Contracts Outline

I) Basics of Contract Law

A) Sources of law and purpose
1) Much of contract law was created through the common law
2) Today much of this has been codified (eg !CC for sale of goods contracts)
") Contracts are intended to be sure parties #now their obligations to each other
$) %lements of a contract
1) Agreement between parties such that a third party could determine their obligations & 'a
meeting of the minds(
2) Consideration & something of )alue e*changed
") %nforcement & a common feature but not a necessary element
+) ,eliance & separate issue from the terms of the contract (common with promises)
-) Miscellaneous elements
a) .eed not be written (e*cept for real estate in California)
b) .o re/uirement to ha)e a response from the other party if their performance is
sufficient as a response & your agreement forms the contract '0o 1 and 23ll pay 4(
C) !niform Commercial Code (!CC)
1) Applies only to sale of goods contracts
a) Ser)ices are not co)ered5 but principles of !CC are often applied
2) Should be treated li#e code5 basic principles are )ery important
a) Many states are adopting the !CC in whole or in part into their codes
") Pittsley v. Houser
a) As#s if laying carpet is a separate ser)ice or part of the good itself
b) Tests used by the court6
i) 7redominant factor & is the purpose mostly for sale of a good or a ser)ice
(when selling carpet are you selling the good or the installation)
ii) Se)erance of the contract & separate the goods and ser)ices sections
iii) Apply the !CC e)en if situation is a ser)ice rather than a good
0) ,ationales for forming contracts
1) Many businesses actually operate under ineffecti)e or improper contracts
a) These often ser)e perfectly well for what the businesses need
b) Many business relationships rely on trust and history
c) Much of contract law doctrine has arisen form defects in these sort of
arrangements
2) %*plicit contracts are generally only created when specific performance is critical
") Creating a legal forum for resol)ing debates stops pri)ate (or illegal) dispute resolution
%) Contract law and public policy
1) Courts do not want to act as complaint bureaus or interfere with free e*changes
2) Courts step in to ensure that appropriate agreements are enforced
") Only certain deals are enforced by courts
a) 2n their terms contracts can stipulate specific types of dispute resolution
b) 2f alternati)e dispute resolutions are inade/uate or inappropriate the state can
ta#e o)er
+) Contracts can e)en stipulate5 as a term5 the no enforcement regime be applicable so
long as the consideration is appropriate and the term is e*plicit
II) Promises
A) 7hilosophical )iews
1) Moral philosophers hold that promises should be enforceable as contracts (by ma#ing
the promise you induce reliance and create harm by bac#ing out)
a) They do allow certain actions abrogate the obligation to adhere to the promise
2) 8egal doctrine has gone the other way5 holding promises as unenforceable absent
reliance (or some other e*traordinary factor)
$) Simple donati)e promises (9ifts)
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Contracts Outline
1) Theoretical origins
a) ,estatement6
i) :1; & bargain re/uires mutual assent to the e*change and consideration
1 7arties must reach a mutual bargain and assent to the terms
ii) :;1 & re/uirement of e*change< types of e*change
1) Consideration re/uires bargaining for a performance or return
consideration
2) Consideration is bargained for if it is sought by the promisor in
e*change for his promise and gi)en by the promisee in e*change
for his promise
") 7erformance may consist of6 a) An act other than a promise< b) a
forbearance of a legal right< or c) creation5 destruction5 modification
of a legal relation
+) Consideration may be made or gi)en to the promisor or a
representati)e
b) ,easons to re/uire consideration
i) 7eople often promise in the heat of the moment and courts are unwilling
to hold them to such hasty promises
a) 7romisor might not be able to perform (changed circumstances)
b) 7romisor may not want to perform upon reflection
c) 7romisee may not deser)e the promise
ii) Consideration ser)es as e)idence of an intent to form a contract
c) Dougherty v. Salt
i) Aunt Tillie gi)es her nephew a note for =">>> so he3ll be 'ta#en care of(
ii) She says this is for him always doing for her5 now she wants to do for
him (past consideration)
iii) She does not honor the note when it comes due
i)) 2ssues6 was there consideration?
)) 7rocedural @istory6
a) Aury found for the nephew & set aside by the Budge
b) Appellate Court found the note )alid e)idence of consideration
under the theory that she wouldn3t ha)e signed it if she didn3t thin#
she was getting )alue for it
c) CardoCo (writing for the maBority) re)erses the appellate court
saying that formal writing was not sufficient to create a contract5 it
was a simple donati)e promise for an e*ecutory gift (gift in the
future)
1) There was nothing of )alue e*changed that was )iewed
as consideration by both parties
2) 7ast consideration cannot support a contract & no bargain
)i) Black Letter: reciprocal consideration is re/uired to enforce a donati)e
promise
2) Consideration
a) Consideration must be bargained for5 if an element is simply essential to fulfilling
a promise there is no consideration
i) There is a grey area when an element is bargained for & apply common
sense5 is it reasonable that someone would bargain for that consideration
b) %lement of form
i) Modern courts seldom loo# at the ade/uacy of consideration5 but they will
not honor contracts based on truly to#en consideration
a) This reinforces the e)identiary nature of consideration
b) 2f the form of contract is fulfilled courts typically honor it
ii) Schnell v. Nell
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a) .ell had contracted with se)eral friends of his dead wife to pay
them =2>> in e*change for =>>1 each (form of a contract) to honor
her wishes
1) @e then died and his estate would not pay
b) 7laintiffs sued arguing6
1) 2t had the form of a contract
2) 8o)eDaffection of wife and her contribution to the marriage
") Eife3s intent to gi)e the money
c) Court disposes of reason 2 as past consideration and reason "
as a gift and was left with reason 1
1) Court found that the consideration was so nominal that it
satisfied the form but not the force of a contract5 it was
simply a donati)e promise and not an enforceable contract
2) Today courts may honor it5 although the consideration
was )ery nominal & especially since this was li/uidated
)alue where the inade/uacy of consideration is )ery blatant
d) @olmes suggested that form was sufficient
iii) ,estatement 2
nd
re/uires a bargain in fact5 not simply a bargain in form
a) .ominal consideration ma#es contracts for options or guaranties
enforceable (especially when the consideration is actually gi)en)
i)) Seals no longer hold any real importance5 States ha)e split three ways6
a) .o )alue
b) ,ebuttable presumption of enforceability
c) 8imited enforceability
") ,eliance
a) %lements of reliance
i) ,eliance can ma#e a donati)e promise enforceable
ii) ,estatement 2
nd
:F>
a) Gour elements for reliance to apply6
1 A promise
2 7romisor should reasonably e*pect promise to induce
action or forbearance
" 7romisee actually relied on the promise
+ Gailure to enforce would create inBustice
b) 7romissory estoppel
i) Originally reliance barred claims of lac# of consideration
ii) Today reliance substitutes for consideration
iii) 2mportant distinction for remedies
a) 2f party is estopped from pleading lac# of consideration he must
honor the contract
b) 2f reliance is treated as an e/uitable solution then the party is
only liable for the )alue the promisee reasonably relied on
c) ,emedies
i) %*pectation damages (forward loo#ing5 standard remedy) & puts inBured
party in the state they would ha)e been in had the contract been performed
a) Compensates for what was not gained as a result of breach
ii) ,eliance damages (bac#ward loo#ing) & puts the inBured in the state
they would ha)e been in had the promise ne)er been made
a) Compensates for acti)ities not underta#en as a result of promise
b) Co)ers costs incurred because of the promise
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d) Cases6
i) Kirksey v. Kirksey
a) Man in)ites his widowed sisterHinHlaw to come stay on his land5
sets her up for a while5 then e)icts her
b) The Supreme Court of Alabama decided that her brotherHinHlaw
made a simple donati)e promise and owed her no damages
1) ,estatements undid this allowing reliance as
consideration
2) $y relying on the promise she lost the ability to plant
crops and retain her old home5 now that she is e)icted she
is in a worse place than she would ha)e been in if he had
ne)er made the promise
ii) Times-Mirror
a) 8os Angeles initiated condemnation procedures on the TimesH
Mirror3s land
b) TimesHMirror secured a new site and began building a new
facility5 but the city stopped condemnation proceedings
c) The court re/uired the city to perform and buy the site
iii) Feinberg v. Pfeiffer
a) Gacts6
1) At a shareholders meeting the company decided to grant
Geinberg a pension of half her salary upon retirement (at her
discretion)
2) She continued to wor# for a while but decided to retire
early because she could support her family on her and her
husband3s pension
") The company subse/uently reduced then eliminated her
pension
b) Geinberg claimed reasonable reliance on the pension and as#ed
the court to enforce the contract
c) 0efendants claimed that the pension was a gift5 not a contract5
and therefore had the right to terminate at will
d) Court held it was a contract
1) Eithout the promise of the pension she could and would
ha)e continued to wor# and earn her full salary
2) The court could ha)e simply ordered compensation for
the amount of lost wages she did not recei)e after she
retired
") The company could ha)e argued they only needed to
compensate her to the point where she got sic# and could
no longer wor#
+) The court enforces the original promise5 but treats it as a
contract and essentially awards e*pectation damages (what
shoe would ha)e e*pected to recei)e if the contract was
honored)
i)) Hayes v. Plantations Steel
a) @ayes decided to retire and his employer promises to pay him an
annual amount to ta#e care of him
b) After control of the company changes hands the payments stop
c) @ayes sues and loses for two reasons
1 @e had already decided to retire before the promise was
made so there was no reliance on that promise to retire (he
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Contracts Outline
could not reasonably rely on it because he was not sure it
would continue)
2 @is e*Hemployer and the new proprietors did not ha)e
#nowledge that he was relying on the money for his
retirement (if they did5 or that he was passing up wor# then
they might ha)e been liable)
)) ol!stick v. "#M $ealty
a) Court argues that there may be times when e*pectation
damages are appropriate in some reliance situations
)i) D% Stout
a) Gacts6
1) Stout was a li/uor distributor in 2ndiana
2) Stout was relying on @iram Eal#er and $acardi
") $acardi told Stout they intended to continue distributing
through Stout after which Stout enters into negotiations to
sell their remaining assets but reBects an offer
+) $acardi then pulled out causing Stout to lose =->>5>>>
b) Stout claims that $acardi owes them the decrease in )alue as a
reliance measure for inBuring their bargaining position
c) $acardi argued that the distribution agreement was atHwill and
could be terminated at any time5 so any reliance was unreasonable
d) Court3s holding
1) $acardi argued this was li#e lost wages in an atHwill
employment contract (not compensable)
2) Court )iewed this more li#e a mo)ing e*pense & there is a
defined li/uidated damage suffered by Stout5 not
e*pectation damages (although these were damages they
e&'ecte! to recei)e)
a) Stout lost the increased offer )alue =->>5>>>
") Once $acardi made the promise they could not simply
re)o#e it #nowing that Stout was relying on that promise
during their negotiations
)ii) (alters v. Marathon )il
a) Gacts6
1) 7laintiffs contact Marathon about starting a fueling station
franchise
2) Marathon promised to gi)e them a franchise and to
supply them with gas
") The Ealters spent significant funds impro)ing the site5 but
Marathon breached the contract
b) Court held that they should recei)e e*pectation damages for the
amount of gas they could reasonably ha)e e*pected to ha)e sold
had Marathon honored the promise
c) The court treats this as a donati)e promise5 but award
e*pectation damages
1) Court treats this as a lost opportunity cost type of damage
& the Ealters could ha)e gotten a different franchise5 but
since they relied on the Marathon franchise they should
recei)e the reasonable benefit of that reliance & this goes to
what they could recei)e as franchise owners5 not simply
what they paid to impro)e the site
2) The court only awards a year3s worth of damages in the
assumption that the Ealters can find a new business in that
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Contracts Outline
time & in a pure e*pectation damages award the court would
loo# to the total life of the contract and what those profits
would ha)e been (minus mitigation)
III) Bargain, Unconscionability, Duress
A) Consideration must be bargained for to create a contract
1) As long as the bargain form is followed courts will typically not loo# at the amount of
consideration (e*cept in cases of li/uidated damages that are Bust facially inade/uate)
$) ,estatement 2
nd
Sections
1) :;1 (see abo)e)
2) :;2 e*cept as pro)ided for in ::;" and ;+ any performance bargained for is
consideration
a) :;" & performance of a settled legal duty is not consideration
b) :;+ & Settlement of claims
1) Gorbearance of an in)alid legal claim is not consideration
2) Gorbearance of a )alid claim is consideration
") :;F ade/uacy of consideration & if the re/uirements of consideration are met there are
no further re/uirements for6
a) A gain5 ad)antage5 or benefit to the promisor or a loss5 disad)antage5 or
detriment to the promisee
b) %/ui)alence in the )alues e*changed
c) 'mutuality of obligation(
C) Statute of Grauds (highlights)
1) Common law doctrine that re/uires certain #inds of contracts be in writing
2) @as only limited applicability
") 2n California it applies to real estate contracts
0) Cases6
1) Hammer v. Si!*ay
a) Gacts6
i) !ncle promises nephew =->>> if he refrains from drin#ing5 smo#ing5 or
gambling until he is 21
a) This is a unilateral contract & a promise for an actDforbearance)
ii) At 21 boy tells his uncle he has performed and uncle offers to hold the
money for his nephew
iii) After the uncle dies the estate refuses to pay out the money
b) The estate argued that the nephew benefited from the forbearance and there
was no mutual consideration5 therefore no contract
c) The court holds that the promisor need not recei)e a tangible benefit from a
bargain5 the promisee simply must gi)e up some legal right to ma#e the contract
enforceable & the forbearance is sufficient consideration
d) Iey holdings6
1 Things must be bargained for
2 7romisee must actually forebear a legal duty
" The promisee need not suffer a detriment nor the promisor a benefit
2) Davies v. Martel +aboratory Services
a) %mployee is promoted and sent for an M$A by the company5 but the company
fires her and stops paying for her to go to school
b) The court holds that she ga)e up a legal right to ser)e on the board of the
company and in e*change the company owed her the schooling (mutual
consideration)
") Hancock ,ank v. Shell )il
a) Gacts6
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Contracts Outline
i) 8essee could only renew the contract for 1- year periods while Shell
could terminate it on F> days notice
ii) @ancoc# gained control of the lease and tried to e)ict Shell by arguing
that the contract was so oneHsided that it lac#ed mutuality
b) The court holds that the contract is not )oid simply because the terms were bad5
there was mutual consideration and @ancoc# #new the terms getting in
+) ,atsakis v. Demotsis
a) Gacts6
i) 7laintiff (creditor) loaned 0emotsis ->>5>>> drachma in e*change for
=2>>>
ii) 0emotsis was stuc# in 9reece during EE22 when she made the
contract5 is star)ing5 and doesn3t care what she has to pay to get the line of
credit
iii) After the war she pays $atsa#is bac# the fair )alue of the loan (K=2-)
and thin#s that should be enough
i)) She argued that she only entered into the contract out of desperation
and it was therefore e*ecuted under duress (lac# of consideration)
b) The court reBects the argument of lac#Dfailure of consideration & she recei)ed
the benefit of her bargain
i) Creditor recei)es the full contract amount plus interest
ii) The actual )alue of the currency to her at the time was li#ely much
higher than the simple e*change rate & courts are not in the habit of reH
e)aluating the )alue of bargains made5 they simply loo# to see if the form
of the contract was made and if the bargain is manifestly unreasonable
%) 0uress
1) 0uress at the time of e*ecution can be grounds to abrogate a contract
2) ,estatement 2
nd

a) :1;- & when a contract is )oidable for duress
1 2f a party3s assent is induced by improper threat by the other party that
lea)es no reasonable alternati)e
2 2f the party3s assent is induced by improper threat by another nonHparty
the contract is )oidable unless the other contracting party does not #now of
the threat if good faith and gi)es )alue it may be enforceable
b) :1;J & improper threats
a) A threat is improper if6
1 Threat is a crime or tort5 or would be if it resulted in gaining
property
2 Threat is criminal prosecution
" Threat to use ci)il process is made in bad faith
+ Threat is a breach of good faith and fair dealing
b) A threat is improper if the resulting e*change is not on fair terms and6
1 Threat would harm recipient and not greatly benefit ma#er
2 7rior unfair dealings enhance the effecti)eness of the threat
" Threat is an unfair use of power for illegitimate ends
") 0uress without an improper threat (falls under unconscionability)
a) Terms of the contract seem manifestly unfair5 perhaps as the result of ine/uities
in bargaining position (Ms 0emotsis5 maybe)
b) 2nducement to ma#e bad deals & con)ince someone to ma#e a )ery bad deal
with terrible terms
+) Cases6
a) #houinar! v. #houinar!
i) Gacts6
a) Conflict o)er ownership of the company
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Contracts Outline
b) Company gets into bad financial situation5 one of the members
secured financing contingent on resolution of the ownership dispute
c) Other members agree to resol)e if he buys them out at an
inflated rate & apparently a duress situation
ii) ,easoning
a) The court agrees that this is a duress situation but enforces the
terms of the contract he entered & the people e*torting the high
price were not responsible for putting him in the negati)e situation5
they simply too# ad)antage of it5 since they did not create the
duress they are not penaliCed for e*ploiting it
b) -isenberg & '$argain 7rinciple and its 8imits(
i) @ypo6 Symphony musician with bro#en an#le and passing geologist
a) !nder common law two principles of contract enforcement apply6
1 ,escuer did not cause the duress5 so he should recei)e
the benefit of the bargain he struc# (no duty argument)
2 The court does not Budge the )alue of a bargain & the
musician recei)ed consideration for the consideration he
promised (e)en if gi)en under duress5 what is the )alue of
his life?)
b) ,easons not to enforce the contract
1 The reward is grossly disproportionate to the cost and ris#
to the rescuer
2 The musician recei)ed tremendous benefit5 what is that
worth?
ii) Contract law is a body of principles created by states to determine when
pri)ate deals should be enforced & intended to regulate and protect
economic transactions
a) As a policy matter we want to enforce contracts that promote
desirable social acti)ities (li#e rescues)
i) @ow much reward is re/uired to encourage rescuing?
ii) 7erhaps enforcement will also deter ris#y acti)ity
b) %isenberg suggests a bonus system that is high enough to
encourage rescue acti)ity but not so high as to deter people from
ta#ing actions
iii) @ow states implement %isenberg3s ideas
a) .ew 4or# priceHgouging statutes (see pg -FHJ1)
1) Statute is intended to deter gouging5 but does not create
a brightHline rule to define gouging
2) %)erything is defined in reference to unconscionability
without defining what unconscionable means either
") Application in Peo'le v. T*o (heel #or'.
a) 7rice increases ranged form +HJ;L
b) Court3s determination of unconscionability
i) .o e)idence of shortage5 only that the
mar#et would bear higher prices
ii) Gact specific instance of unconscionability
c) Two #inds of unconscionability recogniCed by
courts6 (interaction is unclear)
1 7rocedural6 created by unfair contract
practices5 how the contract is obtained
2 Substanti)e6 contract terms are ridiculously
high or unfair
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G) !nconscionability
1) Gactors for determining unconscionability by the court
a) Eas there meaningful consent (did the person understand the terms)6
i) 0id they understand the conse/uences of breach
ii) Ehat was their le)el of mental competency or ability
iii) 2f the seller tailors the contract to a specific mar#et they cannot then
argue that they were unsure what mar#et they are selling to5 or the abilities
of that mar#et
b) 7ossible standards a party may be held to6
i) Should the seller ha)e obBecti)ely #now the buyer didn3t understand the
terms of the contract (how much is the seller responsible for the buyer?)
ii) Should the buyer be responsible for being sure they understand (unless
the contract is o)ertly decepti)e)
a) 0oes the buyer ha)e a reasonable alternati)e choice?
iii) 2s this sort of contract customary in the area (would buyers be used to
entering into similar contracts)
2) !CC :2H">2 !nconscionability
(1) 2f the court finds the terms of a contract unconscionable they may choose not
to enforce it in its entirety or Bust the flawed portions5 or limit the application as they
see fit
(2) 2f a contract is claimedDappears unconscionable the parties shall be gi)en the
opportunity about its commercial setting5 purpose5 and effect to aid the court
") Ehy ha)e a contract of unconscionability
a) 7rotect people form harmful contracts they may not understand
b) Channeling of beha)ior & we want merchants to act morally and consumers to
see# out information to gi)e them greater bargaining power
+) Cases6
a) (illiams v. (alker-Thomas Furniture #o.
i) Case of an unconscionable contract for furniture payments
a) As long as a balance remains of any item ever bought from the
store all of the items ser)e as collateral (miss a payment and
e)erything can be repossessed)
ii) @ow to determine unconscionability
a) 2s it unconscionable on its face? & loo# at the facts and
circumstances
1) The people entering these contracts are generally poor5
perhaps underHeducated5 and unli#ely to ma#e good
financial Budgments
2) The store has a distinct incenti)e to ignore the person3s
situation to impro)e its3 own financial situation
") Might e)en argue contract was obtained by fraud
iii) Eho should be responsible for ensuring the parties understand the
terms of the contract?
a) The court implies that because the store #new the plaintiff3s
financial situation they #new that she could not afford the new items
she bought and sold them to induce a default
b) Con)ersely5 she had always been a good customer and the store
may ha)e assumed she had alternati)e sources of income
c) The trend is that buyers should be liable for contracts they sign5
but that enforceability can be rebutted by e)idence of6
1 Glawed process and no meaning choice of alternati)e O,
2 The terms of the contract 'shoc# the conscious(
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i)) .ote from Kirby & sellers can ma#e themsel)es liable if they
affirmati)ely go after a customer rather than allowing the customer to come
to them
b) Ma&*ell v. Fi!elity Financial
i) Gacts6
a) The Ma*wells bought a solar water heater (that ne)er functioned)
that was ridiculously e*pensi)e and re/uired their house as
collateral
b) Subse/uently they re/uired an additional loan and when they got
that their entire contract was rewritten into a new contract
1) This is called a 'no)ation( & e*tinguishing the old contract
an replacing it with a new one
c) Gidelity argued that the no)ation e*tinguished any
unconscionability in the original contract
ii) At the trial and appellate le)els the no)ation argument was accepted
iii) The state Supreme court loo#s at two issues6
1 Eas the original contract unconscionable
2 0id the no)ation erase any unconscionability
i)) Court then enters into an analysis of procedural and substanti)e
unconscionability
a) @olding that substanti)e unconscionability alone is sufficient to
render a contract in)alid means that no amount of procedure can
protect a defendant & some argue procedure should be a complete
defense
b) Contract3s channeling function is intended to ensure both good
procedure and good substance (we want well informed consumers
and moral sellers)
c) The court holds that the substance of a contract can ser)e as
e)idence of an inherent procedural defect (which can be rebutted) &
combination of both procedural and substanti)e unconscionability
i) There is no e*press need to ha)e both #inds of defects
ii) Substanti)e unconscionability is enough (this may not be
true in all Burisdictions or situations)
d) .o)ation & cannot graft a dead branch to a life tree & the
no)ation did not e*tinguish the original unconscionability
IV) Mutuality
A) !nder classical )iews of contract law mutuality was critical because it showed that both partied
had obligations under the contract and therefore both were bound by its terms (each had an
obligation or neither did)
1) !nilateral promises are unenforceable contracts
2) 8ac# of mutuality can ma#e a promise unenforceable
$) $ilateral )s unilateral contracts
1) $ilateral & con)entional contracts5 at the time of creation both parties e*change
promises for a stated performance
2) !nilateral & a promise in e*change for performance (a party e*changes a promise for a
specific performance) & the completion of the performance ma#es the contract binding
a) The doctrine of mutuality does not really apply because the parties are not really
bound by the promise5 they are bound by the performance & if a party performs
then you are bound5 but they are not bound to perform
b) Mutuality hinges on the e*change of promises
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C) Conditional promises
1) A conditional promise can ser)e as the basis of a binding contract (if 2 do something
then 2 will perform) & see Scott infra
a) The conditional promise ser)es as consideration because it limits the realm of
choice of the promisor5 e)en though they are not actually bound to fulfill the
condition
2) Conditional promises can be based on obBecti)e criteria as well (if it rains 23ll dri)e you
to the store)
") $inding contracts can be based on wholly subBecti)e conditional contracts (if 2 feel li#e it
2 will dri)e you to the store) & constrained by good faith and reasonableness
+) !nder what conditions can someone withdraw from contracts based on conditional
promises
a) $oth parties agree to rescind or substitute a new contract (a no)ation)
b) 9ood faith belief on the party setting the condition they will not fulfill
c) 7arties must allow a reasonable chance for the condition to ta#e place
0) 2llusory promises
1) There is no contract if one party truly does not promise to do anything5 e)en though it
might appear to they are ma#ing a promise (23ll buy all the widgets from you 2 want & no
obligation to buy any widgets) & see (ickham infra
a) This is true e)en if a party promises to buy all they need5 without a definable
amount the contract is uncertain and unenforceable
2) Today courts will li#ely loo# for a duty of good faith and fair dealing
a) Courts will often )iew the opportunity to enter a new mar#et as consideration in
return for an illusory promise (ie chance to supply coal in (ickham) e)en if one
party is not bound by a specific performance5 beyond an obligation of fair dealing
b) Theoretical basis6
1 $argain for a chance
2 9ood faith consideration of buying (unbound party has a duty of good
faith to consider buying from the bound party)
") ,estatement 2
nd
:;; & illusory promises are not consideration if the promisor retains
other options unless each of the alternati)e performances would constitute consideration if
bargained for separately
a) Gew Burisdictions ha)e adopted this section because of bargain for a chance
and good faith as limitations to options
%) !CC :2H">J Output ,e/uirements Contracts
1) A term which measures re/uirements by the output of the seller or the needs of the
buyer means such actual output as may occur in good faith5 although no unreasonable
amount out of proportion to pre)ious needsDdemands can be re/uired or tendered
2) An agreement by the buyer or seller for e*clusi)e dealing imposes an obligation by the
seller to supply the goods and the buyer to obtain them from the seller
H.otes6
a) These #inds of contracts are common5 but are essentially illusory since they
specify no e*plicit amount (courts will still tend to enforce them if reasonable and
madeDsatisfied in good faith)
b) These typically represent chance to sell type contracts (eg (ickham coal)
c) 8egal )iews of these contracts6
1 Classical common law6 no contract without definite amounts
2 ,estatement 2
nd
:;; & if there are alternati)e performances they must
each be sufficient for consideration (buying nothing is not consideration)
" Modern common law (follows !CC) & the chance to sell is sufficient to
create consideration (seems most applicable when someone is trying to
enter a new mar#et rather than continuing to supply an established mar#et)
7age 11
Contracts Outline
G) Cases6
1) Scott v. Moragues +umber #o.
a) Scott agrees to ship lumber for Moragues if he buys a boat & Moragues agrees
to ship the lumber with Scott for a specific price
b) Scott buys the boat5 but refuses to ship the lumber
i) @e argues that there was no contract due to lac# of mutuality & he was
under no obligation to buy the ship therefore he was not bound to perform
anything
c) The court holds that5 true5 he was under no obligation to buy the ship5 but once
he did buy the ship he *as obliged to honor the contract & a conditional promise
can be the basis for a binding contract
i) Consideration need not be an absolute obligation5 rather it is a narrowing
of the world of possibilities
ii) The contract forms at the time the conditional promise is made5 .OT
when the condition is fulfilled
2) (ickham % ,urton #oal v. Farmers. +umber
a) Gacts6
i) 7laintiff promised to supply coal of a certain /uality at a certain price
a) 0efendant buys only so much as they want
ii) 7laintiff is trying to get out of the contract and does not chose to supply
coal (price is bad)
iii) 0efendant has had to co)er the amount of coal they did not recei)e and
wants to reco)er damages
b) 7laintiff argues that there was no contract because the defendant3s promise was
illusory & the defendant did not ha)e to buy any coal
c) Court agrees with plaintiff
i) They )iew the contract as )oid for lac# of consideration (buyer3s choice
was not constrained)5 for lac# of certainty (amount to be bought was ne)er
defined)5 and for lac# of mutuality (if one party isn3t bound5 neither is)
") #oca-#ola v. )range #rush
a) Orange Crush agreed to supply concentrate to CocaHCola for as long as CocaH
Cola wanted it5 but CocaHCola could terminate at will
b) Orange Crush stopped shipping concentrate and argued lac# of mutuality &
CocaHCola was not bound to buy any concentrate & court agreed
+) +i!ner v. Mi!-#ontinent Petroleum
a) A seemingly oneHsided contract containing a 1>Hday notice pro)ision was
sufficient consideration for mutuality
-) urfein v. (erbelovsky
a) $uyer had the option to cancel the contract at any time before shipment &
supplier argues there was no mutuality
b) Supplier decided not to ship5 court says the contract is binding because the
supplier had the option to ship immediately to ma#e the contract binding5 and
therefore it was the supplier3s option to ma#e the contract binding
J) Mattei v. Ho''er
a) Gacts6
i) ,eal estate contract to buy property contingent on finding tenants
ii) Seller tried to bac# out claiming contract was based on an illusory
promise since the buyer could bac# out at will (contingent on finding
tenants)
b) ,easoning of the court
i) Contract was )alid & buyer did not ha)e complete discretion5 condition
was subBect to a reasonable person standard
7age 12
Contracts Outline
ii) %)en if choice is open to the whim of the buyer there is still an implied
obligation of good faith and fair dealing
;) Helle v. +an!mark
a) Stands for he modern doctrine that courts will do whate)er they can to a)oid
in)alidating a contract on purely procedural grounds
M) Harris v. Time/ "nc.
a) Gacts6
i) @arris sues Time for a calculator watch promised in a promotional mailing
b) Court3s holding6
i) ,egardless of how inconse/uential @arris3s detriment was from opening
Time3s mailing Time still recei)ed the benefit of their bargain & @arris
opened their mailing which promised a calculator watch5 therefore Time
was obliged to honor the contract they created
F) (oo! v. +ucy/ +a!y Duff-or!on
a) Gacts6
i) She ga)e Eood e*clusi)e rights to place her endorsement on products
and mar#et them
ii) She was still ma#ing endorsement personally on the side
iii) She e)entually tried to brea# the contract5 claiming in)alidity because of
an illusory promise & Eood was not bound to do any mar#eting
b) Court3s reasoning6
i) CardoCo holds that there is a presumption that plaintiff will ma#e
reasonable efforts to mar#et the products e)en in the absence of an
e*press promise to do so & while in a formalistic )iew there is no binding
e*plicit e*press promise ta#ing the document as a whole there is a
presumption of good faith
ii) Black Letter & implied promises can be binding based on good faith
1>) +acle!e as v. 0moco )il
a) Gacts6
i) 8aclede contracted to pro)ide propane ser)ices to housing de)elopments
that were not yet on municipal gas lines
ii) They contracted with Amoco to pro)ide propane with the terms6
1 Amoco must pro)ide propane as re/uired (no termination
pro)ision for Amoco)
2 8aclede can terminate annually with "> days notice
iii) 0uring a propane shortage Amoco cuts the 8aclede allocation and then
tries to raise prices5 when 8aclede protests Amoco terminates the contract
b) Court3s ,easoning
i) Missouri court reBects Amoco3s claim of lac# of mutuality based on the
termination pro)isions
a) There need not be point for point correspondence for mutuality to
e*ist
b) Court differentiates failure of consideration from mutuality of
consideration
1) Gailure of consideration would occur if 8aclede had such
a sweeping termination pro)ision that it would outweigh any
other consideration5 but a termination clause is in)alid only if
there is no restriction
c) Also5 no lac# of mutuality
1) Gormally5 the contract re/uired Amoco to supply all of
8aclede3s re/uirements while 8aclede was re/uired to buy
nothing
7age 1"
Contracts Outline
2) 8aclede3s distribution system was designed to accept
propane only from Amoco5 therefore the inference could
easily be made that 8aclede intended to get propane only
from Amoco & the court is gi)ing force to the clear intent of
the parties
d) !nder !CC :2H">J 8aclede is bound to buy all of its needs from
Amoco and Amoco is bound to supply them5 if 8aclede3s needs had
dramatically increased then they would ha)e been allowed to go to
another supplier without breaching because then their re/uirements
would ha)e been unreasonable (but they would not ha)e been able
to claim Amoco breached5 neither would Amoco)
11) rouse v. rou' Health
a) Gacts6
i) 9rouse was offered a position as a pharmacist with 9roup @ealth which
was later rescinded because they could not find a positi)e reference for
him (term of employment was at will)
ii) 9rouse left his original Bob and reBected another offer in reliance on this
offer
b) 0efendants claim that since the contract was at will they could fire him at any
time5 there is no difference between firing him a before he starts or the day after
c) Court3s ,easoning
i) This should be a case of promissory estoppel & 9rouse relied on the
promise of a Bob and incurred a detriment for it & award reliance damages
a) This creates the situation that a remedy e*ists for being fired the
day before you start wor# but not the day after
b) Court holds that there is a duty of good faith to allow a new
employee the chance to perform before firing him e)en if their
contract is for at will employment
d) .otes on at will employment contracts6
i) Some Burisdiction hold no reasonable reliance on at will employment
ii) Most Burisdictions apply a good faith and fair dealing standard and award
reliance damages
iii) Some courts go further by determining the a)erage length of
employment and awarding e*pectation damages
V) Legal Duties
A) Some parties owe a duty to perform because of their position as public employees and cannot
bargain for consideration for performing those duties (police officer cannot bargain for payment
from a shop owner to arrest burglars & that is a bribe not a contract)
1) ,estatement 2
nd
:;" & performance of a legal duty owed to a promisor is not
consideration< though it is consideration if the performance is not part of the duty and is
bargained for
$) Types of legal duties6
1) 7ublic duties (as a result of employment)
2) Contractual duties (go)erned by terms of the contract)
") Ginancial duties (also a result of contract terms)
a) At early common law there was ne)er a duty to accept less money for a debt
regardless of new agreements
b) More modern )iews allow these contracts to be enforceable because creditors
often find greater )alue in ha)ing an obligation e*ecuted sooner for a lesser
amount5 but debtors would not e*ecute such contracts if they were not enforceable
C) 0uress and legal duties
7age 1+
Contracts Outline
0) Cases6
1) ray v. Martino
a) Gacts6
i) 9ray was a 'special( police officer & sort of a contract officer
ii) @e had information about some stolen Bewels which he offered in return
for a reward
iii) @e supplied the information and sued for the reward
b) Court3s ,easoning6
i) 8ower court found a )alid contract
ii) .ew Aersey Supreme Court found that he had a legal duty as a police
officer to supply the information and therefore could not sue for the reward
& promising to perform his Bob is not consideration
2) Denney v. $e''ert
a) Gacts6
i) 2n)ol)es se)eral different groups of people (off duty deputy sheriff5 ban#
employees5 police officers) all claiming a reward for information leading to
the capture of some ban# robbers
b) Court3s ,easoning
i) $an# employees had a duty to preser)e the assets of the ban#5 police
officers had a duty to apprehend the ban# robbers
ii) OffHduty sheriff had no duty since he was operating outside the scope of
his employment and outside his normal Burisdiction
") +ingenfel!er v. (ain*right ,re*ery
a) Gacts6
i) %*ecutors of an architect are suing to enforce the terms of a modified
contract awarding a commission for the installation of a refrigeration
system in a brewery he designed
ii) Original contact re/uired architect to o)ersee the construction of the
brewery including the installation of the refrigeration system
a) Architect was the president of a company that supplied
refrigeration systems5 assumed they would use his5 and threatened
to breach and lea)e the site if they did not5 or in the alternati)e pay
him a commission on top of his original price
b) The brewery agrees to pay him more money if he returns to wor#
c) Original contract made no mention of using his system
b) Arguments and ,easoning6
i) The original contract had disputed legal duties (see ,estatement 2
nd
:;"
& performance of a settle! legal duty is not consideration) and the new
contract was a resolution of the disputed claim
a) The court dismisses this argument claiming that there was no
real disputeDconfusion about the duty5 only disappointment by
8ingenfelder that the brewery was not using his refrigeration system
ii) The new contract was a no)ation of the original contract (original
contract was )oided and replaced by the new contract with the higher
payment price)
a) The only change in performance is by the brewery5 8ingenfelder
is not doing anything new5 therefore under ,estatement 2
nd
:;" he
is only performing his legal duty which is not consideration
iii) Ginally they argue that 8ingenfelder could simply ha)e breached and
allowed the brewery to sue him (essentially gi)ing up his right to be sued
as a form of consideration)
a) The court dismisses this completely as ridiculous
7age 1-
Contracts Outline
+) Foakes v. ,eer
a) Gacts6
i) Goa#es owes $eer a debt and tries to reform the payment schedule so
that he will repay the money sooner if she will accept the money without
interest & is the new contract binding?
b) Court3s ,easoning
i) The court decides that the contract is not binding for lac# of mutuality
ii) They do e*press reser)ations about in)alidating the contract because
people can find )alue in a debt paid off sooner at a lower cost than later at
full )alue
-) 0ustin "nstruments v. +oral #or'.
a) Gacts6
i) 8oral contracted with Austin to supply parts for a .a)y contract
ii) 8oral subse/uently bids on an additional contract and recei)es bids from
Austin to supply some of those parts as well
a) 8oral accepts Austin3s bids on only some of the parts
b) Austin tells 8oral they are raising the price on the original contract
(because of increased costs) and will only perform if 8oral accepts
the bid for the entire second proBect
c) Austin also slowed down or stopped deli)ery of parts
iii) 8oral accepted the new terms but claimed duress in a letter to Austin
i)) Once both contracts were complete 8oral informs Austin they will only
pay the original price and sues for past payments & Austin counters
)) Austin claimed the new contract was a renegotiation
)i) 8oral claims they entered the new contract under duress because of the
time schedule and penalties of the .a)y contract
b) Appellate 0i)ision ,easoning6
i) The original letter by 8oral was self ser)ing
ii) 8oral did not ma#e sufficient efforts to co)er or find replacement parts
iii) There did not seem to be the immediacy necessary for a duress claim
a) 8oral did not e)en attempt to contact the .a)y to change the
deli)ery schedule
i)) The appellate di)ision assumes that Austin entered the new contract in
good faith
a) .o re/uirement that Austin actually show need to increase prices
)) Black Letter: mere threat not to perform does not create duress
a) 0uress has a suggestion of lac# of alternati)es (or no
compensable choice5 li#e co)er) & 'wrongful or unlawful threat that
depri)es the other party of unfettered will(
b) This decision indicates that 8oral did ha)e choices and that 8oral
had the duty to demonstrate that they did not ha)e free choice
c) Court of Appeals ,easoning6
i) 8oral did ma#e reasonable efforts to find alternati)es by going to all or
their appro)ed )endors
a) 2n mitigating damages you are only re/uired to ma#e reasonable
efforts5 not e)ery concei)able effort and the breaching party
generally cannot define what a reasonable effort is
ii) Circumstances surrounding the contract6
a) 0uress is grounds to )oid a contract when the party enters it in
response to an unlawful threat & Austin3s threat not to perform was
unlawful
7age 1J
Contracts Outline
b) .o alternati)e source of material (couldn3t co)er) and no
compensation for breach would ha)e repaired reputational damage
suffered
iii) There was no duty to contact the .a)y & the innocent party has no duty
to ris# other contracts to mitigate damages from a breaching party
d) Ehy the split?
i) 7olicy6 we want people to ha)e confidence in their contracts
ii) 7olicy6 do not want to allow people to allege duress after the fact through
selfHser)ing actions before the fact
VI) ccor! an! "atisfaction
A) Terminology
1) Accord & an agreed to alternati)e performance to a preHe*isting contractual duty
a) 8i/uidated amount less than the full amount is not an alternati)e performance it
is lesser performance so it does not /ualify as an accord (usually)
b) 0ifferent performance or performance not in)ol)ing li/uidated amounts can be
an accord if agreed to
i) ObBecti)ely less )aluable but different performance /ualifies
ii) 8esser payment on a different time schedule !oes /ualify (sometimes)
2) Satisfaction & performance of the accord
") %*ecutory accord & an accord that has been agreed to but not performed
a) Courts will enforce e*ecutory contracts but not e*ecutory accords5 you can
rescind an accord with no penalty up until performance5 but once performance
ta#es place it is binding
b) 7olicy6 better to allow parties to pri)ately resol)e conflicts so allow accord
c) 2f an e*ecutory accord is actually a new contract it can be enforced (no bright
line separating accords and new contracts5 courts weigh lots of factors)
i) 2f there is )agueness in the original contract leading to disputes in duties
the court might see an accord as a new contract
ii) 2f the original performance had matured but not been performed an
accord will li#ely be treated as a new contract
iii) 7erformance in the form of money is always treated differently5 reduction
in payment is usually treated as an accord5 not a new contract (when such
a decrease if enforceable at all)
i)) ,eliance can sometimes apply as an e/uitable doctrine to enforce
accords
+) Accord and satisfaction together e*ecute the original contract
$) !CC : "H"11 (commercial paper section)
1) Accord and satisfaction only applies if there was some dispute as to the price owed
a) The amount due may be unli/uidated (eg based on mar#et )alue)
2) 2f the dispute is in good faith (not simply because on party disputes it)5 the party ma#es
it clear that the amount tendered is in full payment of the debt5 and the other party accepts
that payment then the payment represents and accord and satisfaction
") %*ceptions6
a) ,eturn money accepted within F> days (reasonable period under the common
law) there is no accord and satisfaction and the original contract stands
i) A party cannot cash a chec# and reser)e the right to sue later
b) 2f there is a designated person that must be informed you must inform them (or
they must obtain actual #nowledge somehow)
+) Black Letter: for accord and satisfaction
1 !nderlying amount disputed in good faith
2 Accord is tendered in good faith with conspicuous notice
" Opposing party accepts tendered amount
7age 1;
Contracts Outline
C) Cases6
1) Flambeau v. Honey*ell
a) Gacts6
i) Glambeau bought computers from @oneywell at a set price and also
recei)ed =1+5>>> in programming ser)ices to be e*ercised at their
discretion
ii) Glambeau decided the programming ser)ices were not useful and
subtracted their )alue from the total cost (=1>FI H =1+I N =F-I) and
tendered a chec# in that amount stating '7aid 2n Gull( on the chec#
iii) @oneywell cashed the chec# and sued for the balance
b) Court3s ,easoning6
1) 7ayment in full of a disputed amount is an accord and satisfaction5 but
payment of a lesser undisputed amount is not
2) 2f a contract co)ers two amounts5 one disputed one undisputed the
disputed part ma#es the entire contract )alue disputed & they must arise
from the same transaction and occurrences (the same contract)
") The computer ser)ices were legitimately disputed5 therefore the entire
contract was disputed and the accord and satisfaction was appropriate
VII) #ecision, Mo!ification, an! $ai%er
A) Terminology
1) ,ecision & the parties agree that they no longer want to be bound by the contract terms
a) Contract may no longer be beneficial so they cancel it
2) Modification & change the terms of the contract midHstream
a) ,estatement 2
nd
:MF & a promise modifying a duty under a contract not fully
performed on either si!e is binding6 (co)ers ser)ices)
i) 2f the modification is fair and e/uitable in )iew of circumstances not
anticipated by the parties (creates consideration)
ii) To the e*tent allowed by statute
iii) 2f Bustice re/uires in light of reliance
b) !CC :2H2>F (co)ers sale of goods)
i) An agreement modifying a contract needs no consideration to be binding
H0iffers from ,estatement 2
nd
:MF
ii) Gor written contracts with a pro)ision that modification be in writing oral
modifications are not binding
iii) 2f an attempt to modify (because of a written re/uirement) does not
ser)e as a modification it may ser)e as a wai)er
c) 7ertains to e*ecutory contracts5 not ones that ha)e been performed
d) ,ole of consideration for modification under :MF6
i) Ser)es as e)idence to demonstrate bargaining for the modification
ii) Addresses if the change is Bust and reasonable under changed situation
a) Changed circumstances can lead to new benefits that represent
new consideration and thus a binding new contract
b) The new contract bargains for a different performance
e) Ehene)er loo#ing at modifications consider6
i) Eas ris# e*pressly allocated in the original contract
ii) Eere the changed circumstances reasonably foreseeable
iii) Eere the changes significant enough to warrant modification
i)) Eas the modification adopted )oluntarily
)) Eas the amount of new compensation reasonable in light of the changed
circumstances
f) Modifications create a new contract and cannot be retracted
7age 1M
Contracts Outline
") Eai)er & an agreement to accept less compensation for performance without
consideration
a) Eai)ers differ from modifications because they can be retracted at will with
reasonable notice before e*ecution (li#e e*ecutory accords)
b) !nder ,estatement 2
nd
a modification without consideration is a wai)er
i) :M+ & section 1 allows parties to wai)e immaterial parts of a contract at
will5 but determining what is immaterial is )ery subBecti)e
c) !nder the !CC :2H2>F (where there is no necessity for consideration) wai)ers
can be distinguished by as#ing6
i) 0oes the change address a promise or a central part of the performance
& wai)ers address ancillary promises not central performance
ii) 0oes the change address a central part of the performance but modify it
only marginally & wai)ers can change central performance moderately5 but
changes fundamentally altering the performance are generally
modifications
HEai)ers generally apply to conditions not performance
$) Cases6
1) 0ngel v. Murray
a) Gacts6
i) Maher contracted to haul trash for the city
ii) Contracts were for a fi*ed annual sum for a term of - years
iii) The contract assumed an annual growth of 2>H2- residences per year
i)) 2n the final two years of one of the contracts there was an increase of
+>> residences and Maher as#ed for an additional =1>5>>> to co)er these
costs5 which was agreed to by the city council
b) Court3s ,easoning
i) The trial court )iewed this as a case of fulfilling a preHe*isting legal duty
and therefore not consideration for a new contract
ii) Supreme Court found a true change in circumstances6
a) The contract did not e*pressly allocate the ris# of changes in city
siCe top Maher
b) The change in siCe was sufficient to ma#e the new terms fair and
e/uitable to warrant the increased payment
2) #lark v. (est
a) Gacts6
i) Clar# was well #nown for writing legal caseboo#s5 and for drin#ing
ii) Eest contracted with Clar# for a caseboo# at a price of =2 per page5 with
an additional =+ per page if he refrained from drin#ing
b) Clar# claimed that Eest #new he was drin#ing5 ne)er said anything5 promised to
pay him the full )alue5 were satisfied with the product5 but did not pay full amount
i) %ssentially5 drin#ing loo#ed immaterial to the contract5 Eest recei)ed
satisfactory performance and ne)er indicated that Clar# was not performing
properly
c) Eest argues that they bargained for two things6 a caseboo# at =2 a page5 and
Clar# not drin#ing for =+ a page
d) Court3s ,easoning6
i) Eas abstinence from drin#ing a condition or performance?
a) Contract was not clear or instructi)e on this issue
ii) $eha)ior of the parties6
a) Court prefers an e*press o)er an implied wai)er
b) The representations made by Eest had the character of an
e*press wai)er
iii) 2ntent of the parties6
7age 1F
Contracts Outline
a) Eest really only wanted a good case boo#
b) $y wai)ing the drin#ing pro)ision they still recei)ed the benefit of
their bargain
VIII) Past Consi!eration
A) 7ast consideration does not constitute grounds for a binding contract
1) Courts generally re/uire that consideration arise at the time of the contract
2) %*ceptions & there had to be an original contract that the new promise is based on &
this gi)es the original contract new life
1 Someone owes a debt5 the statute of limitations has run5 and they promise to
pay the debt
2 Someone goes ban#rupt and is unable to discharge a debt but later promises to
pay the debt
" A minor incurs a debt and promises to pay it after reaching the age of maBority
") Today past consideration can be the basis for a contract only if the benefiting party
ma#es a promise in response5 it cannot be the basis to sue a party to force them to
promise
+) ,estatement 2
nd
:MJ
1 The promise for past consideration is binding if it must be enforced to pre)ent
inBustice (e*ception to the common law)
a) Co)ers situation li#e (ebb and promissory estoppel
-) Black Letter &common law): past consideration is not binding consideration for a
promise
$) Cases6
1) Mills v. (yman
a) Gacts6
i) Mills cared for Eyman3s con at considerable e*pense
ii) Eyman promises to pay Mills for caring for his son but then renegs
b) Court applies blac# letter common law6 past consideration is not binding
2) (ebb v. Mco*in
a) Gacts6
1) Eebb was seriously and permanently inBured when stopping a barrel
from falling on Mc9owin and thus sa)ing his life
2) Mc9owin offered to pay Eebb a wee#ly stipend for the rest of his life
") Mc9owin died and his heirs decided to stop paying the stipend
b) Court3s ,easoning
1) The court adopted two fictions to ma#e the contract enforceable
1 Mc9owin recei)ed a tangible benefit and was morally bound to
repay that debt
2 Mc9owin would ha)e bargained for the consideration Eebb ga)e
had he had the opportunity & promise to pay confirms this
a) The benefit recei)ed has to be proportional to the price
I') #eme!ies
A) Contracts cases are usually about remedies (#ind and )alue)
1) ,estatement 2
nd
:"++
1 %*pectation damages & gi)e the nonHbreaching party the benefit of their bargain
2 ,eliance damages & put the party in the position they would ha)e been in had
no promise been made
" ,estitution damages & restoring to the party a benefit they conferred on the
other party (pay someone bac# for what they already paid)
7age 2>
Contracts Outline
2) 0amages are always net
a) Always subtract out6
i) Costs a party did not incur as a result of the breach
ii) $enefits the party recei)ed prior to the breach
iii) Mitigation (offsetting benefits)
b) Costs to include6
i) 8ost profits
ii) Gi*ed costs (sometimes)
iii) Mitigation (costs incurred)
") 0amages are not awarded as a punishment5 they are always intended as
compensation to an inBured party for their losses
+) 2n situations where the promise made is unclear or the e*pected outcome is uncertain
(physician promises) courts tend to apply reliance rather than e*pectation damages
(restore the promisee to the state they would ha)e been in had no promise been made)
$) Cases6
1) Ha*kins v. Mcee
a) Gacts6
i) @aw#ins has a scar on his hand that Mc9ee promises to repair with a
s#in graft
ii) Mc9ee promises to ma#e the hand 1>>L perfect with a short reco)ery
and little pain
iii) @aw#ins agrees to this bargain
i)) @aw#ins suffers se)ere pain5 a long hospital stay5 and the hairy han!
b) @aw#ins sues for breach of warranty and is as#ing for pain and suffering and
the difference in )alue between a perfect hand and what he got
i) This is a situation of e*pectation damages
ii) The court denies an award for pain and suffering (at least for the pain
e*pected from such an operation)
iii) @e did recei)e the difference in )alue for his useless hand and the
perfect one he e*pected5 only K=1+>> (seems low but probably reflects the
court3s reluctance to enforce a medical promise)
a) There is an assumption that professional ser)ices ha)e an
inherent character of uncertainty
b) 1an 2ee v. (it3ke & doctor was reassuring patient about
outcome5 not guaranteeing a positi)e result
c) Sullivan v. ).#onnor & court determines that there must be clear
proof that the doctor made a promise of a specific outcome and that
reliance damages are appropriate compensation
2) 4S Naval "nstitute v. #harter #ommunications/ "nc.
a) Gacts6
i) They license the rights to the paperbac# of Hunt for $e! )ctober with a
pro)ision that the boo# not be published before October 1FM-
ii) The publisher prints and ships the boo# in September 1FM-
iii) .a)al as#s for all of the sales of the paperbac# in September5 the trial
court awards the lost profits that .a)al would li#ely ha)e recei)ed in
September had the paperbac# not been a)ailable
a) The court adopts an e*pectation measure
b) 0istrict court awards
i) 8ost sales that .a)al would ha)e made for the hardco)er edition
ii) The profits Charter made from their copyright infringement & essentially
imposing a puniti)e damage for their infringement of the copyright
c) Circuit court re)erses the second component of the damages
7age 21
Contracts Outline
i) Charter actually gained the copyright in 1FM+5 but were not allowed to
e*ercise that right prior to September 1FM- & the only appropriate award
would be for lost e*pectation damages under the contract5 not for copyright
infringement5 because there was no copyright to infringe
") -arthinfo v. Hy!ros'here
a) Gacts6
i) %arthinfo refused to ma#e royalty payments they were obliged to ma#e to
@ydrosphere
ii) @ydrosphere see#s to rescind the contract rather than force performance
a) The court will sometimes grant rescission of a contract if there
has been an irreparable breach
b) 9enerally5 e)en if the other party has breached you are still
bound by your side of the contract & rescission may be the only way
to get out of the contractual re/uirements
b) .ormally5 after rescission5 the parties will as# for e*pectation damages
i) 2n this case the court awards restitution damages because they are
unable to determine what the appropriate e*pectation damages would be &
restore the parties to the position they would ha)e been in had there been
no promise
ii) 2f the court awarded part of %arthinfo3s profits to @ydrosphere they would
ha)e been putting @ydrosphere into a better position than they would ha)e
been without the promise
iii) The court is wrestling with unBust enrichment for %arthinfo and putting
@ydrosphere into a better position
i)) The court decides to force %arthinfo to completely disgorge their profits
& this might put %arthinfo into a worse position5 but the court determined it
was the most e/uitable outcome
c) 7rinciples from the case6
i) After rescission the parties should recei)e restitution damages and any
profits should be construed to benefit the nonHbreaching party
ii) %)en if this inBures the breaching party it is Bustified as an e/uitable
solution
') (fficient Breac)
A) A theoretical situation where breaching a contract actually ends up benefiting all parties
1) ,e/uires perfect #nowledge by the breaching party and an assumption that the
innocent party simply )alues the contract for its li/uidated )alue and can therefore be fully
compensated by the breaching party & 7osner3s assumptions
2) @owe)er5 there are situations where we cannot effecti)ely determine the )alue of
contract terms
a) Can sometimes use the price parties would pay for an item to determine
)aluation
$) 2f breach is truly efficient why not gi)e the innocent party the benefit of the bargain & hold the
original contract )alid and then let the innocent party contract with the party willing to pay more5 or
gi)e the increased )alue to the innocent party
1) 7osner claims increased transaction costs would e*tinguish increased )alue5 but
ignores the costs of litigation o)er the breached contract5 he would allow a complete
defense for efficient breach
2) 7osner then suggested the concept of true efficient breach (where e)ery party is happy
with the outcome) )ersus opportunistic efficient breach (where one party is happy and one
no which leads to litigation)
7age 22
Contracts Outline
a) Griedman suggests the concept of efficient theft & if you ta#e a commodity a
party wasn3t using without compensating them and then use it there should be no
crime5 an e*treme e*ample used to argue against efficient breach
C) This has ne)er become a doctrine or defense in contract law
1) Touches on the idea that there is no puniti)e component of contract law5 the purpose is
only to compensate for inBuries
2) %*treme e*ample of efficient breach doesn3t e)en re/uire compensation of the innocent
party5 only e)idence that breaching the contract led to a hirer net reward than the original
contract
'I) Diminution in Value
A) Courts will not always award full e*pectation damages if the difference between actual
li/uidated damages and e*pectation damages is huge5 instead they will award diminution in )alue
as a reflection of the 'actual( inBury
1) Courts seldom re/uire specific performance5 although they typically will award
e*pectation damages in the form of cost of completion as a replacement
2) 2nstead the court uses the alternati)e e*pectation measure of diminution in )alue where
the economics do not ma#e sense in cost of completion
") Black Letter: there is a strong presumption for cost of completion5 but where the cost
of completion is huge compared to the diminution in )alue or the benefit of completion is
small the court may simply award that diminution
a) %specially true if replacement of the damaged property is easy
b) Courts also do not want to put the inBured party into a better position5 they
simply want to compensate them for their actual loss
+) Gactors to consider6
1 0id the plaintiff specifically bargain for the term and grant consideration to ma#e
that bargain part of the contract (ie restoration of property)
2 Can the )alue of the bargained for term be fairly e)aluated obBecti)ely
" 2s there a huge disparity between the cost of completionDperformance and
diminution in )alue
+ 2s the breach in bad faith
- SubBecti)e factors6
a) @ow central was the breach to the terms of the contract (materiality)
b) 2f the breached term was material how reasonable is it to re/uire the
performance in light of the circumstances considering6
1 2s it reasonable for a party to want the performance at the price
2 As a policy do we want the contract enforced
$) Cases6
1) Peevyhouse v. arlan! #oal % Mining #o.
a) Gacts6
i) 9arland contracted with the 7ee)yhouses to strip mine coal on their
property
ii) As a term of the contract the 7ee)yhouses ga)e up some of the standard
compensation to ha)e their property restored to its original condition
iii) 9arland found less coal than they e*pected and decided not to restore
the property to its original state because it would be too e*pensi)e
b) 7ee)yhouses sue 9arland for =2-5>>>5 restoration would ha)e cost =2F5>>>5
the court only awards =">> as the diminution in )alue of their land
c) Court3s ,easoning
i) Mar#et )alue of the land is only K=">>> so restoring it would ma#e no
economic sense (in terms of li/uidated )alue)
7age 2"
Contracts Outline
ii) 0oes not ta#e into account that 7ee)yhouses ha)e an attachment to the
land and ga)e up other potential compensation specifically to ha)e their
land restored
iii) 7olicy /uestion & when can a party contract ha)e faith that contract
terms will actually be fulfilled5 when will they #now they3ll get the benefit of
their bargains and why should the breaching party be able to get out of the
contract because it was more e*pensi)e than they anticipated
a) 2f 9arland had found more coal than e*pected they would not
ha)e been re/uired to pay the 7ee)yhouses more money
b) This situation loo#s li#e the breaching party wins either way
c) There may e)en ha)e been some bad faith from the beginning5
or there could be in similar situations
2) Schenberger v. 0'ache #or'.
a) Contracted to ha)e ground water cleanHup after mining & doing the cleanup
would ha)e been e*pensi)e while diminution in )alue was moderate so the court
only re/uired compensation for diminution in )alue
") Droher v. Toushin
a) Gacts & house was built improperly so the floor sagged5 repair would cost K->L
of the )alue of the house
b) Court only awarded diminution in )alue
+) -astern Steamshi' v. 4S
a) !S promised to restore a ship used during the war6 restoration would cost =+M
but the ship would only be worth =2M after refurbishment5 court awarded =2M
-) $u&ley v. Forsyth
a) Contractor built a swimming pool that was too shallow
b) Court awarded moderate diminution in )alue
J) School District of -lmira v. Mc+ane
a) Gacts & supplier supplied beams that were treated with a chemical so they
discolored but were still structurally functional
b) The court awarded cost of completion damages e)en though they were much
greater than diminution in )alue because the supplier #new these beams were to
be part of a showpiece swimming pool and therefore #new they were being
specifically bargained for and that diminution in )alue would in no way compensate
for the loss
;) +ouise #aroline Nursing Home v. Di& #onstruction
a) Gacts6
i) .ursing home contracted to ha)e some new buildings built
ii) The builder breached and standard compensation is cost of completion
b) .ursing home as#ed for )alue of a completed building not simply cost of
completion
i) There was an oddity in the mar#et at the time and a completed building
was worth much more than it cost to simply finish it
c) The court reBected this )aluation and simply awarded cost of completion
i) This is basically a re)erse diminution in )alue situation
'II) Breac) of Contract: "er%ices
A) Cases6
1) 0iello #onstruction v. Nation*i!e Trailer Training
a) Gacts6
i) 0efendant contracted to ha)e a large area pa)ed to be paid for in
installments
ii) 0efendant fell behind in payments and plaintiff sued for breach
b) Court must resol)e how to measure damages6
7age 2+
Contracts Outline
c) Option 16 %*pected profit calculation
HCosts plaintiff incurred in performing6 =215->>
H8ost e*pected profits =">>>
HTotal damages of =2+5->>
H8ess payments already recei)ed =1>5->>
H7lus interest at ML HH gi)ing a total of =1J5M>> in damages
d) Option 26 Actual sa)ings calculation
HContract price of =""5>>>
HMinus costs actually sa)ed6 ?
HMinus payments recei)ed6 =1>5->>
H9i)es total
7roblem with this calculation is deterring costs actually sa)ed
e) !sually the two calculation will yield the same result5 but not always
i) 2f the contract was money losing the first calculation might lea)e you
better off than the second calculation (which might end up in a net loss5 or
a wash)
ii) Courts tend to apply the measure most beneficial to the plaintiff
2) (ire! Music v. #lark
a) Gacts6
i) Clar# contracted to ha)e music transmitted to his business for a certain
monthly price for a set period of time
ii) $efore the end of his contract he decided to mo)e5 but the person ta#ing
o)er his location still wanted the music so he tried to transfer the contract to
that person
iii) Eired music obBected and sued for breach of contract
b) Eired argued that this was a loss )olume sale
i) They would ha)e sold ser)ice to this new customer and still gotten the
benefit of the contract with Clar#5 therefore they are inBured for he )alue of
one sale through this breach
c) Court agreed with Eired & if they can show that they would ha)e made that sale
anyway then they ha)e demonstrated an inBury by not getting that sale
") 1ite& v. #aribte&
a) Gacts6
i) Caribte* ma#es fabric and Oite* waterproofs it
ii) Caribte* contracts with Oite* for waterproofing ser)ice but ne)er ships
fabric to be waterproofed so Oite* sues for breach
b) Oaluation6
HContract price of ="152->
HMinus costs not incurred of =1>51"J
H.o payments recei)ed
HTotal damages of =21511+
c) Caribte* argues that fi*ed o)erhead costs should ha)e been factored in (they
assumed that Oite* adds o)erhead costs into e)ery contract)
d) Court e*cludes o)erhead costs because they are still incurred e)en if the Bob is
not performed5 therefore they are not sa)ed by breach of contract & only direct
costs are sa)ed by the breach
'III) Breac) of Contract: "ale of *oo!s
A) ,ele)ant !CC 7ro)isions6
:2H;>M "eller+ Damages for ,on-acce.tance or #e.u!iation
(1) The measure of damages for nonHacceptance or repudiation by the buyer is the
difference between the mar#et price at the time and place for tender and the
7age 2-
Contracts Outline
unpaid contract price together with any incidental damages and less e*penses
sa)ed as a result of buyer3s breach
(2) 2f the measure of damages in (1) is inade/uate to put the seller in as good a
position as performance would ha)e done then the measure of damages is the
profit (including reasonable o)erhead) which the seller would ha)e made form full
performance by the buyer5 together with any incidental damages5 due allowance
for costs reasonably incurred and due credit for payments or proceeds of resale
:2H;1> "eller+s Inci!ental Damages
2ncidental damages to an aggrie)ed seller include any commercially reasonable
charges5 e*penses or commission incurred in stopping deli)ery5 in the
transportation5 care and custody of goods after the buyer3s breach5 in connection
with return or resale of the goods or otherwise resulting from the breach
:2H;11 Buyer+s #eme!ies in *eneral/ Buyer+s "ecurity Interest in #e0ecte! *oo!s
(1) Ehere the seller fails to ma#e deli)ery or repudiates or the buyer rightfully
reBects or Bustifiably re)o#es acceptance then with respect to any goods in)ol)ed5
and with respect to the whole if the breach goes to the whole contract5 the buyer
may cancel and whether or not he has done so may in addition to reco)ering so
much of the price as he has paid
(a) 'co)er( and ha)e damages under the ne*t section as to all the goods
affected whether or not they ha)e been identified to the contract< or
(b) reco)er damages for nonHdeli)ery as pro)ided in :2H;1"
:2H;12 1Co%er2/ Buyer+s Procurement of "ubstitute *oo!s
(1) After a breach within the preceding section the buyer may 'co)er( by ma#ing in
good faith and without unreasonable delay any reasonable purchase of or contract
to purchase goods in substitution for those due from the seller
(2) The buyer may reco)er from the seller as damages the difference between the
cost of co)er and the contract price together with any incidental or conse/uential
damages as hereinafter defined (:2H;1-)5 but less e*penses sa)ed in
conse/uence of the seller3s breach
(") Gailure of the buyer to effect co)er within this section does not bar him from
any other remedy
,otes: Seller only has to co)er losses resulting from co)er
:2H;1" Buyer+s Damages for ,on-!eli%ery or #e.u!iation
(1) The measure for nonHdeli)ery or repudiation by the seller is the difference
between the mar#et price at the time *hen the buyer learne! of the breach and the
contract price together with any incidental and conse/uential damages pro)ided in
:2H;1-5 but less e*penses sa)ed in conse/uence of the seller3s breach
(2) Mar#et price is to be determined as of the place for tender or5 in cases of
reBection after arri)al or re)ocation of acceptance5 as of the place of arri)al
,otes6 2f the mar#et price of the goods dropped there would be no reco)ery
:2H;1+ Buyer+s Damages for Breac) in #egar! to cce.te! *oo!s
(1) Ehere the buyer has accepted goods and gi)en notification he may reco)er as
damages for any nonHconformity of tender the loss resulting in the ordinary course
of e)ents from the seller3s breach as determined in any manner which is
reasonable
(2) The measure of damages for breach of warranty is the difference at the time
and place of acceptance between the )alue of the goods accepted and the )alue
they would ha)e had if they had been as warranted5 unless special circumstances
show pro*imate damages of a different amount
(") 2n a proper case any incidental and conse/uential damages under the ne*t
section may also be reco)ered
7age 2J
Contracts Outline
,otes: The court applies an e*pectation measure for damages5 nonHbreaching
party recei)es either the goods they contracted for or compensation for the
difference between contract and what they recei)ed
a) These damages can be a tremendous windfall
i) 9i)es the nonHbreaching party the benefit of their bargain
ii) %nsures that the seller does not ma#e unreasonable warranties
or representations
:2H;1- Buyer+s Inci!ental an! Conse3uential Damages
(1) 2ncidental damages resulting from the seller3s breach include e*penses
reasonably incurred in inspection5 receipt5 transportation and care and custody of
goods rightfully reBected5 any commercially reasonable charges5 e*penses or
commissions in connection with effecting co)er and any other reasonable e*pense
incident to the delay or other breach
(2) Conse/uential damages resulting from the seller3s breach include
(a) Any loss resulting from general or particular re/uirements and needs of
which the seller at the time of contracting had reason to #now and which
could not reasonably be pre)ented by co)er or otherwise< and
(b) 2nBury to person or property pro*imately resulting from any breach of
warranty
:2H;1M Li3ui!ation or Limitation of Damages/ De.osits
(1) 0amages for breach by either party may be li/uidated in the agreement but
only at an amount which is reasonable in the light of the anticipated or actual harm
cause by the breach5 the difficulties of proof of loss5 and the incon)enience or
nonfeasibility of otherwise obtaining an ade/uate remedy A term fi*ing
unreasonably large li/uidated damages is )oid as a penalty
(2) Ehere the seller Bustifiably withholds deli)ery of goods because of the buyer3s
breach5 the buyer is entitled to restitution of any amount by which the sum of his
payments e*ceeds
(a) The amount to which the seller is entitled by )irtue of terms li/uidating
the seller3s damages
(b) Twenty percent of the )alue of the total performance for which the buyer
is obligated under the contract or =->>5 whiche)er is smaller
(") The buyer3s right to restitution is subBect to offset to the e*tent that the seller
establishes
(a) A right to reco)er damages under this Articles other than subsection 1
(b) The amount or )alue of any benefits recei)ed by the buyer directly or
indirectly by reason of the contract
(+) ,esale of goods recei)ed in payment
:2H;2" Proof of Market Price: 4ime an! Place
(1) 2f an action based on anticipatory repudiation comes to trial before the time for
performance with respect to some or all of the goods5 any damages based on
mar#et price shall be determined according to the price of such goods pre)ailing at
the time when the aggrie)ed party learned of the repudiation
(2) 2f e)idence of a price pre)ailing at the times or places described is not readily
a)ailable the price pre)ailing within any reasonable time before or after the time
described or at any other place which in commercial Budgment or under usage of
trade would ser)e as a reasonable substitute for the one described may be used5
ma#ing any proper allowance for the cost of transporting the goods to or from such
other place
(") %)idence of a rele)ant price pre)ailing at a time or place other than the one
described in this Article offered by one party is not admissible unless and until he
has gi)en the other party such notice as the court finds sufficient to pre)ent unfair
7age 2;
Contracts Outline
surprise
:2H;2+ !missibility of Market 5uotations
Ehene)er the pre)ailing price or )alue of any goods regularly bought and sold in
any established commodity mar#et is in issue5 reports in official publications or
trade Bournals or in newspapers or periodicals of general circulation published as
the reports of such mar#et shall be admissible in e)idence The circumstances of
the preparation of such a report may be shown to affect its weight but not its
admissibility
$) %ffects of seller3s breach as a buyer of goods
1) Two ways a seller may breach
a) .ot deli)er goods at all (or all of the goods promised)
b) 0eli)er defecti)e or nonHconforming goods
2) ,emedies a)ailable to the buyer
a) Gor defecti)e goods
i) ,eturn defecti)e goods5 demand replacement goods or compensation for
replacing the goods on the mar#et5 and damages for losses incurred in
storing5 accepting5 testing5 etc the defecti)e goods
ii) Can retain the bad goods and re/uest compensation & can either get a
refund to reflect the reduced )alue of the defecti)e goods or damages to
co)er repair of the goods
iii) !nder :2H;12 can also co)er and reco)er the difference between the
contract price and the mar#et price
i)) Ginally5 can choose not to co)er and reco)er the difference in price
between contract and mar#et prices (common in commodities mar#ets
where parties seldom want the goods5 they Bust want the profit from mar#et
fluctuations)
b) Gor nonHdeli)ery
i) Can reco)er either co)er or :2H;1" e*pectation damages
C) Co)er (:2H;12)
1) !nder the !CC there is ne)er an obligation to co)er
a) Gailure of co)er does not bar other remedies
b) Gailure to co)er may ha)e an impact on conse/uential damages under :2H;1-
i) !nder this pro)ision there is a duty to mitigate5 failure to co)er loo#s li#e
a serious failure to mitigate5 unless co)er is truly impossible
ii) Once a party learns of a breach they are obliged to a)oid whate)er costs
the can5 this can tie in with co)er
2) 2s it possible to co)er but reco)er :2H;1" damages?
a) 2t may be more lucrati)e to co)er at the time of breach5 but then sue for
damages under :2H;1" because the co)er and mar#et prices are different and the
mar#et price at the time of suit gi)es a much better return
b) Most Burisdiction do not allow this sort of shell game
c) @owe)er5 a buyer can choose not to co)er at the time of breach5 sue for the
losses under :2H;1" then co)er at lower mar#et prices
") Courts will contemplate windfalls under these breach remedy pro)isions and fa)or
innocent parties when determining where the windfall should lie
0) %fficient $reach
1) Audge 7osner argues that there are times when parties can breach the terms of a
contract but end up with all parties better off & this is efficient breach
a) This is efficient because it a)oids the transaction costs of further bargaining
b) 0oes not factor in litigation costs resulting from the breach
2) Griedman and %isenberg suggest that rather than allowing efficient breach this sort of
situation should lead to new bargaining that leads to e)eryone being better off
a) Criticism suggests that one party can simply e*tort all of the profits
7age 2M
Contracts Outline
%) $reach Cases6
1) #ontinental San! % ravel v. K%K ravel
a) Continental bought e/uipment from IPI for =->I that was damaged and
re/uired =1>+I in repairs
b) IPI argued they should only be liable for loss in mar#et )alue rather than the
repair damages
a) Continental wants functional e/uipment5 not the mar#et )alue
c) The court finds for IPI demonstrating that it is sometimes possible to reco)er
significantly more in damages than the mar#et )alue of the contract commodities
2) ,urgess v. #urly )lney.s
a) Gacts6
i) $uyer agreed to buy three combines to be pic#ed up on seller3s land
ii) After se)eral months buyer had not pic#ed up the combines and seller
returned the down payment in an effort to end the transaction
iii) $uyer does not accept the repayment
b) $uyer sues under :2H;1" for the different between the contract and mar#et
prices (wants li/uidated damages5 not performance or co)er)
i) The Bury found the mar#et price was highly inflated and there was no
difference between what he was being gi)en and actual mar#et price
c) 2n the alternati)e the buyer sued under :2H;1- for lost profits
i) The court determined that the new deal buyer claimed he had made did
not loo# li#e a bona fi!e deal and reBected it
ii) The court did find that if there had been a real deal then these sorts of
damages would ha)e been appropriate
") Delchi #arrier S'a v. $otore& #or'.
a) Gacts6
i) 0elchi order a large shipment of compressors from ,otore* of defined
/uality and specifications
ii) ,otore* shipped compressors that did not meet the specifications and
could not be repaired
a) They claimed the specifications were inad)ertently
communicated and not really intended as part of the contract
iii) 0elchi sued for lost sales5 co)er costs5 storage5 etc
b) Trial court awarded only certain conse/uential damages
i) Awarded lost sales5 storage costs5 increased costs for e*pediting
shipment form other suppliers5 lost profits
ii) 0enied labor losses5 customs and shipping charges5 obsolete parts for
use only with those compressors
c) $oth 0elchi and ,otore* appeal
i) 0elchi & the denied damages should ha)e been awarded
ii) ,otore* & lost profits were inappropriate because 0elchi did not e*haust
their in)entory and should not ha)e recei)ed fi*ed costs
d) Appellate decision
i) The court says fi*ed costs are deducted only if the business shuts down
entirely5 not if the wor# load is simply reduced because the share of fi*ed
costs a certain contract co)ers may not be factored into that contract
therefore to bac# out fi*ed costs would be to penaliCe innocent parties (as
between innocent and breaching parties courts err on the side of the
innocent)
ii) Other awards to 0elchi
a) The trial court found that the award of lost profits ade/uately
compensated e)erything5 it already included the costs
7age 2F
Contracts Outline
b) The appellate court disagrees and finds the additional damages
appropriate because they are compensating losses that *oul! not
have occurre! had there been no breach5 therefore these are costs
not included in the original contract price
+) KM Harvesting v. Fresh Net*ork
a) Gacts6
i) I9M had longHterm contracts with Gresh .etwor# to sell lettuce at =>>F
a pound
ii) Ehen there was a bad har)est I9M breached and sold lettuce to other
buyers at a significant profit
a) 2n response Gresh .etwor# breached on an outstanding payment
to I9M of =2""I and co)ered their obligations to their lettuce
buyers caused by I9M3s breach
b) Two cross causes
i) I9M against Gresh .etwor# for =2""I outstanding
ii) Gresh .etwor# against I9M for co)er
c) At trial both parties stipulate to I9M3s claim (Black Letter: if a buyer recei)es
goods and refuses to pay the seller has a cause of action5 regardless of other
surrounding circumstances)
d) Gresh .etwor#3s claim
i) Gresh incurred =;>>I in co)er costs
ii) @owe)er they are inBured far less
a) Their sales contracts are costQL5 so their buyer co)ered all but
=;>I of their costs
iii) The court decides that5 as a policy matter5 the windfall should go to the
innocent party
a) Gormally5 :2H;12 does not limit co)er based on compensation
deri)ed form outside contracts & it only loo#s at the contract at issue
b) The plaintiff tries to argue that California has a policy against
such massi)e windfall damages in :2H;1" damages but the court
reBects the argument
-) Neri v. $etail Marine #or'.
a) Case of buyer breach in a )olume sale conte*t
b) Gacts6
i) .eri contracted to buy a boat5 then bac#ed out
ii) ,etail Marine was e)entually able to sell that boat
c) Claims6
i) ,etail Marine claims lost profits from the sale
ii) .eri says they should only get li/uidated damages under :2H;1M
d) The court finds that this is a lost )olume sale situation and that ,etail Marine is
entitled to lost profits under :2H;>M
.ote6 for lost )olume sellers they must show both that they could ha)e made
another sale and that it would ha)e been e/ually profitable ($.-. Davis #hemical
v. Diasonics)
G) Mitigation Cases6
1) $ockingham county v. +uten ,ri!ge
a) Gacts6
i) ,oc#ingham breached a contract with 8uten when they decided to stop a
road construction proBect
ii) 8uten continued to build the bridge they had been contracted to build
e)en though it literally went nowhere5 there was no access
b) 8uten then sued for breach of contract and payment
c) Analysis
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Contracts Outline
i) The court held that once 8uten new of he breach they had a duty not to
incur any more costs than were necessary
ii) The court awarded them lost profits as a result of the breach5 but not any
of the costs they incurred after they learned of the breach
2) Ma!sen v. Murrey % Sons
a) Gacts6
i) Murrey P Sons made highly customiCed pool tables for Madsen
ii) Madsen breached and did not pay for the tables
iii) Murrey P Sons sal)aged the parts they could and burned the remains
b) Analysis
i) The court held that they should ha)e sold the tables at a discount rather
than Bust sal)aging the parts they could5 this step was unreasonable
ii) This decision is unusually5 the court generally allows the inBured party to
chose which reasonable step they chose to ta#e to mitigate damages
") "n re Kellet 0ircraft #or'.
a) Gacts6
i) Iellet breached a contract to supply Amerform with shower cabinets
ii) Amerform got two different bids for co)er6 Cutler (=1M each) and
8uscombe (=1" each Q =->> retooling)
iii) Amerform accepted the Cutler bid
b) Iellet argued Amerform had a duty to ta#e the lowest bid
c) Analysis
i) The court held that as between two reasonable bids the inBured party has
the discretion to decide which bid to accept
ii) This is the general rule5 though some courts may re/uire ma*imum
mitigation (Murrey % Sons)
iii) 9eneral principles6 the inBured party may choose whiche)er reasonable
course of mitigation they see fit5 so long as their actions are reasonable in
the situation
+) S.5. roves % Sons #o. v. (arner #o.
a) Gacts6
i) 9ro)es awarded Earner a subcontract to supply concrete for a bridge
proBect
ii) Earner failed to supply the concrete on time and 9ro)es sued
b) Earner claimed that 9ro)es could ha)e obtained ade/uate concrete from other
sources and therefore should not reco)er due to failure to mitigate
c) The court held that if Earner was aware of ade/uate replacement sources of
concrete they should ha)e bought that concrete and sold it to 9ro)es rather than
breaching
d) 7rinciple6 both the inBured party and the breaching party can be responsible for
mitigating damages if they ha)e e/ual access to mitigation
-) ,ank )ne v. Taylor
a) Gacts6
i) $an# improperly froCe Taylor3s accounts interfering with her ability to ta#e
ad)antage of business opportunities
b) $an# claimed she could ha)e used other assets to ta#e ad)antage of the
opportunities therefore they should not be liable for inBuries
c) The court held a party need only ta#e reasonable steps to mitigate damages
and the ban# did not propose reasonable steps5 their proposition was
unreasonable
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9) Mitigation in %mployment6
1) Shirley Maclaine v. 67
th
#entury Fo&
a) Gacts6
i) Shirley Maclaine contracted to star in '$loomer 9irl( for =;->5>>>
ii) Go* decides not to produce the mo)ie and offers her the lead in '$ig
Country $ig Man( a western to be shot in Australia
iii) She refuses and sue for breach of contract
b) Go* argues that she had the opportunity to mitigate and failed to do so5
therefore they should not be liable for the contract price
c) Analysis6 (articulation of $lac# 8etter law)
i) A person is not re/uired to ta#e wor# of 'a different or inferior #ind( to
fulfill the duty of mitigation (based on reasonability analysis)
ii) 2nferiority is easy to determine (salary5 benefits5 location5 seniority5 etc)
iii) 0ifference is a le)els of abstraction type test (how different is Banitorial
ser)ice in one building )ersus another as compared to acting in one mo)ie
)ersus another)
a) Can be go)erned by practice in the specific field
b) Contro)ersy on subBecti)ity of the test (how different is different)
c) 2n some professions a small difference can be significant
d) 0o not want to allow the breaching party to define what mitigation
the innocent party is re/uired to underta#e
i)) ,eputational inBuries are reco)erable under Tort5 not Contract law5
although there may be reco)erable damages if a party can show the loss of
specific Bobs because of the inBury
2) Costs of mitigation
a) Mr. -!!ie v. insberg
i) 9insberg was improperly fired5 mitigated for a part of the remainder of his
contract5 then incurred costs loo#ing for a new Bob
ii) @e sued and reco)ered for the balance of his contract and for the costs
he incurred loo#ing for new wor#
b) Southern Kes*ick v. (hetherholt
i) 7rinciple6 there is no obligation to ta#e inferior wor#5 but if you do the
proceeds go towards mitigating damages
'IV) 6oreseeability of 7arm
A) $ac#ground
1) Common law did not always include an element of foreseeability in assessing damages
a) %ntered AngloHAmerican Burisprudence in the 1M->s
b) There was a strong presumption that buyers and sellers should e*plicitly spell
out obligations under the contract and conse/uences of breach (four corners of the
contract idea)
c) The changes in business heralded by the 2ndustrial ,e)olution made contracts
much more common and less specific as to obligations and conse/uences
2) %ffect of foreseeability
a) Goreseeability places a limit on e*pectation damages by re/uiring that the #ind
and e*tent of damages be predictable by the breaching party
i) Ha!ley holds that there are some types of damages that are not
compensable under this regime
b) Goreseeability is also about appropriately allocating ris#s (ensures that one
party is not acting as insurance for the other party)
i) 8east cost a)oiders & the party in the best position to #now of the ris# and
ta#e steps to a)oid it should be liable for damages
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ii) 2f damages were unlimited they would e)entually ser)e as a barrier to
contracts
a) 7arties would resort to pro)isions to limit liability which would
ser)e as a disincenti)e to contract
b) This would either increase costs or decrease ser)ices thus
decreasing the social utility of the transaction
c) Goreseeability analysis ensures that parties to not either o)er
insure (charge too much) or o)er contract (ma#e contracts
needlessly e*plicit and cumbersome)
iii) Ee want parties to e*ercise reasonable care and to be held liable for
reasonable conse/uences of the ris#s they ta#e5 but we do not want to
punish them because of unforeseeable or unreasonable conse/uences of
their actions
a) 2f contracting parties are concerned about unforeseeable
conse/uences they must e*plicitly define them in the contract
") Causation
a) To reco)er conse/uential damages a party must show a causal lin# between the
breach and the damages incurred
i) 2f there are multiple causes the breach must be the 'rimary cause
(although some courts apply a substantial factor standard rather then
re/uiring the breach to be the primary cause)
b) Courts do not di)ide liability in contract5 although some are mo)ing to an
apportionment scheme for causation and damages (li#e comparati)e negligence)
i) 2n roves the court found the plaintiff was partially responsible for losses
and only awarded 2-L compensation for defendant3s breach
c) Analysis to determine compensation from breach6
1 0etermine if there was a breach of the contract
a) Court loo#s at performance re/uested and gi)en
2 0etermine if there is a compensable harm
a) Eere there foreseeable losses due to the breach
" Eere there additional causes pro*imately responsible for the harm
+ 2f there are other causes was the breach a substantial factor
a) 2f the breach was clearly the main cause then the breaching party
will li#ely be liable
b) 2f damages could ha)e been a)oided or would ha)e happened
e)en without the breach there will li#ely be no liability
c) 2f there are se)eral substantial factors leading to the damages
the court may determine contribution form each factor
- 0etermine each party3s liability
$) Cases6
1) Ha!ley v. ,a&en!ale
a) Gacts6
i) Mill brea#s its only cran#shaft and is shut down until a new #new one can
be made
ii) $a*endale promises to get the cran#shaft to the casters the ne*t day
and @adley ma#es sure to comply with all re/uirements for the shipment to
get to the casters on time
iii) The shaft ta#es a wee# to arri)e at the casters costing the mill lots of
money
b) @adley sues $a*endale for lost profits because the shipment was delayed
c) ,ationales6
i) Ehy should @adley reco)er?
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a) 2f we re/uire parties to spell out e)ery possible contingency
contracts would become needlessly cumbersome5 a reasonable
foreseeability standard should satisfy the re/uirements
ii) Ehy shouldn3t @adley reco)er?
a) Ee want parties to enter into contracts and only to hold them
liable for foreseeable conse/uences of breach (were the lost profits
foreseeable?)
d) Analysis6
i) ,ule6 parties are liable for two #inds of damages6
a) Those that flow natural from the breach & direct result of the
breach
b) Those that can reasonably foreseen by the parties at the time
they made the contract as the probable result of breach
1) Inowledge of the conse/uences can be actual or
imputed #nowledge (should ha)e #nown)
ii) Application6
a) The court ignores e)idence that $a*endale actually #new that the
mill was shut down (only communicated by a ser)ant to a ser)ant5
)ery stratified )iew of business)
b) The court then hypothesiCes that it would be reasonable for
$a*endale to suppose the mill was still operating5 so no reco)ery
2) 1ictoria +aun!ry v. Ne*man "n!ustries
a) Gacts6
i) Oictoria buys a huge boiler to produce steam to e*pand its business
ii) Ehile disassembling the boiler for shipment .ewman3s employees
damage some of the parts re/uiring significant and time consuming repair
iii) The boiler is delayed for months and Oictoria sues for lost profits from
Bobs they were unable to ta#e as a result
b) !nder Ha!ley there should be no reco)ery since Oictoria ne)er e*plicitly
informed .ewman of the conse/uences of delay in the terms of the contract
c) The court goes the other way6
i) They find that the lost profits flow naturally from the breach
ii) A reasonable party thin#ing about the conse/uences at the time of
contract would ha)e realiCed that lost profits were a possibility (imputed
#nowledge of conse/uences of breach)
iii) ,easonability test6
a) The test is about common sense5 Bust because things are
logically connectable does not ma#e them reasonably foreseeable
b) Actual #nowledge al*ays trumps reasonability (e)en if a
conse/uence is totally unforeseeable and unreasonable if the
contracting parties specifically mentioned it as a possible
conse/uence damages may be awarded)
") Koufos v. #3arniko*
a) Gacts6
i) 7laintiff chartered a ship to transport sugar to $asrah
ii) The ship was supposed to ta#e 2> days and actually too# ">
iii) 2n the ten days the ship was delayed the sugar mar#et crashed
b) The plaintiff sues the ship owner for lost profits
i) The owner agrees that he owes F days of interest on the profits because
the sugar owner would ha)e been paid earlier if the ship had arri)ed on
time & the argument is about *hat those profits should ha)e been
a) The plaintiff says the profits should be measured at what the
compensation would ha)e been had the ship arri)ed on time
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b) The ship owner argues he only owes interest on what the sugar
was worth when it was actually sold in $asrah
c) Analysis6
i) The court finds that the ship owner #new that there are fluctuations in the
commodities mar#et and that the sugar was li#ely to be sold in $asrah
when it arri)ed & therefore he is liable for the impact his delay had on the
plaintiff3s profits
ii) Black Letter: if the defendant gambles with the plaintiff3s fortune the ris#
of loss lies with the defendant
+) Hector Martine3 an! #o. v. Southern Pacific Trans'.
a) Gacts6
i) MartineC contracted to ha)e the parts of a piece of mining machinery
shipped by rail
ii) One of the fi)e cars carrying the e/uipment arri)ed a month alter than
MartineC contended it should ha)e arri)ed
iii) MartineC sued for the fair mar#et rental price for the e/uipment for that
month
b) Analysis6
i) The court held that lost rental )alue was a foreseeable conse/uence of
the delay & the damage need not be the most foreseeable conse/uence
only a foreseeable conse/uence and lost rental )alue for a piece of
e/uipment is such a conse/uence
C) Certainty
1) Addresses how lost profits or lost chances can be )alued & courts can only award
damages if they can reasonably calculate them
2) Cases6
a) Kenfor! v. -rie #ounty (blac# letter case)
i) Gacts6
a) The county decides to build a domed stadium and contracts with
Ienford to build it and 0S2 to run the business
b) The county then decides not to go through with the proBect
ii) Calculation of lost profits for the builder was easily disposed of
iii) Calculation losses to 0S2 was much harder to calculate
a) 0S23s estimate
1) They e*pected to run the stadium for 2>H+> years
2) They presented significant theoretical e)idence of what
their profits would ha)e been
") The Bury belie)ed the calculation and awarded millions
i)) The supreme court o)erturned the Bury award
a) They agreed that a lost profits award was appropriate5 but
thought that the calculation used was far too nebulous
b) They create a rule that lost profits need not be certain5 but it must
be reasonably certain based on rationale estimates
i) 0S2 had only one other similar business to base their
estimates on5 and that was in a significantly different locale
ii) Their financial model was built entirely on assumptions
iii) The court loo#s at this using the 'new business( rule a
truly new business cannot recei)e lost profits because they
are too speculati)e5 no basis on which to Budge them
a) Today5 courts will loo# at new businesses using a
reasonable certainty standard how reasonable are
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Contracts Outline
the damages in light of the mar#et5 the type of
business5 etc
c) The court reBects a rational basis standard
i) ,ational basis rule & there must be a rational basis leading
to the profit calculation that the breaching party would ha)e
to show was inappropriate
ii) The court reBects the rational basis standard with a
reasonable certainty rule & there must be a reasonable
certainty based on obBecti)e e)idence that the damage
calculation is appropriate
)) The court clarified its rule in 0shlan! Management v. 5anien
a) The reasonable certainty rule did not re/uire absolute certainty5
rather the calculation used must be based on obBecti)ely
reasonable assumptions (e)en though the specific calculation may
be somewhat speculati)e)
1) So long as the calculation uses reasonable assumptions
based on industry standards and history it satisfies the
reasonable certainty rule
2) As the degree of uncertainty in the assumptions increases
the amount of reasonable certainty decreases
b) $ombola v. #osin!as
i) A trainer contracts to train5 house5 and race a horse for its owner
ii) Aust before a maBor race the owner ta#es the horse bac# in breach of the
contract
iii) The trainer sues for losses as a result of this breach (from other races)
a) The trial court says the lost profit calculation based on lost
proceeds from races was too speculati)e
b) The appellate court says that the calculation is appropriate and
based on reasonable assumptions
1) The court #nows how many races the horse has won
before and after the breach (which were consistent with
each other)
2) Therefore it was reasonably certain that the trainer would
ha)e recei)ed those profits if he had been allowed to
continue racing the horse5 therefore the profit award is
appropriate
'V) Li3ui!ate! Damages
A) Contracts can contain terms that define specific damages in the e)ent of breach
1) Simply because the parties agree to stipulated damages in the e)ent of breach does
not mean that these damages are necessarily enforceable
2) The relati)e bargaining power of the two parties generally is not considered5 although
policy considerations usually weigh against enforcing li/uidated damages that are agreed
to under duress
") Courts will generally enforce li/uidated damages clauses that are a reasonable
appro*imation of the actual damages suffered while awards that seem puniti)e will not be
enforced
a) 2f the damages are low they most li#ely *ill be enforced
+) $rings up two important /uestions6
1 @ow to determine a reasonable appro*imation of compensation
2 2s reasonableness measured at the time of contract5 at the time of breach5 or
both
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-) 9eneral rule6 the li/uidated damages clause must5 in good faith5 estimate the li#ely
damages the party will suffer and will be enforced if it does not constitute a penalty
a) 2f the inBured party can show that the li/uidated damages clause was
reasonable either at time of breach or when the contract was made it will be
enforced
$) $enefits of li/uidated damages clauses
1) .otice6 parties #now the conse/uences of breach
2) %fficiency6 #eeps contract disputes out of court
") Allows parties to define their e*pectations and the conse/uences of breach to each
other
a) 0efines foreseeability of harm5 other obligations of the parties5 etc
+) Ehy not always enforce li/uidated damages unless they e*ceed actual damages?
a) 7arties might not trust the courts to determine damages
b) The pro)ision would be redundant and would not lead to certainty or efficiency
since the court would still ha)e to determine actual damages
c) 7arties that do a lot of contracting might come out e)en o)er all of their
contracts (some li/uidated damages pro)isions high5 some low) & if li/uidated
damages are limited by actual damages then these contractors would come out
behind and would stop using li/uidated damages clauses
C) Ehy courts might disfa)or li/uidated damages
1) 2ncreases the costs of contracting
2) @istorically5 damages ha)e been imposed by public rather than pri)ate entities5 courts
disfa)or putting that sort of power into pri)ate hands
") 7arties will ha)e imperfect information about the e)entual harms they suffer from a
breach5 therefore it will be difficult for them to properly )alue those harms during contract
negotiations
a) Somewhat parado*ically5 courts are more li#ely to enforce li/uidated damages
clauses if estimating damages is difficult (basically5 if the parties don3t #now what
the damages will be but settle on a )alue the court is more li#ely to honor that
)alue than if it is simple to calculate the damages)
+) 7er)erse responses (beha)ior courts can regulate if they retain the power to impose
damages)
a) Conditions might change during performance of the contract such that the
li/uidated damages clause might create a windfall for one party causing them to
attempt to induce breach
b) 2f li/uidated damages are low it might be cheaper for a party to breach and pay
the damages than perform
0) Cases6
1) (asserman.s "nc. v. Mi!!leto*n
a) 8i/uidated damages pro)ision6
1 7rorated portion of reno)ation costs
2 2-L of gross annual proceeds (" years di)ided by 12)
b) ,ule applied6 the clause must in good faith estimate li#ely damages and will be
enforced if it does not constitute a penalty
i) 2f the clause does not reflect a reasonable estimate of pro)able inBuries it
is li#ely a penalty
ii) This is both forward loo#ing (reasonable forecast) and bac#ward loo#ing
(pro)able inBury)
iii) The /uestion really is how does the court estimate damages6
1 Eas the clause a reasonable forecast of damages at the time of
the contract
2 0oes the clause actually reasonably reflect the damages suffered
as a result of the breach
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c) The court says that the modern rule is fle*ible6 the clause must loo# reasonable
either at the time of contract or at the time of breach
i) The court allows the plaintiff to then decide when the estimate should be
made if they can pro)e that either is appropriate
ii) The court also in)o#es the uncertainty argument & the more uncertain
damages of breach were at the time of contract the more li#ely the clause
will be enforced
a) The less information the parties had at the time of contracting the
more li#ely the clause will be )iewed as reasonable (or the more
difficult it will be to pro)e that it was unreasonable)
b) 2f the court allows li/uidated damages clauses in )ery uncertain
situations the parties can limit their liability & ta#en to e*tremes
e)en clauses that loo# puniti)e might be allowed because it inBects
certainty into an uncertain situation
iii) The court does not thin# that the profits clause is reasonable and
remands it for further proceedings
'VI) ".ecific Performance
A) $ac#ground
1) Specific performance is rare for both practical and historical reasons
a) @istorical6 stems from the difference between courts of law and e/uity
i) Courts of law could only le)y money damages or cause the sheriff to
confiscate property to co)er those damages5 they could not order other
types of compensation & e*cept in cases of transfers of land5 where they
could be enforced
ii) Courts of e/uity stepped in only when remedies at law were inade/uate
b) 7ractical6 benefit of the bargain
i) 2f we force people to perform we get bad performance
ii) Ee do not want to indefinitely indenture people5 which forcing them to
perform could do5 instead we want them to be able to change their minds
and supply alternati)e performance
iii) There is also a re/uirement of court super)ision to ensure that the
performance is done properly5 otherwise the parties are li#ely to return to
court and waste more time
2) Ehile seldom granted5 plaintiffs sometimes as#ed for specific performance
a) Common award in sale of land and sale of uni/ue goods contracts5 so long as
they ha)e not been sold to an innocent third party
b) Seldom awarded (and often not re/uested) in ser)ices contracts
i) An e*ception is ser)ices that are uni/uely a)ailable5 or become uni/ue
due to the passage of time
c) Sometimes awarded in employment contracts
i) Seldom awarded if employee breach (bad wor#Dindenture idea)
ii) More common in cases of employer breaches (gi)e benefit of the
bargain to the innocent party5 gi)e them a chance to perform their wor#)
$) !ni/ueness
1) !nder the !CC :2H;1J there is a presumption that specific performance is an
appropriate remedy for uni/ue goods
2) !nder the ,estatement ::"-F and "J> uni/ueness is simply a factor to be considered5
but not the determining factor for deciding remedy if the goods or ser)ices can reasonably
be )alued
:"-F (ffect of !e3uacy of Damages
(1) Specific performance or an inBunction will not be ordered if damages
would be ade/uate to protect the e*pectation interest of the inBured parties
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Contracts Outline
(2) The ade/uacy of the damage remedy for failure to render one part of
the performance due does not preclude specific performance or inBunction
as to the contract as a whole
(") Specific performance or an inBunction will not be refused merely
because there is a remedy for breach other than damages
:"J> 6actors ffecting !e3uacy of Damages
2n determining whether the remedy in damages would be ade/uate5 the
following circumstances are significant6
(a) The difficulty of pro)ing damages with reasonable certainty
(b) The difficulty of procuring a suitable substitute performance by
means of money awarded as damages
(c) The li#elihood that an award of damages could not be collected
C) Cases6
1) +on!on ,ucket v. Ste*art
a) Gacts6
i) 0efendants installed an inade/uate heating system and failed to
complete it
ii) 7laintiffs as#ed for specific performance
b) Trial court said actual damages were too hard to determine and that specific
performance was an easier remedy
c) The appellate court holds that simply because damages are hard to calculate
does not ma#e specific performance the appropriate remedy & there is a
presumption against specific performance in building contracts and damages are
the appropriate remedy (specific performance is only appropriate if damages
would be an inade/uate remedy)
d) ,ule6 damages must be nearly incalculable to Bustify specific performance
2) (algreen v. Sara #reek (Audge 7osner)
a) Gacts6
i) Sara Cree# entered into a lease with Ealgreen that pre)ented them from
leasing space in the shopping center to another pharmacy
ii) Ehen an arrangement with an 'anchor( store fell through Sara Cree#
was going to lease space to a deepHdiscount pharmacy
b) Ealgreen as#ed for an inBunction to force specific performance of their lease
c) Sara Cree# said lost profits were an appropriate remedy for their breach
d) Audge 7osner3s Analysis
i) !nder +on!on ,ucket the damages must be essentially incalculable
before the court should impose specific performance
ii) Audge 7osner then argues that the court will ha)e a )ery difficult time
determining what the damages are6
a) They are unli#ely to get the damages calculation correct and
e)en attempting to would be costly to the court
b) 9ranting an inBunction an inBunction is cheap5 simple5 and allows
the parties to bargain around it (Mr %fficient $reach5 remember)
iii) Cost factors Audge 7osner considers
a) Administrati)e & low for an inBunction5 high for damages
b) Monitoring & moderate for an inBunction5 low for damages
c) $argaining & moderate to high for an inBunction5 low for damages
d) Social costs of accuracy & inBunction leads to high accuracy and
low social costs5 monetary damages may lead to the re)erse
e) After loo#ing at these factors Audge 7osner decides the best outcome is to
apply the inBunction and allow the parties to bargain around it (efficient breach type
model)
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i) Ealgreen can determine the price of its monopoly power in the shopping
center
ii) Sara Cree# can determine if it )alues the deepHdiscount pharmacy
enough to pay Ealgreen3s price or if they want to find a different tenant to
fill the )acancy
f) This is no)el under the common law
i) Audge 7osner ma#es an efficiency analysis
ii) The common law generally Bust loo#s at the ade/uacy of the remedy
") Stokes v. Moore
a) %mployment contract containing a nonHcompete clause with an inBunction as the
mode of relief (sort of li#e a li/uidated damages clause) & this is strange because
the parties ha)e no power to enforce an inBunction on their own
b) The court does not find itself bound by the specified remedy5 although it will ta#e
the consent of the parties to such a remedy into consideration
+) 1an (agner 0!vertising v. S%M -nter'rises
a) Surrounds a contract for a uni/ue ad)ertising location
b) The ad)ertiser claimed that damages could not replace the uni/ue benefits of
the location & only specific performance could ma#e them whole
c) The court ma#es a )aluation determination & the court does not care that the
parties find the location uni/ue5 rather the court wants to #now what )alue the
parties place on that sort of e*posure and if the damages can address that uni/ue
)aluation
-) +acle!e v. 0moco
a) Gacts6
i) 8aclede has a re/uirements contract with Amoco for the supply of
propane to a number of housing de)elopments
b) Ehen Amoco breaches the contract 8aclede as#s for an inBunction and specific
performance for the remainder of the contract (1>H1- years)
c) Amoco counters and offers to pay co)er
i) There may practically be no way to co)er the propane shortfall5 therefore
specific performance may be an appropriate remedy
ii) There are other sources a)ailable5 in fact 8aclede has already contracted
with some to supply additional propane
d) The court notes the presence of other suppliers in the mar#et5 but also that
none are willing to enter the sort of long term contract 8aclede has with Amoco5
therefore specific performance of the present contract is the appropriate remedy
e) Amoco argues against specific performance for se)eral reasons6
i) Monitoring costs to the court5 the 'we3ll be bad( argument
ii) The contract is indefinite and uncertain & reBected since it is li#ely to be
terminated within 1- years
f) 7rinciple6 under an outputDre/uirements contract co)er on a spot mar#et may not
necessarily compensate for damages incurred as a result of a breach of a long
term contract therefore specific performance may be an appropriate remedy
J) (eathersby v. ore
a) Eeathersby contracted for all of 9ore3s cotton at a price of =>"> a pound
b) 9ore breached early and refused to deli)er the cotton when the price of cotton
was at =>"- a pound
c) Eeathersby goes to court when the cotton was due and as#s for specific
performance & at the time the price of cotton is =>M> a pound
d) !nder !CC :2H;1" Eeathersby can only reco)er damages as of the time he
learned of the breach (=>>- a pound) whereas with specific performance he
ma#es a profit of =>-> a pound
e) Arguments Eeathersby could ma#e to support his case
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i) @e e*pected cotton on a specific date rather than at the time of breach5
at that time he had no need of cotton
a) @e could ha)e bought options?
ii) At the time of breach there was a cross complaint by the defendant for
breach5 therefore the contract might ha)e been )oid anyway and he did not
want to be stuc# with cotton he would recei)e no co)er damages on &
basically argue that no time of breach was determined until the court
resol)ed that a )alid contract had been formed and then breached
f) The court also noted that historically5 specific performance was an appropriate
remedy for crops contracts because co)er might not be possible in a gi)en area
i) .o replacement crops might be a)ailable on the local mar#et because
they had all already been bought up
g) The court awarded at most damages at the time of breach5 not at the time of
suit
'VII) #eliance an! #estitution Damages in t)e Bargain Conte8t
A) Types of damages
1) ,eliance damages6 these are damages incurred as a result of a party3s promise5 the
award is supposed to restore the inBured party to the position they would ha)e been in had
no promise been made
2) ,estitution damages6 these damages restore a benefit gi)en by the plaintiff to the
defendant (addresses unBust enrichment & the breaching party should not benefit from the
breach)
a) There must be a substantial breach before the court will award restitution
damages
b) The plaintiff must show that they ha)e conferred something of benefit on the
defendant
i) Therefore the contract must be partially e*ecuted on the part of the
plaintiff
ii) 2f the contract has been substantially performed the court is li#ely to
award e*pectation damages according to the terms of the contract rather
than restitution or /uantum meruit
") 7arties can opt to sue for the )alue they ha)e gi)en (/uantum meruit) rather than lost
profits (if they are too difficult to calculate or too uncertain)
a) Oalue conferred as e)aluated by whom?
i) 2s it the subBecti)e )aluation according to the person who recei)es it?
ii) 2s it the obBecti)e mar#et )alue of the goodsDser)ices?
iii) 2n cases of low bid estimates where wor#ers are trying to get a Bob5 do
we )alue their wor# in relation to the whole bid or in relation to mar#et
)alue?
$) ,estatement Sections
:"++ Pur.oses of #eme!ies
Audicial remedies ser)e to protect one ore more of the following interests of a
promisee
(a) @is 'e*pectation interest( which is his interest in ha)ing the benefit of his
bargain by being put in as good a position as he would ha)e been in had the
contract been performed
(b) @is 'reliance interest( which is his interest in being reimbursed for loss caused
by reliance on the contract by being put in as good a position as he would ha)e
been had the contract not been made
(c) @is 'restitution interest( which is his interest in ha)ing restored to him any
benefit that he has considered on the other party
:"+- 9u!icial #eme!ies %ailable
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The Budicial remedies a)ailable include a Budgment or order
(a) Awarding a sum of money due under the contract or as damages
(b) ,e/uiring specific performance of a contract or enBoining its nonHperformance
(c) ,e/uiring restoration of a specific thing to pre)ent unBust enrichment
(d) Awarding a sum of money to pre)ent unBust enrichment
(e) 0eclaring the rights of the parties
(f) %nforcing an arbitration award
:";> #e3uirement 4)at Benefit Be Conferre!
A party is entitled to restitution only to the e*tent that he has conferred a benefit on
the other party by way of part performance or reliance
:";1 Measure of #estitution Interest
2f a sum of money is awarded to protect a party3s restitution interest5 it may as
Bustice re/uires be measured by either
(a) The reasonable )alue to the other party of what he recei)ed in terms of what it
would ha)e cost him to obtain it from a person in the claimant3s position5 or
(b) The e*tent to which the other party3s property has been increased in )alue of
his other interests ad)anced
,ote: this does not allow a purely subBecti)e )aluation5 there must be an obBecti)e
)alue attached5 they cannot claim something is without )alue to them
C) Cases6
1) Security Store v. 0merican $ys. -&'ress
a) Gacts6
i) Security Sto)e contracted to ha)e a new boiler design shipped to a trade
show
ii) They e*plicitly tell the shipping company the boiler must arri)e by a
specific date for display at the show and confirm by letter
iii) The president goes to the show to assemble the boiler5 but only 2> of
the 21 pac#ages arri)e
a) The critical pac#age ne)er arri)es despite repeated promises it
will
b) 2t is e)entually returned to Security Sto)e3s factory
b) 7otential damages
i) 8ost sales opportunities because the boiler was not shown
ii) Cost incurred in shipping
iii) ,eliance damages & costs or renting space5 tra)el to the show5 time
i)) 8ost future profits
)) ,eputational damages because the display ne)er happened
c) !nder contract there is an automatic right to e*pectation damages
i) The court finds that e*pectation damages are too hard to calculate in this
situation because it is unclear what Security Sto)e e*pected to get out of
the show
ii) Security Sto)e could respond by arguing that at least one company was
at the show to buy specifically their #ind of boiler and they were the first
into the mar#et5 also the show was their best means of getting their product
into the mar#et
d) ,ather than demanding e*pectation damages the plaintiff goes for reliance
damages (damages li#e lost wages5 reimbursement for shipping and display space
incurred on reliance of performance by the defendant)
i) 0efendant responds by arguing that the space was rented5 the time
bloc#ed out5 tra)el calculated5 etc before contracting for shipment & these
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were costs Security Sto)e had already planned on incurring before breach
by the defendant5 therefore defendant shouldn3t be liable for them
ii) The court reBects the argument & the shipping company #new the
conse/uences of failing to get the pac#ages to the show on time5 Security
Sto)e had a right to reasonably rely on their contract & by entering into the
agreement the shipper undertoo# all of the burdens and liability for not
getting the pac#age to its3 destination on time
iii) 2t should ha)e been foreseeable to the shipper that Security Sto)e
would ha)e in)ested in the show5 and that in)estment would ha)e been
wasted without recei)ing the parts
e) This remedy co)ers not only the direct costs incurred5 but also the costs
incurred since Security Sto)e was unable to mitigate its losses
f) 7rinciple6 in contracts where e*pectation cannot accurately be calculated the
court is li#ely to award reliance and incidental damages rather than nothing
2) 0nglia television v. $ee!
a) Gacts6
i) A tele)ision company in %ngland spent =-M>I in de)elopment of a mo)ie
then hires ,obert ,eed to play the lead
ii) ,eed later bac#s out because of good faith conflicts in his schedule
iii) The production company sues him for the full damages
b) The company claims no one else could possibly replace ,eed in the mo)ie
c) The court holds that ,eed is liable for all costs5 including those incurred before
he e)er became in)ol)ed with the proBect
i) True reliance is only supposed to restore a party to the position they
would ha)e been in had there been no promise5 not compensate them for
all losses
d) The court3s award seems more li#e a low ball e*pectation damages award5
rather than true reliance (true reliance would be =-M>I in the hole)
") )steen v. 5ohnson
a) Gacts6
i) Osteen was a country singer who engaged Aohnson as a manager to
promote her singing career
ii) Osteen claims he failed to properly promote her and sue for breach
b) 7otential remedies
i) 8ost profits & impossible to determine how much she was li#ely to ma#e
from the contract
ii) ,eliance damages & what options did she forgo to contract with this
person5 how do you restore her to the state she would ha)e been in had
there been no contract
iii) ,estitution
c) The court obser)es that restitution damages are a)ailable 'where there has
been a contract breach of )ital importance5 )ariously defined as a substantial
breach or a breach which goes to the essence of the contract(
i) The breach must be )ital for the award of restitution damages
ii) ,estitution as#s how much the defendant gained rather than how much
the plaintiff lost (unBust enrichment measure)
a) Court must e)aluate how much the defendant has gained from
the plaintiff5 this is in contrast to e*pectation or reliance measures
where the court can use the contract itself as a guide for damages
iii) 9ets particularly complicated for partially performed contracts & he court
would prefer to ha)e people resol)e the conflicts among themsel)es5 that3s
why restitution is a disfa)ored damage
d) Osteen wants the )alue of the ser)ices owed but not performed
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i) 2t sounds li#e e*pectation5 but it is really Bust a refund
+) 4S v. 0lgernon ,lair
a) Gacts6
i) This is a case of a money losing contract
ii) A subHcontractor ceased wor# after the primary contractor stopped
paying him
iii) The subHcontractor sues for /uantum meruit for labor and materials
already gi)en
a) Typically would sue for lost profits5 but in this contract there were
no profits
b) The court allows restitution damages in this case
b) 7olicy behind allowing restitution damages in money losing contracts
i) The breaching party has been unBustly enriched by the innocent party
and should be forced to return that )alue
ii) The breaching party should not be allowed to use the breached contract
as protection to limit losses
iii) The court reBects the argument that simply because it was a losing
contract no damages should be awarded & a party might lose e)en more
on a contract by ha)ing it breached than they would ha)e lost after full
performance so they should be able to reco)er restitution
i)) The court allows the innocent party to chose how to reco)er their losses5
either e*pectation under the losing contract or restitution for ser)ices
rendered
-) )liver v. #am'bell
a) Gacts6
i) 8awyer was hired to handle a di)orce for a fee of =M-> plus e*penses
ii) @iring party dismissed the layer and paid only =-->
iii) The lawyer then sued
b) 0amages a)ailable6
i) 7resumpti)e damage6 =">> in e*pectation damages plus e*penses
ii) ,estitution damages under /uantum meruit for the )alue conferred which
was estimated at =->>>
c) The court denies the /uantum meruit damage measure5 since the only
e*ecutory portion of the contract was the final payment that3s all the court would
allow Oli)er to reco)er
d) Black Letter: when the breach is relati)ely minor the innocent party may not
see# /uantum meruit5 this is only a)ailable if the breach is substantial and material
(the court would rather stay within the terms of the contract than ha)e to ma#e
independent e)aluations outside the contract)
'VIII) Contract Inter.retation
A) @ow do we determine the terms of a contract?
1) Many contracts are simply oral agreements so there is little obBecti)e e)idence of the
terms
a) Often a /uestion of credibility (or reasonableness) left up to the Bury
2) ObBecti)e )s subBecti)e meaning
a) As#s if we loo# to the outward signs of the contract (obBecti)e) or the intent of
the parties (subBecti)e) e)idence
b) OE @olmes 'contract law is not about the meeting of the minds5 but if the
outward signs are in accord with each other(
c) Contract law typically fa)ors obBecti)e o)er subBecti)e e)idence
i) The letter of the contract generally wins out of what parties subBecti)ely
thought the contract meant5 although subBecti)e e)idence may be used
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Contracts Outline
$) Outward signs of the contract
1) @istorically the four corners of the contract go)erned interpretation with e*trinsic
e)idence carrying little weight in interpretation
2) Modern doctrine has loosened this presumption and there are some cases where the
court is forbidden to rely solely on the letter of the contract
a) The more lenient interpretation embraces the idea that the letter of the contract
may not contain all of the information5 e*trinsic e)idence might inform
interpretation
b) Toady the letter of the contract is generally the starting point for interpretation
rather than the terminus & today other e)idence is fre/uently consulted
C) Types of e*trinsic e)idence in contract interpretation
1) %*trinsic e)idence lies along a continuum from )ery obBecti)e through wholly subBecti)e
ObBecti)e i) 2ndustryDtrade standards are often considered the most obBecti)e
e)idence of standard practice
ii) 8anguage of the contract (starting point for the analysis in all cases)
iii) Contemporaneous or related agreements that inform the meaning of
contract terms
i)) 7re)ious contracts between the parties (less obBecti)e but still on the
obBecti)e side of the scale)
)) .egotiations (midpoint of the scale)
a) Could be e)idenced by draft contracts5 memos5 con)ersations
leading to the contract5 etc
b) Could also lump in post contract actions by the parties at this
point
i) Could co)er performance gi)en5 etc to demonstrate that
party3s subBecti)e understanding of obligations
)i) Actual #nowledge by one party of the other3s understanding of the
contract
a) ,eally more of an ultimate fact than real e)idence
)ii) 2ndi)idual party3s actual belief
a) %*perienceDtradeDpast dealings in the trade (not dealings
between the parties but of either party within the trade)
b) 0iagnostic of how they ha)e historically done business and what
terms might mean to them in light of that e*perience
SubBecti)e )iii) 7ri)ate thoughts of the parties
a) Most subBecti)e5 and of little probati)e )alue to the court
2) The more subBecti)e the e)idence the more unilateral & it reflects the understanding of
a specific party5 not the meeting of the minds
") ObBecti)e e)idence is geared more towards what reasonable contracting parties might
understand the terms of the contract to mean
0) Contract language
1) 7arties tend to document the terms and obligations of maBor transactions & this is
where the real action is in contract interpretation
2) 8i#e e*trinsic e)idence contract language can range from obBecti)e to subBecti)e
ObBecti)e i) 9eneral usage & the man on the street dictionary definition
ii) 8ocal or trade meaning used by the parties
iii) Mutual standard & term of art used by the parties to describe something
parties must be able to pro)e the specific meaning implied by the term
SubBecti)e i)) 2ndi)idual usage & meaning a particular party gi)es to the language
a) The court is concerned with determining the meeting of the
minds5 indi)idual usage is not useful unless it can be demonstrated
that both parties understand the meaning
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") !ltimately5 the court is concerned with determining what5 under the facts and
circumstances of the contract5 the parties reasonably understood their obligations to be
a) ,estatement 1
st
:22; & 2nterpretation5 Comment - & a standard of reasonable
e*pectation5 which would attach to words or other manifestations of intention the
meaning which the party employing them should reasonably ha)e apprehended
that they would con)ey to the other party
b) %)en after the court has parsed the language of the contract they might modify
the meaning if the facts an circumstances demand such a change & plain
language is not dispositi)e of the contract
c) At bottom the court is trying to )indicate the meeting of the minds of the parties5
it is engaged in determining what they really 'meant( in the contract
%) Attributing meanings to contract terms
1) 2n classical contract law the goal was to use the most obBecti)e e)idence a)ailable to
determine the meaning of a contract term
a) Audge @and '2f5 howe)er5 it were pro)ed by twenty bishops that either party5
when he used the words5 intended something else than the usual meaning which
the law imposes upon them5 he would still be held5 unless there were some mutual
mista#e5 or something else of the sortif it appears by other words5 or acts5 of the
parties that they attribute a peculiar meaning to such words as they use in the
contract5 that meaning will pre)ail5 but only by )irtue of the other words and not
because of their une*pressed intent( (page "M+) & mutual agreement does not
o)ercome obBecti)e meaning
2) Modern doctrine gi)es more weight to the subBecti)e intent of the parties as e)idenced
by four principles of interpretation6 (subBecti)e intent trumps obBecti)e meaning5
reasonableness applies only to resol)e conflicts in meaning)
1 2f the parties subBecti)ely attach different meanings to an e*pression5 neither
party #nows that the other attaches a different meaning5 and the two meanings are
not e/ually reasonable5 the more reasonable meaning pre)ails
a) The conflict does not nullify the contract5 the more reasonable
interpretation pre)ails
2 2f the parties subBecti)ely attach different meanings to an e*pression5 neither
party #nows that the other attaches a different meaning5 and the two meanings are
e/ually reasonable5 neither meaning pre)ails (no mutual assent)
a) $oth parties are e/ually reasonable in their interpretation5 but since the
interpretations are in conflict not contract is formed and both parties may
end up significantly inBured
b) Cannot reco)er reliance or e*pectation damages since no contract was
formed5 may be able to reco)er restitution damages
" 2f the parties subBecti)ely attach the same meaning to an e*pression5 that
meaning pre)ails e)en though it is unreasonable (the parties can define a
meaning5 e)en an unreasonable one5 but mutual consent)
+ 2f the parties5 A and $5 attach different meanings5 M and 45 to an e*pression5 and
A #nows that $ attaches meaning 45 while $ does not #now that A attaches
meaning M5 meaning 4 pre)ails e)en if it is less reasonable than meaning M (the
mutually understood meaning pre)ails5 e)en if it is less reasonable and conflicts
with one party3s meaning)
a) 2f the subBecti)e meaning is unreasonable the court may re/uire actual
#nowledge5 howe)er if the interpretation is reasonable5 Bust not as
reasonable5 constructi)e #nowledge may suffice
b) The less reasonable the interpretation the higher the standard of
#nowledge re/uired before the court will apply this principle
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") ,estatement 2
nd
Sections
:2> (ffect of Misun!erstan!ing
(1) There is no manifestation of mutual assent to an e*change if the parties
attach materially different meanings to their manifestations and
(a) .either party #nows or has reason to #now the meaning
attached by the other< or
(b) %ach party #nows or each party has reason to #now the
meaning attached by the other
(2) The manifestations of the parties are operati)e in accordance with the
meaning attached to them by one of the parties if
(a) That party does not #now of any different meaning attached by
the other5 and the other #nows the meaning attached by the first
party< or
(b) That party has no reason to #now of any different meaning
attached by the other5 and the other has reason to #now the
meaning attached by the first party
:2>1 $)ose Meaning Pre%ails
(1) Ehere the parties ha)e attached the same meaning to a promise or
agreement or a term thereof5 it is interpreted in accordance with that
meaning
(2) Ehere the parties ha)e attached different meanings to a promise or
agreement or a term thereof5 it is interpreted in accordance with the
meaning attached by one of them it at the time the agreement was made
(a) That party did not #now of any different meaning attached by the
other5 and the other #new the meaning attached by the first party< or
(b) That party had no reason to #now of any different meaning
attached by the other5 and the other had reason to #now the
meaning attached by the first party
(") .either party is bound by the meaning attached by the other5 e)en
though the result may be a failure of mutual assent e*cept as stated in this
Section
G) Gilling in the gaps in interpretation
1) Courts will not enforce or reHwrite o)erly )ague contract terms
2) 2f a contract is substantially complete but lac#s some important terms the court will
generally apply a reasonableness standard to fill in those terms rather than )oid the
contract due to )agueness
") 2n contracts using trade language the court will usually hold e/ually #nowledgeable
parties to the trade usage5 but if one or both parties are new to the trade the court is less
li#ely to hold them to that meaning (again5 based on reasonableness)
9) Cases6
1) +ucy v. 2ehmer
a) Gacts6
i) The two wrote an agreement for the sale of a specific farm for a specific
price on a nap#in and signed it
a) They actually wrote a couple of drafts and changed the language
to ma#e it more accurate
ii) 2ssue6 is the agreement a contract or a drun#en Bo#e?
b) 2nterpretation
i) 0oes the written language indicate a specific intent?
a) This is an agreement for real estate and complies with the
Statute of Grauds (written5 stating with specificity5 and signed by the
grantor)
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b) 8anguage seems plain and serious5 no unreasonable or
outrageous terms and nothing to indicate a Bo#e
c) The contract was modified by the parties indicating a bargaining
process o)er the language
d) 2t has all of the elements of a contract6 offer5 acceptance5
signatures5 consideration & should the court go farther?
ii) There is some indication from the facts and circumstances that suggests
the agreement was Bust a Bo#e
a) The parties were both drun# at the time
b) Rehmer claimed he told his wife it was a Bo#e (but 8ucy was
unaware of this)
c) 8ucy had tried to buy the property from Rehmer multiple times
before and he had ne)er been willing to sell at any price
iii) Court ends up using a reasonableness standard & what would a
reasonable person in 8ucy3s position understand the agreement to mean?
a) Eere there facts that indicated this was a serious business
transaction
1) 2t had the form of a contract
2) They had pre)iously bargained for the land but Rehmer
had always bac#ed out before completing the contract
") Rehmer claimed it was a Bo#e but told only his wife ()ery
subBecti)e e)idence of little weight)
+) 8ucy too# steps to ac/uire financing for the purchase (so
he probably thought it was a contract)
b) The obBecti)e e)idence leans towards an actual contract5 which is
what the court concluded5 if subBecti)e e)idence were gi)en more
weight it could ha)e gone the other way
c) Black Letter: loo# to he outward e*pression of the parties5 not their inward
intentions & if the outward e*pression manifests an intent to ma#e a contractDoffer
then a contractDoffer has been made and is binding
2) $affles v. (ichelhaus
a) This is the case of the two ships Peerless
b) ,ule6 if two parties ha)e e/ually reasonable but conflicting interpretations of a
contract there has been no meeting of the minds and no contract has been formed
c) 2n this case each party had a reasonable interpretation of the meaning of the
contract terms
i) Ehen it became clear there were two ships of the same name sailing
from $ombay the contract was re)ealed to ha)e a latent ambiguity and was
therefore defecti)e
ii) The e*trinsic e)idence clearly indicated that the two parties were tal#ing
about different ships
iii) The defendant was let out of the nonHe*istent contract
i)) The plaintiff argued that the defendant was simply contracting for cotton
and that the name of he ship on which it was arri)ing was an immaterial
term of the contract
a) .ot necessarily so because it did5 clearly5 ser)e as a substitute
for a specific deli)ery term
d) Today courts are li#ely to remo)e any ambiguous terms and replace them with
terms effectuating the intent of the parties5 if this is possible5 rather than simply
)acating the contract as defecti)e
") Frigaliment v. ,NS "ntern Sales #or'
a) Gacts6
i) 0ispute o)er the meaning of the words chic#en
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ii) 7laintiffs order 'chic#en( of different siCes in different /uantities for
different prices
iii) The defendant supplies them with small broilerHfryers and larger stewing
chic#ens5 but the plaintiffs claim they understood 'chic#en( to refer only to
broilerHfryers and not to older5 larger birds (they used chic#en as a term of
art rather than a generic designation)
b) %)identiary analysis by Audge Griendly
i) Terms of the contract & not informati)e because they gi)e no e*plicit
definition of the word chic#en
ii) .egotiations
a) There is some conflict between the 9erman and %nglish
meaning of the term chic#en which apparently was not resol)ed
during the negotiations
b) The 9erman word is )ery broad and the plaintiffs argue that
because they did not use that term they intended the more specific
%nglish meaning
c) This is refuted by the plaintiff3s agent who said any sort of
chic#en was satisfactory
iii) Trade usage
a) 7laintiff3s e*pert testifies that in the trade chic#en generally mean
broilerHfryer5 howe)er in his contracts the e*pert specifies broilerH
fryer rather than relying on the purported 'trade usage(
b) Suggests that while there might be some specific trade usage it
is no uni)ersal or conclusi)e
i)) !S0A Standards
a) 9enerally5 Gederal standards or definitions are of little e)identiary
importance unless they reflect trade usage
b) 2n this case the parties referred to !S0A regulations for grading
chic#en within the terms of the contract
c) The !S0A standards ha)e a )ery broad definition for chic#en5
which includes broilerHfryers5 stewing hens5 capons5 etc
d) This is only significant because the other obBecti)e e)idence ga)e
no clear indication of meaning5 if it had this would li#ely not ha)e
tipped the balance in fa)or of the defendants
)) 7ricing
a) 7rices in the pre)ailing mar#et were significantly higher for large
young chic#ens but prices for stewing chic#ens were consistent with
the price schedule adopted by the parties in the contract & argues
against the term 'chic#en( meaning only young chic#ens
b) There is a presumption that the defendant would not enter into a
losing contract (although they were new to the mar#et can might do
so to gain a foothold)
c) Ehile the prices are obBecti)e the meaning of the prices to the
parties has a significant subBecti)e component which is probably
why it was consulted last by the court
c) Conclusions
i) The court found that the defendant3s subBecti)e understanding was
consistent with a significant amount of more obBecti)e e)idence while the
plaintiff3s understanding was not well supported
ii) !nder the facts and circumstances of he case the defendant3s
understanding was obBecti)ely reasonable & to repudiate this the plaintiff
would ha)e to show strong obBecti)e e)idence of a different meaning of the
term5 which they could not do
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Contracts Outline
+) -mbry v. Harga!ine/ McKittrick Dry oo!s #o.
a) 2nterpretation in an employment contract setting
b) Gacts6
i) %mbry wor#ed on an annual contract basis for @argadine and his
contract term was nearing its end
ii) %mbry tells @argadine that without a new contract he will be forced to
mo)e on and find new employment
iii) %mbry tal#s to his boss during a busy time and lays out his case &
@argadine tells him not to worry5 he3s fine and to go get his men out on the
road
i)) %mbry returns to wor# and is dismissed se)eral months later
c) 2ssues6 did the interaction constitute formation of a contract?
d) Analysis
i) The court finds that only outward manifestations are important5 inner
intentions are of little significance & there fore they focus on what
reasonable interpretation %mbry could place on his bosses words
ii) 2n the lower court the Bury instruction re/uired that both parties intend to
form a contract & this instruction is reBected by the appellate court5 there the
court focuses only on what significance %mbry could reasonably place on
the words
a) %mbry could and did reasonably interpret @argadine3s statement
as a new contract
b) 2n these cases it is important not only that the plaintiff can
reasonably rely on the statement but that they !o rely
-) Haines v. Ne* 8ork
a) Gacts6
i) .ew 4or# agreed to build an maintain a sewage treatment plant to be
sure that other communities did not pollute their drin#ing water
ii) The contract lac#ed e*plicit terms for how long they were supposed to
maintain the plant5 if they were obliged to increase capacity5 and how much
)olume they had to handle (no termination clause in the contract)
b) 2ssue6 how long is .ew 4or# re/uired to maintain the plant and how much
capacity do they ha)e to add to the plant?
c) The only guidance a)ailable to the court was the intent which moti)ated the
original contract
i) .ew 4or# was moti)ated by ensuring a clean water supply for the city5
therefore the contract should persist as long as that was important
ii) ,easonableness is e)aluated at the time the contract is forme! not when
the contract terms are revie*e! (therefore must eliminate considerations
li#e en)ironmental standards and regulations that would ensure clean
water anyway)
iii) Assuming .ew 4or# continues to ha)e a duty to pro)ide the ser)ices
under the contract5 what is the scope of that duty
a) The court treats this li#e a re/uirements contract & they are
re/uired to continue ser)ing the areas they already ser)e5 but need
not e*pand ser)ices to accommodate increased demand (they need
only deal with as much waste as the plant can handle and no more)
d) Black Letter &.rinci.le): courts presume contracts are not perpetual but last a
reasonable length of time (similar to the e)aluation of re/uirements contracts) and
will loo# to the intent of the original contract to determine how long it should last
(ha)e circumstances changed?)
J) S'aul!ing v. Morse
a) Gacts6
7age ->
Contracts Outline
i) Changed circumstances case in)ol)ing a child support agreement
ii) Morse agreed to support his son through high school and to pay for
college
iii) The terms of the contract assume he will go directly to college and say
something li#e 'until he graduates from college( but instead the son
enlists in the Army during EE22
i)) The trust then sues Morse for the support the contract apparently
re/uires him to pay
b) Arguments6
i) Trustee & the letter of the contract says Morse must pay
ii) Morse & the intent of the contract was to pro)ide support
c) Analysis
i) The court loo#s beyond the plain language of the contract to the intent of
the contracting parties & when they made the contract they were basing it
on a set of mutually understood e*pectations that did not come to pass
ii) The intent of the contract was to pro)ide for support and education5
which right now cannot be done
iii)2f the parties had contemplated the current situation they would ha)e
included a suspension clause5 therefore the clause should be added
i)) .ote6 under this sort of contract the presence of a li/uidated )alue in the
contract does not mean the court will be bound by it & if the intent of the
contract cannot be satisfied by the amount specified the court will li#ely
alter that amount to effectuate the intent of the contract (facts and
circumstances analysis)
d) 7rinciple6 changed circumstances will trump the letter of a contract5 the court will
loo# to intent more than the written word and enact the purpose of the contracting
parties rather than sla)ishly following the letter of the contract
;) ,er*ick % Smith v. Salem Press "nc.
a) 2ssue6 price /uote for the binding of a two )olume boo# & was the price per set
or per )olume?
b) Arguments6
i) 7laintiff claimed the price was per )olume5 in accordance with trade
custom and practice
ii) 0efendant thought the bid was per set
iii) The contract5 on its face5 was )ague
c) Analysis
i) Ehen there is a common trade usage it is assumed that the contracting
parties are aware of that usage5 therefore proof of actual #nowledge is not
re/uired
a) $inder does not need to pro)e #nowledge
b) 0efendant does not win on a claim of ignorance
c) The Bury must decide if the contract complied with trade usage
ii) Court does not address if both parties must be part of the trade
a) $rings up fair notice issues
b) Modern doctrine holds that if one of the parties is not a member
of the trade then they will not be held to trade usage in their
contracts (see umina)
M) Flo*er #ity v. umina
a) 2ssue6 in a painting contract does the bid co)er both apartments and common
areas or only apartments?
b) Arguments6
i) 7laintiff argues that the custom in the trade is for painting contracts to
co)er both apartments and common areas
7age -1
Contracts Outline
ii) 0efendant argues that their bid was restricted only to painting the
apartments as specified in the bid
c) The court applies the modern doctrine
i) $usinesses new to the trade are not strictly held to trade usage or
practices in forming contracts
ii) The court in)alidates the contract on the grounds that both parties were
ma#ing a reasonable interpretation of the contract in light of their subBecti)e
understandings5 one using trade usage the other common usage & there
was no meeting of the minds
'I') :ffer
A) Ehat constitutes an offer?
1) ,estatement 2
nd
:2+ :ffer Define!
An offer is the manifestation of willingness to enter into a bargain5 so made as to
Bustify another person in understanding that his assent to that bargain is in)ited
and will conclude it (it3s an offer if reasonable people would thin# it is an offer)
2) 2ssues6
a) 0ifference between an offer and an in)itation to bargain
i) Are the terms clear5 e*plicit5 and in)ite only a yes or no
ii) Are there still terms that need to be resol)ed or open /uestions as to
performance or consideration
b) 2f it was an offer was it still open at the time of acceptance or did the offer e*pire
due to time5 circumstances5 or re)ocation by the offeror
c) Eas the offer accepted or did the offeree ma#e a counterHoffer
i) Eas it a yesDno answer or a how about answer
$) Termination
1) ,estatement 2
nd
:+1 La.se of 4ime
(1) An offeree3s power of acceptance is terminated a the time specified in the offer5
or5 if no time is specified5 at the end of a reasonable time
(2) Ehat is a reasonable time is a /uestion of fact5 depending on all the
circumstances e*isting when the offer and attempted acceptance are made
(") !nless otherwise indicated by the language or the circumstances5 an offer sent
by mail is seasonably accepted if an acceptance is mailed at any time before
midnight on the day on which the offer is recei)ed
2) ,easonableness is generally e)aluated in the eyes of the offeror5 but it could be based
on the perception of either party & the court will ultimately determine if e*pectations are
reasonable
C) CounterHoffers
1) ,estatement 2
nd
:"F Counter-offers
(1) A counterHoffer is an offer made by an offeree to his offeror relating to
the same matter as the original offer and proposing a substituted bargain
differing from that proposed by the original offer
(2) An offeree3s power of acceptance is terminated by his ma#ing of a
counterHoffer5 unless the offeror has manifested a contrary intention or
unless the counterHoffer manifests a contrary intention of the offeree
:-F Pur.orte! cce.tance $)ic) !!s 5ualifications
A reply to an offer which purports to accept it but is conditional on the
offeror3s assent to terms additional to or different from those offered is not
an acceptance but is a counterHoffer
2) 2f a party is gi)en an e*plicit offer they must respond in an e/ually e*plicit manner or it
may be percei)ed as a counterHoffer rather than an acceptance with a re/uest
a) The line between unconditional acceptance and conditional re/uest is fuCCy
7age -2
Contracts Outline
i) @inges on whether the re/uest is a new condition (counterHoffer) or
simply a re/uest or clarification about the offer
ii) 2s the in/uiry simply a clarification of a contract term or a new term
b) %/ui)ocal acceptances are generally considered counterHoffers
") A counterHoffer terminates the original underlying offer and replaces it with a new offer
a) A counterHoffer e*tinguishes the opportunity to accept the original offer
+) A communication only functions as an acceptance if it une/ui)ocally accepts an offer on
its original terms (things li#e yes5 and 2 accept are good)
a) Common law 'mirror image( rule & any change5 e)en a tiny one5 functioned as a
counterHoffer
b) Today the mirror image rule is disfa)ored & an acceptance is )iewed as a
counterHoffer only if it alters a material term of the original offer (price5 deli)ery5 etc)
0) ,e)ocation
1) Eays to e*tinguish the power of acceptance6
a) %lapse of time
b) ,eBection or acts that can reasonably be percei)ed as reBection
c) CounterHoffer
d) 0eath of offeror or offeree
e) ,e)ocation
2) ,estatement 2
nd
:+2 #e%ocation by Communication 6rom :fferor #ecei%e! by :fferee
An offeree3s power of acceptance is terminated when the offeree recei)es
from the offeror a manifestation of an intention not to enter into the
proposed contract
:+" In!irect Communication of re%ocation
An offeree3s power of acceptance is terminated when the offeror ta#es
definite action inconsistent with an intention to enter into the proposed
contract and the offeree ac/uires reliable information to that effect
") ,e)ocation and reliance
a) Ehen can an offeror re)o#e an offer and when can an offeree reasonably rely
on it?
i) So long as there is no separate consideration gi)en to #eep an offer open
it can be re)o#ed at will by the offeror
ii) ,eliance on an open offer is not reasonable unless there is a separate
agreement in)ol)ing consideration to #eep the offer open
iii) An offeree cannot rely on an offer if he learns of an intention on the part
of the offeror not to enter into the contract & the information can either be
directly communicated or constructi)e
b) Auctions (Payne v. #ave & the sil)er worm case)
i) 0octrine holds that auctions are solicitations for bids5 not offer for sale
ii) $ids are offers5 not acceptances5 until the ga)el falls
iii) !CC :2H"2M "ale by uction
(2) A sale by auction is complete when the auctioneer so
announces by the fall of the hammer or in customary manner
Ehere a bid is made while the hammer is falling in acceptance of a
prior bid the auctioneer may in his discretion reopen the bidding or
declare the goods sold under the bid on which the hammer was
falling
i)) ,estatement 2
nd
:2M uctions
(1) At an auction5 unless a contrary intention is manifested
(a) The auctioneer in)ites offers from successi)e bidders
which he may accept or reBect
7age -"
Contracts Outline
(b) Ehen goods are put up without reser)e5 the auctioneer
ma#es an offer to sell at any price bid by the highest bidder5
and after the auctioneer calls for bids the goods cannot be
withdrawn unless no bid is made within a reasonable time
(c) Ehether or not the auction is without reser)e5 a bidder
may withdraw his bid until the auctioneer3s announcement of
completion of the sale5 but a bidder3s retraction does not
re)i)e any pre)ious bid
c) !nilateral contracts
i) A type of contract where performance is the mode of acceptance
ii) !nder the common law acceptance re/uired complete performance
a) Stac#ed the dec# in fa)or of the offeror who could re)o#e until
the last cent of acceptance was performed
iii) !nder the modern doctrine once performance begins the offeror has to
gi)e the offeree a chance to complete performance (see ,estatement 2
nd

sections)
:+- :.tion Contract Create! by Part Performance of 4en!er
(1) Ehere an offer in)ites an offeree to accept by rendering
a performance and does not in)ite promissory acceptance5
an option contract is created when the offeree tenders or
begins the in)ited performance or tenders a beginning of it
(2) The offeror3s duty of performance under any option
contract so created is conditional on completion or tender of
the in)ited performance in accordance with the terms of the
offer
:M; :.tion Contract
(1) An offer is binding as an option contract if it6
(a) 2s in writing and signed by the offeror5 recites a
purported consideration for the ma#ing of the offer5
and proposes an e*change on fair terms within a
reasonable time< or
(b) 2s made irre)ocable by statute
(2) An offer which the offeror should reasonably e*pect to
induce action or forbearance of a substantial character on
the part of the offeree before acceptance and which does
induce such action or forbearance is binding as an option
contract to the e*tent necessary to a)oid inBustice
:F> Promise #easonably In!ucing ction or 6orbearance
(1) A promise which the promisor should reasonably e*pect
to induce action or forbearance on the part of the promisee
or a third person and which does induce such action or
forbearance is binding if inBustice can be a)oided only by
enforcement of the promise The remedy granted may be
limited as Bustice re/uires
(2) A charitable subscription or a marriage settlement is
binding under (1) without proof that the promise induced
action or forbearance
i)) 0ifference between :+-5 :M; and :F> reliance
a) :F> applies to reliance on promises (particularly donati)e
promises) that do not actually form a contract & the action ta#en
does not create a contract5 it simply causes a detriment to the
promisee
7age -+
Contracts Outline
b) :+- applies to actual formal contracts where the offeree has
begun performance in response to an offer (not a promise) & the
offeree is gi)en a reasonable opportunity to compete performance
(realm of unilateral contracts)
1) !nder :+- a party must actually begin performance5
preparation to perform is not sufficient to ma#e the unilateral
contract binding
2) The maBor difference between :+- and :F> is the type of
damage award a)ailable5 which really hinges on how much
performance has ta#en place
a) 2f plaintiff has prepared to perform5 but has not
started performance only :F> reliance damages are
a)ailable & offer is treated li#e a donati)e promise5
not a contract
b) Once a party begins to perform a contract has
formed and a party can see# e*pectation damages
under :+-
c) 2n cases where e*pectation damages are too
speculati)e or difficult to determine the court may
award reliance damages rather than no damages
c) :M; applies in cases of bilateral contracts (promise for a promise)
and stops one party from re)o#ing a promise the other party has
relied on (especially critical in the area of Bob bidding)
%) Cases
1) +onegran v. Scolnick
a) Gacts6
i) 0efendant ad)ertised +> acres of land for sale in Aoshua Tree
a) 0id not state a price5 the specific location5 date of sale5 etc & this
was an in)itation to bargain5 not an offer
b) 9enerally these sorts of ads5 e)en if a price is stated5 are
considered in)itations to bargain5 not offers of a contract5 the party
placing the ad reser)es the right to re)o#e it at will5 refuse bids5 etc
& they ha)e not circumscribed their sphere of free action
ii) 7laintiff responded to the ad and as#ed for details about the property
a) 0efendant responded with a form letter describing the property
and /uoting a minimum price (closer to an offer5 although it was
clearly a form letter li#ely sent to multiple people)
iii) 7laintiff replies to the form letter (he does not treat it as an offer)
describing the property he loo#ed at5 as#ing if that was the appropriate
property5 and suggesting a possible escrow agent to complete the
transaction & more bargaining5 it was not an e*plicit acceptance
i)) 0efendant replies saying that the escrow agent is acceptable and
plaintiff found the proper land5 but to respond soon because there were
others interested in the property
a) Again5 not an acceptance of the plaintiff offer5 but an indication
that bargaining was ongoing
b) Seems to be saying that if the plaintiff e*plicitly accepts the offer
before anyone else does they ha)e a contract & seems li#e an offer
with an implied condition of /uic# response
)) 7laintiff replies and accepts the offer but is too late5 the property has
been sold
b) Timeline of the transaction
+DM & 0efendant mailed final letter
7age --
Contracts Outline
+D12 & 0efendant sold property to another buyer
+D1+ & 7laintiff recei)ed letter
+D1- & 7laintiff mailed acceptance of implied offer in defendant3s letter
+D1; & 7laintiff opened escrow account
c) Analysis6 did the defendant ma#e an offer or was this all bargaining?
i) The court treats the defendant3s final letter as a conditional acceptance of
the plaintiff3s letter (about the escrow agent) the condition being a prompt
reply before another offer was made The April M
th
letter was a conditional
acceptance5 not a counterHoffer
ii) The April M
th
letter seemed to re/uire additional assent by the plaintiff
there was no e*plicit language of acceptance by the defendant5 rather the
language suggests that the plaintiff could ha)e the property if he e*plicitly
told the defendant he wanted it before anyone else did
a) The letter was triggering a race not gi)ing the plaintiff an option
on the property
b) The language suggests that the defendant was unsure as to the
plaintiff3s sincerity about buying the land
d) Black Letter: there is no offer unless a reasonable person would find that the
terms create a binding power of acceptance (no more bargaining is re/uired5
saying yes seals the deal)
2) +efko*it3 v. reat Minnea'olis Sur'lus Store
a) Gacts6
i) 0epartment store placed an ad offering furs for a )ery low price to the
first person to arri)e with the money
ii) 7laintiff is always the first to arri)e
a) Girst time he is informed the policy applies only to women
b) Second time he is told he was already told about the policy and
was ineligible for the promotion
iii) 7laintiff sues for performance or damages
b) Argument
i) 7laintiff6 the ad is an offer that he is attempting to accept
ii) 0efense6 the ad is really only an in)itation to bargain5 not a true offer
c) Analysis6
i) The court reBects the store3s argument & simply because the offer is made
to a large number of people rather than a single specific person5 does not
mean it is not an offer
a) 2f the terms of the offer are clear5 definite5 and lea)e nothing open
for further negotiation it creates a binding power of acceptance
b) The acceptance of the offer by the plaintiff creates a binding
contract
ii) The court only awards damages for some of the furs
d) Black Letter: 2f the terms of an offer are clear5 e*plicit5 definite5 and no longer
open to negotiation then it creates a binding power of acceptance in the buyer
") Nebraska See! v. Harsh
a) !se of the word 'want6 in an ad for the sale of seeds ma#es it a solicitation for
bids rather than a binding offer
b) Trade usage may inform these sorts of ads (ie if want is commonly used in
such contracts it might be considered a true offer not Bust an in)itation)
+) Moulton v. Kersha*
a) Offer for salt was considered a solicitation to bid e)en though the ad was
e*tremely e*plicit about terms5 price5 deli)ery5 a)ailability5 etc
b) Today the case would li#ely go the other way
-) Fairmount lass (orks v. run!en-Martin (oo!en*are #o.
7age -J
Contracts Outline
a) @ere there is an e*plicit ad that the court considers an offer rather than an
in)itation to bargain
J) 0kers v. Se!berry
a) Gacts6
i) Two engineers wor#ing for Sedberry are unhappy with the way the
company is being run and tal# with Sedberry about their concerns
ii) $efore they )oice their concerns they tender their resignations5 she
ma#es no comment5 they tal# about the company5 and she send them bac#
to wor# with instructions about what to do
iii) Se)eral days later she contacts them and says she accepts the
resignations at which point they tell her the offer had been rescinded &
leads to their suit against Sedberry
b) Analysis
i) The court focuses on reasonableness in terms of the offeror3s
interpretation of the actions of the offeree
a) She too# no action5 ga)e them orders5 and told them to return to
wor#
b) !nder the facts an circumstances they percei)ed her acts as
declining their offer to resign & at that point the offer was
e*tinguished
ii) ,egardless of her internal intent5 Sedberry3s actions indicated that she
declined their offer5 therefore she could not later accept it5 the offer was
e*tinguished
a) She could ha)e acted on the offer in the future if she had
indicated she planned to thin# about it and inform them of a
decision later
;) 0r!ente v. Horan
a) ,eal estate contract & buyers accepted the contract5 but as#ed if certain
furnishing were included with the sale
b) Court held that this was a counterHoffer an not simply a clarification
M) $ho!e "slan! De't. Trans'. v. Provi!ence % (orchester $$
a) Gacts6
i) State statute re/uired that property owners with railroad trac#s on their
land gi)e the state the right of first refusal at the lowest acceptable price
when the land is put up for sale
ii) Ehen offered the property the state accepts5 but tells the seller not to
remo)e the railroad trac#s on the property
iii) Seller claims this was not an acceptance5 but was instead a counterH
offer that they did not ha)e to accept
b) Analysis
i) The court says there was no substanti)e change in the material terms of
the offer5 and e)en if there were it was in fa)or of the seller5 therefore this
was simply an acceptance and not a counter offer
F) Price v. )klahoma #ollege of )steo'athic Me!icine an! Surgery
a) Surgeon accepts a contract but with his acceptance writes that he is doing so
under protest5 that the contract does not abide by other negotiated terms5 and that
he is dissatisfied
b) Black Letter: and acceptance5 e)en a grudging one5 is an acceptance and
ma#es the contract binding
1>) Dickinson v. Do!!s
a) Gacts6
i) 0odds offered to sell 0ic#inson a house
a) 0odds told 0ic#inson to respond by Griday F6>> am
7age -;
Contracts Outline
ii) 0ic#inson decided Thursday night to accept the offer
a) At that time he learned that 0odds was negotiating with someone
else to sell the house
b) 0ic#inson wrote 0odds a letter and left it with his motherHinHlaw
with whom 0odds was staying & 0odds ne)er recei)ed the letter
iii) Griday morning 0ic#inson and his agent both found 0odds at the train
station and con)eyed the acceptance again5 at which point 0odds told
0ic#inson he had sold the property
i)) 0ic#inson sued for specific performance
b) Analysis
i) 2ssue 16 could the offer be re)o#ed?
a) The court held that since there had been no separate
consideration gi)en (e)en tenuous consideration li#e #eeping the
offer open to gi)e 0ic#inson a chance to thin# about it) the offer
could be re)o#ed at will by 0odds
ii) 2ssue 26 was the offer e)er re)o#ed?
a) 0odds ne)er e*plicitly re)o#ed the offer5 but 0ic#inson was
constructi)ely aware of re)ocation Thursday night when he learned
of other negotiations
b) 2f the offeror acts in a way inconsistent with the original offer5 and
the offeree learns of such actions5 he is on notice that the offer has
li#ely been re)o#ed
11) $agosta v. (il!er
a) Gacts6
i) Eilder put a piece of property up for sale called the 'Gor# Shop(
ii) ,agosta mailed Eilder an acceptance of the offer along with a chec# for
=2>>> and began arranging financing for the remainder
iii) Eilder returned the chec# and countered5 offering to sell the property for
=MMI if ,agosta would appear at a specific ban# at a specific time with the
money & acceptance as performance
i)) After some more e*changes the defendant re)o#ed the offer and plaintiff
sued
b) Analysis
i) The defendant argued that the plaintiff had not begun performance5 he
had simply prepared to perform which did not ma#e the contract binding
ii) The only damages a)ailable to the plaintiff are reliance damages
a)ailable under :F> (for what they did in preparation to perform) not
e*pectation damages under :+- because no actual performance had been
started
12) Drennan v. Star Paving
a) Gacts6
i) 9eneral contractor is ma#ing a bid and solicits bids from sub contractors
ii) Star 7a)ing ma#es the low bid for pa)ing ser)ices which 0rennan uses
in his o)erHall bid
iii) 0rennan is awarded the Bob but before he can tell Star 7a)ing he won
the bid they recant their bid and as# for a much higher bid
i)) 0rennan is forced to find other bids and sues Star 7a)ing for his costs
b) Arguments6
i) Star 7a)ing argues they re)o#ed their offer before 0rennan accepted it5
therefore no contract was e)er formed and 0rennan should reco)er nothing
ii) 0rennan responds by arguing that he relied5 to his detriment5 on Star
7a)ing3s bid5 therefore he should be able to reco)er
c) Analysis
7age -M
Contracts Outline
i) 2ssue before the court6 can 0rennan3s reliance ma#e Star 7a)ing3s offer
binding?
ii) Austice Traynor argues that an offer or a bid in this conte*t is really no
different than a conditional promise5 therefore under :F> promissory
doctrine should ma#e reliance damages a)ailable
a) 2f the bid had e*plicitly included a re)ocation clause the situation
would be )ery different5 but no such clause was included
iii) Austice Traynor also notes :+- which allows partial performance to
ma#e a unilateral contract binding where classical contract law doctrine
re/uired complete performance
i)) .ew 0octrine (Combination of ,estatement 2
nd
::+-5 M;(2)5 and F>)6 if a
party ma#es an offer that may be reasonably relied on by the offeree and
the offeree does rely on it to their detriment the offer cannot be re)o#ed
d) 2ne/ualities created by the Drennan decision
i) !nder the decision subHcontractors are bound to their bids to the general
contractor5 but a general contractor is not bound to use those bids & the
contract duties are une)en
ii) The concern is that this will lead to unfair labor practices and bid
shopping by the general contractor
a) A general contractor could use a low bid to e*tort e)en lower bids
by other subHcontractors
b) Might lead subHcontractors to bid high and thus reduce the
efficiency of the system & could also lead to collusion among
bidders to parcel out Bobs
iii) Single round bidding and other contract pro)isions (li#e specification of
subHcontractors) can address many of these concerns
'') Mo!es of cce.tance
A) Gorm of acceptance allowed
1) Classical contract doctrine said that the mode of acceptance had to e*actly match the
contract terms or the contract was breached
2) This rigid classical doctrine is no longer the case5 although if specific types of
performance are material contract terms performance of other sorts may still )iolate the
contract (uses a reasonableness standard) & See ,estatement 2
nd
:"> 6orm of cce.tance In%ite!
(1) An offer may in)ite or re/uire acceptance to be made by an affirmati)e
answer in words5 or by performing or refraining from performing specified
acts5 or may empower the offeree to ma#e a selection of terms in his
acceptance
(2) !nless otherwise indicated by the language or the circumstances5 an
offer in)ites acceptance in any manner and by any medium reasonable in
the circumstance
:"2 In%itation of Promise of Performance
2n case of doubt an offer is interpreted as in)iting the offeree to accept
either by promising to perform what the offer re/uests of by rendering the
performance5 as the offeree chooses
") 2f the contract terms are unclear as to the form of the acceptance (offeror does not
e*press an e&'licit preference) the offeree is at liberty to ma#e whate)er sort of
acceptance they reasonably see fit
a) The offeror must une/ui)ocally e*press the preference5 language e*pressing a
preference does not ma#e that preference a binding mode of acceptance
b) 7resumption is generally that contracts are bilateral & promise for a promise
7age -F
Contracts Outline
+) Aust as an offeror must communicate an intention to re)o#e an offer (or act in a way
inconsistent with #eep the offer open) an offeree must communicate an intention to accept
an offer
a) .ot generally an issue in bilateral contracts where the contract is a promise for
a promise
b) 2n unilateral contracts if the offeror specifies a specific type of notice5 failure to
gi)e notice by that means can mean that the offer was ne)er formally accepted5
e)en if performance is gi)en
-) Black Letter Princi.les
a) An offeror may always specify a re/uired mode of acceptance
i) The specification must be e*plicit5 language indicating a preference is not
binding
ii) Courts will a)oid re/uiring a specific mode of acceptance and may e)en
endea)or to read around facially binding language
b) 2f a mode is suggested5 but not e*plicitly re/uired5 any reasonable mode of
acceptance will li#ely suffice
c) 9enerally this technicality is used by the offeror to a)oid the contract5 though the
offeree may attempt it as well & it can be a double edged sword
$) Acceptance by an act
1) Gor unilateral contracts with acceptance embodied in action the moti)e behind the
performance is immaterial so long as the performance satisfies the terms of the contract
a) A party can perform e)en if they are acting in a way they would ha)e acted
regardless of a promise or offer & the performance need not be in response to the
offer as long as it is consistent with the contract terms
2) Similarly5 if a party tenders performance consistent with the terms of an offer that they
are aware of and benefits from that contract5 they are bound by its terms (they ha)e
formed and performed the contract)
C) .otice
1) At common law the offeree of a unilateral contract had to gi)e specific notice to the
offeror of their acceptance5 unless the offeror recei)ed actual notice from some other
source
0) Cases6
1) Klockner v. reen
a) Gacts6
i) A woman3s stepson and his daughter care for her in her old age
ii) @er will originally had all of her assets going to her husband upon her
death5 but he preHdeceases her and she ne)er reHwrites her will so she dies
intestate
iii) 0uring her life she promised her belongings to her stepHgranddaughter
and her real property to her stepson in return for caring for her for the rest
of her life
i)) The two ne)er e*plicitly accepted this offer5 they simply continued caring
for her & when she died and they attempted to enforce this promise her
children claimed they had offered no consideration5 rather they simply
performed acts they would ha)e performed anyway therefore they should
not recei)e the benefit of the promise
b) Analysis
i) The court treats this li#e a unilateral contract & she promised and their
performance was acceptance of that performance
ii) The moti)e behind the performance is immaterial5 as long as it satisfies
the terms of the contract
2) Simmons v/ 4nite! States
a) Gacts6
7age J>
Contracts Outline
i) American $rewery sponsored a contest called the American $eer Gishing
0erby
a) They tagged a fish and offered a =2-5>>> reward to anyone who
caught and presented it
ii) Simmons was aware of the contest but did not intend to catch the fish
when he went fishing and ended up with the tagged fish
iii) Simmons obtained the reward but attempted to call it a gift from the
brewery rather than priCe income since he had not intended to enter or win
the contest
i)) The 2,S sued him for unpaid ta*es
b) Analysis
i) The court said that since he was aware of the contest and too#
ad)antage of the offer he participated in the contest5 therefore his winnings
were income5 not a gift from the contest sponsors & if a party is aware of an
offer and accepts the benefits of the offer they cannot also claim that they
did not enter into a contract
") #arlill v. #arbolic Smoke ,all #o.
a) Gacts6
i) Carbolic published an ad)ertisement offering =1>> in compensation to
anyone who used their product and still contracted the flu
ii) Carlill bought the smo#e ball5 used it5 and got the flu5 she then attempted
to claim her compensation
iii) Carbolic defends by arguing she ne)er ga)e them specific notice that
she had accepted the offer in their ad)ertisement
b) Types of notice she could ha)e gi)en them6
i) .otice that she was using the smo#e ball
ii) .otice she intended to accept the offer and that if she got sic# she would
claim the compensation
iii) .otice that she was using the smo#e ball on the strength of the ad
c) Analysis
i) The court reBects the notice argument
a) The notice Carbolic is re/uesting is in the nature of a bilateral
contract5 but the ad was clearly an offer for a unilateral contract
(specific as to terms5 no further negotiation needed5 etc)
b) All Carlill needed to do was use the ball and then present herself
when it failed5 nothing else was necessary to accept the contract &
the only notice re/uired is notice of completion of performance
ii) Black Letter: performance constitutes acceptance5 no additional notice
is re/uired e*cept notice of completion of performance within a reasonable
time after completion
+) ,isho' v. -aton
a) Gacts6
i) %aton wrote to $ishop and promised to co)er any loan $ishop might
ma#e to %aton3s nephew
ii) $ishop guaranteed a loan and then ended up ha)ing to co)er it when the
nephew defaulted
iii) $ishop then tried to reco)er the balance from %aton
i)) $ishop sent notice to %aton at the time he made the loan5 but %aton did
not recei)e notice for two months and claimed that the notice was not
timely
a) The letter ne)er arri)ed5 but the mode was appropriate
7age J1
Contracts Outline
b) Analysis
i) The court held that as long as the notice was communicated by a
reasonable means the fact that it was ne)er recei)ed did not in)alidate it &
the notice was )alid
a) The negotiation was begun by mail and5 absent any information
to the contrary5 all other communications are presumpti)ely
appropriate if made in the same way & still holds true today
ii) There is a suggestion that if the party gi)ing notice does not recei)e
performance for a long time or has reason to belie)e notice was not
actually recei)ed they are constructi)ely on notice that notice was ne)er
gi)en
a) There is a tension between the holding in ,isho' and reasonable
reliance on the part of the offeror that silence on the part of an
offeree suggests no obligation
iii) Today5 notice is go)erned by the doctrine of reasonableness & was the
mode of noticeDacceptance used reasonable in light of the facts and
circumstances of the situation
-) "nternational Filter v. #onroe in/ "ce/ an! +ight
a) 7rincipal6 an offeror can always e*plicitly re/uire a specific method of
communicating acceptance (a specific form of notice)
b) Gailure to comply can )oid the offeror3s responsibility
J) Polaroi! v. $ollins
a) Gacts6
i) @oo#er had specific indemnification clause on its purchase
orders
ii) ,ollins performed and ne)er returned the ac#nowledgement copy
of these indemnification for se)eral years
iii) ,ollins e)entually challenged the indemnity clause
b) Analysis
i) The court ma#es two important holdings6
1 7rinciple 16 when a party performs according to terms
specified in a contract they ha)e accepted by course of
performance5 e)en if they ne)er e*plicitly accept or intend to
accept the terms
2 7rinciple 26 the offeror may specify the re/uired mode of
acceptance5 this is the only mode that binds them5 but other
methods of acceptance might bind the offeree
a) 2f the offer suggest a method of acceptance it
does not preclude other reasonable forms of
acceptance
b) A reasonable course of performance can ser)e as
a mode of acceptance5 e)en if it is not e*plicitly listed
as such a mode
''I) ".ecial cases of unilateral contracts: im.lie!-in-law an! im.lie!-in-fact
A) Gunctional distinctions
1) Contract impliedHinHlaw & this is a contract that was ne)er actually formed but must be
created to pre)ent inBustice (usually unBust enrichment)
2) Contract impliedHinHfact & an actual contract is formed as the result of conduct or
actions ta#en by the parties suggesting a contract was implied (often the result of a
mista#e on the part of one of the parties that could ha)e been corrected by the other)
") $oth doctrines create true5 enforceable5 legally binding contracts regardless of how5
doctrinally5 they are created
7age J2
Contracts Outline
a) The standard remedy of e*pectation damages is a)ailable5 not restitution which
is typically the remedy for unBust enrichment
$) 7aradigm cases6
1) 2mpliedHinHlaw6 party is inBured and gi)en first aid5 they owe compensation for the
ser)ices rendered
a) Applies only to emergency care5 more elaborate care or nonHlife threatening
care is li#ely not co)ered
b) Austifications
i) Gairness & would ha)e bargained for the benefit if they could ha)e
ii) %fficiency & parties will not feel secure in gi)ing aid if they are not
compensated for it
c) The court will generally apply a reasonableness standard to determine if the
contract is formed & would a reasonable person ha)e accepted the ser)ices gi)en
under the pre)ailing facts and circumstances (which include idiosyncrasies of the
party)
2) 2mpliedHinHfact6 you watch a house painter accidentally paint your house instead of your
neighbor3s without correcting the mista#e
a) The doctrine re/uires that the benefiting party be aware of the benefit being
conferred and in a position to stop it
C) Cases6
1) Nursing #are Services "nc. v. Dobos
a) Gacts6
i) Mrs 0obos recei)ed nursing care both in the hospital and after she left
that she accepted but was not aware she had to pay for
b) Analysis
i) The care was gi)en during three separate periods
1 2n hospital round the cloc# care
a) Galls under the emergency aid doctrine5 had she been
able to she would ha)e accepted it & impliedHinHlaw contract
2 +M hours of postHrelease care
a) Mrs 0obos admits that she agreed to and accepted this
care5 therefore a normal contract was formed and there was
no dispute
" Two additional wee#s of care
a) She accepted the care5 but thought it was co)ered by
Medicare
b) .ursing Care Ser)ices argued that she accepted the care
and ne)er in/uired about payment or attempted to terminate
the care & created an impliedHinHfact contract
i) $egs the /uestion of who should be responsible for
the in/uiry5 Mrs 0obos5 or .ursing Care which has
more e*perience with this sort of situation?
ii) Mrs 0obos was liable for the contract price e)en though she ne)er
e*plicitly agreed to any contract
2) Day v. #aton
a) Caton watched 0ay build a wall that will benefit him5 but refuses to pay for it
b) Suestions6
i) 2s there an obligation to pay?
a) %*pectation of payment is the #ey5 did the plaintiff ha)e a
reasonable e*pectation of payment
ii) The court finds three criteria necessary before an implied contract is
formed
1 Inow the act is being performed
7age J"
Contracts Outline
2 The party recei)es a benefit from the act
" The benefiting party #nows the acting party e*pects to be paid for
conferring the benefit (at least in part)
") ,astian v. affor!
a) Gacts6
i) $astian agreed to design and build a building for 9afford (no e*plicit
contract)
ii) $astian begins to design the building and 9afford attempts to arrange
financing
iii) 9afford needs a firm bid to secure financing but $astian will only wor#
on a costHplus basis so 9afford hires a different architectDbuilder
i)) $astian sues for the )alue already gi)en
b) Analysis
i) The lower court found for the defendant & no unBust enrichment
ii) 2daho Supreme Court found an impliedHinHfact contract & the defendant
recei)ed the benefit of the plans made5 e)en if they were useless to him5
and therefore must pay for that benefit
0) 2mplied Contracts in %mployment
1) Often in)ol)es the /uestion of the effects of changes in policy e*pressed in employee
handboo#s5 guidelines5 etc
a) 2f the facts and circumstances suggest that terms mentioned in an employee
handboo# or other written materials are intended to become part of a contract the
court is li#ely to enforce them
b) The maBor issue is whether new terms5 either oral or in a written document li#e
an employee manual5 can o)errule terms in an original written contract
2) Cases6
a) Foley v. "nteractive Data
i) 2ssue6 can oral statements by an employer indicating that employees will
only be discharged for good cause replace atHwill terms in a written
contract
a) 2s there an implied good cause pro)ision?
b) 0oes any implied contract superceded the written contract?
ii) Analysis6
a) The court focuses on three /uestions6
1 0id the employer ma#e comments indicating they will only
terminate for good cause?
2 0oes the conduct of the employer suggest such a policy?
" 0id the employee gi)e separate consideration for the
modified dismissal pro)ision?
b) The issue was whether the termination only for good cause
pro)ision was simply a donati)e promise (a gift5 not a contract) or a
unilateral contract (promise in return for performance)
1) There need not necessarily be new performance5 Bust the
implicit understanding that employees may wor# harder or
stay with the company longer if they thin# they ha)e greater
Bob security
c) The court found that there was an implied good cause pro)ision
(there was an impliedHinHfact contract)6
1) %mployee handboo#s5 guidelines5 statements5 etc
2) %mployer conduct
") The fact that the employees continued to wor# for the
company after the statementsDoffers had been made was
acceptance through performance of the contract
7age J+
Contracts Outline
iii) .ote6 employment rights acti)ists hated this case because it e*plicitly
stated the presumption that all contracts are at will unless there is a clear
indication to the contrary in the contract or the facts and circumstances
surrounding it & there was no implied good cause pro)ision5 at will mean
Bust that5 employers can terminate employees at will
b) 0smus v. Pacific ,ell
i) 2ssue6 can an employer who unilaterally created a program promising a benefit
then unilaterally withdraw that offer?
ii) Approaches to the /uestion6
a) The employer unilaterally instituted the program5 they can then
unilaterally withdraw it (complete unilateral discretion)
b) Once the program has been instituted and employees ha)e performed
under that program it becomes a contract and can only be withdrawn after
negotiation with the employees (impliedHinHfact contract)
c) The program can be withdrawn after appropriate notice and without
altering )ested rights (middle ground5 unilateral modification with notice)
iii) Analysis6
a) The Court must determine what the approach in California should be
b) The court holds that the program can be withdrawn or modified at will so
long as they gi)e appropriate notice and do not alter )ested rights under
the original program
1) There is no re/uirement for negotiation or compensation
2) Ehile in place5 though5 the program has the force of a contract5
so rights granted under the program cannot be altered while it
remains in effect
c) This doctrine seems consistent with unilateral contracts where the
promise can be withdrawn up until performance is initiated (implied option
to complete performance under ,estatement 2
nd
:+-
1) 2f 7acific $ell had granted the benefits for a fi*ed term they could
not rescind those benefits because once performance in
acceptance of those terms had started they had an implied duty to
allow the employee to complete performance under those terms
2) 0smus applies to benefits programs and employment contracts
that indefinite5 therefore :+- does not control
''II) (8trinsic e%i!ence rules
A) 7arol e)idence rule
1) 0octrine
a) Addresses the e*tent to which a written contract can be e*panded or modified
by prior or contemporaneous agreements
b) %lements6
1 Eritten main agreement
2 7rior written< O, priorDcontemporaneous oral5 collateral agreement
" The collateral agreement is being offered for enforcement
a) Today the collateral agreement can generally be offered as
e)idence of the meaning of the written contract5 Bust not as an
enforceable contract
b) At common law courts would not consider their e)identiary )alue
c) %ffect of the rule (what happens when the elements are satisfied)
i) The collateral agreement is not enforceable 2G6
1 The main written agreement is 'integrated( A.0
2 The subBect matter of the collateral agreement is within the scope
of the integrated agreement
7age J-
Contracts Outline
ii) 2ntegration
a) This basically as#s if the written agreement loo#s li#e it includes
the complete understanding of the parties in regards to the issue &
is it a full e*pression of their intentions
iii) Scope
a) Eould the terms of the collateral agreement reasonably be
included in the written agreement
b) Scope is often )ery difficult to determine5 courts generally do a
sort of gut chec# & does it feel li#e it should be included
c) Classical rule & would reasonable people include it
d) Common law rule6 a complete written agreement cannot be modified by a prior
or contemporaneous oral agreement or a prior written one affecting subBect matter
that would reasonably be e*pected to be included in the written agreement
i) %)identiary rule6 written agreements carry more weight than oral ones
ii) Eritten agreements )oid oral agreements as to the same subBect matter
e) !nder the formal common law doctrine courts will loo# to the four corners of the
contract5 and if it loo#s complete on its face will not consider any e)idence of
collateral oral contracts that would modify the written contract5 e)en as e)idence of
meaning of the written agreement
f) Conflicting )iews6 Eilliston and Corbin
i) Eilliston & if the parties state5 in the contract5 that it is integrated5 it is
integrated and the parol e)idence rule should apply ('four corners( )iew)
ii) Corbin & the contract says what the parties bother to write down5 but
they may not #now what it actually means5 use e*trinsic e)idence
(including collateral agreements) to determine the understanding of the
parties and then determine the scope of the contract and whether it is
integrated (e*trinsic e)idence )iew)
2) Modern approach
a) The elements and factors to trigger the rule are the same5 the action is in the
terms of scope and integration
b) 2ntegration & go)erned by ,estatement 2
nd
6
:2>F & Integrate! greements
(1) An integrated agreement is a writing or writings constituting a
final e*pression of one or more terms of an agreement
(2) Ehether there is an integrated agreement is to be determined
by the court as a /uestion preliminary to determination of a /uestion
of interpretation or to application of the parol e)idence rule
(") Ehere the parties reduce an agreement to writing which in )iew
of its completeness and specificity reasonably appears to be a
complete agreement5 it is ta#en to be an integrated agreement
unless it is established by other e)idence that the writing did not
constitute a final e*pression
,otes6
(1) Allows complete or partial (term by term) integration
(2) $efore e*cluding any e)idence e)erything should be
considered to determine if the agreement is integrated
(") 2f the contract loo#s reasonably complete it is the burden
of the plaintiff to show lac# of integration
:21> & Com.letely an! Partially Integrate! greements
(1) A completely integrated agreement is an integrated agreement
adopted by the parties as a complete and e*clusi)e statement of
the terms of the agreement
7age JJ
Contracts Outline
(2) A partially integrated agreement is an integrated agreement
other than a completely integrated agreement
(") Ehether an agreement is completely or partially integrated is to
be determined by the court as a /uestion preliminary to
determination of a /uestion of interpretation or to application of the
parol e)idence rule
:21" & (ffect of Integrate! greement on Prior greements &Parol
(%i!ence #ule)
(1) A binding integrated agreement discharges prior agreements to
the e*tent that it is inconsistent with them
(2) A binding completely integrated agreement discharges prior
agreements to the e*tent that they are within its scope
(") An integrated agreement that is not binding or that is )oidable
and a)oided does not discharge a prior agreement $ut an
integrated agreement5 e)en though not binding5 may be effecti)e to
render inoperati)e a term which would ha)e been part of the
agreement if it had not been integrated
,otes:
(1) Applies to integrated agreements
a) This section applies to 'partially( integrated
agreements5 or agreements that would not ha)e
been integrated at common law
i) The contract may be complete5 or
integrated5 as to particular terms5 but open as
to others
b) 0ischarges inconsistent agreements
i) 2nconsistent can be read narrowly to mean
simple contradiction5 or more broadly to
mean anything that conflicts with the meaning
c) 7rior writtenDoral or contemporaneous oral
agreements are enforceable5 so long as they are not
inconsistent with the main agreement
i) Since the agreement is not a complete
e*pression of the intentions of the parties (if it
were it would be completely integrated) it can
be modified by other agreements
(2) Applies to binding5 completely integrated agreements
a) These are analogous to common law integrated
agreements & full and complete understanding of the
parties about the transaction
b) Scope is still a gut chec# analysis
c) A completely integrated agreement does not
incorporate any additional terms from other
agreements
:21+ & (%i!ence of Prior or Contem.oraneous greements an!
,egotiations
Agreements and negotiations prior to or contemporaneous with the
adoption of a writing are admissible in e)idence to establish
(a) that the writing is or is not an integrated agreement
(b) that the integrated agreement5 if any5 is completely or
partially integrated
(c) the meaning of the writing5 whether or not integrated
7age J;
Contracts Outline
(d) illegality5 fraud5 duress5 mista#e5 lac# of consideration5 or
other in)alidating cause
(e) ground for granting or denying recission5 reformation5
specific performance5 or other remedy
,ote: all this is e)idence to rebut the presumption that a written
agreement is completely integrated
:21- & Contra!iction of Integrate! 4erms
%*cept as stated in :21+ where there is a binding agreement5 either
completely or partially integrated5 e)idence of prior or
contemporaneous agreements or negotiations is not admissible in
e)idence to contradict a term of the writing
:21J & Consistent !!itional 4erms
(1) e)idence of a consistent additional term is admissible to
supplement an integrated agreement unless the court finds that the
agreement was completely integrated
(2) An agreement is not completely integrated if the writing omits a
consistent additional agreed term which is
(a) agreed to for separate consideration5 O,
(b) such term as in the circumstances might naturally be
omitted from the writing
:21; & Integrate! greement "ub0ect to :ral #e3uirement of a
Con!ition
Ehere the parties to a written agreement agree orally that
performance of the agreement is subBect to the occurrence of a
stated condition5 the agreement is not integrated with respect to the
oral condition
c) Scope
i) Scope is largely determined by outside facts and circumstances & should
the subBect matter reasonably be included within the scope of the
agreement
ii) The modern rule and restatement as#s whether the collateral agreement
is something that would contradict the main agreement & if the collateral
agreement is )alid would it in)alidate part of the main agreement5 or can it
stand alone without conflict5 if it can stand alone it is outside the scope of
the original agreement
") Summary of parol e)idence rule analysis
a) Are the three elements present6
1 Eritten main agreement
2 7rior written< or priorDcontemporaneous oral collateral agreement
" 7laintiff is attempting to enforce collateral agreement
b) 2ntegration and scope
1 2s the agreement partially or completely integrated?
a) 2f partially integrated & enforce collateral agreements that are not
inconsistent with the main agreement & :21"(1)
b) 2f completely integrated than got to T2
2 2s the collateral agreement within the scope of the main agreement?
a) 2f the collateral agreement is outside the scope of the main
agreement5 then enforce the agreement
b) 2f the collateral agreement is within the scope of the main
agreement then )oid the collateral agreement H :21"(2)
7age JM
Contracts Outline
+) Cases6
a) Mitchill v. +ath
i) Gacts6
a) The parties enter into a written contract for the sale of some land
b) They also ma#e an oral arrangement to ha)e an ugly building
(the icehouse) on an adBoining piece of land ta#en down
1) The icehouse remo)al was not made part of the written
agreement
ii) Analysis6
a) The court describes three conditions that must be met before a
separate agreement is enforceable6
1 The condition must be collateral (freeHstanding5 separate5
side agreement)
2 The collateral agreement must not contradict e*press or
implied conditions of the written contract
" The collateral agreement must be one that the parties
would not ordinarily be e*pected to embody in the writing
a) As# if the written agreement loo#s complete on its
own without the collateral agreement5 if so then the
collateral agreement fails & four corners analysis
b) 2ntegration & did the agreement loo# li#e a complete land sale
i) The court ta#es a classical )iew and holds that there is
nothing in the contract to indicate it was not a complete
agreement
c) Scope & would the remo)al of the icehouse fall within the bounds
of the land sale
i) The maBority says it would
ii) The dissenters argues that the icehouse was on a
separate piece of land and would not logically come within
the scope of the sale of property go)erned by the written
contract
$) !ses of e*trinsic e)idence
1) @istorically contracts ha)e been restrained by plain meaning rules & interpretation was
restricted to the four corners of the contract (setting aside the constraints of the parol
e)idence rule)
a) Courts5 o)er time5 became concerned with the meaning of 'plain meaning(
b) Courts began to loo# to e)idence of the intent of the parties when e)aluating the
meaning of a contract
c) This change in time was about allowing e*trinsic e)idence to illuminate
inter'retation of the meaning of the contract not to alter enforcement which is
go)erned by the parol e)idence rule (what do the terms mean )s what are the
obligations5 although the two can become blurred since interpretation can alter
obligation)
2) Admissibility of e*trinsic e)idence often comes down to a /uestion of drafting
a) Ehy both carefully drafting a contract if the court admits e*traneous e)idence
anyway?
i) 2n most Burisdictions the te*t of the contract is primary and only when
there is actual or potential ambiguity is e*trinsic e)idence consulted
a) 2n strict te*tualist Burisdictions Budges may be )ery unwilling to go
beyond the four corners and rely much more hea)ily on obBecti)e
e)idence than subBecti)e
ii) %)en in Burisdictions where e*trinsic e)idence is liberally admitted (li#e
California) the language of the contract is the starting point of interpretation
7age JF
Contracts Outline
b) The maBor difference between plain meaning and e*trinsic e)idence Burisdictions
is the strength of the presumption about the importance of the written contract
i) 7lain meaning & the te*t can be sufficiently clear to bar the admission of
e*trinsic e)idence (ambiguity is defined in different ways)
ii) %*trinsic e)idence & e*trinsic e)idence should usually or always be
admitted because the te*t is seldom5 if e)er5 clear enough to faithfully
reflect the intent of the parties (howe)er e*trinsic e)idence is not
controlling5 it is used to illuminate5 not reformulate5 the contract terms)
c) %*ample6 integration
i) !nder the ,estatement collateral agreements are almost always
consulted as evi!ence of integration (or lac# thereof) rather than as
enforceable contracts
ii) 2n this sort of analysis the court typically goes outside the four corners of
the contract specifically because there is a conflict about the ade/uacy of
that contract & but the collateral agreements are only consulted as
e)identiary guides5 mechanisms to get to the intent of the parties
iii) There was concern that allowing collateral agreements as e)idence all
contracts would be found not to be integrated5 and therefore all collateral
agreements would be found to be enforceable (demise of the parol
e)idence rule) & the ,estatement deals with this with the 'inconsistency(
rules
") Cases6
a) Steuart v. Mc#hesney (strict plain meaning Burisdiction)
i) Gacts6
a) Option contract for the sale of land6 the McChesneys ha)e the
option to buy the land from the Steuarts for the fair mar#et )alue5
based on the county ta* roles as of the date the Steuarts inform the
McChesneys of a bona fide offer for the land
b) The Steuarts decide to sell the land
1) They recei)e offers of ="-H=->I
2) They inform the McChesneys who offer =;M2> as the fair
mar#et )alue based on the ta* rolls
") The Steuarts refuse the offer and as# the court to
reinterpret the contract to read the terms to mean true fair
mar#et )alue5 not the )alue based on the ta* rolls
ii) Analysis6
a) The trial court finds for the Steuarts
b) The Superior court re)erses and finds the language of the
contract to be plain and unambiguous
c) The Supreme Court of 7ennsyl)ania affirms the Superior Court
1) 8aw of 7ennsyl)ania & if the te*t is clear and
unambiguous then the intent is to be determined only by the
terms of the contract (no e*trinsic e)idence allowed)
2) Iinds of ambiguity6
a) 7atent ambiguity & e*ists on the face of the
contract (obBecti)e ambiguity)
i) Te*t must itself be ambiguous based on
obBecti)e interpretation (dictionary5 trade
usage5 etc)
ii) !sage of the language must be
nonsensical in the conte*t of the contract
7age ;>
Contracts Outline
b) 8atent ambiguity & the te*t is clear5 but could
apply to more than one situation (Ships 7eerless
situation)
") The court finds neither patent or latent ambiguities in the
contract5 therefore it must be enforced
iii) There are5 reasonably both patent and latent ambiguities in the term
)aluation (the contract calls for a )aluation on a specific date5 but ta* roll
)aluations are not done on particular dates5 so what does the contract
actually mean?)
b) P%- v. ( Thomas Drayage (Sup Ct Cal 1FJM)
i) Gacts6
a) Thomas was wor#ing for 79P% and the contract contained an indemnity
clause that obligated Thomas to pay for any damage it caused while
wor#ing for 79P% under the contract
b) Thomas damaged a 79P% turbine and 79P% attempted to reco)er
under the indemnity clause
c) Thomas claimed the clause only applied to damage cause to third
parties5 not to damage to 79P% e/uipment
ii) 2ssue6 when should e*trinsic e)idence be allowed to interpret a contract
iii) Analysis6
a) The trial court adheres to the plain meaning and finds for 79P%
b) The Supreme Court holds that the trial court erred in not consulting
e*trinsic e)idence
1) Standard6 if the e*trinsic e)idence could illuminate the meaning
of the contract and the intent of the parties or gi)e the contract a
reasonable alternati)e meaning it should be admitted
2) The court ma#es an e)en stronger statement by holding that
e*trinsic e)idence should be e*cluded only if the subBecti)e intent of
the parties can be determined from the te*t of the contract alone
") Ginally5 the court holds that it is im'ossible to determine subBect
intent from the contract terms alone5 therefore e*trinsic e)idence
must be admitted & there can be no plain meaning5 the contract can
never be the end of the analysis5 it can only be the beginning5 this is
the controlling e)identiary rule for California
c) 0moco Pro!uction #o. v. (estern Slo'e as #o.
i) !nder the !CC e*trinsic e)idence is always consulted to interpret a sale of
goods contract5 e)en if there is no facial ambiguity
d) Tri!ent #enter v. #onnecticut eneral +ife "nsurance (F
th
Cir 1FMM)
i) Gacts6
a) Trident borrows money from Connecticut to be repaid o)er time at a
fi*ed interest rate and a no preHpayment for the first twel)e years
b) 2nterest rates drop and Trident wants to refinance the loan5 but
Connecticut refuses
c) Trident claims that5 under the contract5 if they default they can preHpay5
therefore they argue that they can preHpay so long as they pay the penalty
for defaulting
ii) Analysis6
a) Audge IoCins#i states that the contract is crystal clear5 there is no preH
payment pro)ision within the first twel)e years unless Trident actually
defaults on the loan5 howe)er since he is bound by the California ,ule the
case must be remanded for consideration of all of the e*trinsic e)idence
in)ol)ed
7age ;1
Contracts Outline
''III) 6orm Contracts
A) Gorm contracts seldom conform to the typical )iew of how a contract is formed (the bargain
principle)
1) Ee do not e*pect parties to research the terms or conditions of form contracts5
therefore courts are seldom li#ely to hold parties to all of their terms
2) Gorm contracts are a matter of con)enience and efficiency5 therefore if courts never
enforced them parties would always bargain for e)ery term and business would become
unmanageable (this is especially true for large scale dealers of goods or ser)ices who
enter into lots of identical contracts with different parties on a regular basis5 eg airlines)
") 9uiding principle6 important or material terms of a form contract cannot be hidden or
obscured (addresses the idea of notice5 parties need to #now the important stuff)
a) @idden terms are seldom enforceable (affects lots of boiler plate)
b) 7arties do ha)e a reasonable obligation to read form contracts to find the
important pro)isions (large type5 boldface5 etc) & failure to do so is not a defense
to enforcement
$) Commercial form contracts & maBor area where they are important
1) 9o)erned in large part by the !CC6
:2H2>1 & 6ormal #e3uirements/ "tatute of 6rau!s
(1) %*cept as otherwise pro)ided in this section a contract for the sale of
goods for the price of =->> or more is not enforceable by way of action or
defense unless there is some writing sufficient to indicate that a contract for
sale has been made between the parties and signed by the party against
whom enforcement is sought or by his authoriCed agent or bro#er A writing
is not insufficient because it omits or incorrectly states a term agreed upon
but the contract is not enforceable under this paragraph beyond the
/uantity of goods shown in such writing
(2) $etween merchants if within a reasonable time a writing in confirmation
of the contract and sufficient against the sender is recei)ed and the party
recei)ing it has reason to #now its contents5 it satisfies the re/uirements of
subsection (1) against such party unless written notice of obBection to its
contents is gi)en within 1> days after it is recei)ed
(") A contract which does not satisfy the re/uirements of subsection (1) but
which is )alid in other respects is enforceable
(a) 2f the goods are to be specifically manufactured for the buyer
and are not suitable for sale to others in the ordinary course of the
seller3s business and the seller5 before notice of repudiation is
recei)ed and under circumstances which reasonably indicate that
the goods are for the buyer5 has made either a substantial
beginning of their manufacture or commitments for their
procurement< O,
(b) 2f the party against whom enforcement is sought admits in his
pleading5 testimony5 or otherwise in court that a contract for sale
was made5 the contract is not enforceable under this pro)ision
beyond the /uantity of goods admitted< O,
(c) Eith respect to goods or which payment has been made and
accepted or which ha)e been recei)ed and accepted
:2H2>+ & 6ormation in *eneral
(1) A contract for sale of goods may be made in any manner sufficient to
show agreement5 including conduct by both parties which recogniCes the
e*istence of such a contract
(2) An agreement sufficient to constitute a contract for sale may be found
e)en though the moment of its ma#ing is underdetermined
7age ;2
Contracts Outline
(") %)en though one or more terms are left open a contract for sale does
not fail for indefiniteness if the parties ha)e intended to ma#e a contract
and there is a reasonably certain basis for gi)ing an appropriate remedy
:2H2>; & !!itional 4erms in cce.tance or Confirmation
(1) A definite and seasonable e*pression of acceptance or a written
confirmation which is sent within a reasonable time operates as an
acceptance e)en though it states terms additional to or different from those
offered or agreed upon5 unless acceptance is e*pressly made conditional
on assent to the additional or different terms
(2) The additional terms are to be construed as proposals for addition to
the contract $etween merchants such terms become part of the contract
unless6
(a) The offer e*pressly limits acceptance to the terms of the offer
(b) They materially alter it< O,
(c) .otification of obBection to them has already been gi)en or is
gi)en within a reasonable time after notice of them is recei)ed
(") Conduct by both parties which recogniCes the e*istence of a contract is
sufficient to establish a contract for sale although the writings of the parties
do not otherwise establish a contract 2n such case the terms of the
particular contract consist of those terms which the writings of the parties
agree5 together with any supplementary terms incorporated under any
other pro)isions of this Act
2) At common law contracts were go)erned by the mirror image rule & the terms had to be
identical in the offer and acceptance or no contract was formed
a) Most merchants had their own form contracts which differed from each other5 so
under the mirror image rule contracts based on form contracts ne)er formed
b) Courts began by mo)ing from the mirror image rule to the 'last shot( rule where
the final form e*changed go)erned
i) This simply led to a greater e*change of forms with each party attempting
to be the last to send a form and therefore go)ern the contract
c) The !CC dealt with these conflicts issues in :2H2>;
") !CC :2H2>;
a) This section applies only to form contracts5 not to other business arrangements
i) 9enerally only applied to form contracts between merchants5 not
between an indi)idual and a merchant
ii) The language assumes little actual bargaining in the contract5 rather it
implies that the bargaining is done through forms
b) Section (1) reBects the mirror image rule and allows a form reply to ser)e as an
acceptance of an offer e)en if it include additional or different terms
i) The acceptance can5 howe)er5 be conditioned upon e*press acceptance
of the new or different terms
ii) Gailure to accept the new terms ends the acceptance5 but this must be
e*plicit5 as must the re/uest for an e*plicit answer5 under ar!ner 2emke
silence cannot ser)e as an acceptance of different terms
iii) The !CC is intended to be fle*ible5 but not so fle*ible that a response is
al*ays intended as an acceptance rather than a counter offer5 the last part
of (1) ma#es counter offers possible
c) Section (2) e*plains how to reconcile the terms
i) 0ifferent terms are treated as additional proposals for the contract
ii) (a) & if the offer e*pressly limits acceptance to the terms of the original
offer then all other terms altering that offer drop out (allows the offeror to
control the terms of the contract)
iii) (b) & The court must determine if an alteration is material to the contract
7age ;"
Contracts Outline
i)) (c) & 2f a party e*plicitly obBects to a contract term it is not incorporated
d) :2H2>; en)isions the following sort of three step e*change6
1 Gorm offer
2 Gorm reply by offeree
a) This reply can be either an acceptance with or without additional
or different terms< or
b) A counter offer with new terms
i) To be a counter offer the acceptance must state clearly
that the acceptance is conditional upon acceptance of the
new terms and that the offeror must e*plicitly assent to the
new terms
" %ffects6
a) 2f the response was an acceptance with additional terms the
effect of those terms is determined under :2H2>;(2)
i) 2f the terms are different and material to the contract the
#noc#Hout rule will generally apply5 with gaps filled by the
!CC or if necessary the court under :2H2>;(")
b) 2f the response was a counter offer the original offeror must
e*plicitly accept or reBect it before it can go into effect
c) 2f the response was a counter offer and the original offeror
performs but ne)er e*plicitly accepts the terms the contract will be
reHformulated under :2H2>;(") based on the circumstances
+) Cases6
1) ar!ner 2emke v. Dunham
a) Gacts6
i) 9ardner buys chillers from 0unham for a 0O% proBect using a
form purchase order with both e*plicit and implied warranty terms
ii) 0unham replies with a form acceptance which carries a number
of warranty disclaimers
iii) The chillers ha)e defects and 0unham says it will only repair
defects attributable to their parts5 other defects are repairable at
0O%3s cost
i)) 0O% has the chillers repaired by an independent contractor and
deducts the price from 9ardner3s payment
)) 9ardner sues 0unham for the costs under the original warranty
terms of the contract
b) Arguments6
i) 9ardner6 the disclaimers were new or different terms that
materially altered the contract and therefore ne)er became a part of
the contract under :2H2>;(2)
ii) 0unham6 their ac#nowledgment was a counter offer and any
acceptance was e*pressly conditional upon the incorporation of the
disclaimers into the contract
c) Analysis6
i) Eas the acceptance actually a counter offer?
1 Assume the ac#nowledgement was a counter offer5 there
was no clear acceptance of that counter offer by the buyer5
so no contract
a) !nder $oto-+ift the counter offer was accepted by
conduct ma#ing the counter offer the controlling
contract
7age ;+
Contracts Outline
b) The court reBects this interpretation because it
essentially reinstates the 'last shot( rule
2 !nder Dorton if there was a counter offer the original
offeree must ma#e it clear that the acceptance is e*pressly
conditional on acceptance of the new terms by the original
offeror5 if there is no such language the form is simply an
acceptance under :2H2>;(1) and the new terms drop out
under :2H2>;(2)(b)
" Since 9ardner ne)er accepted the new terms but
continued to perform the court could reformulate the
contract under :2H2>;(")
ii) The court ruled that 0unham did not ma#e a counter offer but
simply accepted5 howe)er that acceptance included both a!!itional
and materially !ifferent terms
iii) :2H2>;(2) only mentions incorporating a!!itional terms5 not
different one5 the court has three options to deal with this situation6
1 ,ead :2H2>;(2) to apply to both additional and different
terms
a) There is a presumption that the final set of terms
would go)ern5 but once again this returns to the 'last
shot rule(
b) This analysis is followed in some Burisdictions
2 %*clude the different terms on the acceptance and allow
the original offer terms to go)ern & 'last shot( in re)erse
" Inoc#Hout rule & e*clude both conflicting terms and let the
!CC and the court go)ern the remainder
a) MaBority of Burisdictions use the #noc#Hout rule & if
there is no e*press negotiation on the terms they get
#noc#ed out
b) The gaps created are generally filled by !CC
pro)isions
i)) @ere the #noc#Hout got rid of all of the warranty pro)isions5 but
the !CC filled the gap with implied warranty pro)isions
2) Other /uestions6
a) Pro#D v. 2ei!enberg and ate*ay 6777 teach that as long as there is a
meaningful opportunity to reBect a form contract acceptance of it ma#es the
contract terms binding5 e)en if the terms are not a)ailable before purchase
b) Open /uestion6 what is the effect of assenting if an acceptance has one
term which re/uires e*press assent an a number of other different terms?
i) .ot clear what assent to the re/uired term does
ii) Strategically assent to permissible terms and reBect any
obBectionable ones (more detailed answer is usually safer)
-) Application of !CC :2H2>;
1 2s the form an acceptance or a counter offer?
a) 2f there is language re/uiring e*press assent for a contract it is a counter
offer & could mean there is no contract
i) 2f the parties continue to deal5 e)en without assent5 got to :2H
2>;(")5 #noc#Hout terms5 and reform the contract
ii) Eith counter offers the process starts o)er again after assent5
which itself can contain another counter offer
b) 2f there is no e*press re/uirement for assent it is an acceptance
2 2f the response is an acceptance5 :2H2>;(2) go)erns how to deal with
newDdifferent terms
7age ;-
Contracts Outline
a) Inoc#Hout different terms (generally)
b) 2ncorporate new terms5 unless they alter material terms of the contract
i) Materiality is generally Budged on a basis of undue hardship or
unfair surprise (e/uitable in/uiry)
" 2f terms are #noc#ed out the contract must be reformed
a) The first /uestion must be if there is enough of a contract left to reform
i) 2f too many material terms are #noc#ed out the contract may be
)oided
ii) @ere materiality really goes to the purpose of the contract
b) 2f the contract is sal)ageable then use the !CC or :2H2>;(") to fill in the
gaps of the contract (either from course of conduct or specific pro)isions)
''IV) Mistake
A) 9enerally bro#en into two categories6
1) Mutual mista#e & both parties are mista#en as to a factDcondition of the contract
2) !nilateral mista#e & only one party is mista#en about the factDcondition
") Analysis & determine whether either side is mista#en5 then6
a) 2f both sides are mista#en6 rescind
b) 2f neither side is mista#en6 enforce
c) 2t one side is mista#en6 do unilateral mista#e analysis
$) ,estatement 2
nd
:1-2 H $)en Mistake of Bot) Parties Makes a Contract Voi!able
(1) Ehere a mista#e of both parties at the time a contract was made as to a basic
assumption on which the contract was made has a material effect on the agreed
e*change of performances5 the contract is )oidable by the ad)ersely affected party
unless he bears the ris# of the mista#e under the rule in :1-+
(2) 2n determining whether the mista#e has a material effect on the agreed
e*change of performances5 account is ta#en of any relief by way of reformation5
restitution5 or otherwise
:1-" & $)en Mistake of :ne Party Makes Contract Voi!able
Ehen a mista#e of one party at the time a contract was made as to a basic
assumption on which he made the contract has a material effect on the agreed
e*change of performances that is ad)erse to him5 the contract is )oidable by him if
he does not bear the ris# of the mista#e under the rule in :1-+ A.0
(a) the effect of the mista#e is such that enforcement of the contract would
be unconscionable5 O,
(b) the other party had reason to #now of the mista#e or his fault caused
the mista#e
:1-+ & $)en a Party Bears t)e #isk of a Mistake
A party bears the ris# of a mista#e when
(a) the ris# is allocated to him by agreement of the parties5 O,
(b) he is aware5 at the time the contract is made5 that he has only limited
#nowledge with respect to the facts to which the mista#e relates but treats
his limited #nowledge as sufficient5 O,
(c) the ris# is allocated to him by the court on the ground that it is
reasonable in the circumstances to do so
C) Mutual mista#e
1) Case of mutual mista#e generally bring up two /uestions
1 Eas there actually a mutual mista#e
2 Eas the mista#e material to the contract
a) The mista#e must go to the essence of the contract before a court will
grant recission5 if it is only a mista#e as to )alue or /uality the court is li#ely
to honor the contract
7age ;J
Contracts Outline
b) Ehen the contract is rescinded the parties wal# away5 there are
generally no damages5 although the court might gi)e restitution under a
theory of 9uantum meruit or something li#e that
2) :1-+ pre)ents recission when there is an e/uitable way to allocate the ris# to a specific
party (either through assumption5 faulty #nowledge5 or action of the court)
a) A party ta#ing ad)antage of another party3s ignorance has assumed the ris# that
the contract may be rescinded
") There is a critical difference between true mista#es (riffith)5 where the court will
rescind the contract5 and gambles on the part of the parties (,oynton and Firestone)
where the court will li#ely affirm the contract
a) @a)e to as# what were the parties contracting for5 and what did they li#ely thin#
they would recei)e & was it a bet5 or was it a mista#e
+) $lac# letter principles6
1 Mista#e must be about an essential element of the contract and it must
undermine the core of the performance of the contract & go)erned by the facts and
circumstances of the situation
2 2f the mista#e is mutual and affects the essence of the contract & rescind
-) Modern doctrine
a) ::1-2 and 1-+ of the ,estatement 2
nd
focus more on assumption or distribution
of the ris# (either e*press or by acting with imperfect #nowledge)
b) The court first loo#s at mutuality of mista#e and whether it goes to the essence
of the contract5 then determines if ris# has been allocated
c) 2f the ad)ersely affected party bears the ris# they cannot see# recission
i) Sellers assume the ris# under warranties
ii) $uyers assume the ris# under asHis clauses
iii) 2f #nowledge is imperfect the court uses a reasonableness standard
(were the parties acting reasonably based on their #nowledge)
J) Cases6
a) Sher*oo! v. (alker
i) Gacts6
a) Eal#er showed Sherwood some cattle that he belie)ed to be and
represented as barren
b) Sherwood chose to buy a specific cow5 ,ose5 for =M>
1) 2f she were fertile she would be worth =M>>
c) Eal#er later learned that ,ose was pregnant5 refused to deli)er
her5 and sought recission of the contract
d) Sherwood sought specific performance
ii) Analysis
a) The court casts this as a case of mutual mista#e
1) The court assumes the contract was for a barren cow
b) 0octrine deployed6 if the mista#e went to a material fact of the
contract there will be recission
1) '2f there is a misapprehension about the substance of the
thing bargained for there is no contract(
2) $arrenness might be a /uality of the cow5 but it also goes
to the essence of the contract because of the 1>1 difference
in )alue
c) The court rescinds the contract
iii) Eas the court correct? & 0issent3s argument
a) Eas the contract really for a barren cow?
1) Eal#er thought he was selling a barren cow5 but was that
what Sherwood was buying?
7age ;;
Contracts Outline
b) Sherwood might simply ha)e been gambling on a low priced cow
that he thought might be fertile
c) 2n this situation there was no mutual mista#e there was a
unilateral mista#e and a good bet & should Eal#er ha)e been stuc#
with his bargain?
1) The contract would ha)e sur)i)ed because Eal#er was
proceeding on his own imperfect #nowledge and Sherwood
had no conclusi)e proof that ,ose was fertile5 Bust his
gambler3s instincts
2) The ,estatement 2
nd
:1-" allows a party to gamble on
another3s mista#e5 but if they ha)e actual #nowledge that the
other party is mista#en they cannot ta#e ad)antage of it
d) Iey insight6 if the parties enter an agreement with different
opinions as to the nature of the good being bargained for there is no
mutual mista#e5 there are simply differing e*pectations (could e)en
be described as different bets)
b) riffith v. ,rymer
i) 9riffith contracted for a room to watch the Iing3s coronation procession
a) This is a mista#e case5 and not changed circumstances5 because
at the time of the contract it was already #nown (though not by
these parties) that the procession would not ta#e place due to
illness
ii) The court held that since the contract specifically said the room was
rented to watch the coronation procession and since5 at the time of
contracting5 that was impossible it was a true mutual mista#e going to the
essence of the contract
a) The contract was well drafted5 it included the pro)ision that the
room was specifically for watching the procession
b) 0rafting lesson6 ma#e the purpose of the contract clear5 it can
control whether or not the proper performance is gi)en and what
happens under unforeseen circumstances
c) 2n this case intent might also ha)e been inferred from the
surrounding facts and circumstances
c) (oo! v. ,oynton
i) The diamond case
ii) The court found that there was nothing in the facts and circumstances
suggesting that $oynton #new the stone was a diamond
a) There was no mutual mista#e6 both parties were betting on the
)alue and neither had #nowledge of the true )alue
b) The case might fall under unconscionability5 but $oynton did not
coerce Eood into selling5 did not put her in a negati)e position5 and
did not defraud her & he is allowed to ta#e ad)antage of her
situation to his own benefit
d) Firestone v. 4nion +eague
i) Gacts6
a) Girestone bought a painting from !nion 8eague that is commonly
belie)ed to be a $ierstadt worth =->>I
b) Opinions in the art world changes and the )alue drops to =->I
c) Girestone sues for recission based on mutual mista#e
ii) The court finds that there was no mista#e
a) Oalue for /uestionable wor# is e*pressed by pre)ailing opinion
7age ;M
Contracts Outline
b) The parties did not contract for a paintings that *as a $ierstadt5
they contracted fro a painting that they (both) thought was a
$ierstadt
i) Girestone Bust made a bad bet5 but both parties got what
they bargained for
e) (est #oast 0irlines v. Miner.s 0ircraft
i) %ngines in the Bun# can case
ii) The court held that the engines were ne)er part of the contract & Eest
Coast ne)er intended to sell them and the Bun# trader ne)er intended to
buy them5 both parties thought the canisters contained scrap metal5
therefore title to the engines ne)er shifted they intended to sell Bun#5
there was no gamble that the containers might hold something )aluable
f) -verett v. -state of Sumsta!
i) %)erett buys a loc#ed safe containing ="2I in cash
ii) Court held that the contract should stand
a) The buyer was buying the safe an! its contents (gamble that it
might be )aluable)
b) The seller was selling the safe an! its contents (gamble it would
be empty
c) There was no mista#e5 Bust a couple of gambles
iii) This is distinguishable from (est #oast because here the parties were
e*plicitly gambling on the un#nown contents of the safe in (est #oast
the parties '#new( the containers held only Bun# metal5 they were Bust
mista#en in that #nowledge
g) +ena*ee #ounty v. Messerly
i) Gacts6
a) After a series of e*changes5 Messerlys sell a piece of land with a
small apartment building on it to the 7ic#les as an income property
b) After the 7ic#les begin paying for the property the tenants
complain about wretched conditions which lead to e)entual
condemnation
c) The 7ic#les then sue for recission
ii) Analysis6
a) The court denies recission
b) There is a true mutual mista#e5 both parties thought it was an
income producing property when they transacted
1) The court finds that there was a mista#e which went to
the core of the contract & so there should5 presumably be
recission5 but no
c) The contract contained an 'asHis( clause which shifted the burden
of the ris# to the buyer5 therefore the 7ic#les are stuc#
h) arb-#o v. +ansing-+e*is
i) Gacts6
a) Sale of property contract
b) 7roperty was contaminated by lea#age from underground
gasoline storage tan#s
c) !nder Gederal law the seller retains liability for cleanHup
1) Seller would be ad)ersely affected by the sale
2) At the time of contract neither party #new about the
contamination
ii) 7ositions6
a) $uyer sues for specific performance
b) Seller wants recission5 or indemnity for cleanHup from 9arbHCo
7age ;F
Contracts Outline
i)) Analysis
a) The court grants recission
i) The purchaser bears all of the ris# under the contract
ii) !nder :1-+ since the seller bears none of the ris# un!er
the contract and is ad)ersely affected by the contract they
can sue for recission
b) ,is# allocation comes from the contract5 and ad)erse impact
stems from the Gederal statute
i) ,eachcomber #oins v. ,oskett
i) 7laintiff bought a coin that both parties thought was authentic and
)aluable
a) The coin turns out to be fa#e and the buyer sues for recission
ii) The court holds that the parties bargained with the certainty that the coin
was authentic5 therefore they were mista#en as to that fact (which went to
the core of the contract) & the contract should be rescinded
iii) ,ule6 failure to in)estigate is not a complete bar to recission
a) The parties were positi)e they had a genuine article5 therefore
there was no reasonable need to in)estigate the authenticity
b) This can be distinguished from Firestone where the parties were
only ma#ing an assumption based on pre)ailing opinion5 they were
not bargaining from certainty
0) !nilateral mista#e
1) %*cept as stated in :1-" a mista#en party is usually stuc# with their mista#e
a) This is a )ery fact intensi)e in/uiry
i) 8oo# for e)idence that the nonHmista#en party has contributed to the
mista#e or #new that the other party was mista#en
ii) 2f the factual in/uiry cannot shift the burden then the mista#en party is
stuc# with the conse/uences of the mista#e
b) Earranties (either e*press or implied) can also shift the burden of the mista#e
i) $lac# letter6 if a party warrants something as true they must honor that
warranty (2imbalist5 the )iolin case)
ii) Earranties in general are strong presumptions of where the ris# lies5 but
they can be rebutted by the facts and circumstances5 especially if the nonH
mista#en party had actual #nowledge about the situation
2) Cases6
a) -llsinore -lementary v. Kastorff
i) Iastorff forgot to include the )alue of plumbing in a construction bid
ii) The court held that the district #new or should ha)e #nown that Iastorff
had made a mista#e and too# ad)antage of that therefore the contract
should be rescinded
a) $asically an unconscionability analysis5 this )aries among
Burisdictions
''V) C)ange! Circumstances
A) Changed circumstances occur after the contract has been formed while mista#e addresses
misperceptions that e*isted at the time the contract was formed
1) Gor changed circumstances the assumptions were true at the time of contracting and
then change as the contract is performed
$) Two classes of changed circumstances cases
1) 2mpossibilityDcommercial impracticability & performance is legally impossible or
commercially impracticable
a) Co)ers both things that are truly impossible ()ital item no longer e*ists) but also
things that are simple impractical
7age M>
Contracts Outline
2) Grustration of purpose & purpose of the contact cannot be fulfilled or is not )aluable
a) 2f the court finds frustration the contract is held unperformable and both parties
are released from performance
") Grustration and impossibility are two sides of the same coin
a) 2mpossibility goes to the ability or cost of performance
b) Grustration goes to the )alue of completing performance
C) !CC Sections
:2H->F & #isk of Loss in t)e bsence of Breac)
(1) Ehere the contract re/uires or authoriCes the seller to ship the goods by carrier
(a) 2f it does not re/uire him to deli)er them at a particular destination5 the
ris# of loss passes to the buyer when the goods are duly deli)ered to the
carrier e)en though the shipment is under reser)ation
(b) 2f it does re/uire him to deli)er them at a particular destination and the
goods are there duly tendered while in the possession of the carrier5 the
ris# of loss passes to the buyer when the goods are there duly so tendered
as to enable the buyer to ta#e deli)ery
(2) Ehere the goods are held by a bailee to be deli)ered without being mo)er5 the
ris# of loss passes to the buyer
(a) On his receipt of a negotiable document of title co)ering the goods< O,
(b) On ac#nowledgement by the bailee of the buyer3s right to possession of
the goods< O,
(") 2n any case not within subsection (1) or (2)5 the ris# of loss passes to the buyer
on his receipt of the goods if the seller is a merchant< otherwise the ris# passes to
the buyer on tender of deli)ery
(+) The pro)isions of this section are subBect to the contrary agreement of the
parties and on effect of breach on ris# of loss
:2H-1> & (ffect of Breac) on #isk of Loss
(1) Ehere a tender or deli)ery of goods so fails to conform to the contract as to
gi)e a right of reBection the ris# of their loss remains on the seller until cure or
acceptance
(2) Ehere the buyer rightfully re)o#es acceptance he may to the e*tent of any
deficiency in his effecti)e insurance co)erage treat the ris# of loss as ha)ing rested
on the seller from the beginning
(") Ehere the buyer as to conforming goods already identified to the contract for
sale repudiates or is otherwise in breach before ris# of the loss has passed to him5
the seller may to the e*tent of any deficiency in his effecti)e insurance co)erage
treat the ris# of loss as resting on the buyer for a commercially reasonable time
:2HJ1" & Casualty to i!entifie! *oo!s
Ehere a contract re/uires for its performance goods identified when the contract is
made5 and the goods suffer casualty without fault of either party before ris# of loss
passes to the buyer5 or in a proper case under a 'no arri)al5 no sale( term then6
(a) 2f the loss is total the contract is a)oided< A.0
(b) 2f the loss is partial or the goods ha)e so deteriorated as no longer to
conform to the contract the buyer may ne)ertheless demand inspection
and at his option either treat the contract as a)oided or accept the goods
with due allowance from the contract price for the deterioration or the
deficiency in /uantity but without further right against the seller
:2HJ1+ & "ubstitute! Performance
(1) Ehere without fault of either party the agreed berthing5 loading5 or unloading
facilities fail or an agreed type of carrier becomes una)ailable or the agreed
manner of deli)ery otherwise becomes commercially impracticable but a
commercially reasonable substitute is a)ailable5 such substitute performance must
be tendered and accepted
7age M1
Contracts Outline
(2) 2f the agreed means or manner of payment fails because of domestic or foreign
go)ernmental regulation5 the seller may withhold or stop deli)ery unless the buyer
pro)ides a means or manner of payment which is commercially a substantial
e/ui)alent 2f deli)ery has already been ta#en5 payment by the means or in the
manner pro)ided by the regulation discharges the buyer3s obligation unless the
regulation is discriminatory5 oppressi)e or predatory
:2HJ1- & (8cuse by 6ailure of Presu..ose! Con!ition
%*cept so far as a seller may ha)e assumed a greater obligation
(a) 0elay in deli)ery or nonHdeli)ery in whole or in part by a seller who
complies with paragraphs (b) and (c) is not a breach of his duty under a
contract for sale if performance as agreed has been made impracticable by
the occurrence of a contingency the nonHoccurrence of which was a basic
assumption on which the contract was made or by compliance in good faith
with any applicable foreign or domestic go)ernmental regulation or order
whether or not it later pro)es to be in)alid
(b) Ehere the causes mentioned in paragraph (a) affect only a part of the
seller3s capacity to perform5 he must allocate production and deli)eries
among his customers but may at his option include regular customers not
then under contract as well as his own re/uirements for further
manufacture @e may so allocate in any manner which is fair and
reasonable
(c) The seller must notify the buyer seasonably that there will be delay or
nonHdeli)ery and5 when allocation is re/uired under paragraph (b)5 of the
estimated /uota thus made a)ailable for the buyer
,ote: Significantly increased costs do not e*cuse nonHdeli)ery of goods
a) 2f adBustments within the terms of the contract are not sufficient to
account for the price change court may grant an impossibility
defense
b) Ehen the defendant e*plicitly assumes the ris# of the changed
circumstance the court will enforce that promise5 e)en if it truly is
commercially impossible to fulfill
0) ,estatement 2
nd
:2J1 & Disc)arge by "u.er%ening Im.racticability
Ehere5 after a contract is made5 a party3s performance is made impracticable
without his fault by the occurrence of an e)ent the nonHoccurrence of which was a
basic assumption on which the contract was made5 his duty to render performance
is discharged5 unless the language or circumstances indicate the contrary
:2J- & Disc)arge by "u.er%ening 6rustration
Ehere5 after a contract is made5 a party3s principal purpose is substantially
frustrated without his fault by the occurrence of an e)ent the nonHoccurrence of
which was a basic assumption on which the contract was made5 his remaining
duties to render performance are discharged5 unless the language or the
circumstances indicate the contrary
:2JJ & (8isting Im.racticability or 6rustration (mista#e)
(1) Ehere5 at the time a contract is made5 a party3s performance under it is
impracticable without his fault because of a fact of which he has no reason to #now
and the nonHe*istence of which is a basic assumption on which the contract is
made5 no duty to render that performance arises5 unless the language or
circumstances indicate the contrary
(2) Applies to frustration
%) 2mpossibility
1) Courts originally created a legal fiction to deal with cases of impossibility & if parties had
thought about the possibility of the e)ent ta#ing place they would ha)e e*plicitly included
7age M2
Contracts Outline
the continued e*istence of the condition as part of the contract5 the condition was a basic
assumption of the contract (ie continued e*istence of a building in a rental agreement)
a) Modern doctrine has done away with this fiction today courts simply loo# at
whether or not performance has become impossible or commercially impractical
2) 7erformance need not be truly impossible5 it need simply be truly commercially
impractical (substantial increase in price or decrease in profit5 not simply an impact on the
benefit deri)ed)
a) The court must be con)inced that neither party specifically assumed the ris#
before they )oid the contract
b) Changes in price will not )oid a contract5 the change must be substantial5 to the
point of ma#ing performance truly impossible
") Cases6
a) Taylor v. #al!*ell
i) Gacts6 Contract to hold a concert in a hall that burns down before the
concert (through no fault of either party)
ii) Analysis
a) !nder the common law the parties should ha)e been held to the
plain terms of their contract no pro)ision for fire5 so the court
would ha)e had to6
1 Gorce defendant to rebuild the recital hall (impossible) O,
2 Gorce the plaintiff to accept and pay for the rubble
(useless5 purpose was frustrated)
b) To a)oid this absurd result the court creates the legal fiction of an
additional term in the contract & the substance of the contract must
still be in e*istence at the time of performance
1) !nless the contract contains specific pro)isions that shift
the ris# to one party failure of the condition nullifies the
contract
c) The court basically argues that this is simply honoring the intent
of the parties & if they had thought the condition might ta#e places
they would ha)e made these pro)isions to address it
b) Mineral Park +an! v. Ho*ar!
i) Gacts6 0efendant made a re/uirements contract with plaintiff to buy all of
the gra)el they needed for a building proBect from him5 but breached
ii) 0efense argued that they bought all of the gra)el that was commercially
practical for them to mine and use5 the remaining gra)el was too e*pensi)e
iii) Analysis
a) The court rescinded the contract on the grounds of impossibility
because it would ha)e been impractical for them to use the gra)el
b) This case lowered the bar to impracticability significantly5
subse/uent courts ha)e raised the bar
c) 4.S. v. (egematic
i) Gacts6
a) Eegematic won a contract to pro)ide a computer to the
go)ernment
1) Contract contained substantial penalties for delay
b) Eegematic as#s for se)eral delays5 then e)entually informs the
go)ernment will be unable to perform the contract
c) The go)ernment co)ers with a substantially more e*pensi)e
computer and sues Eegematic for the co)er and for the delays
ii) Analysis
a) The court loo#s to !CC :2HJ1- ris# will not be applied if
performance becomes impossible unless that ris# was assumed
7age M"
Contracts Outline
b) Ehen Eegematic solicited purchasers to buy their untested
computer system they assumed the ris# that their re)olutionary
technology would fail
1) The go)ernment wanted a computer5 not a research and
engineering proBect
c) Ginal nail in the coffin6 the court held that factually performance
was not e)en necessarily impossible5 Bust e*pensi)e5 and the
e*pense could ha)e been recouped through other sales
d) Dill v. To*n of -nfiel!
i) Gacts6
a) 0ill entered into a contract to build a de)elopment for the city
b) Contract had some strange specific terms6
1 0ill had to ma#e a =1>>I down payment
2 0ill had to de)elop and present plans to the city
" 0ill had to obtain financing for the de)elopment
+ 2f 0ill fails to obtain financing the contract is rescinded
and he gets his down payment bac#
- 2f 0ill fails to present the plans to the city he forfeits the
down payment
c) 0ill fails to get financing and ne)er presents the plans to the city
d) The city rescinds the contract and #eeps the down payment
e) 0ill sues for the down payment
ii) The court is unsympathetic the contract is plain5 it was foreseeable
that he would forfeit the down payment if he didn3t present the plans5
therefore he should ha)e presented the plans (the contract specifically
places the burden on 0ill5 e)en though the contract became impossible)
e) Transatlantic Financing v. 4.S.
i) Gacts6
a) Transatlantic contracts to ship cargo to 2ran
b) After the shipment lea)es the %gyptians close the SueC Canal
c) The shipper contacts the go)ernment about paying the e*tra cost
for a trip around the Cape of 9ood @ope5 the representati)e they
reach cannot guarantee payment5 but says they are welcome to
submit a claim
d) The ship changes course5 deli)ers the goods5 and then submits a
claim5 which is refused
e) Transatlantic then sues for the e*tra costs
ii) Analysis
a) Transatlantic said that the contract became impossible to perform
as soon as the SueC Canal was closed because the implication of
the terms was that the trip would ta#e place through the canal
1) 2f the closing made performance impossible then deli)ery
of the cargo was a benefit granted and Transatlantic should
be able to reco)er under 9uantum meruit
b) The court articulates three factors that must be satisfied before
granting the defense of impossibility
1 An une*pected contingency must ta#e place
2 The ris# of the une*pected contingency must not ha)e
been allocated to either party
" Occurrence of the contingency must ha)e made
performance commercially impracticable
c) Application of the factors6
7age M+
Contracts Outline
1 The parties assumed the shipment would ta#e place
through the SueC Canal
2 The contract is silent about the ris# of this occurrence5 so
loo# to the circumstances6
a) !nrest in %gypt
b) Transatlantic was in the business
c) The court holds that the ris# was allocated to
Transatlantic
d) Black Letter: allocation of the ris# to one party
does not mean they bear all ris#5 rather it creates a
presumption that raises the burden of pro)ing
impracticability
1) @owe)er5 if the contract e*plicitly states
that one party bears all of the ris# courts will
li#ely enforce the terms
" The shipment could still be made5 it was only modestly
more e*pensi)e
d) The court held that there was no impossibility and Transatlantic
lost (the contact was enforceable)
f) Construction conte*t6 Fo*ler v. "nsurance #om'any of North 0merica
i) Gacts6
a) $uilding was damaged by fire and was being repaired
b) $efore the repairs were completed the building was completely
destroyed by another nonHnegligent fire
c) Contractor sues for payment for the performance he ga)e
ii) Changed circumstances defenses are common in construction cases5
generally on one of three grounds6
1 2nput costs change (labor5 materials5 etc more e*pensi)e)
2 Aob was substantially harder than e*pected
" Calamity & the subBect of the Bob is destroyed (/uasiHfrustration)
iii) 9rounds 1 and 2 are standard impossibility situations e)aluated on the
three factor Transatlantic test
i)) 9round " is generally e)aluated under a different rule6
a) .ew structures
1) There is a presumption that if a new structure is
destroyed before completion the builder cannot claim
impossibility
a) Can be rebutted by contract terms (indemnity
clause5 distribution of ris#5 etc)
2) $uilders may be allowed out of performance based on
true impossibility5 but they are still liable for breach of the
contract (damages5 co)er5 etc)
") 7olicy rationale6 builders are the leastHcost insurers (best
able to e)aluate how much insurance is appropriate5 to
bargain for it5 and to #nowDpre)ent dangers)
+) Contract rationale6 contract was for a completed building5
the plaintiff has recei)ed no benefit until they get the building
a) $ecomes tric#y with segmented contracts (build
some and pay some if parts already paid for are
destroyed what effect?
i) 2s part of a building )aluable?
ii) 2s there any understanding of the e)ent in
the contract?
7age M-
Contracts Outline
b) ,epairs
1) 2f a building is destroyed during repair the builder can )oid
the contract under impossibility an! gets paid for any wor#
completed (no obligation to rebuild to complete the contract
destruction ma#es the contract impossible)
a) The theory with repair is that each increment of
wor# confers a benefit on the plaintiff5 so they should
pay for it e)en though the contract is ne)er
completed (9uantum meruit idea)
b) Grom a practical point of )iew many people
performing repairs are incapable of rebuilding a
destroyed structure
2) The burden lies with the buyer to insure the property
against damages (they best #now how much they )alue it5
how much ris# they want to ta#e5 etc)
c) Additions
1) Some Burisdictions treat them as new construction
a) Some Burisdictions restrict new construction only
to buildings on separate lots
2) Some Burisdictions treat them as repairs
") Gact intensi)e5 no bright lines
d) Court saw this as a repair & granted impossibility defense
g) 0lbre Marble v. ,o*en & preparation to perform
i) Albre Marble had prepared samples and plans at $owen3s re/uest an in
preparation for a contract he then lost (possibly by his own fault)
ii) Albre Marble sued for reco)ery for their costs of preparation
iii) Analysis
a) Common law rule6 if for some reason a contract becomes
impossible of completion a builder may only reco)er for wor# they
ha)e 'wrought into the structure(
1) Strict common law rule & it had to be built in
b) The plaintiff argues that their performance was at the e*press
re/uest of $owen as part of the contract and should therefore be
considered wrought into the structure
c) The court holds that if the preparation is done at the e*press
re/uest or under the super)ision of the defendant then there will be
reco)ery
1) The court emphasiCes that this is not an alteration or an
e*pansion of the 'wrought in( doctrine5 rather this is an
e/uitable solution under these facts
h) Missouri Public Service v. Peabo!y
i) Gacts6
a) 7eabody negotiated a long term contract to supply coal to M7S
1) The contract contained specific terms to deal with inflation
o)er time which was inade/uate under the circumstances
b) 0uring the oil embargo of the 1F;>s coal prices rose much faster
than the inflation inde*
1) 7eabody threatened to terminate deli)ery if M7S did not
alter the terms
2) M7S offered a moderate increase in price5 7eabody
reBected it and stopped performance of the contract under a
theory of impracticability
ii) Analysis6
7age MJ
Contracts Outline
a) The court reBects the impracticability argument because it failed
on two5 if not all three5 of the Transatlantic factors
1 Eas the change foreseeable? & The dramatic changes in
price were foreseeable5 they e*pressly included a term to
compensate for inflation in the contract
a) The magnitude of the change was unusual5 but
that is not enough to ma#e it a wholly unforeseeable
contingency
b) The oil embargo was foreseeable to parties in the
business
c) 7eabody rebutted by arguing that they e*pected
some increase in prices but not the substantial
increases that too# place
2 Eas the ris# allocated? & the court found that 7eabody
had assumed the ris# under the contract
" 0id the changed circumstances create a commercial
impracticability? & the change would cause hardship5 but not
impracticability
a) The court obser)ed that the company as a whole
was ma#ing money5 e)en if this one di)ision would
lose money
b) 7eabody argued that the court should concentrate
solely on the contract with Missouri 7ublic Ser)ice
iii) ,ule6 mere losses under a contract5 e)en if they are substantial5 will not
automatically ma#e performance impracticable
i) eorgia Po*er v. #imarron
i) Another coal supply case
ii) @ere5 the e*press terms of the contract allow e*cuse of performance for
gross ine/uities that arise during the contract term & gross ine/uities are to
be Budged by an arbitrator to determine if impracticability e*ists
a) The court does not find impracticability5 rather it allows the issue
to go to arbitration5 as the contract terms specify
B) ,arbarossa % Sons/ "nc. v. "ten #hevrolet/ "nc.
i) Gacts6
a) $arbarossa contracted to buy a large truc# from 2ten
b) 2ten placed an order for the truc# with 9M5 but 9M informed 2ten
that they would not be able to fill the order
c) 2ten informed $arbarossa that 9M could not supply the truc# and
$arbarossa sued for breach
ii) 2ten defended on the basis of impossibility & they couldn3t get the truc#
from 9M
iii) The court denied the defense
a) 2ten assumed the contract implied that the truc# had to come new
from 9M5 but the court found that there was nothing in the contract
which re/uired that the truc# come new5 rather all 2ten had to do
was deli)er a truc#5 it could ha)e come from another dealer where
the truc#s *ere a)ailable
1) !nclear what complete una)ailability would mean
2) Eould 2ten ha)e to go to another distributor?
#) Sellan! Pontiac-M# b. King
i) Gacts6
a) Selland and Iing entered into a contract to build some busses
7age M;
Contracts Outline
1) Selland would supply chassis to Iing and Iing would
supply bodies
2) The contract specifically stipulated that the bodies would
come from Superior Manufacturing
b) Superior Manufacturing went out of business5 Iing breached5
and Selland sued
ii) Iing defended on the basis of impossibility
iii) The court granted the defense since the contract had stipulated to a
specific source for the bodies and it was5 truly5 impossible to obtain bus
bodies from that source5 therefore the contract was impossible to perform
G) Grustration of purpose (another fla)or of impossibility)
1) 0octrine applies when5 through no fault of the party5 the purpose of the contract is
frustrated and has no )alue to the party see#ing recission
a) ,e/uires that the purpose be clearly stated to the other party at the time of
contract and that the purpose be )ital to the contract
i) The parties must ha)e a mutual understanding of the purpose of the
contract
ii) 2f the frustrated purpose is only one of se)eral purposes5 or is only
peripheral to the contract courts tend not to grant frustration as a defense
b) 2f the purpose is e*plicit (either through mutual understanding5 or5 better yet5 in
the terms of the contract) and becomes frustrated courts will generally grant
recission (or a defense to breach) under frustration
2) Cases6
a) Krell v. Henry
i) Gacts6
a) @enry rented a room during the day for two days for the purpose
of watching the Iing3s coronation procession
b) The #ing became ill and the procession was postponed
c) @enry failed to pay for the room and Irell sued
ii) @enry defended by arguing his purpose was frustrated
iii) The court finds5 from the surrounding circumstances since it is absent
from the terms of the contract5 that the parties mutually understood that the
purpose of the contract was to watch the procession5 since that was
impossible the purpose was frustrated and the contract was rescinded
b) This issue comes up fre/uently in the case of )acations & lots of conflict o)er
the purpose of a )acation5 whether deli)ery of the e*pected purpose possible5 did
either side e*plicitly assume the ris#
7age MM