. Note how the court uses relational contract principles, as mentioned in

the last sentence of the note.

Quake Construction, Inc. v. American Airlines is at least as interesting. Was there an

economic need for the letter of intent? Was it well drafted? What does the last sentence mean?

Is reserving the right to cancel the LOI the same as saying that it is not legally binding? Is it

significant that the reservation was limited to a specified event (“if the parties cannot agree on a

fully executed subcontract agreement”)? By the way, who is the contractor and who is the

17

subcontractor? Jones appears nominally to be a general contractor, but it really is just an

administrator for the “owner,” American Airlines. In effect, Quake is the general contractor for

the project and is called the general contractor in the LOI, but its LOI is with Jones, not

American. Jones, as American’s agent, clearly binds American, which is a co-defendant.

(More sloppy drafting.) What, exactly, is the Illinois Supreme Court’s holding? What is

Justice Stamos’s disagreement? He cites both the Farnsworth and the Knapp articles, and has a

fairly perceptive discussion beginning at the bottom of page 182. His last paragraph, desiring

greater clarity in drafting, is certainly right, but is he correct is suggesting that the LOI as written

“is just ambiguous enough for Quake’s complaint to survive a motion to dismiss?” Answer note

1 on page 183. Redraft the critical portion of the LOI to eliminate the ambiguities.

The notes following Quake are very valuable. Professor Knapp wrote the break-through

article on the topic in 1969, and in 1987 Allan Farnsworth wrote a very influential article

basically agreeing with Knapp. Both are well summarized on pages 184-86 and are more fully

reprinted in the Anthology. Skip the summary of Knapp (presumably by Knapp), and read the

beginning of his article in the Anthology. Feel free to read the rest of the article and the

Farnsworth article, but don’t feel obliged to do so. Both find a duty to bargain in good faith

under some circumstances, though not a duty to reach agreement. What is the difference?

What remedies should be available? The most critical thing to do in drafting a letter of intent is

to state explicitly which parts are binding legally and to state explicitly what conduct is required,

whether the parties agree to bargain in good faith and what would constitute a breach of a duty to

bargain in good faith. The cases in notes 4 and 5 show that this is an area of intense dispute, but

also of frequent legal liability.

Wednesday, September 16, 2009: Drafting Preliminary Agreeements. KC&P 188-92.

Haggard 6-38. (Skip Exercises 1 and 2). Write out documents for Problems 2-6 (a) and 2-7.

Given that Pennzoil v. Texaco led to a settlement of $3,000,000,000 (note use of arabic

numbers when billions are involved) and Texaco’s eventual collapse, you can see that this is not

a silly topic favored by soft-core lawyers. Now read Haggard thoroughly and carefully and then

spend serious time drafting the documents asked for in Problems 2-6 (a) and 2-7.

Thursday, September 17, 2009: Electronic Contracting. Supp. 270 (middle) to 272

(top) (E-SIGN and UETA). KC&P 193-214. Supp. 259-68 (middle) (UCITA § 112).

Today we look at a topic that didn’t exist a few years ago and is now critically important,

electronic contracting. Inevitably, the mechanics will continue to change. They already have

from the cases in the casebook, although Brower, Klocek, ProCD and Hill v. Gateway remain the

dominant cases. Why do I say that none of these cases involves the most pressing issue today?

We start in the Supplement with the editors’ description of two statutes on the mechanics

of electronic contracting, the Uniform Electronic Transactions Act (UETA), an attempt at a

uniform state statute, and the federal Electronic Signatures in Global and National Commerce

Act (“E-SIGN”– don’t you love those folks in Congress working nights to come up with a title

18

that will form a convenient acronym?) UETA is also discussed briefly on Supp. 265, in the note

on UCITA. The complicated question of preemption of state law by E-SIGN is discussed in the

carryover paragraph at Supp. 270-71. In a nutshell, these laws permit any law or rules requiring

writing to be satisfied by computerized “records” and electronic signatures. The use of

electronics is based on the parties’ agreement, but as the Supplement says, agreement can be

inferred from conduct. All but three states (Washington (home of Microsoft), Illinois and New

York) have adopted UETA, as shown in note 8 on Supp. 271. (By the way, NCCUSL has

changed its name to the Uniform Law Commission. Much less interesting.)

We go back to the casebook, which begins with a good discussion of shrink-wrap,

click-wrap and browse-wrap. The basic idea is that you used to buy software on a floppy disc

that was packaged in shrink-wrap, with a notice on it that by tearing the shrink-wrap you agreed

to the terms in the enclosed EULA (end user license agreement). Now, you download the

software off the Internet, but before you can install it you are told that you can read the EULA

and must click a box that says “I agree.” If you don’t click the box, you can’t install what you

bought. The various Gateway 2000 cases didn’t actually involve click-wrap. They involved a

booklet in the box that included an arbitration clause and claimed that you were bound by its

terms if you send back your computer within thirty days. Note that you typically bought the

computer on the phone or over the Internet, giving your credit card number at that moment.

Even if your action is viewed as just an offer, why isn’t the act of shipping the computer an

acceptance by the seller? If we view its inclusion of the new terms in the box as a counter-offer,

why isn’t this transaction governed by UCC 2-207? (You’d better go and reread 2-207 (original

version). The best-known cases are the two opinions by Judge Frank Easterbrook in the Seventh

Circuit, Hill v. Gateway 2000 and its predecessor, ProCD v. Zeidenberg, both highly criticized

and very influential. (Easterbrook, like his colleague on the Seventh Circuit, Judge Richard

Posner, was a law and economics type at the University of Chicago, appointed to the bench by

President Ronald Reagan, who also appointed University of Virginia law and economics

professor Antonin Scalia first to the D.C. Circuit and then to the Supreme Court.)

Brower v. Gateway 2000 is an opinion by New York’s Appellate Division, the important

intermediate appellate court. I have been a member of the New York Bar since I got out of law

school and I actually knew the trial judge before she went on the bench. I think both opinions

are terrible. It’s a case of thanks a lot for deciding that an arbitration requiring a non-refundable

$2000 fee and risking attorney’s fees was unconscionable, but what about the rest of what’s

wrong?

First of all, many law professors have noted that Easterbrook’s reading of 2-207, blindly

followed by the Appellate Division, is simply wrong. He said (see second full paragraph on

KC&P 197) that 2-207 only deals with the battle of the forms, but its first section expressly

applies to an oral contract in which one party sends a writing (“or a written confirmation which is

sent within a reasonable time”) that adds or changes terms. See the first two sentences of

Official Comment 1, immediately after the text of 2-207 on Supp. 28. Under 2-207 (2), the

additional terms (i.e., the stuff in the box) are construed as proposals, and only become part of

the contract through the recipient’s silence if the transaction is between merchants. While it is

19

possible that the buyer of the software in ProCD v. Zeidenberg arguably was a merchant, it’s

clear that the buyers in both Hill v. Gateway 2000 and Brower were not, so regardless whether an

arbitration clause is a material change, the additional terms would not become part of the contract

under 2-207 (2). Then, under 2-207 (3), there would be a contract, since both parties’ conduct

recognized it (Brower paid his credit card bill and Gateway shipped the computer), but the

contract would only consist of terms “on which the writings of the parties agree,” and all other

terms would be supplied by the Code. Thus, no arbitration clause.

In addition, others have pointed out that at common law, taking a product off the shelf at

a self-service grocery or super market and presenting it (the technical term, I believe, is

“uttering” it) to the cashier was the buyer’s offer, which was accepted when the cashier rang up

the transaction. That still would have created a contract at the time of the telephone or Internet

transaction, making Gateway’s additional terms merely an attempt to change the deal, which the

buyer had no duty to respond to. Both these points are discussed in Notes 1 and 2, KC&P

200-02.

The argument to the contrary is that these are “rolling contracts,” contracts not made at

one time and place, but evolving as the parties do business. I find this a perversion of the ideas

of Llewellyn and Ian Macneil, who agreed that contracts were not always formed neatly by an

offer and acceptance at a focused moment. But they, especially Macneil, focused on the

continuing relationship between the parties. Macneil agreed that contracts should not always be

“presentiated” (i.e., focused only on the moment of contracting; note the “i” after the first “t”),

because parties in a long-term relationship often change terms informally and through conduct

during the life of the relationship. (An excellent example is Olgebay Norton v. Armco, Inc.,

KC&P 176 note 4.) But none of these Internet or 800 number phone transactions involves a

continuing relationship, and the changes in terms are just dictated by the seller. As you can see,

some courts, most notably the Kansas federal District Court in Klocek v. Gateway, Inc. (Gateway

changed its name), the Third Circuit in Step-Saver, and a very humble lower New York State

court, the Civil Court, which is like a County Court here, in Licitra v. Gateway. (Actually, the

proceeding was in Small Claims Court, which is part of the Civil Court.) The Licitra court was

located on Staten Island, which is not in the First Department, which decided Brower, and thus

is not bound by the Appellate Division’s decision. Incidentally, the judge in Licitra had the

following to say about the packaging involved:

Before deciding the merits of this case the Court must address a troubling issue. The

computer industry and other courts have adopted the term “pizza box” to describe the

package in which the document containing the terms and conditions of the agreement is

shipped. As a matter of law in the State of New York, such a container is not a “pizza

box”. No self-respecting New York pizza would be caught soggy in such a box. The

container may pass as a “ pizza box” in those parts of the world that think food from

Domino's, Little Caesar's, Pizza Hut, and Poppa John's is pizza. In this Court's opinion

such a classification cannot be recognized east of the Hudson River.

20

The judge’s name, by the way is Straniere. I know his brother, and Judge Phillip Straniere has

since been elected to the New York Supreme Court, still a trial court, but the important one. In

referring to the idea of acceptance unless you return the product within thirty days, Judge

Straniere also wrote:

Accepting these holdings as being applicable, if the defendant, as a term and condition of

filing a claim, required the consumer to sing “O Sole Mio” in Yiddish while standing on

his or her head in Macy's window, only Mandy Patinkin would qualify to object to the

receipt of defective equipment. This cannot be so. What these decisions must mean is that

a contract has been formed with the price, the equipment and time of delivery agreed to,

but almost nothing else.

I like his views on both pizza and clickwrap. Nonetheless, I’m under the impression that

more courts have enforced clickwrap than have rejected it.

The big question is what to do about contracts of adhesion in e-commerce. As we’ve

noted before, we have to have form contracts, particularly in mass transactions, most of which

will involve consumers or small businesses. But the clickwrap/rolling contract approach allows

the seller to dictate terms, some of which are outrageous. While it is possible that some will be

struck down by courts (or arbitrators) as unconscionable, few consumers can afford to litigate

(often in a far-away court, say in Washington State, as Microsoft’s EULAs provide, if I am not

mistaken). In addition, how many consumers understand the EULA, even if it is available to

read or download, and what about the psychological deterrent to sending back the software you

already bought and are in the process of installing? In a business context, how often does a

responsible officer or attorney for the buyer install the software, as opposed to the geek from the

mailroom? I recently published a piece attacking the problem, but concluding that the only real

solution will be the specific outlawing of particularly offensive terms through legislation. There

are many defenses of adhesion contracts. Probably Randy Barnett’s Consenting to Form

Contracts, 71 Fordham L. Rev. 627 (2002) is as good as any and more readable. Mine is

“Implied,” “Inferred,” and “Imposed”: Default Rules and Adhesion Contracts–The Need for

Radical Surgery, 28 Pace L. Rev. 195 (2008). You are under no obligation to read any of this

and will get no advantage on the exam if you spend time on “Professor Linzer’s brilliant analysis

of the adhesion contract problem.” Neither will you suffer if you say (as many have) that I don’t

know what I’m talking about.

Note 6 on KC&P 203 discusses the important question whether software is a good, not

the medium, but the actual codes, whether on a plastic disc or downloaded directly. The

revision didn’t resolve the question, but said the “information” was not a good. It didn’t define

information, and ignored the key issue that if your Windows Vista is lousy, as everyone says it is,

your computer (unquestionably a good) won’t work right. That compromise, which followed

years of wrangling between the ALI and NCCUSL (i.e., the Uniform Laws Commission),

satisfied about no one, and the Uniform Laws Commission is still looking for its first state

21

legislature that will adopt Revised Article 2.

At this point, go to the Supplement and read about UCITA. As I’ve mentioned, Dean

Nimmer was the Reporter for what was first Article 2B of the Revised UCC and then, after the

ALI pulled out of the project, UCITA. I was a spear-carrier among its opponents. While there

were many opponents, one of the leaders was Professor Jean Braucher of Arizona and Wisconsin,

who incidentally, is the daughter of Judge Robert Braucher, who was the first reporter of the

Second Restatement. Some of the controversy is described at the bottom of Supp. 260. So far,

Maryland and Virginia have adopted UCITA, four states have adopted “bombshelter bills”

forbidding the enforcement of choice of law clauses in software contract that adopt the law of

any state that has passed UCITA. (This would affect AOL, which is domiciled in Virginia, and

has a Virginia choice of law clause in its click-wrapped EULA.) As I understand it, the Uniform

Law Commission has pretty much given up on getting UCITA adopted, but courts sometimes

look to it in states that have not enacted it.

We will also read and discuss Register.com, Inc v. Verio, Inc., involving a more benign

use of the dominant party’s power, but raising issues that are both similar and different from

those in the earlier cases we discuss. How do it and the notes following it bear on the issues

raised in this class?

IV

Liability Without Formal Agreement

Friday, September 18, 2009: Reliance and Promissory Estoppel. KC&P 215-18, 222

n. 1-244; 249 n. 3-253 (top).

The Introductory notes remind you of what we’ve already learned about the origins of §

90. Kirksey v. Kirksey, involving Dear Sister Antillico, is a museum piece in that the majority

opinion is written by the dissenter. Can you find bargained for consideration in the

brother-in-law’s letter? Do you see any problems with your analysis? Many observers think

the brother-in-law was hitting on Antillico (whose name wasn’t that – see the article at the end of

the note following the case). From what I can see, she was a woman who’d had a hard life and

now had five children (plus a couple of slaves; don’t get too sentimental about her). The

brother-in-law remarried and his new wife didn’t seem to want Antillico around. Did she really

rely? On what? Exactly. I skip Greiner v. Greiner, in which the illiterate mother promises

land to one son, who abandons what he had and comes all the way across Kansas and starts

building. Another brother interferes. Court applies § 90. Now answer the notes following it.

Wright v. Newman is a family law case, but its facts are very different from the ones we’ve seen

so far. How did Ms. Newman rely? What about the dissenter’s arguments, and the

concurrence’s answers?

King v. Trustees of Boston University moves out of the family, but into the controversial

are of charitable subscriptions. What and how did Dr. King promise? How did BU rely?

22

Consider how a Georgia court might have analyzed and resolved the case? What about § 90

(2)? The courts all reject it, but they usually find for the charity. (Not Maryland National Bank

v. United Jewish Appeal, however, where the court may have been put off by the UJA’s high

pressure tactics, admittedly to very well-off supporters of Israel. The UJA couldn’t claim

reliance, because it was very responsible, and didn’t commit money until it had it.) Katz v.

Denny Dare still has aspects of family about it. How? But it shows how the cases have moved

from the days of Plowman v. Indian Ref. Co. (Note the cases discussed on pages 241-42.) Is

Katz’s case as strong as Mrs. Feinberg’s in Feinberg v. Pfeiffer Co.? Stronger? Why? The

notes following the case are good. I’ve always liked the result in Vastoler v. American Can Co.,

but found his “detrimental” reliance rather strained. Compare Hayes v. Plantation Steel Co., and

be aware of ERISA. The final group of notes push our discussion, discuss whether section 90 is

based more on promise or reliance, and lead into the current debate whether promissory estoppel

has seen its better days. Note that Professor Knapp has written two important articles in this

field, as mentioned in the last note.

Wednesday, September 23, 2009: What Is Restitution? KC&P 253-66. Anthology

327-38 (top) (John W. Wade, Restitution for Benefits Conferred Without Request).

Now we enter a separate field of law, but one that is closely related to contract and often

intertwined with actual contract. Understand that first of all, restitution is not based on

agreement or “meeting of the minds.” As the historical introduction and Credit Bureau v. Pelo

show, even if the defendant is incompetent, unconscious or opposed to getting the supposed

enrichment, he may be held liable in restitution, which is based, not on agreement, but on unjust

enrichment. The courts of the eighteenth and nineteenth centuries sometimes used a fiction, the

contract-implied-in law, to fit restitution into assumpsit. Courts still sometimes speak that way,

like the court in Pelo, but there is no contract. You will also find many other terms used, like

quasi-contract and quantum meruit, but restitution is the better term.

While restitution is not based on agreement, we are still left with the problem of you not

wanting benefits imposed on you for a price. Suppose you go away for a couple of weeks and

your neighbor mows your lawn without asking you. Should you have to pay? The answer is

no; he is viewed as a “volunteer” or an “officious intermeddler.” But suppose you kick your

fourteen year old daughter out of the house without food in the winter. If a neighbor takes her in

and feeds and clothes her, she (the neighbor) will be able to recover these costs from you. Can

you see why? Explain. She would be able to recover from you even if you warned her that you

wouldn’t pay any of your daughter’s expenses, and were perfectly competent. Why does the

hospital in Pelo get treated differently? Why are professional services treated differently in § 20

of the Restatement Third of Restitution and Unjust Enrichment (“R3R”)? Notice how Andrew

Kull, the Reporter of R3R changed “with intent to charge therefor” in § 116 of the First

Restatement to “if the circumstances justify the claimant’s decision to intervene without a prior

agreement for payment or reimbursement” in § 20 of the Third. If you saw someone drowning,

and kept a rented boat out for an extra hour rescuing him, would you likely spend a lot of time

thinking about getting reimbursed? Shouldn’t you get paid? But why is § 20 limited to

professional services? Part of the argument is that we can’t put a price on the value of a life

23

saved, but we can when standard professional services are concerned. But shouldn’t the rescuer

get his out-of-pocket expenses? Note, however, that these expenses are not really an enrichment

of the person saved, they are a cost of his being saved. To my view, this is too fine a distinction

to justify denying the rescuer his expenses, but so far, the Reporter seems to disagree.

Dean John Wade, a great authority on restitution, wrote an excellent article on how to

draw the lines when benefits are granted without a request. I want you to read it in the

Anthology, pages 327-38. The current R3R, which will probably be completed and put to the

ALI for approval in May of 2010, shows the influence of both Posner, (KC&P 265 n. 5) and

Wade, among others.

Thursday, September 24, 2009: The Similarities and Differences Between Restitution

and Implied in Fact Contracts. KC&P 266-86.

Today’s readings focus on the difference between an implied-in-fact contract and

restitution. In Commerce Partnership 8098 Limited Partnership v. Equity Const. Co., did

Equity sufficiently plead a claim in restitution? What do you think of Commerce’s arguments in

the first full paragraph on page 267? What do you think of the trial judge’s observations? Judge

Gross in the District Court of Appeal gives a very cogent and accurate explanation. One

complication with the many terms for forms of action that have been brought together

under the rubric “restitution” is that some developed in actions at law and others in equity (at a

time when there were separate courts for each). Another (illustrated by Watts v. Watts) is that

facts that support restitution often also support an implied-in-fact contract. In Commerce

Partnership there was no contract between the sub-contractor and the owner. Does the court of

appeal find this a problem? If not, what is the basis of the owner’s liability to the sub? What does

the court say are the prerequisites to a restitution action by the sub against the owner? On the

issue of exhaustion of remedies, note the court’s discussion of mechanic’s liens and the further

discussion in Note 4 on page 272. Why should the burden of proving non-payment by the owner

be on the sub? If you represented the sub on remand, how would you go about proving

non-payment?

By the way, why are there twelve judges taking part in this intermediate appellate

decision?

Watts v. Watts is written by Justice Shirley Abrahamson, later Chief Justice of the

Wisconsin Supreme Court and one of America’s best state court judges. Seven years earlier,

Justice Abrahamson had written Estate of Steffes, discussed on pages 279-82. In Steffes an older

man had lived for several years with a cocktail waitress who had left her husband and children to

live with him. Unlike the Wattses, the couple is Steffes did not hold themselves out as married

(which would have been difficult, since at the beginning both were married to others, a point

made at length, and vitriolically, by the dissenter). In Steffes the man had made remarks about

leaving his farm to the plaintiff, but died without doing so. He had provided her with room and

board, some clothing and an old car, and she had done housework as well as some heavy farm

work, and took good care of him when he became ill with cancer. The trial court had allowed

recovery in both implied-in-fact contract, based on the man’s remarks about leaving the farm to

24

the woman, and in restitution based on unjust enrichment (see the excellent quotation at the

bottom of page 281). The Supreme Court upheld the implied-in-fact contract recovery, and said it

didn’t have to reach the restitution claim, but in Watts you can see how Justice Abrahamson

finds that Steffes also supports a claim of unjust enrichment.

Watts is essentially a family law case, but note that a) Wisconsin does not allow

common law marriages (p. 277 n. 11), b) the Wisconsin Supreme Court declines the chance to

apply the marriage and divorce provisions of the Wisconsin Family Code to a non-marital

cohabitation, and c) it refuses on its own account to create “marriage by estoppel.” Nonetheless,

it rejects the non-husband’s public policy arguments, in allowing Ms. Watts to survive summary

judgment on theories of both express contract and implied-in-fact contract as well as in

restitution. What do you think of the public policy arguments, discussed on pages 278-82 and in

the notes following Watts? Are they likely to benefit men or women?

Based on the facts stated on pages 274-75, what facts do you find to support an

express contract or an implied-in-fact contract? What about the restitution claim? Do you see

how implied-in-fact contracts often overlap with restitution and reliance, despite the importance

of keeping the concepts straight? Do you see a possible contract claim based on reliance as well?

These several theories of liability had an impact on the final recovery. Note 1 on page 283

doesn’t completely tell the story. While the jury denied the express contract claim and gave Ms.

Watts a restitution award of only $113,000 (or about 10% of Mr. Watt’s gain in wealth during the

relationship), the court of appeals on the second appeal affirmed the restitution award, but

reversed the denial of the express contract claim. The lawyer who handled the case told me that

on the second remand, the parties settled the entire case for about $250,000, which sounds like a

fairly decent compromise (though only half or less of what she would have received in the

division of property if they had been married). The other notes following the case discuss the

notorious case of Marvin v. Marvin, same sex marriages and claims for restitution involving

services within the family, all of which raise tough issues.

V.

Formalities, Formalism and Their Effect on Interpretation

Friday, September 25, 2009: Promises for Benefits Previously Conferred. KC&P

286-301. Beginning of the Statute of Frauds. Supp.: Restatement Second § 110. KC&P

303-10.

Promises for Benefits Previously Conferred

I understand why Professor Knapp came up with the term “promissory restitution,”

(do you?), but I still don’t like the term. We just spent two classes learning that restitution is not

based on promise or agreement, so the term confuses students. The underlying issue is that one

person promises to do something for the other (usually give money) because the other had

previously done something for the promisor. Why does classical contract have such a hard time

with this concept? Mills v. Wyman has been on the books for 184 years and in the contracts

25

casebooks for almost as long. Apparently its facts are all wrong, as explained in Note 7 on page

291. Chief Justice Parker gives the classical response to a T. He isn’t totally convincing when

he discusses the “moral obligation” exceptions (revival of promises discharged because of

bankruptcy, infancy and the statute of limitations). The modern versions of these exceptions are

in R2K §§ 82, 83 and 85. Why do you think that the classical courts relaxed the bargain

principle for them?

Webb v. McGowin is always yoked with Mills, though decided 110 years later. Do

you see how Judge Bricken uses restitution concepts to figure out how to enforce the promise.

Go carefully through his reasoning. Harrington v. Taylor, p. 295 Note 1, is in the casebooks

mostly because it can be contrasted with Webb, with students being asked to find ways to

reconcile the two cases. Do so, but realize that the Webb rule seems well-received, and is

adopted in § 86 of the Second Restatement. But it still is hard to find a good rationale. You get

a debate between two heavy hitters, Lon Fuller and Richard Posner in Note 4 on page 297.

Which do you find more convincing? Note 5 on page 299 brings us back to our discussion last

week of Restatement of Restitution § 116 and its limitation to professionals in R3R § 20.

We then have two problems to do thoroughly and well. They are useful reviews of

what you’ve learned recently.

The Statute of Frauds

Begin by reading R2K § 110 carefully. The Statute of Frauds is 332 years old, and

it makes some sense to require some kinds of contracts to be in writing, but nonetheless, the S/F

is confused and confusing. Most important, it is a trap for the unwary. You need to internalize

two notions: 1) always put everything in writing; and 2) if a promise is oral, think Statute of

Frauds! The introductory comments are good, and the paragraph beginning Section A (on page

305) is particularly useful in showing you how to approach any question involving a contract that

is not in writing and signed by the person to be charged. (By the way, don’t forget E-SIGN and

UETA, which are directly relevant to the Statute of Frauds. What do they do to it?)

We will spend the next class on the specific parts of the Statute of Frauds and the

application of reliance and restitution to it. We have one case today, another casebook

warhorse, Crabtree v. Elizabeth Arden Sales Corp. Elizabeth Arden was a famous

businesswoman, dealing in cosmetics and fashion. Her place of business is still on Fifth Avenue

in Manhattan, with the famous red door still there. She was also a very tough woman to deal

with. The case is where it is to describe what kind of writing can satisfy the Statute, but it also

involves the most difficult trap in the S/F, the one year provision, which we will further discuss

in the next class. Read Crabtree closely. It is very well written, by the most respected New

York judge of his generation, Stanley Fuld, who served on the Court of Appeals from about 1944

to the seventies. (Unlike some brilliant judges, Fuld was always courteous and never

egotistical.) Obviously, a written and signed contract will satisfy the Statute, but Crabtree shows

how a signed memorandum not containing all the terms, and even in several pieces, can also

satisfy the Statute.

26

Wednesday, September 30, 2009: More On the Statute of Frauds. KC&P 310 n. 1-314

(middle); 320 n. 1-336 (top). Supp.: Restatement Second § 139; UCC 2-201.

Today we look at the individual parts of the Statute of Frauds. (Look again at R2R §

110.) Crabtree showed us the one year provision, which is far and away the most dangerous

one, since the other provisions can be memorized. Any time you have a land sale contract; a

sale of goods of $500 or more (UCC 2-201; raised to $5000 by Revised Article 2); an oral

contract of a surety to pay the debt of another; or of an executor or administrator of an estate to

pay a debt of the estate; or a contract made in consideration of marriage (not a contract to

marry!), you can easily think Statute of Frauds, but the one year provision can come from an

unexpected angle.

The One Year Provision

Why do you think the one year provision was put in? Presumably because memories

fade. But consider the following hypos. In which do I win?

a) My son’s birthday is November 6. I hear your band play at a Halloween party on

October 31, 2009 and invite you to play at his birthday party the following week. You say

you’re booked, so I orally hire you to play at his birthday party next year (November 6, 2010).

On November 1, 2009 (the day after I made the promise), I change my mind and fire you. You

sue me in Small Claims Court, alleging an anticipatory repudiation, which is a total breach.

Your case comes to trial on November 20, just three weeks after I made the promise. I plead the

Statute of Frauds one year provision.

b) Again, I hear you play on October 31, 2009, and hire you on the spot to play at a

Halloween Party to be held on October 30, 2010. I again fire you on November 1, 2009. You

wait nearly four years to sue me, bringing the action on October 29, 2013. Discovery and

motion practice take five years, and the case finally goes to trial on November 6, 2018, more than

nine years after I repudiated (and thus breached) the contract. Again I plead the Statute of

Frauds one year provision.

Answer my riddle.

Because of the bizarreness of the one year provision, the courts make very fine

distinctions, trying their best to make it inapplicable, but being unwilling to overrule the

legislatures, which have consistently been unwilling to repeal it, as England did more than fifty

years ago. Notes 1 and 2 on pages 310-11 go through some of the permutations. Notes 3-5 deal

with some of the mechanics of finding a signed writing. (I have always loved Illustration 4 to

R2R § 133 (KC&P 313), which is based on a real case.) Do note carefully that if there was a

contract, even an oral one, you don’t need a writing signed by both parties, but only one signed

by “the party to be charged.” Also, understand that the oral contract lacking a writing is not

void. If it violates the S/F it is unenforceable, but if a party carries it out, he can’t get his money

27

back. Also, if a third party interferes with an unenforceable contract, he still could be liable for

the tort of interference with contract.

The Land Sale Provision

I skipped a case involving a land sale, but you have the notes following it, which

distinguish among contracts involving land, and shows that only some are covered by the S/F.

The “part performance” doctrine is particularly important, because, as Williston said at the ALI,

it is an example of the courts using reliance as a way out of the S/F dilemma, and was a source of

sections 45 and 90. (See Anthology 343, first column, and 344, first column.) Some of this

was based on the distinction between law and equity, which we have been discussing recently,

and which is discussed in the Comment on page 322.

The Executor/Administrator and Suretyship Provisions

These two provisions are inspired by the fact that it is often easy to say that a third party

promised a creditor of someone else to pay that someone else’s debt. The alleged promisor

doesn’t have an obvious incentive to pay for a third person, but situations can arise where this is

plausible. To avoid the serious problems of proof, we require a writing. Can you visualize an

executor who finds that the funeral home won’t bury the decedent without getting paid. The

estate has not yet been probated, so the executor can’t just write a check on the estate’s bank

account, and instead says he’ll guarantee payment. We want that in writing, since it would be

awfully convenient for undertakers to lie about this. This is even more true about sureties, A

suretyship contract involves A saying to B that he will pay C’s debt if C doesn’t pay it (see the

discussion on page 305).

One major exception to the suretyship provision – created by the courts without statutory

authority but sensible according to common sense – is called “the main purpose doctrine.” If a

surety is deemed to have made the promise primarily to protect his own interests, a writing is not

needed (see KC&P 305, first full paragraph). The typical example is as follows: Owner finds

out that a subcontractor on a construction job has pulled his workers off the site. Owner asks

why. Sub says that he hasn’t been paid by the General Contractor. Owner, who doesn’t want a

delay, orally assures the sub that if the GC doesn’t pay him, the Owner will. This should be

unenforceable under the suretyship provision, but because the courts felt that Owner made the

promise not out of benevolence toward the GC or the sub, but to keep his own project going,

they dispensed with the requirement of a writing.

Reliance and the Statute of Frauds

First read R2K § 139, then read Alaska Democratic Party v. Rice. Subsection (1) of §

139 pretty much tracks § 90. How is subsection (2) different? Why is it different? Its

forebears are obviously §§ 45 and 90, but they are also the part performance doctrine under the

land sale provision of the statute of frauds, which we have already discussed. Rice shows you §

139 in action. Note the heightened burden of persuasion and the fact that damages do not seem

28

to be limited to Ms. Rice’s out-of-pocket expenses. (She seems to be getting expectation

damages, despite the language permitting the remedy to be limited as justice requires.) The notes

following Rice show how the First Restatement created a narrow exception to the S/F for reliance

on a representation or promise that there was or would be a writing, how R2K § 139 expanded

the exception and what the courts have done.

We then do Problem 4-1.

The Sale of Goods Provision

Read UCC 2-201 and then read the two page comment on KC&P 335-36. The sale of

goods provision was in a different section of the original Statute of Frauds, and was interpreted to

permit a recovery for goods actually accepted or paid for. While this “part performance

doctrine,” is continued in the UCC, § 2-201 (3) (c) only permits recovery for the amount

actually accepted or paid for. That distinction is followed in subsection (1), which limits a

writing to the amount of goods stated in the writing. Note that 2-201 (3) (b) makes a notable

change in the law of the statute of frauds by not permitting the defendant to hid behind the

licklog and not admit that the oral contract was made. Should that be enough to satisfy the S/F?

Thursday, October 1, 2009: Interpretation of Contracts. KC&P 349-70.

I am under the impression that the most litigated area of contracts is interpretation. The

book briefly discusses the two terms “interpretation” and “construction.” It explains the

supposed difference. The distinction seems to be out of fashion, though it is still used by some

courts and writers. It has never made sense to me. The most fundamental issue is to what

extent the parties’ actual intent should control, as opposed to either some “objective” conclusion,

based on what a hypothetical reasonable observer would have found, or the “plain meaning” of

the words used, or a rule that prevents a party from explaining what he meant or bringing in

evidence of some communication outside a written document in an attempt to explain its

meaning.

The subjective approach, discussed on KC&P 350-51, argued that if parties’ minds did

not “meet,” there was no contract. The classic case is Raffles v. Wichelhaus, the case of the two

Ships Peerless. We have only the oral argument. At the point at which the lawyer for the buyer

said there was “no consensus ad idem,” the court cut him off and said there must be judgment for

the defendant. Grant Gilmore said this was a flourishing of the subjective autonomous

individual will, and his description of the “wooly-headed judges” who couldn’t understand the

real issue is a great entertainment. A. W. Brian Simpson, an English legal historian who

taught at Michigan and had a penchant for puncturing clever theories, did detailed research in

shipping records and found that a) there were nine Ships Peerless, and b) the dates on which the

cotton was to arrive was critical in a volatile market greatly affected by rumors over the lifting of

the Union blockade of New Orleans during the Civil War. Simpson’s article, cited on page 351,

is very readable and is in the Anthology.

29

As explained in the casebook, Oliver Wendell Holmes in his famous Common Law

lectures argued for a strict objectivity, a position adopted aggressively by the proponents of the

classical approach. This was carried to a ludicrous conclusion in another of my great favorites,

Illustration 1 to § 230 of the First Restatement, reprinted on KC&P 351, and lacerated by Corbin

in the passage quoted at the foot of that page. Note the important rule of R2K § 201 (2): if A

thinks the meaning of a passage is X and B is or should be aware of A’s belief and does not tell

him of a different meaning, B is bound by A’s belief, even if B did not agree with A’s

understanding of the passage.

This rule is illustrated by Joyner v. Adams. Go carefully through the several stages of

the case, bearing in mind burdens of proof (usually plaintiff has the burden; ties go to defendant).

Note that the contra proferentum rule (p. 357 n. 3) is discussed at 355-56. I have seen contracts

containing boilerplate that both sides had a hand in the drafting and were knowledgeable, and

that because of this, there should be no construction against either party.

Concerning the maxims of interpretation, Patterson’s list is pretty standard. Some are common

sense (e.g., handwriting or typing takes over printing, but how important is this in an era of

computerized forms and insertion of text into fields?) The first five are in Latin. You probably

should figure each out. Nos. 2 and 3 are commonly quoted in Latin, No. 5 is usually reduced to

“the contra proferentum rule” and you do see Nos. 1 and 4 from time to time. I’ve always

thought that ejusdem generis is pretty much the same thing as noscitur a sociis. One of the most

important, and most commonly cited, is No. 3, frequently though not always reduced to expressio

unius. Professor Harry Prince, one of the co-authors, wrote a useful article, discussed at the

bottom of page 360, suggesting that the courts should seek a just outcome when there is no way

to fill a gap through interpretation. It’s worth thinking about in this and the next couple of

classes.

Finally, we get to a famous tour de force, Judge Henry Friendly’s tongue in cheek

performance in the “What is chicken?” case, Frigaliment Importing Co. v. B.N.S. Int’l Sales

Corp. Strangely, Friendly a very important Wall Street lawyer (a founder of the well-known

Cleary, Gottleib firm) had just been appointed to the Court of Appeals for the Second Circuit, but

apparently decided to sit as a trial judge on a case to get a sense of what it was like at the level

where the appeals he would hear start. He managed to write a casebook warhorse in his rare

appearance there. Go carefully through the opinion, considering the various sources he uses to

decide “what is chicken?”, and then tell me who won and why, and what Friendly decided

“chicken” means.

We then get nearly four pages of notes dealing with meaning, including burden of proof,

ambiguity, plain meaning, patent and latent ambiguity, trade usage, and Corbin’s insistence on

the importance of context (built on the earlier writings of John Henry Wigmore, writer of the

greatest treatise on evidence, still the standard after more than a century). Lisa Bernstein of the

University of Chicago has spent a lot of her career studying different industries, especially the

diamond and cotton industries. In note 7 she questions the UCC’s emphasis on trade usage. Is

her distinction between relational dealings and the “end game” anything more than saying that

30

parties will change their cooperative approach and act out of self-interest when the relationship

breaks down and litigation looms? Should this prevent us from holding them to their prior

conduct in interpreting their earlier words?

Friday, October 2, 2009: Reasonable Expectations. The Parol Evidence Rule. KC&P

370-94 (top). Restatement Second § 211 (in Supp.).

Reasonable Expectations: should an insurance rule be applied to adhesion contracts?

C&J Fertilizer v. Allied Mut. Ins. Co. sets the problem nicely. C&J certainly bought a

burglary policy and not one against embezzlement or inside jobs. The plain words of the

definition of burglary support the insurance company, but the reason for the definition supports

the insured. Why do we stack the deck against insurance companies? Note that this isn’t some

under the table rule. It is black letter law to construe policies against them and to find

ambiguities for the insured. Is this rob the rich sentimentality, a Robin Hood rule? Or is it

justified? We have an extensive discussion of the reasonable expectations rule in the context of

insurance. What does it mean and how is it applied?

What exactly do we mean by a contract of adhesion? Of course, standardized insurance

policies are contracts of adhesion, but so are millions of other contracts. We have to have them.

(See R2K § 211 (1).) As I’ve said several times, we can’t run an economy with individualized

negotiations between you and the clerk at Hertz every time you rent a car at the airport. But

what about applying the reasonable expectations rule in R2K § 211 (3)? This provision was a

compromise, with Professor Farnsworth slightly watering it down to get support, as explained in

Professor Roger Henderson’s passage on page 381. I have written some on adhesion contracts,

and believe that they are exerting an even bigger influence on contract law because of

e-commerce, so I may have something more to say about this matter.

The Parol Evidence Rule

The parol evidence rule basically says that if two parties agree that a writing completely

states (“totally integrates”) their agreement no extrinsic evidence will be allowed in to contradict

or supplement the writing. If the writing integrates only part of the agreement, extrinsic evidence

will be admitted to supplement, but not to contradict the writing. The reason for this rule is

disputed. One rationale is that it is to protect the truth against self-serving or unintentionally

mis-remembered oral statements that would undermine the writing. This is the idea behind

Thompson v. Libby, and this rationale has a close connection with the statute of frauds. It also

reflects a strong belief in both the sanctity of a writing and the fixed meaning of words. In

contrast, Corbin and before him, John Henry Wigmore, author of the still-foundational treatise,

Wigmore on Evidence, argued for a less rigid view of the doctrine. Corbin argued that the basis

of the rule was simply that a later contract superceded (“integrated”) an earlier one, but only if

the parties intended that result. Corbin wrote that their intention as to integration and as to the

meaning of the words they used should both be discerned through the use of whatever evidence

was available, including prior negotiations and earlier drafts. Williston recognized that writings

31

were not always self-explanatory, but argued that if extrinsic evidence of integration were

allowed in, many contracts would be subject to a claim of non-integration requiring a trial on the

merits (the “four corners” approach).

A major battle involves the concept of plain meaning. To many people the notion that

words don’t have obvious meanings is like saying that nothing means anything. They will, of

course, concede that some words are vague and can’t be precisely defined (“good faith,”

“reasonable efforts”) while others have conflicting meanings (“sanction” can mean “authorize”

or “impose a penalty upon;” “contractual rights” may or may not include a claim for the tort of

bad faith breach of contract). They are not, however, willing to allow extrinsic evidence in to

create an ambiguity that is not apparent on the face of a writing. The contrary argument is that

words are vessels that acquire meaning through context and that anyone putting a fixed meaning

on a word in the abstract is simply imposing his definition on the parties, and thus substituting

his intent for theirs, i.e., rewriting their contract.

One of the great examples of Texas lore is the famous story of Mildred A. (Ma) Ferguson,

one of the first two women elected state governors. Ma’s husband, Farmer Jim (later “Pa”)

Ferguson, had been impeached around 1920 because he kept pardoning moonshiners, and he was

thus ineligible to be governor, so Ma ran in his place. She generally did what Pa told her, but one

time when he was out of town, her assistants brought her a bill that had been passed allowing

classes in counties on the Mexican border to be taught in Spanish. Ma vetoed the bill, saying

“English was good enough for Jesus, it’s good enough for me.” I find a similarity between Ma

Ferguson and the more rigid plain meaning aficionados. Of this, more in the next two classes.

Like the Holy Roman Empire, the parol evidence rule can fairly be stated as not involving

“parol” (an extrinsic writing is equally barred), is not a rule of “evidence” (it is widely viewed as

a rule of substantive contract law), and, given its many exceptions and wrinkles, is not even a

“rule.” Wigmore said this 100 years ago and even Williston more or less agreed with him. A

number of the exceptions, etc., are discussed on pages 390-94.

Wednesday, October 7, 2009: The Corbin (and Traynor) View. KC&P 394-410 (top);

415-18. Anthology 422-25 (L. Gordon Krovitz, Saving Contracts From High Weirdness).

The basic issues are how to decide integration (four corners rule or allowing extrinsic

evidence to show that the parties didn’t intend the writing to be the complete and final word on

the deal) and whether to allow extrinsic evidence to explain the writing.

All courts agree that a facial ambiguity permits extrinsic evidence to clarify it. For

example: a doctor and a hospital sign a written contract in which it is agreed that he will be

“Co-chairman of the internal medicine department.” When he arrives, he discovers that Dr. X is

described as “Chairman” while he is described as “Co-chairman.” He sues, contending that he

had been promised orally that he would be the equal of Dr. X and both would be called

“Co-chairmen.” You know that “co-“ is a prefix that can either mean equal (think of pro

football teams’ three co-captains – offense, defense and special teams) or assistant (co-pilot).

Thus, this seems to be an ambiguity on the face of the contract, and most if not all courts would

allow in the extrinsic evidence of negotiations to explain the facial ambiguity.

32

But there are many situations in which there is no ambiguity apparent on the face of the

writing. That is often called a latent ambiguity. (The Peerless case is an example of that.) Not

all court will allow extrinsic evidence in to “create” the ambiguity. Others do, or are rather

loose in finding a facial ambiguity. In addition, Corbin, followed by the Second Restatement,

argued that the parol evidence rule had no place in the question of using extrinsic evidence

interpret the words of a contract, even if there was no ambiguity at all.

The PG&E Case

An intriguing and critically important case is Pacific Gas & Elec. Co. v. G. W. Thomas

Drayage & Rigging Co., a 1968 opinion by Chief Justice Roger Traynor, described in a tribute

article by Judge Henry Friendly (of Frigaliment fame) as the “ablest judge of his generation.” In

PG&E the G .W. Thomas Co., a contractor replacing the cover to a steam turbine owned by

PG&E, agreed to “‘indemnify’ plaintiff [PG&E] ‘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.’” During the work the cover fell and damaged an exposed rotor of the turbine.

PG&E sued Thomas for more than $25,000 on both a negligence theory, which it dismissed at

trial, and under the indemnification clause. The critical question became whether the word

“indemnify” means only holding someone harmless against third party liability or means

repaying that person for his own losses. PG&E obtained a judgment based on the theory that

the indemnification language covered PG&E’s own losses as well as any damages that it had to

pay to third parties. At trial Thomas offered to prove “by admission of plaintiff’s agents, by

defendant’s conduct under similar contracts entered into with plaintiff, and by other proof that in

the indemnity clause the parties meant to cover injury to property of third parties only and not to

plaintiff’s property.”

I think you can see that there is a pretty good argument that the word “indemnify” is

ambiguous on its face, but that’s not what any of the courts held. The trial court held that the

plain meaning of the word “indemnify” barred any extrinsic evidence of a narrower meaning,

since that would contradict the “plain meaning.” Strangely, the trial court conceded that the

clause used the classic language of a third party indemnity, but still found that the plain meaning

of “indemnify” required Thomas to reimburse PG&E for its own losses, and that any attempt to

limit this plain meaning would contradict it in violation of the parol evidence rule. Even

stranger, the Court of Appeal reversed on the ground that the plain meaning of “indemnify” could

not include reimbursement of the indemnitee’s own losses. The California Supreme Court

made no comment about the Court of Appeal’s actions or about the phenomenon of two courts

finding diametrically opposed “plain” meanings.

After stating this background Traynor immediately described the trial court’s actions in

Corbin’s language: “When a court interprets a contract on this basis, it determines the meaning

of the instrument in accordance with the ‘. . . extrinsic evidence of the judge’s own linguistic

education and experience,’” and continued, “[t]he exclusion of testimony that might contradict

the linguistic background of the judge reflects a judicial belief in the possibility of perfect verbal

33

expression. . . . This belief is the remnant of primitive faith in the inherent potency and inherent

meaning of words.” This was strong language, but it had the support of Corbin and Wigmore,

whom Traynor cited. At this point Traynor threw in a footnote that is reproduced in the Wall

Street Journal article in the Anthology, and described as “what may be the weirdest footnote in

the history of U.S. courts.” Of this, more later in the class.

Chief Justice Traynor was implicitly saying that the written document is not the contract.

The agreement between the parties is the contract, and to limit it to the written words and to treat

the parties’ actual intent as irrelevant is to invest the writing with a potency similar to what

primitive faith does. He echoed Corbin in suggesting that the parol evidence rule was not

involved when extrinsic evidence was used for interpretation: “Although extrinsic evidence is not

admissible to add to, detract from, or vary the terms of a written contract, these terms must first

be determined before it can be decided whether or not extrinsic evidence is being offered for a

prohibited purpose.”

What Traynor actually put forth as the governing rule in California parol evidence cases

was no radical gutting of the parol evidence rule, though it was a major change:

The test of admissibility of extrinsic evidence to explain the meaning of a

written instrument is not whether it appears to the court to be plain and

unambiguous on its face, but whether the offered evidence is relevant to prove a

meaning to which the language of the instrument is reasonably susceptible.

Traynor wasn’t completely clear on whether an ambiguity, latent or patent, was

needed, though one was clearly involved here. In a footnote, he expressed skepticism that

ambiguity was even needed, since interpretation of a contract was on the

Traynor-Corbin-Wigmore approach, not connected with the parol evidence rule. As you will

see from both the opinion of Judge Alex Kozinski in Trident Center v. Connecticut General

Life Ins. Co., KC&P 406 and

the article in the Anthology, however, it remains very controversial, after 40 years.

First, however, we look at Taylor v. State Farm Mut. Auto Ins. Co., KC&P 394. Taylor

involves a pretty close question, but also involves the jury’s resolution. The issue is whether

bad faith breach of contract is within “all contractual rights, claims, and causes of actions,”

which the plaintiff released. (The release is on pages 402-03.) Chief Justice Feldman’s opinion

is clearly written. Don’t miss his treatment of the issues of ambiguity and the contra

proferentum rule in nn. 3 and 9. In a footnote that the editors cut out, he said that in his opinion

“as a matter of doctrinal purity, a bad faith claim is a cause of action for breach of contract to

which, for various policy reasons, a tort rather than a contract measure of damages is applied.

Thus, to the author, a release of contractual claims necessarily releases a bad faith claim. . . [, but

t]he object of contract interpretation is not to satisfy a judge’s compulsive devotion to

jurisprudential theory but instead, ‘to determine and make effective the Intention of the

Contracting Parties.’” (The italics are because he was quoting Corbin, who had used them.) In

his view, the judge’s job was only to decide if the case was close enough to send to the jury, not

34

to decide the ultimate question of the parties’ meaning.

Now analyze Taylor and decide if you agree with it. Then read Kozinski in Trident and

his critics on KC&P 406-08, and take note of the CISG’s position, on KC&P 409-10. Finally,

go to the Anthology and read my introduction and the delightful op-ed piece by L. Gordon

Krovitz, “Saving Contracts From High Weirdness.” Mr. Krovitz was then a staff writer on the

Wall Street Journal, but later became the Journal’s publisher, which is a pretty important

position.

Thursday, October 8, 2009: Trade Usage and Course of Dealing; Corbin’s (Almost)

Last Words On the Subject. KC&P 418-35. Anthology 405-12 (Arthur L. Corbin, The

Interpretation of Words and the Parol Evidence Rule). Available but not required:

Anthology 412-22 (E. Allan Farnsworth, “Meaning” In the Law of Contracts), 511-26 (top)

(Amy H. Kastely on trade usage).

Most of today’s casebook reading is devoted to Nanakuli Paving & Rock Co. v. Shell Oil

Co. This is a remarkable case. Check the procedure and how the case is resolved. We don’t

have the entire 1969 contract between Nanakuli and Shell. We do know that under the earlier

1963 contract Shell guaranteed Nanakuli a supply of asphalt, but a) Nanakuli wasn’t committed

to a specific amount, and b) Shell didn’t quote a specific price. Instead, Nanakuli would put in

an order for a specified amount of asphalt and would pay “Shell’s Posted Price at time of

delivery.” As you see, the problem was that in January of 1974, Nanakuli ordered 7200 tons of

asphalt but before delivery Shell raised the price by $32 per ton, to $76. Under the plain words

of the contract, what price was Nanakuli obliged to pay? Why does Nanakuli claim that Shell is

obliged to sell it the 7200 tons at the $44 price? Note how the court begins with a history of

Shell-Nanakuli relations before 1973, considers both trade usage and Shell’s course of

performance and then returns to Shell-Nanakuli relations in 1973-74. We then get long

discussions of trade usage and course of performance and a discussion of the collision between

them and express terms. Arguably, there is a different approach under Article 2 than there is

under the parol evidence rule. The discussion is careful and complex; you should read it closely.

Then the court briefly considers good faith, and reinstates the jury verdict for Nanakuli for almost

a quarter of a million dollars. Note the concurrence of then-Circuit Judge Anthony Kennedy,

soon to become an associate justice (and the swing vote) of the United States Supreme Court.

Justice Kennedy is considered a conservative and his concurrence shows his skepticism about

general notions of good faith. Why, then, does he concur?

Important concepts such as determining the scope of a relevant trade and the impact of a

trade usage on express terms are discussed in the notes following Nanakuli. Note 6 on page 431

considers the case as “an exemplar of ‘modern’ contract law.” Some speak of it being

“contextual.” Isn’t a relationship part of the context?

Before we do the two problems, read Corbin’s fine article, The Interpretation of Words

and the Parol Evidence Rule, described in the introductory note in the Anthology. It was

originally four separate pocket parts to the treatise, the first a restatement of his basic philosophy,

“Growth of the Law, in Spite of Long Repetition of Formalistic Rules,” the next dealing with

Frigaliment, the third discussing “semantic stone walls” in the context of a wooden reading of a

35

statute that produced a ridiculous result, and finally discussing the role of extrinsic evidence in

the process of interpretation given what Corbin always called “the so-called Parol Evidence

Rule.” His disdain for the PER drips off pages 411 and 412 of the Anthology. Corbin was

about 90 at this time. He wrote the pocket parts and the editors of the Cornell Law Review put

them into the form of the article. About the same time he wrote Judge Braucher (in one of the

letters printed in the Anthology, this one on pages 18-19), “My 90th

anniversary – a most

undesired one – came and went. Although deaf and blind [earlier in the letter he said that

glaucoma had just caught “the reading spot in my remaining eye”] and my law work ended, I

could not refuse a request of the editor of the Kansas Law Review, representative of my native

State and my Alma Mater. The article will appear in the December number.” (That article,

which is very good, is Sixty-Eight Years at Law, 13 U. Kan. L. Rev. 183 (1964); a wonderful

excerpt from it appears in note 47 on Anthology 19.) At some time, look at Professor Joe

Perillo’s editing of Corbin’s letters to Braucher, Anthology 13-20. I never met the man, but I

feel as if I know him from the letters, the article in today’s reading and the Kansas article,

together with his moving note about Williston’s death at 101, Samuel Williston, 76 Harv. L. Rev.

1327 (1963). Of those late pieces, today’s reading is the most substantive, and makes a great

deal of sense.

Finally, do the problems on pages 432-35.

Friday, October 8, 2009: No class. I have a meeting in Philadelphia of the Members

Consultative Group for the Restatement Third of Restitution. We will make the class up.

VI.

Implied Terms and Other Devices For Policing the Bargain

Wednesday, October 14, 2009: “Implied” Terms (herein of gap-fillers and default

rules). The Implied Covenant of Good Faith. KC&P 437-59. Supp.: UCC 2-306(2), 1-203.

Restatement Second § 205. Anthology 470-71. Available but not required: two articles

from the Summers and Burton debate discussed at KC&P 448-50, are reprinted following

the assigned note, Anthology 471-87.

As suggested by the introductory note, the word “implied” takes on several different

meanings in contract law. First of all, I am a bit of crank about the fact that it is almost always

misused. “Imply” means to suggest by indirection. “Infer” means to draw a conclusion about

something from indefinite information. Thus, you say “Sorry that I’m not prepared. Something

came up in my family, “implying” that it was a personal matter that was serious. If I draw that

“inference,” I may say “that’s all right.” If I “infer” that you are really saying “we all wanted to

watch “Dancing With the Stars,” I may be less accommodating. It is common for courts to use

“imply” when they mean “infer.” Even Cardozo, who spoke the King’s English very well, twice

uses “implication” in Wood v. Lucy when he should say “inference.” “The implication of a

promise here finds support in many circumstances” (p. 438 last paragraph); and “the implication

is that the plaintiff’s business organization will be used for the purpose for which it is adapted”

(p. 439 first full paragraph). In both cases (the second instance is a little closer), he is really

36

saying that it is proper for the court to infer these facts. I suggest that this sloppy use of

language is more than esthetically annoying. It makes the process unclear. In Wood v. Lucy

the facts make it pretty clear that the parties intended Otis Wood to have a duty to make

reasonable efforts to sell Lady Duff-Gordon’s “creations.” Thus, the case involves a clear

inference to fill the gap left by poor drafting. UCC 2-306 (2) imposes in an exclusive dealing

contract, “unless otherwise agreed an obligation . . . to use best efforts to promote [goods’] sale.”

Since the duty may be displaced by the parties (“unless otherwise agreed”), it is a default rule,

rather than an immutable one. For the difference, see UCC 1-102 (3):

The effect of provisions of this Act may be varied by agreement, . . . except that

the obligations of good faith, diligence, reasonableness and care prescribed by this Act

may not be disclaimed by agreement but the parties may by agreement determine the

standards by which the performance of such obligations is to be measured if such

standards are not manifestly unreasonable.

You presumably have noticed that UCC 2-306 (2) speaks of “best efforts,” while Cardozo says

“reasonable efforts.” The distinction, which should not be underestimated, is discussed in Note

4 following Wood v. Lucy. The case was the subject of a very entertaining symposium at Pace

Law School last year in conjunction with the Fashion Institute of Technology, 28 Pace L. Rev.

161-454 (2008). (Lady Duff-Gordon arguably was an important contributor to the development

of women’s fashion, including possibly the elimination of the corset and the shortening of skirts

(usually attributed to Coco Chanel, and of incredible importance in the liberation of women)).

I knew nothing in advance about the fashion history, but contributed a piece called

“Implied,” “Inferred,” and “Imposed”: Default Rules and Adhesion Contracts – the Need for

Radical Surgery. I do not like the terms “implied-in-fact” and “implied-in-law,” as used in Note

5 on page 443 of the casebook. But I think that we should recognize that some times courts are

inferring what the parties meant but either failed to say or said inarticulately, and at other times

are imposing a rule of law that the court thinks makes sense under the circumstances. Assuming

the parties could displace the imposed rule, it is a default rule. When the parties left a gap it

sometimes can rather easily be filled by an inference, as in Wood v. Lucy. At other times,

particularly if there has been a technological change that greatly affects the pre-existing contract,

the court has no way to infer what the parties intended. Then it must either use its common

sense to achieve a fair result, or must impose some rule of law. Two interesting examples

approached the problem somewhat differently. In Parev Products Co. v. I. Rokeach & Sons, a

1941 Second Circuit opinion, the plaintiff had licensed in the 1920s a rather glutinous cooking

oil that satisfied the kosher laws to the defendant, a large producer of kosher foods. The

relationship was successful for about fifteen years, until Crisco and Spry appeared on the scene.

They were semi-solid and more convenient and also satisfied the kosher laws. Rokeach, which

saw its market share dropping, brought out its own semi-solid product, Kea, on which it did not

have to pay royalties to Parev. Parev sued, and Judge Charles Clark, a former dean of Yale Law

School, said he couldn’t pretend to read the parties’ minds fifteen years before the competing

products were invented, and worked out a solution that allowed Parev to recover whatever losses

in royalties were attributable to Kea rather than Crisco and Spry. (On how it was to prove this,

Clark was somewhat vague, but said that Parev could use expert testimony.) The other case is

Kirke La Shelle Co. v. Paul Armstrong Co., in which a license to use a play did not require

37

royalties for “motion pictures,” but had been made when talkies were in existence, but unknown

commercially. The New York Court of Appeals found that royalties were required for talking

pictures, and imposed the “implied obligation of good faith and fair dealing,” in the passage

quoted on page 449.

What kind of term is involved in Leibel v. Raynor Mfg. Co.? What kind is involved in

Seidenberg v. Summit Bank? On the question of what good faith means, you get something of

the debate between Professors Robert Summers and Steven Burton, which I discuss in the

required note in the Anthology. More from the two of them can be found in the Anthology, but

is not required.

Thursday, October 15, 2009: Good Faith in Action. KC&P 459-80. Recommended:

Walter F. Pratt, Jr., American Contract Law At the Turn of the Century, Anthology 147-56.

As you read these cases, remember the debate in Taylor v. State Farm over whether bad

faith breach of contract is a contractual action or a tort action. The notes following Seidenberg

v. Summit Bank discuss Nanakuli and the lender liability cases and the issue of a party who

deliberately breaches a contract, perhaps with the intention of breaking the other party

economically or at least crippling the other party regardless of motive (as in Sons of Thunder).

K.M.C. Co. v. Irving Trust Co., KC&P 461 n. 5, was written by Judge Cordelia Kennedy (who

said that she didn’t realize it was a famous case until her niece read it in law school).

Requirement and output contracts are discussed in the Comment on pages 462-64, and in the

Pratt article in the Anthology.

From there we read two cases. Morin Building Prods. v. Baystone Constr. Co. is a good

opinion by Judge Posner, gussied up with some law and economics. It discusses the important

and basic notion of satisfaction clauses and when satisfaction must only be in good faith (note

that this is the bottom test – even if a contract says that a party has an absolute right to reject for

dissatisfaction, he still must actually be dissatisfied, rather than, say, just trying to get out of a

deal; see KC&P 470 n. 3), and when the dissatisfaction must be reasonable (see also 468-69 nn.

1-2). Then we get the highly entertaining case of Locke v. Warner Bros. I have not been able

to find Sondra Locke’s opus, Ratboy, but I’m told that it is a contender for the worst movie ever

made. (I have no personal opinion.) Should this matter on the facts of the case? What did

Warner’s do wrong? Why didn’t it simply have the right to pay or play?

Friday, October 16, 2009: Good Faith in Employment and Franchise Contracts.

KC&P 486-97. Haggard 39-69. (Note that pp. 62-69 of Haggard are basically review of stuff

we’ve learned in the casebook.) Do Problems 6-1 and 6-2. Rewrite paragraph 9 of the

franchise agreement in Problem 6-2, as explained below, using the drafting skills you learn

in Haggard.

It seems that I keep anticipating what I have assigned for the next class. I skipped a case

on employment at-will, but we begin with several notes on the topic. As you can see, the courts

are reluctant to find that the duty of good faith creates a general requirement of good cause for

termination, but they have found bad faith when and employee is cheated out of something he

earned by being fired (KC&P 487 n. 2), and in cases involving sexual harassment, such as Mrs.

38

Monge’s case. The casebook doesn’t seem to mention that the Supreme Court (in an opinion by

then-Chief Justice William Rehnquist) found that sexual harassment violated Title VII of the

Civil Rights Act of 1964, which forbids discrimination in employment based on sex. This

certainly a more effective control on at-will employment than an implied term in a contract, but it

doesn’t preempt state good faith contract law. Note 3 on page 488 discusses public policy; some

of those policies are based on statutes, others on a more fluid notion of public policy. The mere

fact that more than thirty states have recognized some public policy exception to at-will

employment doesn’t prove that the courts in those states will find a public policy if there is not

explicit statute being violated. If an employee is given some oral assurance of permanent

employment in a nominally at-will job and gives up another job in reliance on this assurance,

some courts will enforce it on a reliance basis, as noted in the last paragraph on page 488 and in

the carryover paragraph on 489-90.

The employment handbook cases are discussed on page 489. Do note that all the cases

in the first paragraph are from the 1980s, while most of the cases in the second paragraph,

rejecting the enforceability of handbook provisions, are more recent. Disclaimers usually

protect the employer, but note that the Vermont Supreme Court rejected general “boilerplate

language” in 1995. Note 5 on page 490 raises the interesting problem of retaliatory discharge of

lawyers who are whistleblowers in one way or another. Then we get some academic

discussion, with a number of writers claiming that at-will employment is efficient. It certainly

makes it easier to run a business if you’re not liable for firing people. You can decide for

yourself if it is an “externality” to put the risk of being without a job on the employee. My

views are set out on page 491.

We then read four short chapters in Haggard. The first deals with the most important

task – avoiding ambiguity. Read and learn that chapter closely. Then consider the definitions

chapter. Definitions are critical; while it is often tedious to go through the definitions section,

the words you use in a contract are the product of its definitions section. Then, we consider how

you create duties, rights, privileges, conditions and warranties. What words should you use to

make it clear that something is a duty rather than a condition or a privilege? The last seven

pages review material that we have learned from the casebook; this should give you a good

review.

Then work the two problems in the casebook.

a) give Ed advice on the issues in Problem 6-1.

b) with respect to Problem 6-2, go through the text of the proposed franchise agreement

and decide what words of legalese can be dropped (paragraph 1, for instance, is filled with

legalese).

c) in Problem 6-2, answer the three categories of questions in Question 1 on page 497.

d) rewrite, in good English and without ambiguities or legalese, paragraph 9 of the

franchise agreement to permit the activities described in Question 1 (b) and c). With respect to

the weekly franchise fee, put in a number that is lower than the full rate, but would show Captain

39

Donut, Inc. that Mr. Fallon is willing to bargain on this point.

e) define “Franchisee” in paragraph 14, to make clear that it is limited to transfers of

rights and does not bind Mrs. Fallon to the restrictions on Mr. Fallon’s activities.

Wednesday, October 21, 2009: Warranties. KC&P 497-515. Supp: UCC 2-313 to

-316.

Carefully read the four sections of the Code that I have assigned. The introduction

describes two of the classic caveat emptor case, Chandelor v. Lopus (1603), involving a fake

bezar stone, and the American Seixas v. Woods (N.Y. 1804), involving peachum, masquerading

as braziletto wood.. Both were written by great judges, Chandelor, as I recall, was by Lord Coke

(pronounced “cook”), and Seixas by Chancellor Kent. Why wasn’t what was said a warranty?

What is a warranty? Note its orthographic connection with “guaranty.” (For phonetic reasons

that are far beyond my understanding, Latinate words often migrate from a g to a w (Gaul

became Wales, “guerre” in French becomes “war.”) In common usage, a warranty is a guarantee,

but in legal parlance, we use “guarantee” (verb) and “guaranty” (noun) to be an agreement to

stand behind someone’s debt or other legal obligation, but use warranty meaning that you stand

behind your product. The casebook explains the evolution of warranty law in the 19th

and 20th

centuries, including the great Judge Skelly Wright’s sea-changing opinion in Javins v. First

National Realty Co.. Note how it gets picked up in a model statute, put out, not by the Uniform

Law Commission (then NCCUSL), but by the ALI. Where do warranties come from? What is

the difference between an implied warranty and an express one? Are the implied warranties in

the Code inferred from the parties’ words and actions or imposed on them? Are they default

rules? Bayliner Marine Corp. v. Crow does a very good job explaining the differences among

the warranties involved in sales of goods. Is a $120,000 sport fishing boat a good, subject to

Article 2? Go through the court’s analysis. Do you agree with each part of it? Figure out

why. The notes following Baywater should help you in understanding the differences. Do

Problem 6-3 relatively quickly. Then look at Caceci v. Di Canio Constr. Co. Here, as in

Javins, we move away from goods to real property. Judge Bellacosa’s opinion does a nice job of

showing how a court decides whether to create a warranty, and the notes following it flesh out

the nuances, including the role of disclaimers. (As you can see, the warranty of habitability

seems to be a default rule, but one that is not easily displaced.) Is it clear that warranty is a

matter of contract law? The actual answer is very murky, especially since much (but by no

means all) of warranty law involves personal injury.

Thursday, October 22, 2009: Capacity (summarized by PL). Duress and Undue

Influence. KC&P 517-19 (top); Supp.: Restatement Second §§ 14-16. KC&P 537-56.

Anthology 487. Available but not required: Robert L. Hale, Bargaining, Duress, and

Economic Liberty, Anthology 488-94.

Capacity

The basics of capacity are summarized in the introductory note on KC&P 517-19. To

save time, I skip the cases, but summarize the concept here. Three of the major categories of

40

incapacity are shown in the Restatement citations: infancy, mental illness or defect (sic) and

intoxication. The age of consent is today almost always 18, which avoids many of the problems

when a married man of 20 with two children could claim to be an “infant.” Most cases seem to

involve teenaged boys who bought used cars. There are some states that allow counterclaims

for the damage to the vehicle, but the basic rule is that it is no defense that the adult did not know

the child was under 18, and that the child (but not the adult) may disaffirm the contract not only

during minority but for a reasonable time after turning 18. It is possible to get court approval of

a minor’s contracts (important in show business situations), and of course the minor’s parents

can sign for him. The problems of mental illness are that some mentally ill people can

understand the transaction but “can’t seem to stop myself.” Cases involving bipolarism

(manic-depressive illness) have found mental incapacity when a person in the manic phase makes

ridiculous contracts that he wants to make and “understands,” but that should have put the other

party on guard that there was something wrong. Cases decided while the Second Restatement

was being written fleshed out § 15 (1) (b) on inability to act in a reasonable manner. Note that

unlike infancy, incapacity due to mental illness or intoxication require that the other party knew

or should have known of the incapacity.

Economic Duress and Undue Influence

The notion of economic duress flies in the face of a market/capitalist system based on

scarcity and bargaining over what you need and I have. Nonetheless, there has always been a

notion that force robs you of free will, and even if “free will” is too vague a concept to get us

very far, when one party “stonewalls” by refusing to do what is clearly required under a contract

and uses the other party’s financial weakness because of the stonewalling to force an unfair

settlement (as in Totem Marine), the imposed-upon party may have a claim to set the deal aside.

See my note at Anthology 487. There are three excellent articles on the topic, all mentioned in

the note. One of them, by Robert Hale, is reprinted following the note. Your call whether to

read it. It is good.

As to pressure of a non-economic sort, Odorizzi v. Bloomfield School District has a very

good checklist of factors causing what it calls “overpersuasion” on page 552. The opinion runs

through various rubrics used in California and rejects several that seem to me to be valid. It

finds grounds to set the resignation aside, but shows that you need to check the case law in the

jurisdiction where you are challenging a contract to see what label you should use. Note that the

labels aren’t always used the same way in different states, as shown in the Odorizzi opinion.

Friday, October 23, 2009: Nondisclosure, Misrepresentation and Fraud. KC&P

556-84.

The introductory note well explains the distinction between a tort action for fraud or

misrepresentation and a defense to a contract action or an action for contract rescission. The

Second Restatement says that since you don’t get affirmative damages in the contract use of

fraud and misrepresentation it does not require as much to make out your case.

We begin with a wonderful, if sad, fraud case, Sysester v. Banta, a good example of a

kind of case that appears often, the lonely older woman who is oversold dancing lesson by being

told that she is another Ginger Rogers. But note: isn’t Syester both a tort case and a contract

41

case? Explain why and how the court deals with both questions. Traditionally, the tort of fraud

required “scienter,” which required knowledge that a statement was false, and an intention that

the other party rely on the statement, together with reliance and damage. There isn’t much

problem finding that in Syester, but what about the definitions in the Restatement of Contracts

with respect to knowledge? (See note 1 on page 565.) Note the ethical issues raised in note 5

on page 567.

Hill v. Jones is a termite case. There are parts of the United Staes where termites are rare

enough that no discussion of them has taken place. Here, the problem is that Mr. Hill did have

suspicions and made some inquiries, but not aggressively enough. Also, the sellers seek to use

the “no representations” clause in the contract. How does the court deal with these questions?

Beyond those issues, what about a duty to disclose? Restatement Second of Contracts § 161 has

four ground creating a duty to disclose, but the first three of them involve correcting something.

The fourth is based on “a relationship of trust and confidence,” but what does that mean? Does

the Arizona Court of Appeals go beyond the R2K test? What about whether the Hills did

enough to protect themselves? Is that not dependent on the procedural posture of this case?

We also get a very nice note about John Marshall’s famous opinion in Laidlaw v. Organ, and

Page Keeton’s restating of the issue. Former Yale Law School Dean Anthony Kronman’s article

on mistake and non-disclosure, heavily influenced by Laidlaw, is discussed on KC&P 575 and

reprinted in the Anthology 565-72.

We have several pages of notes dealing with the higher duty involved when a fiduciary

deals with a beneficiary, followed by a comment of the ethical issues involved for lawyers. Park

100 Investors v. Kartes involves the Karteses going to their daughter’s wedding rehearsal and

signing papers without reading them, and with Scannell strategically remaining silent at critical

moments. Why do the Karteses win? (Remember Ray v. Eurice Bros. at the beginning of the

course?) Note the difference between fraud in the inducement and fraud in the execution

(sometimes called “fraud in the factum”). Kartes involves fraud in the execution; it has always

been easier to recover for fraud in the execution, but often it is hard to prove it.

Wednesday, October 28, 2009: Unconscionability. KC&P 584-99, 608-10, 622-32.

Supp.: UCC 2-302; R2K §§ 205-08. Anthology 494-95, 509-10. Highly recommended, but

not required, Arthur A. Leff, Unconscionability and the Code–The Emperor’s New Clause,

Anthology 495-509.

As usual, the introductory notes are helpful, especially historically. Williams v.

Walker-Thomas Furniture Co. is a famous, influential and controversial case, another one of

Skelly Wright’s big cases. Is the problem that Mrs. Williams was charged too much, was sold

something that she shouldn’t have been pressured to buy or was sold something under a contract

that had tricks hidden in it? Do you understand the cross-collateralization clause? Explain it.

Do you think that Mrs. Williams was as well educated as you? What race is Mrs. Williams?

How do you know? What about Judge Danaher’s dissent’s points? The notes following the

case refer to Art Leff’s great, funny, and still controversial article, which is in the Anthology.

Are the problems in Williams procedurally or substantively unconscionable? What is the

difference? Which are which? At this point, check out Article 2 and the Restatement sections,

as well as the two notes in the Anthology. Leff’s article is very good and rather fun. Should

42

unconscionability have to be both procedural and substantive? Why? With respect to my

rhetorical questions about Mrs. Williams and Leff’s thoughts about unconscionability and

implicit removal of capacity, consider note 2 on page 592. Many of the critical cases are from

the sixties and involve outrageous overpricing, but the rent-to-own case are more recent. Should

price unconscionability be a ground for invalidation in itself? (The common law courts have

always been distrustful of the concept of the just price, something that the chancellors in Equity

(who were originally priests) found more congenial.) What about the rather different situation in

Ahern v. Knecht, KC&J 594 n. 4? You then get a note on consumer legislation. Dean

Alderman is the leading authority on the Texas Deceptive Trade Practices Act. While the DTPA

has been shorn back by hostile legislatures and courts over the last twenty-five years, Alderman

says it still has force.

One of the most controversial areas is the use of contracts of adhesion to require

consumers and small business people to take part in arbitrations, at the cost of a) a jury trial, b)

access to the courts, especially local courts, c) the possibility of class actions, and d) appeal and a

reasoned opinion by a judge. We discussed this in connection with click-wrap, and, again,

Alderman is a major player, as shown on page 610. Because the Supreme Court has ruled that

the Federal Arbitration Act preempts state consumer legislation, there is movement in Congress

to modify the FAA to restrict involuntary arbitration in adhesion contracts. There is more on

arbitration clauses in the notes on KC&P 622-32, and this goes as well into arbitration clauses in

employment contracts, as well as confidentiality provisions. How arbitrations actually work is

discussed in the comment on commercial, employment and consumer arbitration on pages

635-32.

Thursday, October 29, 2009: Public Policy. KC&P 632-33, 642-61. Anthology

441-43. Available but not required: two articles, by Martha Field of Harvard and

Marjorie Maguire Shultz of Berkeley, taking opposite points of view on surrogacy, appear

in the Anthology immediately after the assigned note, Anthology 444-70. Review the

discussion of Kass v. Kass in the Syllabus for the first day of class.

In earlier times, the common term used for this topic was “illegality,” and often involved

contracts in which someone had been bribed. In an important article written when he was very

young, Walter Gellhorn, later a famous administrative law scholar, argued that “public policy,” a

broader concept than illegality, should apply, and his view has prevailed. I have a short note on

this at Anthology 433, which I want you to read, followed by Gellhorn’s article, which I have not

assigned. The problem of covenants not to compete is briefly discussed on KC&P 632, with a

short problem that illustrated the common situation. For time reasons, I skipped the case

following the note, but the comments on pp. 642-47 give you a good start on this important topic.

While the courts do often speak of freedom of contract, they also are reluctant to prevent a person

(especially a professional) from earning a living, so they require that the restrictions be limited,

usually by time and place. Do you see why courts are more likely to accept a restriction on

employment when the person making the covenant not to compete has sold his business to the

other party? But when it’s a route man for Orkin, who wants to start his own exterminating

business, it’s tougher than Papa John selling his interest in Pizza Hut. But if the route man

signed a covenant not to compete when he took the job, and got his customer list from Orkin, his

case doesn’t seem as strong. But what if he built up the route and was responsible for Orkin

43

obtaining most of the customers he’s now trying to take away from them. (If you’re in a

whimsical mood, see how many Orkin cases there are in Westlaw. I’m under a visceral belief

that there are lots.) As the notes tell you, lawyers have been limited in carving up clients, but

doctors’ covenants are often enforced; invariably, it’s the old doctor who made his young

assistant agree not to compete, even when many of the patients haven’t seen the old doctor in

years. The Texas Supreme Court used to be one of the most liberal (til the late eighties). In the

early and mid-eighties, they struck down all covenants not to compete involving what they called

“common callings,” refusing an injunction against the manager of a chain beauty salon who

walked out with her staff and the Rolodex and set up a rival salon very nearby. I suspect that

case is not still viable, though I haven’t checked. What do you think of the “blue pencil” rule, in

note 8 on page 646

The more more gut-wrenching problems of public policy today involve reproduction and

surrogacy. Remember Kass v. Kass, discussed in the Syllabus for the first day of class. Read the

thoughtful opinion in R.R. v. M.H., KC&P 647, followed by the excellent notes following it,

discussing both the legendary Baby M. case from New Jersey, and Johnson v. Calvert, a

California case involving “gestational surrogacy.” Both cases are discussed in my note in the

Anthology and in Martha Field’s article following the note. Professor Field is hostile to

surrogacy, while Professor Marjorie Maguire Shultz, as mentioned in the introductory note,

surprised an audience of contracts teachers when she, a strong feminist like Professor Field, said

she found nothing anti-feminist about holding women to their promises. Professor Shultz also

discusses Baby M. Both articles are well worth reading. Whether or not you read them, come

in prepared to discuss how public policy should deal with surrogacy.

VII.

Mistakes and Changed Circumstances

Friday, October 30, 2009: A Very Brief Trip Through the Topic (with much summary

by PL). KC&P 663-64, [Additional half-page assignment: read the bottom half of 668 to 669

(top) (beginning “Appellees contend, on the other hand,” and ending after the block

quotation)]; 671 n. 2 - 674, 684-701, 709-11, 713-15, 737-40. R2K §§ 152-53, 261; UCC

2-615.

In order to cover the course in four credits, I have to skip over 100 pages, covering this

topic in one class instead of, perhaps, four. I will end up talking a lot, I fear, and it’s been my

experience that students don’t learn as well when I lecture as they do when they have to come up

with answers. I hope you’ll do more than scribble and type. Feel free to interrupt and ask

questions or take exception to what I say. Please note that I added slightly to the reading, having

you read of one of Contract Lore’s most entertaining cases, Sherwood v. Walker, the case of the

famous Rose the Second of Aberlone, and some sections from the Second Restatement and

Article 2 of the Code.

Mistake

If you look back to Ray v. Eurice Bros., from the very beginning of the course, you

will find that the Eurice Brothers tried to argue that they were mistaken about the content of the

44

contract with the Rays. The court didn’t believe them, but said in the carry-over paragraph on

28-29 that only mutual mistakes could be used to invalidate a contract, not unilateral ones. The

introductory note on page 664 discusses what we mean by mistake, and notes that the concepts of

mistake, impossibility, frustration and impracticability are fairly closely related. In addition,

sometimes there is an element of non-disclosure or even fraud (consider both the termite case,

Hill v. Jones, KC&P 567 and John Marshall’s opinion in Laidlaw v. Organ, p. 572). Just as we

have moved from a rigid notion of fraud requiring willfulness or scienter to a willingness to

invalidate a contract when there has been a material misrepresentation, even if not intentional, in

the area of mistake, the Second Restatement expands the concept of mistake, making a contract

voidable for a mutual mistake, if material, and even for a unilateral mistake if material, and if the

effect of the mistake would make enforcement of the contract unconscionable or if the other

party hid behind the lick-log or caused the mistake. Sherwood v. Walker involved a prize cow

that was believed barren and was sold for meat, but turned out to be pregnant. The Michigan

court’s reasoning has a high Victorian sound to it. Do you agree that “[a] barren cow is

substantially a different creature than a breeding one”? Apply R2K § 152. How would you

decide the case? (Rose has been subjected to sexist jokes about getting pregnant for the past 122

years. You can find an illustration in the Anthology at p. 590 n. 90, where the saintly Jack

Dawson, well into his eighties and writing his last law review article makes reference to “a

well-bred pregnant cow (the two attributes, I assume, being compatible in a cow).”) Once again,

the notes on pages 672-74 get into the problems of “as is” clauses and questions of conscious

ignorance. Note 6 on page 673 talks about “scrivener’s error,” about the easiest mistake to get

corrected, if you can convince the court that that is what in fact happened. (One of the first

things I did in court was make a motion to correct a scrivener’s error.) We have to skip

Wil-Fred’s, Inc. v. Metropolitan Sanitation District, a decision of the Illinois Appellate Court

following a fairly widespread approach that allows a bidder on a government contract to get out

of a clear computation error if the government hasn’t relied on the error. (This case involved an

understandable mistake by Wil-Fred’s long-time sub, which had always been reliable.

Wil-Fred’s attempted to change its prime bid to add the cost of the sub’s mistake. That

Wil-Fred’s chose to litigate rather than stick with its prime bid and throw the sub to the wolves

(it might have gone bankrupt) shows how relations among businesses often lead to results that

mystify economists.) How does it differ from Drennan v. Star Paving Co., KC&P 112?

Changed Circumstances

Impossibility, impracticability and commercial frustration (beginning on page 684)

Last year, Dean Alderman went on tv after Hurricane Ike, to tell viewers that even if

their apartment was uninhabitable for a while, they would still have to pay rent. Traditionally,

as I recall, if your leased apartment burned down, you still had to pay rent on the space in the air

that you had the “right” (“privilege?”) to occupy. Some of this rule has been abolished by

statute, but you can see its origin in Paradine v. Jane, from 1647. Taylor v. Caldwell, decided

more than 200 years later, creates an implied condition, based on the underlying “basis” of the

contract, namely, that the music hall would be in existence when the performance took place.

Note that in many contracts the fact that some casualty happened, particularly to goods, is no

defense. We treat contracts for personal services differently. George Burns, a great comedian,

was a star for generations, especially the thirties through the sixties. But he had a major

45

comeback around the mid-seventies, when he was close to eighty, and continued to perform until

close to 100. He actually had a contract to perform at the London Palladium for his 100th

birthday, but was too frail to carry it out. Needless to say, this was not a breach of contract,

although Burns said “I can’t die before I’m 100. I have a contract.”

Consider, however, the famous Coronation Cases, the best known being Krell v. Henry.

The defendant had contracted to rent a room for a large premium for one particular afternoon.

Though there was nothing explicit about the room having a great view of the procession of King

Edward VII’s coronation, that was obviously why Henry had paid the premium. (Remember,

Queen Victoria had reigned from 1837 to 1901. Hardly anyone under 75 had ever seen a

coronation, so it was an immensely popular event.) Unfortunately, “Bertie,” who was in his

sixties and had led a life of dissipation, developed appendicitis, and the coronation had to be

rescheduled. Henry had paid a deposit, but now Krell wanted the balance. Krell could still

perform, he could make the sitting room available for Henry to sit in, watching an empty street,

but the court found that the purpose of the contract was “frustrated.” Interestingly, in other

Coronation Cases, the courts did not make the landlord’s give back the deposits, a sort of cutting

the baby in half. Frustration of purpose is theoretically accepted, but rarely used by the courts.

(Lloyd v. Murphy, KC&P 686, which rejected the doctrine, was written by the young Roger

Traynor.)

The concept of commercial impracticability is again something that does not involve

literal impossibility. It is the preferred term today, in both the Restatement and the Code. The

classic case is Mineral Park Land Co. V. Howard, which as you can see, has elements of mistake,

but which has led to a notion of extreme cost changes that were unexpected. In times of wild

inflation (as in the seventies) or, perhaps, an absolute drought in credit (as we have experienced),

many claims have been made under impracticability, though most, I think, have failed. Karl

Wendt Farm Equip. Co. v. International Harvester Co., KC&P 687, is a most interesting

illustration, involving as it did, exactly the economic disruption of the seventies, and a giant

manufacturer (which eventually went bankrupt). The notes following Wendt discuss many

important wrinkles.

But suppose a contract could be physically performed but the actions involved have

been banned by the government? That is not literal impossibility, but is normally a good

defense. See note 1 on page 709.

Contract Modification (beginning p. 713)

We’ve already mused on this topic in connection with economic duress. We want to

encourage companies to work out problems, and many good business people let other companies

out of a contract that has proven onerous, yet there is often a problem of consideration (as in the

Alaska Packers case, which I will tell you about, but which we must skip). Problem 8-3, on

page 713, sets up a nice dilemma. How would you go about advising the client? We then skip

to page 737 and deal with modifications in light of the Statute of Frauds, no-oral-modification

clauses, and settlements, including the critically important concept of accord and satisfaction.

Understand that if there is a legitimate dispute over a sum of money allegedly owed, and the

debtor offers part payment “in full settlement,” if the creditor takes the check and cashes it, he

46

loses any further claim. (Note that the editors slipped in an attempt at accord and satisfaction in

Problem 7-3, p. 659, before you learned of the concept.) There are some exceptions, but the basic

rule is still strong. (You can actually use it with big companies unless they say on the bill that

you have to send any claim for part payment to a specified person at a specified address. You

can’t do it with the IRS. If you do, they can put you in jail.)

VIII.

Conditions, Material Breach and Anticipatory Repudiation

Wednesday, November 4, 2009: Conditions. KC&P 783-806 (top). Supp.:

Restatement Second §§ 224 - 29.

Repeat after me: YOU CANNOT BREACH A CONDITION. YOU CANNOT

BREACH A CONDITION. YOU CANNOT BREACH A CONDITION. In the words of

R2K § 224, “a condition is an event, not certain to occur, which must occur, unless its

non-occurrence is excused, before performance under a contract is due.” If a condition does not

occur, the other party doesn’t have to perform, but is not entitled to damages. On the other

hand, a covenant or promise creates a duty. Non-performance of a duty is a breach of contract,

even if minor and unintentional. It leads to damages, which may be only nominal or may be

colossal. That is the basic distinction. However, as you probably suspected, it gets more

complicated. Sometimes a condition may also be a covenant, and thus simultaneously excuse

the other party’s from further performance and give him a right to damages. At other times, a

breach may be so serious (“a material breach”) that it gives the non-breaching party a right to

damages and the privilege to terminate the contract and thus not perform further, and thus has the

effect of a condition.

In many cases a condition can be very dangerous. In Oppenheimer & Co. v, Oppenheim,

Appel, Dixon & Co., what did Oppenheimer do wrong? If getting the old landlord’s approval of

Oppenheim, Appel’s proposed tenant work in writing by February 25, 1987 was a duty, what

would have been Oppenheim, Appel’s damages? Answer: probably none or very small.1 But

because getting the written consent in by the specified date was a condition, Oppenheimer lost all

its rights against O-A. I have mentioned that the New York Court of Appeals is very

conservative on contract law, and this opinion is an illustration. The notes following

Oppenheimer flesh out some of the subtleties, including the interesting “pay when paid” clauses

that contractors have tried to use to make their payments to subs dependent on the owner first

paying. Occasionally, the general can make a good case that the sub took the job in an

essentially contingent arrangement, but barring a pretty express agreement, the courts back the

1I know you haven’t studied remedies yet, but the issue there would normally have been

any additional expenses that O-A suffered from the 23 day delay, especially considering that

Oppenheimer’s lawyer said they had the prime landlord’s approval on February 26. It is

conceivable that the delay could have caused serious damage, but O-A would have had to prove

this and might have been restricted by the rule of Hadley v. Baxendale, which we soon will

study.

47

subs, since common sense says that the generals are in a much better position to assess the

owner’s financial status and take the risk of the owner’s inability to pay. Pay particular attention

to Notes 7-9 on pages 794-96.

Having just trashed the N.Y. Ct. App., I must point out that we read for this class and the

next two influential cases (both earlier than Oppenheimer) that have been influential in

permitting condition to be ameliorated. J.N.A. Realty Corp. v, Cross Bay Chelsea, Inc., written

by a very good and thoughtful judge, Sol Wachtler, later Chief Judge, who had a tragic emotional

breakdown that destroyed his career and sent him to prison, but later regained much of the

respect he had previously enjoyed across party lines. If you’re curious, Google him.

How does J.N.A. differ from Oppenheimer? At least in the casebook’s version of

Oppenheimer, there is no reference to J.N.A., but do notice this on page 791: “Inasmuch as we

are not dealing here with a situation where plaintiff stands to suffer some forfeiture or undue

hardship, we perceive no justification for engaging in a ‘materiality-of-the-nonoccurrence’

analysis.” How does J.N.A. differ? Did Chelsea make investments that would have been lost?

It also goes without saying that loss of location is a critical factor for a restaurant holding a

renewal option. Of course, the market value of the rent had gone way up, so the option really

saved Chelsea money and would have prevented the landlord from making more in the open

market. What about the landlord’s conduct? (I’m not sure you’d gain much by Googling

“hiding behind the lick-log,” at least not in New York State, but do consider the counseling

issues raised in Note 5 on page 804.) But what about Chief Judge Breitel’s dissent and why did

the majority remand the case? Note also Professor Knapp’s research into the case. We’ll try to

do Problem 10-1.

Thursday, November 5, 2009: Material Breach and Constructive Conditions (herein of

Substantial Performance). Anticipatory Repudiation. KC&P 806-31 n. 1. Supp.:

Restatement Second §§ 235, 237, 240-41, 250, 253.

Material Breach

We begin with a brief statement of the concept of material breach, discussed in R2K §§

235, 237 and 240-41 (in rather opaque language). The basic idea is that any deviation from a

contract is a breach, leading to damages, but only a material breach excuses the other party from

performance, giving him the right to “terminate” the contract, which means he doesn’t have to

perform, but still can get damages for the other party’s non-performance less the non-breacher’s

savings from non-performance. Jacob & Youngs, Inc. v. Kent is a great classic, still being

disputed, and decided by a 4-3 vote. Go through it carefully, considering some of the facts

unearthed by Richard Danzig whose research into famous cases revolutionized contract

scholarship when he was teaching at Stanford in the seventies. (I have one of his best pieces in

the Anthology and have assigned it when we get to Hadley v. Baxendale.) We get an excellent

comment on the development of constructive conditions, which I briefly mentioned in the last

class.

Sackett v. Spindler shows us how critical the distinction can be between a material (or

total) breach and a partial (or minor) breach. If Spindler wrongly terminated his contract with

48

Sackett, Sackett gets damages for Spindler’s breach of contract. That is the basis of Sackett’s

lawsuit against Spindler. But Spindler counterclaimed based on the argument that Sackett

materially breached the contract before Spindler terminated it, and the jury agreed with him,

giving him nearly $35,000. The court and the notes following the case go through the various

possibilities and raise valuable counseling and drafting considerations for you to bear in mind as

transactional planners.

Anticipatory Repudiation

We begin the notion of anticipatory repudiation, and will continue it in our next class.

The basic issue is if you say “I won’t perform,” do I have to wait until the time for performance

occurs to sue, or can I treat your statement as a total breach of contract? The issue was pretty

much settled in 1853 in Hochster v. De La Tour, as explained in Note 1 on page 831. But the

concept has wrinkles. First of all, as shown in Sackett v. Spindler, a party, A, who “fires” the

other party, B, by declaring a total breach and terminating the contract between them runs the risk

that if his decision about the total breach is rejected by a later court, he, A, may be found to have

breached the contract himself by the anticipatory repudiation of tossing B off the job, since that is

clearly an unequivocal statement or action that A will not further perform. That was the debate

between Sackett and Spindler. We will deal with the problem in the next class, when we discuss

requests for assurances, a wonderful device that solves most of the problem.

But first we look at a simpler sort of anticipatory repudiation in Truman L. Flatt & Sons

Co. v. Schupf, KC&P 825. Why wasn’t Flatt’s lawyer’s letter of May 21 a repudiation? Even

if it was, did it withdraw the repudiation before Schupf either acted in reliance on the repudiation

(e.g., by selling the property to someone else) or treated the May 21 letter as a repudiation?

(Why didn’t Schupf’s lawyer’s letter of June 9 qualify as treating the May 21 letter as a

repudiation?) The court’s opinion is quite good in explaining these matters.

Friday, November 6, 2009: Requests for Assurances. KC&P 831 n. 2 - 842. Supp.:

UCC 2-609, with Comments; Restatement Second § 251. Computing Expectation Damages

(herein of the Farnsworth Formula).

More on Anticipatory Repudiation

While we understand the effect of an anticipatory repudiation, the question remains, just

what is one, and what about comments or actions that are on the borderline? The remaining

notes on pages 831-33 deal with some of the nice distinctions. Remember, as we said in the last

class. If you declare the other party to be in total breach and announce that your client treats the

contract as terminated, if you are wrong, and a jury later finds that either the other party hadn’t

breached at all or had committed a minor (non-material) breach or one that was curable, your

client will be the one in breach because his (= your) action in terminating the contract without

proper cause is itself an anticipatory repudiation. It is true that the other party does not have to

treat your action as a repudiation – she can urge you to perform the contract and perhaps show

how the breach, if any, can be cured, and you can withdraw a repudiation if it is not acted upon

and if suit has not been commenced. (This time period is sometimes called the locus

penitentiae, the area of repentance.)

49

A cautionary note: You may see a parallel to offer and acceptance, withdrawals of offers,

counter-offers functioning as rejections, separate counter-offers not constituting rejections, etc.,

but you should not think of the process that way. The two parties in Flatt weren’t forming a

contract; they already had a contract, entered into in March. When Flatt’s lawyer sent the May

21 letter, he wasn’t rejecting an offer. He was either merely negotiating and proposing a

modification or was saying that Flatt would not perform, a repudiation. Even under Schupf’s

rejected reasoning, when Schupf’s lawyer replied on June 9, he wasn’t “accepting” the

repudiation. They were arguing that the letter treated the May 21 letter as a repudiation. That’s

not an “acceptance” of the repudiation. That is treating the communication as a repudiation,

which cuts off the locus penitentiae.

Requests for Assurances

You saw the problems raised in Sackett v. Spindler and Flatt when one party claimed the

other had materially breached and the other said that the first party’s claim was itself a

repudiation. Now we learn of a procedural device created by the Code but adopted by R2K §

251: the request for assurances. The comments to UCC 2-609 give some background and the

notes following Hornell Brewing Co. v. Spry describe some of the wrinkles, but the short answer

is that while most courts do not require a request for assurances before a party declares the other

in material breach, it is certainly a wise course. Note that if you ask for too much or use the

device frivolously or too often or in bad faith, your act of requesting the assurances could be a

breach, but used wisely, this is a valuable device. A good way to hone your skills in this area is

to do Problem 10-2 on page 842. We’ll try to find time to go over it in class. I wish I had time

for Problem 10-3, which requires you to negotiate a settlement in the Mason case, but we’re too

pressed for time. (Do you think that this guy is related to Dave Mason?)

IX

Remedies

A. Expectation Damages

Wednesday, November 11, 2009: Computing Expectation Damages KC&P 845-57

(top); 861 (bottom) - 868. Restatement Second § 347. Recommended but not required:

Anthology 236-50 (Judith Maute, Peevyhouse v. Garland Coal & Mining Co. Revisited:

The Ballad of Willie and Lucille).

Expectation Damages and the Farnsworth Formula

The famous Fuller and Perdue article is excerpted on page 846, where Fuller’s three

interests, reliance, restitution and expectation, are explained. While the main point of Fuller’s

article is that reliance is really why we give damages, he explains that we often can’t tell how

much reliance was actually involved, and the expectation interest functions as a surrogate. This

means that if A repudiates before B has done anything in reliance, B will still get all of his

expectation, that is, all that he would have netted had the contract been performed. Since he

doesn’t have to spend money on supplies, labor and overhead, that has to be deducted from the

contract price. Otherwise, B would get a windfall. But B does get all that he would have made

50

as profit on the contract despite the fact that he did nothing in reliance. Professor E. Allan

Farnsworth worked out a formula that usually works. It is set out in R2K §347: Contract

damages equal the Loss in Value (typically the contract price less any progress payments) plus

Other Loss (consequential or incidental damages, of which more in future classes), less Cost

Avoided (what the plaintiff did not have to spend to carry out the contract after the defendant’s

breach) and Loss Avoided (typically salvage value of materials). LV + OL-CA-LA. The three

cases set out on page 850 should help you to apply the formula.

Roesch v. Bray tells us that there are other measures of damages, such as contract price

less market price. Could it fit into the Farnsworth Formula? But wasn’t it foreseeable when the

parties made the contract that if Daddy Bray breached his daughter (!) and son-in-law would have

additional damages since Daddy had encouraged them to buy another house for which they

would presumably need the proceeds of the sale of their house to Daddy? And why is it a cost

incidental to ownership to maintain a house for a year after the buyer repudiates? The editors

suggest this on page 854. The old rule on breaches contracts for the sale of goods contract price

less market price and that still can be used, but under UCC 2-706, a disappointed seller can resell

the rejected goods for any reasonable price and seek the difference from the breaching buyer,

while under UCC 2-712(1) a disappointed buyer can “cover” (that is, buy goods to replace those

that weren’t delivered) at any reasonable price and seek the difference from the seller. In both

situations you don’t have a blank check to resell or cover for an unreasonable sweetheart price

with a friend and then sue for the difference. But you can pay a sizable premium or sell at a

sizable discount if that is commercially reasonable given the circumstances, which would include

how badly you needed the goods. And if you use a broker or middleman, his fees are incidental

damages that can be collected from the breaching party.

Cost to Complete vs. Loss in Value. The Peevyhouse Case.

You’ll recall that in Jacob & Youngs v. Kent Cardozo did not require the economically

wasteful act of giving the value of ripping out the Cohoes pipe and replacing it with Reading

Pipe. Not only did he find that using the wrong brand of pipe was not a material breach, but he

also held that the measure of damages was not the cost of repair (that is, replacing the pipe) but

the loss in value of the house, which he said was zero.

I said in the last class that I thought J&Y v. K was correctly decided. But there are many

other cases in which J&Y was either misapplied, or was properly not applied. In both American

Standard v. Schechtman and the similar Groves v. John Wunder Co. one party agrees to clear the

land of the other in what is really a sale of the gravel (in Groves) or scrap metal (in American

Standard). In both cases the party doing the clearing leaves the job half done because it gets

too expensive (though presumably not enough to qualify as a commercial impracticability), and

says that the property is worth just as much half cleared as it would have been cleared. The

courts in both cases, a generation and half a continent apart rejected this “economic waste”

argument and found the case distinguishable from Jacob & Youngs. Do you agree? Why or

why not? The great dictum of the early New York case of Chamberlain v. Parker about the man

who “chooses to erect a monument to his caprice or folly” is quoted on page 865. Peevyhouse v.

Garland Coal & Mining Co. is discussed in American Standard and in note 3 on page 867. It is

an awful decision, put out by a court several members of whom were later involved in bribery

51

charges. Part of the problem was that the Peevyhouses’ case was not well handled by their

lawyer, but a key vote may (repeat “may”) have been secured by outright or implicit bribery.

The case led Professor Judith Maute, who teaches at Oklahome, where the case took place, to

spend thirteen years researching it. She produced a wonderful article that she let me reprint in

part in the Anthology. (She told me that some of her colleagues were rather put out at my

description in the introductory note of the “Sooner State”as being “differently ethicked.”) You

may find it fun reading, if rather sad. Professor Maute has also produced a documentary based

on Peevyhouse. I don’t remember if it’s on line, but I think the library may have it. I’ll try to

find out and let you know.

Thursday, November 12, 2009: The Rule of Hadley v. Baxendale, Foreseeability and

Certainty of Damages. KC& P 868-86. Also required: Anthology: 183-97 (top) (Richard

Danzig’s classic, Hadley v. Baxendale: A Study in the Industrialization of the Law).

Hadley v. Baxendale is known by name to almost all lawyers, and is very important in

contract damages. According to Ian Ayres and Rob Gertner, in their classic article, discussed, I

believe, earlier in the course, Hadley is an early example of a “penalty default rule,” in that it

forces a party that has an unusual possibility of being injured in a collateral deal dependent on the

contract being made to disclose the possibility to the other party or have no right to damages

from the collateral deal being undermined when the other party breaches the contract being made.

Read the notes following the case carefully. Florafax shows the Hadley rule in action, GTE

didn’t run that much of a direct risk of damages for breaching its contract with Florafax, but

GTE’s liability for undermining Florafax’s deal with Bellerose are enormous.

Note the limitations on collateral damages, discussed in the notes following Florafax,

whether from contractual provisions, the Second Restatement’s statement that the remedy can be

limited to prevent injustice, and the notion of speculative damages. The proof of lost profits,

particularly for new business, raises serious problems of proof at trial, frequently involving

expert testimony and wide disagreement between the experts.

Read Richard Danzig’s classic and pathbreaking article on Hadley in the Anthology.

Friday, November 13, 2008: Mitigation of Damages. KC&P 886-904, 909-10.

Supp.: Restatement Second § 250. Available but not required, Parker v. Twentieth

-Century Fox (the Shirley MacLaine case) is discussed by Mary Joe Frug in her feminist

book review of a contracts casebook in the Anthology. Her article begins on page 170; her

discussion of Parker is on 176-80, including her discussion of the casebook’s use of a sex

kitten picture of Shirley, who was one hell of a babe forty to fifty years ago. Check her out

in the great Billy Wilder serio-comedy, The Apartment, made in 1960. In later editions,

the editors toned the picture down. (Actually, I suspect she’s still one hell of a babe – at

about 75.)

The reading begins with a very sensible note about why you shouldn’t be compensated for

things you brought on yourself, but then we’re off to the races with the original bridge to

nowhere case, Rockingham County v. Luten Bridge Co.. The case is shrouded in mystery; it

seems to have all kinds of local political intrigues about it, but there is no doubt that the revised

County Commission breached its predecessor’s contract when it repudiated it. I wonder if the

52

county could have counterclaimed for the cost of removing the bridge, which was in the middle

of a forest. (Apparently, someone wanted a road through the forest and nobody else did.) The

rule is pretty obvious. You can’t run expenses up and then try to recover them as breach of

contract damages. But what about the notion that you are not required to recognize an

anticipatory repudiation (Truman Flitt; Hornell Brewing Co.)? That’s the debate in Frost v.

Knight, which is not followed here. Look at note 1 following Rockingham County. What

advice would you give the Luten Bridge Co.?

A much more difficult case is involved when an employee is wrongfully terminated.

Since most employment is at-will, employees with fixed term contracts are likely to be higher

level. How much other work must they seek, and on what circumstances should payment for

this work be subtracted from their damages? Havil v. Woodstock Soapstone Company goes

through many of the permutations involved. If the law school fired me (we’ll assume that this is

a breach of contract), but offered me a job at the same salary as men’s room attendant, would I

have to take the job or lose any damages? The Shirley MacLaine case involves that sort of case,

if not that humiliating. It’s a fun case that provoked a dissent that got into questions of social

class. It seems to me that since the substituted offer did not give Shirley MacLaine a veto over

the director and was on location in the outback of Australia rather than near her home in L.A.,

this was an easy case. But if we put these two items to the side and focus on her being the lead

in a musical (which had left-wing overtones that she liked) or being the female lead in a western

(name the female lead in any western other than Cat Ballou), the case gets a little closer. What

about Justice Sullivan’s dissent and Victor Goldberg’s pay-or-play analysis (remember Locke v.

Warner Bros.)? Mary Joe Frug’s comments are worth looking at in the Anthology. The notes

following Parker are also useful.

Wednesday, November 18, 2009: A Potpourri of Contract Damages Issues.

KC&P 911 (top 2 paragraphs only), 929 n. 2 - 935 [types of damages that usually are not

allowed]; 938-46 [Article 2 remedies]; 946-58 [various things about expectation damages,

especially efficient breach of contract]. Anthology 605-07 [PL stuff on efficient breach].

Feel free to look up the UCC sections in the Supplement.

I had to skip a lot of stuff, since we have so few classes left. The opening paragraph

on page 911 sums up three types of damages usually not allowed in contracts cases, which are

then expanded in the notes between KC&P 929 n. 2 to 935.

1) The “American Rule” does not allow attorney’s fees to winners in contract actions.

The effect of this is that even if the other party deliberately breaches a contract with you and you

can easily prove your case, your recovery (which can’t be more than you would have made if he

had fully performed) is reduced by the cost of your lawyer. Even if you can find a lawyer who

will take a contracts case on a contingent fee (not likely), you can’t recover a net of more than 60

to 67% of what you would have made if the contract had been performed. When we add the

other restrictions on contract recovery, you can see that contract litigation is unattractive, and if

the breacher says he’ll give you 50% of your damages, you’ve got a strong reason to settle before

getting a lawyer, while he walks away paying half what he should. I should tell you that Texas

is one of a very small number of states that do not follow the American Rule. (See Civil

Practice and Remedies Law § 38.001.) But with so many contracts having an adhesive

53

arbitration clause, as Dean Alderman told us, even contract litigation isn’t very promising.

2) Most states have never allowed emotional damages in contracts cases (except in

narrow situations like burials and telegrams of deaths, etc., see p. 930 n. 4). There had been a

few cases allowing damages for emotional injuries in basically non-personal contracts, but the

California Supreme Court, in Erlich v, Menezes, which we skip, continued its drift to a more

conservative view, by rejecting the notion of emotional damages for a couple the builder of

whose “dream house” had turned it into a disaster.

3) Punitive damages have not been allowed, except for acts that would also be torts.

There was a move toward treating deliberate breaches of contract, particularly by

“stone-walling,” i.e., essentially saying “go ahead and sue me.” But again, the California

Supreme Court has cut that out.

The notes and comments on pages 929-35 expand on these points.

The second set of notes, KC&P 938-45, summarize remedies under Article 2 of the

Uniform Commercial Code. Look up particular sections in the Supplement.

The third set, KC&P 946-58, deal with the justifications of expectation damages, but

quickly get into my favorite bte noir, efficient breach of contract, which I attack in The

Anthology

.

We’ll have lots to talk about.

B. Disgorgement, Reliance and Restitution

Thursday, November 19, 2009: “Disgorgement” as a Remedy; Damages Based On

the Reliance Interest. KC&P 958-83. Skip Problem 11-4.

I’ve got my doubts about the correctness of Roth v. Speck, but to the extent that it allows

the later contract to be used as evidence of the value of Speck’s work, it seems correct. See

Note 2 on KC&P 960. It does seem consistent with the notion of disgorgement, discussed on

pages 961-64. Daniel Friedmann, the distinguished Israeli dean, former Minister of Justice and

law professor, published an important article on the topic, disagreed with by Farnsworth, but

increasingly being followed, sometimes sub silentio, by a number of courts, particularly when the

defendant has acted either in bad faith or when conventional damages won’t make the plaintiff

whole. It is not surprising that Dan Friedmann also wrote an important article about what he

called “The Efficient Breach Fallacy.” (It’s in the Anthology.) We discussed whether the

breacher or the promisee should get the windfall in a parable like my Four Musketeers hypo.

The disgorgement principle would give it to the promisee, which is heresy to efficient breach

54

aficionados.

Disgorgement is sometime called a form of restitution, which seems right to me, but puts

the emphasis not on defendant being enriched through plaintiff’s labor, property or actions, but

simply taking away defendant’s gain because we think he shouldn’t have breached the contract.

I think it’s still an unjust enrichment, but it’s not because he took something away from plaintiff,

unless we think of plaintiff’s contract right to performance as a kind of property interest that is

either appropriated by defendant or has been tortiously interfered with by him. This, of course,

flies in the face of the notion that willfulness is irrelevant in contract breach or that the breach of

a contract is not a tort. Professor Andrew Kull, of Boston University, the Reporter of the

Restatement Third of Restitution, included a disgorgement section in it, applicable when the

defendant breaches opportunistically and makes a profit. We’ll do Problem 11-4 in a couple of

classes.

Friday, November 20, 2009: Restitutionary Damages. KC&P 983-1007.

I’ve mentioned that the ALI has been working on a Restatement Third of Restitution for

about ten years. The modern view is that restitution is not a remedy but a substantive area of

law, like tort, property and contract, with elements of all of these, and with the central concept of

unjust enrichment. As such, you can see its connection with the disgorgement remedy we

discussed in the previous class. But restitution is also one of the three “interests” discussed by

Fuller and Perdue in their article, considered by many to have been the most influential article

ever written about contracts. Here, we see restitution as a separate basis of liability. United

States ex rel. Coastal Steel Erectors v. Algernon Blair, Inc. is a Miller Act case. (The Miller Act

is described in Note 1 on KC&P 986. The key points are that under every federal building

project, the contractor has to put up both a performance bond for the government and a payment

bond in which a surety guarantees payment to subcontractors. The subs may sue both the

contractor and the surety company in federal court without regard to either diversity or

jurisdictional amount.) Federal substantive law governs; the court is not bound by Erie v.

Tompkins. The suit is nominally brought in the name of the United States on the relation of (ex

rel.) the subcontractor.

If Coastal was running the job at a loss when Blair breached, it shouldn’t have had any

damages. But if Coastal could treat the contract as at an end because of Blair’s breach, could it

claim that it had provided a benefit to Blair? If it could do this (sometimes called – to the

annoyance of purists – acting “off the contract”), it could claim an unjust enrichment equal to

the value of its work, regardless whether it had underestimated the expectation value of the

contract. It certainly was not a volunteer or “officious intermeddler” (rethink the article on

restitution by Dean John Wade in the Anthology). Based on the earlier Susi v. Zara case, also a

Miller Act case, the court says yes. The academics hate this and the R3R rejects the rule, but all

the court apply it. It has never bothered me. The debate is summarized on pages 986-87, with

the important exception of full performance discussed in Note 5 on page 987.

Lancellotti v. Thomas represents the mirror image. Suppose you hire me to build your

house. You have paid me for erecting the structure and then I put on a perfectly good roof,

worth $15,000. But then I completely fall apart and do terrible work on the flooring and interior

55

walls and you declare a material breach and terminate the contract. It will cost you $8500 more

than the contract price to complete the job, and you’re clearly entitled to that amount of damages.

May I still claim $6500, the value of the roof, less your damages from my material breach? If

not, you get a free roof, even though my performance of the roofing was impeccable. To me,

there is some doubt whether Lancellotti properly applied the rule of restitution for a defaulting

plaintiff (as the dissent argues in its last paragraph), but the concept seems right. As you can

see, it goes back quite a way, and Corbin, who you may remember, didn’t think much of the

concept of “willfulness” in contract breaches, played a major role in spreading the idea. Modern

authorities think that innocence by the breacher should (and often does) affect the result.

Then we are entertained by the adventures of Jesse (“The Body”) Ventura, everybody’s

favorite politician until Sarah Palin showed up. Governor Ventura, however, was a pretty

shrewd guy, and became a “heel” commentator. How do the majority and dissent deal with his

quantum meruit claims? Without pretending to know much about the intersection between

copyright and rights of publicity and privacy, I find the debate between the majority and the

excellent dissenter, Judge Morris Sheppard Arnold, an advisor to the Restatement Third of

Restitution, interesting. The important point from our point of view, though, is the interaction

between the oral contract and the alleged right and the interaction among the later written

contract, the apparent fraud by Vince McMahon, and the alleged right.

Consider carefully the difference between “enrichment” and “benefit,” described in Note

4 on page 1005. Then we have a note about the degree of certainty required in restitution cases.

Do Problem 12-1.

We have no classes during Thanksgiving Week.

C. Specific Relief and Agreed Remedies

Wednesday, December 2, 2009: Specific Performance and Injunctions. KC&P

1008-31. Do Problem 11-4 reconsidered, KC&P 1031 n. 6.

As the excerpt from Farnsworth’s seminal article (substantially in his hornbook) shows,

money damages – not specific performance – has generally been the norm in Anglo-American

contract law. Specific relief is much more of a norm in the Civil Law and when administrative

agencies enforce antitrust and civil rights laws. Doug Laycock’s important article, The Death

of the Irreparable Injury Rule, summarized on KC&P 1010, is in the Anthology at 617-35. Why

do you think that specific performance is not the norm?

City Stores v. Ammerman is an important and much-cited case. Given its facts it hardly

seems like a good candidate for specific performance, yet Judge Gasch, a well-respected District

Judge, makes a good case for it. Did the developer make a promise? Did he benefit from the

letter that City Stores sent in exchange for his promise? Did he violate his promise? Would it

have been possible to have awarded City Stores money damages? How? What would have

been the problem(s)? Some years ago one of the students, who knew the D.C. area, said that she

knew Tyson’s Corner, and there was no Landsburgh’s there. Assuming that City Stores sold its

56

right to be in the mall back to Ammerman, is this an inefficient result? Is it a windfall for City

Stores? (Bear in mind our discussion of Peevyhouse v. Garland Coal Co.) Note also Frankin

Point, Inc. v. Harris Trust, KC&P 1019 n. 3. Many of the other wrinkles about specific

performance are mentioned in the other notes, as well as the debate in the literature. Note the

interaction with efficient breach.

In Reier Broadcasting Co. v. Kramer, we turn to a different aspect of equitable remedies,

an injunction preventing someone from doing something because of conflicting contract rights.

This comes up most commonly in situations involving non-competition clauses or in which it is

said that trade secrets would be divulged. Note that here the nominal defendant, Coach Kramer,

is almost a pawn in the dispute between the University and the radio station. Note also the

procedure. In cases like this getting or preventing preliminary relief is the critical thing. See

the top of page 1023.

Why should there be a limitation on granting specific performance for personal

services contracts? If there is such a limit, what is the difference between ordering someone to

perform for A and enjoining him from performing for anyone but A? The dissent suggests that

the case isn’t quite that simple. Why? We then turn to the classic case, Lumley v. Wagner, in

which Ms. Wagner (who was the niece of Richard Wagner, as I understand it), had promised to

work for Lumley and no one else in London during the 1852 season. There are a number of

cases in which artists and athletes have been enjoined from working for anyone other than the

party with whom they had signed an exclusive contract, but often these injunctions are hard to

enforce.

When the American League was formed in 1901, it tried to steal players away from the

National League. Napoleon Lajoie, one of the all-time greats of baseball (lifetime batting

average of .339 with 3,251 hits), jumped from the Philadelphia Phillies to Connie Mack’s new

Philadelphia Athletics. (The Phillies, of course, are still in Philadelphia, and won the World

Series in 2008 and lost it to the Yankees this year; the A’s are now in Oakland, but haven’t won

much in recent years.) The Phillies went into the Pennsylvania courts and got an injunction

against Nap playing for anyone else, but the American League transferred his contract to the new

Cleveland team and he just stayed out of Pennsylvania. He was such a star that for many years

the team was known as the Cleveland Naps. After Lajoie left the team, a vote of the fans

renamed them the Indians, after a tragic but great Native American player, Louis Sakalexis, who

was a great star for the team. (My colleague, Gavin Clarkson, and others, especially Native

American activists, dispute the story.)

There was a big dust-up involving Volkswagen and another big auto company over an

executive, with attempts at injunction. As you see, when someone seeks reinstatement after

being wrongly fired, the courts usually don’t want to do it, but labor arbitrators and courts and

administrative agencies enforcing the civil rights acts, do order reinstatement rather routinely.

Do Problem 11-4.

Thursday, December 3, 2009: Agreed Remedies. KC&P 1031-45; Supp.:

Restatement Second § 356.

57

Assorted Problems. Problem 12-2 (p. 1044) (this can be done pretty quickly);

Problem 12-3 (p. 1045) (do the drafting and use Haggard; bring in the written

non-competition (or, illiterately, “non-compete”) clause).

Agreed Remedies

The introductory note briefly refers to settlements of contract disputes. We don’t spend

anywhere near enough time in the first year on settlements, since they probably make up 99% of

all dispute resolutions, in one form or another. It goes on, however, to discuss liquidated

damages. Just as the courts were hostile to arbitration as an invasion of their prerogatives, they

traditionally refused to enforce liquidated damages provisions if they were “penalties” (a word

you should never use in a contract) or were unreasonable. (Usually this means unreasonably

high, but if they are unreasonably low they could be an unconscionable limitation on a plaintiff’s

recovery, especially in consumer cases).

Westhaven Assoc. v. C.C. of Madison is a good view of a liquidated damages case. The

court lists the usual requirements at the top of page 1035. Note how the second and third

requirements (difficult to estimate and a reasonable forecast) are contradictory or at least

“intertwined.” The court gives us a good discussion. It also discusses the “American Rule,”

governing attorneys’ fees. By the way, look at the lease provision quoted in the last three lines

of the first complete paragraph on page 1033. I say it’s badly drafted. The court later says that

the parties agreed that the attorneys’ fees were limited to expenses of reletting. Try to redraft it

to make clear that the attorneys’ fees are not so limited.

The notes following the case are valuable. Consider a contract involving the

“rebuilding” of I-10. Imagine that it has a completion date with a provision calling for a

$25,000 per day liquidated damages provision. Consider note 4 on page 1041. How about

“late charges,” etc. on bank accounts and credit cards. See note 6 on page 1042. Congress has

enacted a law limiting these charges, but the papers all say that the credit card companies are

raising the fees before the effective date of the statute. Congress is apparently considering

making the ban retroactive.

The Problems

Take them seriously. They reflect what lawyers do, and should also give you some

practice for the exam.

Friday, December 4, 2009: A Question Session and a Summing Up (including PL

Sermon). Anthology 9-10, 13-20, 675. PL will take questions about the course.

“A Question Session”

I’ve never believed in review session, and I have no intention of giving you a Gilbert’s of

my course, especially since Allan Bullwinkle has done such a good job of advising you about the

course. But I will answer questions that bother you. Bring them in. Since I’m less interested

58

in giving you tips about the exam, which I haven’t written yet, I’ll be very willing to discuss with

your broader policy questions as well as specific points of contract law. I’ve received emails

about questions like could Mr. Stern (Baby M.) have recovered his payment to Mary Beth

Whitehead in restitution. (Both Allan and I thought not.) These are intelligent questions. I

know that right now, all you can think about is grades on the exam, but there are bigger issues in

law, and this should also be a chance to talk about them. (I will answer specific doctrinal

questions, but I encourage you also to think about the bigger picture. It’s what law is really

about.)

A Summing Up

First read Corbin’s letters to Judge Robert Braucher. Here is this man in his eighties and

nineties who shows such passion for the law, even as he is going blind and deaf and even when

his son is killed. I don’t know what Judge Braucher’s reactions were, but we, at least, benefit

from this insight into Corbin’s personality, which he tended to hide in his legal writings.

The last piece that Arthur Corbin wrote, when he was ninety, Sixty-Eight Years at Law,

13 U. Kan. L. Rev. 183 (1964), is a delight, and more autobiographical than usual. Professor

Perillo quotes a wonderful passage from it in note 47 on page19. Read it closely, together with

what I put on the last page of the Anthology. You don’t have to take it seriously, but five people

who spent a lot of time with the law of contracts tell you that the stuff is important. I’m the least

important of the five, but the other four, Cardozo, Corbin, Gilmore and Perillo, are pretty good,

so give the passages, and their thoughts about certainty in law, your attention.

I’ve enjoyed teaching you this term. You were well-prepared (mercy notes

notwithstanding), and we had good, intelligent discussion. It’s been fun.

#