Contracts II - Cross

I. Generally
A. CISG
a. Article 1(1a): Applies to the contracts of sale of goods
between parties whose places of business are in different
countries (states) and both are parties to the CISG
i. 1(1b): If the contract says that the contract is to be
governed by the law of a contracting State, CISG
applies because it is a treaty and trumps state laws
b. Article 6: parties can opt out of the CISG
c. Article 10: If a party has more than one place of business,
the place of business is the one that has the closest
relationship to the contract and its performancetaking
into consideration what the parties knew at the time of the
contract
i. If a party doesnt have a place of business, then you
look to the parties habitual residence.
d. NOT CISG: Many foreign companies set up US subsidiaries
and a contract between a US subsidiary of a Chinese
company and a US company would not be subject to the
CISG
e. UCC vs CISG: UCC applies to the sales of goods to
consumers and the CISG excludes consumer transactions
(goods for personal, family, or household use)
i. Ex: buy a car in another country for personal use,
does not fall in the CISG
B. Restatements-Common Law
C. UCC- Article 2: Sale of goods
a. 2-105-Goods Defined
i. Includes all moveable items other than money
(crops, livestock, unborn young of animals)
ii. Not covered: service agreements, real
estate/property
iii. Goods have to be identified and existing or else they
are future goods and not coveredthat is a contract
to sell and a contract to sell is not included in the
UCC
iv. There can be a sale in a part interest of goods
v. Money is included if it is being treated as a
commodity
D. Princess Cruises v. GE
Facts: Princess hired GE to do some work on a boat; it
was to fix things but included a large order of parts. GE says that
UCC doesnt apply bc it was a contract mainly for services and
not goods Held: UCC does not apply
General Rule:

Bone Break/predominant purpose test: To decide if a contract is

for services or goods you must look at (1) the language of the
contract (2) the nature of the business of the supplier and (3)
intrinsic worth of the materials
a. Gravamen Test: Under this test the court does not try to
classify the contract as a whole one way or the other but
applies Article 2 UCC if the controversy in question relates
to the sale component and plies common law is the issue
arises out of the services component.
E. Asante Technologies v. PMC-Sierra
Facts: P is a Delaware Corporation with primary place if
business in Cali. Plaintiff purchased equipment from D. D says
his place of office and work space is in Canada but sells
everything in Cali. P says forms opt out of CISG and that bc one
company that distributes Ds products is in Cali, the UCC should
apply. Held: CISG applies, place of business is in Canada bc
postage was sent from Canada, goods manufactured there, and P
had knowledge that this was happening all in Canada
a. Opt out didnt work in this contract bc it just said they
wanted California law to apply and under California Law the
CISG would apply
b. D wanted this in federal court and the CISG always goes to
federal court
c. Doctrines such as unconscionability, duress, etc are not
governed by the CISG
F. Hypo on Slide:
HYPO: A has a computer store and has a contract with Lenovo
(foreign
company) computers to purchase 100
computers. Delivery is
scheduled for
September 1. A agrees to make a payment for
the computers. September 1 comes and the computers dont
arrive. A wants to bring a breach of contract
against Lenovo.
Clause said that Illinois law
would govern the contract. What
would the
court look to to determine if there is a contract and
if there is a breach and so on?
ANSWER: The court would look to the CISG because as a
treaty, it
pre-empts Illinois law

II. Remedies: Measuring Expectations Restatement

Approach
A. Three kinds of damages contract damages: (can only claim
1)(Fuller and Purdue)
1. Restitution Interest (Exception): defendant must pay for
the benefit received
2. Reliance Interest (Exception): plaintiff relies on a promise
and must be put back to their original positionsimilar to
promissory estoppel, there does not have to be a benefit
received; usually out of pocket costs
a. The key is as good a position as they were before the
contract, not if the contract were fully performed
3. **(Focus of this section) Expectation Interest (RULE):
put the plaintiff in the position he would have been had the
defendant made good on his promise (specific performance or
money damages) Give P the benefit of his bargain
a. Profit is awardedgive the plaintiff the benefit of her
bargain
b. Contract law does not take into account non-economic
damages
c. If contract does not qualify for specific performance and
there are no economic losses, then there is usually no
liability.
4. Justifications for expectation damages rule:
a. Plaintiff has relied substantially, insubstantially,
psychologically on a contract and has been deprived of
something (attitude of expectancy)
b. Will theory views contracting parties as exercising
legislative power, making basic rules regarding their
agreement which should be upheld.
c. Barnes theory damages should be measured by the
net expectation interest of the injured party.
d. Bargain principle both fairness and efficiency are
served by full enforcement of the defendants promise
rather than mere restitutionary award to plaintiff.
A. If unconscionability, fraud, duress, undue
influence, knowingly taking advantage of others
ignorance may justify only partial enforcement
or no enforcement
B. 3 policies identified may justify full bargain
enforcement:
III. Surrogate-Cost theory: Assured
protection of the full cost of reliance
IV. Facilitation of planning (by deterring
breach)

V.

Protection of risk-allocation (contract to

control price changes in future)
B. Restatement Approach Defined: put the injured party in as
good of a position as he would have been in had the contract
been performed
General Measure = Loss in value + other loss cost avoided
loss avoided
a. Loss in Value (partial and total breach): difference
between the value to the injured party of the performance
that should have been received and the value to that party
of what was actually received
i. Look at the actual loss in value to the injured party
and not a hypothetical reasonable person on the
market
ii. Exception-Partial Breach: seller delivered the
wrong goods, that would be a partial breach and
injured party would be awarded the difference
between the actual goods they wanted
b. Other Loss (partial and Total breach): loss other than
loss in value, subject to limitations such as that of
unforeseeability
i. Incidental Damages: additional costs incurred after
the breach in a reasonable attempt to avoid loss,
even If the attempt is unsuccessful
1. Ex: injured party pays a fee to a broker to
obtain a substitute, that expense is recoverable
ii. Consequential Damages: items such as injury to
person or property caused by the breach
1. Ex: services furnished to the injured party are
defective and cause damage to the partys
property
***The first two components apply to partial and total breach.
The next two only apply to total breach.
c. Cost Avoided (total breach only): Injured party
terminates and results in a total breach, save the injured
party further expenditure that would have otherwise been
incurred
i. Ex: injured party is a builder that stops work after
terminating a construction contract bc of the owners
breach, additional expenses the builder saves is cost
avoided
d. Loss Avoided (total breach only): injured party
salvages or reuses some or all of the resources that would
have been devoted to the performance of the contract
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i. Ex: builder sells some of the material on his next job

C. Limitations of the restatement approach:
a. Damages must be reasonably foreseeable (i.e breaching
party had reason to foresee the harm as a probable result
at the time of the contract)
b. Harm must be measured with reasonable certainty (i.e.
amount of damages cannot be speculative)
c. Duty to mitigate damages (i.e. damages cannot be
recovered to the extent that they could have been avoided
or minimized by reasonable efforts)
d. Recovery only for loss that would not have occurred but for
the breachif it still would have occurred doesnt count
e. R347 illustration 15
f. Fixed costs/overhead are not included in damages
(electricity bills, things that you would normally pay
regardless)
D. Lost Volume Seller:
a. Defined: injured party could and would have entered into
the subsequent contract even if the one in question wasnt
broken and could have had the benefit of both.
E. Crabbys Inc v. Hamilton
Facts: D contracted to buy Crabbys restaurant; loan
commitment had to be given within 30 days and had to use
reasonable diligence; buyer made other arrangements like
pushing back closing date, putting utilities in their name, etc; July
30 everything is set and buyer backs out and buys another
property. Seller cant sell again until May of next year. Buyer
says there was no contract bc it was supposed to expire if they
didnt give the loan commitment within 30 days, cant have fair
market value as of 11.5 months later, and it was a distress sale.
Held: Damages to seller based on the price they sold at 11.5
months later being fair market value; 11.5 months was
reasonable to establish fair market value
Restatement approach applied: Loss in value (290k contract
price) + other loss (40k, interest, cost to maintain property)
loss/cost avoided (235k market value)
General Rule: damages for breach of a sale of land is the
difference between the contract price and the fair market value
of the property at the time of the breach (date the sale should
have been completed and one year is not too long to determine
fair market value)
a. Fair Market Value: the price property will bring when it is
offered for sale by an owner who is willing but under no
compulsion to sell and is bought by a buyer who is willing
to purchase but is not compelled to do so.

i. Can be found by real estate appraisers, others who

are qualified by education, training, or experience
b. English Rule: where the seller is in breach, courts
restricted (only allowed) the plaintiff purchaser to
restitution of any payments made on the purchase price
unless the defendant seller acted in bad faith.
c. American Rule: awards expectation damages for any
unexcused failure to convey regardless of the good faith or
bad faith of the seller
F. Hypos
a. Seller agrees to sell computer for $450. Market value is
$600 Buyer breaches. What are the sellers damages?
$450
i. Seller breaches. Buyer has paid the money but the
seller hasnt given her the computer. Damages? She
would get the market value of the computer--$600
ii. Nobody has paid anything yet. But the seller says
that she isnt going to deliver the computer. The
seller has breached. Damages to buyer? Difference
between the market price (loss in value) and the
contract price--$150
b. Owner hires builder to construct a building for $200k. Cost
of construction is $180,000. The owner breaches by
terminating the contract when the work is partly done. At
the time of termination the owner has paid the builder
$70,000 for work done, and the builder has spent a total of
$95,000 for labor and materials. After the owners breach
the builder is able to resell $10,000 of materials purchased
for the project
i. ANSWER: (loss in value = $200,000 - $70,000 =
$130,000) + (other loss = $0) (cost avoided =
$180,000 - $95,000 = $85,000) (loss avoided =
$10,000) = $35,000
c. Employer hired employee under a two-year employment
contract for a salary of $50,000 per year, payable in
installments at the end of each month. Six months after
the employee starts work, the employer wrongfully
discharges her. The employee looks for other work for
three months, but is unable to find a job.
Finally, she
hires an employment agency, paying it a fee of $1,000.
Three months later she obtains a job (similar to the one
from which she was fired) paying $45,000 a year
i. ANSWER: (loss in value = $100,000-$25,000=
$75,000) + (other loss = $1,000) (loss
avoided=$45,000) = $31,000.

III. Measuring Loss in Value: Construction Contracts

A. Restatement Rule: if loss in value to the injured party is not
proved with sufficient certainty, damages can be measured by
(a) diminution in market value or (2) reasonable cost of
completing performance or of remedying the defects if that cost
is not clearly disproportionate to the probable loss in value to
him
B. Two ways to measure loss in value
1) Cost to Complete: reference to cost in removing the green
paint and painting it blue ($300 or more).
2) Diminution in value: difference in value that would have
been if the contract had been performed. D cant have
breached the contract intentionally and must show
substantial performance made in good faith
**General Rule for damages is cost to complete but in some
cases the difference in market value is awarded when there is
unreasonable economic waste, breach is of a covenant which is
only incidental to the main purpose of the contract, and
completion would be disproportionately costly, good faith,
innocent oversight.
C. Factors to decide Diminution in Value or Cost to
Complete:
a. Nature of breach (good faith v bad faith)purposely breach
to avoid costs then court will be less likely to award
diminution in value
b. Economic waste
c. Disproportionate difference between amounts of damages
under the two measures
d. Idiosyncratic value attached to performance (value that
cant be reflected in the market value of the property)
e. Whether the breach is incidental to the main purpose of
the contract (Peevyhouse)
f. Economic Waste: courts will rarely award cost of
completion where the defect is minor and completion
would involve economic waste (have to destroy whats
already done)
D. Jacobs and Youngs: built mansion with the wrong pipes, the
pipes were still sufficient, Held: damages to compensate for
builders use of comparable pipe should be measured by the
difference in market value.
E. Peevyhouse v. Garland Coal and Mining Co
Facts: P owns a farm and D wants to mine coal
from the property. The lease states that D must put the property
back to its original condition after they are done mining. D does
not do this, and it would cost $29k. The value of the farm is only
$300 less than if the $29k work is done. Held: plaintiffs are only
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awarded $300 bc the provision requiring the additional work was

remedial to the main purpose of the contract and the economic
benefit from full performance would be grossly disproportionate
to the cost of performing the work.
General Rule: if the cost is
clearly disproportionate to the probable loss in value to the
plaintiffs then the court should not award the cost of remedying
the defects just the change in value or the economic benefit
should be awarded. ($30k work to increase the property by $20k
is not unreasonable and they would be awarded the $30k)
F. Handicapped Childrens Education Board v. Lukaszewski
Facts: Luk hired at the school but found another job
closer to home at Wee Care, school wouldnt let her out of her
contract; she resigned from the job and the only replacement
they could find had more teaching experience than Luk and cost
$1000 more. Board wants the additional compensation to find a
replacement Held: Damages to the school board; they lost the
benefit of their bargain, only expected to pay a certain price and
took reasonable efforts to find a replacement and there was only
one applicant.
General Rule:
damages for breach of an employment contract include the cost
of obtaining other services equivalent to that promised but not
performed, plus any foreseeable consequential damages.
a. The issue in this case is how to measure the value of
Lukaszewskis servicesshould it be what they were
paying her or what it would cost for a substitute? The court
ruled that it should be the cost for a substitute because
otherwise the school wouldnt be getting what it bargained
for.
G. American Standard v. Schectman
Facts: P contracted to sell D equipment and buildings
on his property if D promised to excavate the property. D did not
do so and argues measure of damages should be the diminution
in property value without the excavation which was only $3k
Held: P gets $90k, cost to complete. The contract was not
substantially performed
General Rule: diminution in value test is only applicable when
the defects are irremediable or may not be repaired without
substantial tearing down (substantial performance is already
done) however, courts have applied the diminution of value even
with no tearing down if the breach is only incidental to the main
purpose of the contract and completion would be
disproportionately costly.

II. Remedies: Measuring Expectations UCC Approach

A.

Buyers Remedies
a. Two ways a seller can commit a breach:
1. deliver goods that fail to conform to the contract in
some way (quality of goods) OR
2. fail to make proper tender of goods (failing to deliver
on time, delivering too few or too many, or failing to
deliver at all)
b. Cover Formula: 2-712
i. Buyer has the option of the cover rule or market value
rule
ii. Defined: a buyer is allowed to cover by making in good
faith and without reasonable delay, any reasonable
purchase or contract to purchase goods in substitute
and recover the difference between the cover price and
the contract price, plus incidental and consequential
damages, less expenses saved bc of the breach
1. Buyer doesnt have to buy identical goods, just
commercially reasonable substitutes
2. Can be more than one contract or sale;
3. This rule applies to merchants and non
merchants
iii. Ex: price of substitute was $650, contract price was
$450. Buyer is entitled to $200
iv. Ex: B bought a different type of computer than the
one that A contracted to sell her. She got a Mac
instead of a Dell. It was fancier and she spent more
money on it. Can she still recover the difference
between the c ontract price and the substitute price?
ANSWER: Depends on if her purchase was done in
good faith and without unreasonable delay. It is
immaterial that hindsight may later prove that the
method of cover used was not the cheapest or the
most effective.
c. Market Formula: 2-713
i. This only applies when the buyer decides not to buy
substitute goods i.e. the buyer has decided not to
cover
ii. Defined: Damages would be the difference of the
market price at the time the buyer learned of the
breach and the contract price plus incidental and
consequential damages, less expenses saved bc of
the breach
iii. Market Price: should be determined by the place of
tender (delivery), or in cases of rejection after arrival

or revocation of acceptance, as of the place of

arrival.
1. Price of goods of the same kind and in the
same branch of trade
2. When market price is difficult to prove, you can
show comparable market price
3. If you cant show market price bc the scarcity of
these goods on the market, then usually u
want specific perf.
iv. Ex: Market value at the time buyer learns of breach
is $600, contract price is $450. Buyer is entitled to
$150.
v. 2-714 damages for accepted goods: amount owed is
the difference between what was accepted and the
value they would have been or should have been.
B.
Sellers Remedies
a. Cover Formula: 2-706(1)
i. Defined: Seller resells the goods after buyer
breaches and can recover the difference between the
resale price and the contract price plus incidental
damages, less expenses saved bc of the breach
1. Resale must be made in good faith and in a
commercially reasonable manner
ii. 3 steps seller must take to recover damages:
1. identify the goods being resold as the same
ones under the contract that was breached
2. give buyer proper notice of resale
a. Private sale: give buyer reasonable
notification of intention to resell
b. Public sale: give buyer reasonable notice
of the time and place of the resale except
in the case of goods which are perishable
or may quickly decline in value
3. Resale must be in good faith and in a
commercially reasonable manner
b. Market Formula: 2-708(1)
i. Defined: Damages is the different between the
market price at the time and place for tender and the
unpaid contract price plus incidental damages, less
expenses saved bc of the breach
ii. Lost Profits: (alternative to market value) If damages
based on this formula are inadequate to put the
seller in as good a position as performance would
have done, then the measure of damages is the
profit which the seller would have made from full
performance plus incidental damages.
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iii. Three cases that should apply lost profits:

1. Lost Volume Seller:
2. Seller who is in the process of assembling a
product for sale when the buyer breaches
(personalized items)
3. Jobber: (middle person who purchases goods
for resale) buyer from a jobber breaches before
the jobber has acquired the goods
iv. When seller can recover the price of goods for
damages:
1. Buyer has accepted the goods then the seller
may recover the price
2. Goods are damaged after the risk of loss has
passed to the buyer
3. Seller is unable to resell the goods with
reasonable effort
v. Ex: contract price that was not paid is $450, the
market value of the laptop at time of tender is $300.
Seller gets $150.

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IV. Limitations of Expectation Damages

A.

Foreseeability
a. Two types of damages that can be awarded:
i. General Damages: Damages that arise naturally
from the breach of contractdont need to make a
special showing to recover these
1. Ex: difference between contract price and
market price
ii. Consequential/Special Damages: damages
flowing from special circumstances communicated at
the time the contract was formed.
1. Loss profits arising from collateral contracts
(note: lost profit on the actual contract that
was breached would be general damages)
2. Injury to person or property caused by goods
that fail to comply with contractual warranties
3. Recoverability of consequential damages
depends on whether they were in
contemplation of the parties at the time the
contract was made
4. Type of loss must be foreseeable, not the way
that it occurs
5. Can use objective analysis: if they had reason
to know
b. Restatement Approach: Cant recover for damages that
the breaching party didnt have reason to foresee as a
probable result of the breach when the contract was made.
Loss is foreseeable when it follows from the breach (a) in
the ordinary course of events (reasonable person should
have foreseen) or (b) as a result of special/unusual
circumstances, beyond the ordinary course of events, that
the party in breach had reason to know (party had actual
notice)
i. A court can decide to limit the damages for
foreseeable loss by excluding recovery of loss of
profits, by allowing recovery only for loss incurred in
reliance or to avoid disproportionate compensation
ii. Objective test
iii. If there are several contributing factors to the loss
the party would have had to foresee all of them.
iv. If it is foreseeable that one party will not be able to
cover or get substitute goods, then that will be taken
into acct for damages
c. Special Situations under the second rule (actual
knowledge)

12

d.

e.

f.

g.

h.
i.

i. Contract to Lend money: if the contract is for D to

lend money to P, courts presume money is an
available commodity that can be obtained elsewhere
borrower can only recover the difference between
the market rate of interest and the interest amount
in the contract even if borrower cant borrow
elsewhere (if lender was aware borrower cant borrow
elsewhere then other damages can be awarded
ii. Liability to third parties: third party liability had to be
foreseeable at the time of the making of the contract
breacher is responsible for reasonable litigation
expenses and settlement the non breaching party
has to pay
Parties can allocate their own risks
i. P gives notice to D about the special circumstances
(part 2 of Hadley rule)
ii. Parties can say D will not be liable for reasonably
foreseeable circumstances
Tacit Agreement Test: (for recovery of consequential
damages): Injured party has to show special
circumstances were brought to the attention of the
breaching party and the breaching party consciously
assumed the liability in question.
Epstein Rule: (default rule):When the contract is silent
on the matter of damages the court should award the
damages that the parties would most likely have agreed on
had they considered the issue of damages
Eisenberg Rule: Allows recovery of all losses that are
proximately caused by a breach, subject to contractual
allocation of risk and principles of fair disclosure of
contractual limitations on liability (essentially a tort
standard)
CISG: Damages for breach may not exceed the loss that
the party of the breach as a possible consequence of the
breach (even broader)
Hadley v. Baxendale
Facts: P had a mill that stopped operating bc the
crank broke; hired D to transport a new shaft and D said it
would take a day but took longer which made P lose profits
for those days Held: for D, they didnt know that P did not
have another shaft and it would cause P to stop business
General Rule: (1) Non breaching party is entitled to
damages that arise naturally from the breach itself
(Direct/general Damages) or (2) those from special
circumstances that were communicated or known by the
parties when the contract was entered into
13

(Special/Consequential Damages) (Have to know about the

special circumstances to be liable for damages)
B.
Certainty/Causation
a. Restatement Rule (352): can only recover damages
which are established with reasonable certainty (also have
to show amount of losses with reasonable certainty; profits
and the amount of those profits)
i. Have to show that you had losses but also amount of
losses
ii. Profits from a new business: usually too
speculative; courts will allow it if plaintiff can show
that he ran a similar business in the past and show
those profits
iii. Have to be able to show what the actual cost of
completion is or else you wont be able to offset what
your damages should be
b. Fact of Damages v. Amount of Damages
i. Fact: It is established that there was some damage
(even if exact amount isnt established) and jury is
given large leeway as to how much they can award
only need a general idea of the actual amount once
its proven there were damages
ii. Amount: the actual amount of damages that were
suffered
c. Reputation: US courts are unwilling to award damages for
loss of reputation even if it can be established with
reasonable certainty
d. Foreseeability vs. certainty:
i. Foreseeability has to do with whether the possibility
of the damages was sufficiently likely at the time the
contract was made
ii. Certainty relates to how clear it is at the time of suit
that the alleged losses in fact occurred and were
caused by Ds breach
e. Redgrave v. Boston Symphony
Actress could recover consequential damages for
loss of professional opportunities (different than harm to
reputation) bc the symphony cancelled her appearance bc
of political statements she made. Other orchestras
cancelled her appearances and it is reasonably certain it
was from Boston Symphonys actions.
f. Florafax International Inc v. GTE
Facts: Florafax hired GTE to answer
calls from flower orders; GTE knew that Bellerose was one
of its main clients. Florafax had one year, then month by
14

month contract w Bellerose but could be terminated by

either w 60 day notice. GTE argues no lost profits from
third party contract and loss of Bellerose profits were not in
contemplation at the time of the contract Held: Damages
to Florafax; GTE knew/it was reasonably certain the
consequences of breach and dont have to be limited to 60
day period bc it is reasonably certain that their contract
with Bellerose would have continued longer General Rule:
Lost profits are recoverable as long as they are (1)
foreseeable when the contract was made (2) they directly
or proximately result from the breach and (3) they are
capable of accurate estimation (certainty)
i. Can only recover net profits and not gross profits
C.
Duty to Mitigate
a. Restatement Approach (350): Damages arent
recoverable for loss that could have been avoided without
undue risk, burden or humiliation
i. Not precluded from recovery if the injured party
made reasonable but unsuccessful efforts
1. Only need to make reasonable effortsnot
expected to incur considerable expense or
inconvenience, disorganize business, damage
reputation, break other contracts
ii. Lost Volume Seller: If the seller would have entered
into both contracts and received benefits from both,
the one is not a substitute for the other.
iii. Personal Service/Employment Contracts: Courts wont
make someone take a position that is at all different
than the one beforemust be completely
comparable (Shirley McClain)
D. Duty to Mitigate under UCC
a. UCC Lost Volume Seller2-708(2): If measure of
damages is inadequate to put the seller in as good a
position as performance would have, then damages is the
profit (including overhead) that the seller would have made
from full performance
i. Has to be able to have entered into both contracts
b. UCC 2-715(2): party has to cover when it is possible to do
so and if they do not where it was possible they cant
recover those damages
i. i.e. buyer doesnt get goods at all or gets defective
goods, buyer has to try to purchase substitute goods
from another supplier
ii. once buyer rejects the goods, they have to follow any
reasonable instructions form the seller concerning
how to get rid of the goods, without instructions
15

buyer must make reasonable efforts to sell them if

they are perishable or threaten to decline in value
c. What seller can do:
i. Resell the goods and can recover contract/resale
difference or
ii. Seller can choose to not resell the goods and get the
difference between the contract price and the market
price at the time and place for tender
iii. Sometimes seller can hold onto the goods and sue
for the contract priceonly allowed where seller is
unable after reasonable effort to resell the goods at a
reasonable price or the circumstances reasonably
indicate that such effort will be unavailing.
iv. Lost profits if none of the others work
d. Rockingham County v. Luten Bridge Co
Facts: County hired Luten to build a bridge,
county repudiated and Luten continued to build the bridge
Held: Luten only gets damages from the time of the
breach, should have stopped working
General Rule:
once a party breaches or repudiates a contract, the other
party cannot continue on with the contract and expect
damages for full performance
i. Approach: damages to injured builder = expenses
incurred + expected profit (same result as R347
approach, just a different way to calculate it)
e. Maness v. Collins
Facts: P sold business to D w agreement that he
would be manager for 3 years; they fired him for not
fulfilling his duties bc the son/nephew of D told employees
not to listen to him, verbally abused him, selling drugs out
of the company building, so P just stayed in his office more
and more. P built himself a new house and did not seek
other employment, says non compete agreement should
be void. D claims he had to mitigate Held: Damages to P;
there was no evidence at trial that there was comparable
work out there for P, and failure to mitigate damages
doesnt preclude damages completely
General Rule:
defendant has the burden of proving that there was
suitable alternative employment available, employment is
comparable, and employee failed to use reasonable
diligence to obtain such alternate employment.
i. Employee needs to mitigate with comparable work:
Parker v. 20th century Fox Case: D promised P
(Shirley McClaine) to be in a major musical motion
picture then took her out but offered her a non
musical motion picture for the same pay. The second
16

is not comparable to the first bc it is a different

motion picture and different directors, etc
ii. Fair v. Red Lion: Employee fired and then offered job
back and she said no bc she had apprehensions
about working there again. This is a failure to
mitigate
1. It would not have been if they were previously
harassed on the job and there was a hostile
work environment
2. Would not have been if when compensation
and duties were difference and employee
would report to his replacement
f. Jetz Service v. Salina Properties
Facts: Jetz supplies coin operated laundry
machines, has a warehouse with 1500 machines. 6 yr
lease with Salina; Salina pulled Jetz machines out and put
their own and says jetz failed to mitigate and should only
be awarded cost to move the equipment Held: jetz is a lost
volume seller; had enough machines to rent out more
General Rule: duty to mitigate does not
apply to lost volume sellers; To be a lost volume seller you
must prove that (1) possess the capacity to make an
additional sale; (2) it would have been profitable to make
an additional sale and (3) it probable would have made an
additional sale absent the buyers breach
i. Fixed costs: cant get damages
ii. Variable costs: can get damages
g. Hypo: Professor is hired by JMLS under 2 year contract to
teach contracts at $50,000 a year. Fired 6 months after
beginning but she was paid for 6 months. She looks for a
job for six months and then finds a job at Marquette law
school at $45,000/year. She incurs $1,000 in expenses in
looking for a new job.What if she doesnt find another law
school job but gets one at the wee-care day care center.
Damages?
h.

17

V. Non-Recoverable Damages
A.
R353: When damages for emotional distress can be
recovered
a. Breach of contract also causes bodily harm:
i. Sullivan v. OConnor: Dr. did nose job on patient and
promised it to look a certain way and it came out
bad; has to get another operation; damages can
include emotional distress of having to undergo
additional operation
b. Emotional distress is a particularly likely
consequence of breach:
i. Contracts of carriers and innkeepers with passengers
and guests, contracts dealing with carriage or
disposition of dead bodies, contract for delivery of
messages concerning death, anxiety over death,
birth of a crippled unwanted child,
ii. Does not include the loss of money
c. ED not recoverable when:
i. loss of money unless left destitute
ii. loss of relationship with child (custody battle)
iii. ED from miscarriage when Dr didn't return call
iv. construction delays/departure
v. not for nervousness or emotional distress
vi. doesn't matter if given notice that person is "delicate
B.
R355: When punitive damages are recoverable:
a. Can recover punitive damages if the conduct constituting a
breach is also a tort for which punitive damages would be
appropriate
i. In a tort an injured party can recover punitive
damages when the conduct is outrageous.
ii. Ex: D a car dealer sells a used car to P. d states the
car Is nearly new with only 3000 miles on it. D set
back the odometer from 33,000 miles. P discovers
Ds misconduct a few months after the purchase and
sues. P is entitled to punitive damages since Ds
conductfraudis a tort.
b. Two types of breach (Professor Dodge): punitive
may apply.
i. Opportunistic breach involves an attempt by the
breaching party to gain at the expense of the nonbreaching party. (to prevent opportunistic breach bc
dont increase social wealth.
ii. Efficient Breach occurs when breaching party
seeks to engage in another transaction more
profitable (incentive to negotiate for release from

18

contract and improve efficiency and less transaction

costs)
c. Exceptions:
i. Bad Faith Breach of Insurance Contracts: bad faith
refusal to honor claims brought by third parties
against their insured parties and also first party
claims
1. Damage for a fire (first party claim)
2. Only limited to insurance contracts (get
punitive damages)
3. Factors: for insurance co breach:
a. Insurance is protection against calamity
b. Unequal bargaining position
c. Claimant especially vulnerable economic
position
d. Whole purpose of insurance is defeated if
Ins. Co can refuse/fail, without
justification, to pay a valid claim.
e. Rationale to encourage fair treatment
and penalize corrupt practices by
insurers.
4. If insured party makes valid claim and they
refuse to pay = bad faith. Then both
compensatory and punitive damages
5. Standard must show absence of reasonable
basis for refusal to pay policy or
reckless/unreasonable reason for non-payment.
ii. Can claim bad faith for all breaches of contracts, not
just insurance contracts; example is if someone
breached voluntarily to make a better deal
somewhere else.
d. Note: although punitive damages for bad faith breach of a
noninsurance contract is unlikely, punitive damages can be
recovered if the defendants conduct goes beyond bad
faith to amount to an independent tort for which punitive
damages are recoverable
i. Usually cases that involve fraud or breach of
fiduciary duty
ii. Allowing punitive damages for other actions would
end in a windfall for the plaintiff and goes against the
expectations principlewould put plaintiff in a much
greater position

19

VI. Efficient Breach

A.
Policy for Efficient Breach: If makes one person better
off without making anyone else worse off then it is 1) socially
beneficial 2) efficient breach
B.
Justification for the Expectation Damage Rule
a. Executory Contract: Contract that has been neither
performed nor relied on
i. However, just bc the contract wanted performed
doesnt mean that one party didnt rely on the
contract to make other arrangementso most
contracts are not purely executory
b. Why do we always pay the injured party his expected
profit?
i. May compensate for less tangible elements of
reliance that dont always get calculated in damages.
There is a fear of under-compensating.
ii. Encourages reliance on contracts, want to award a
full measure. Rely on the institution of contracts.
iii. Deter the decision to breach.
iv. Psychological Argument: the injured party has a
property like interest in that performance and the
better approach is to not limit the injured party to out
of pocket expenses; he has an expectancy once he
enters into the contract
1. Ex Doctor: you cancel an apt and they still
charge you bc they could have seen another
patient at that time.
c. Hypos
i. A agrees to sell corn to B for $2/bushel for corn. B is
planning to resell the corn to C for $3/bushel. The
market price at the time of the breach went up to
$4/bushel. Suppose A has better opportunities and
sells the corn to another person
1. UCC Market Formula: Bs damages are the
difference between the market price and the
contract price
2. UCC Cover Formula Variation: B went out and
spent $4.50/bushel to keep the contract with
third person. With good faith and without
unreasonable delay-he can recover the price
differential which is the difference between the
cover price and the contract price.
3. What if C releases B from the obligation to
perform under the contract? B now wouldnt
have an obligation anymore. Could the farmer

20

make an argument
that damages should
be limited to less than $2/bushel?
4. ARGUMENT: At the end of the contract, he
would have only been getting $1/bushel
because that was what the expectation was
under the contract.
5. ARGUMENT AGAINST THIS: Recognize that one
function of contracts is that it is a mechanism
by which parties allocate risk. If it shifts in
ones favor, then he should be entitled to the
market price. You take a risk when you
contract!
C.

Theory of Efficient Breach

a. Rule: If breaching would be more profitable or efficient for
the breaching party, then it is efficient
i. Posner: breaching a contract is good if its efficientEconomic Insight
1. Sometimes better for a party to breach a
contract because he gets a better deal out of it
2. Rules of contract remedies are good from a
policy perspective, because breach of contract
might not be considered a socially bad thing
3. Perato Superior: Some parties are better off
without some party being worse off
ii. Holmes: breaching a contract is amoral- when you
breach a contract you either pay damages or you
honor your contract-there is no morality involved
iii. Basic Idea: efficient breach is that no one is worse off
but some are better off.
b. Arguments against the theory:
i. doesnt take into account the transaction costs to
litigate and to actually get the damages
ii. Doesnt take into account the emotional distress and
other damages that
arent usually compensated
for.
iii. It isnt fair. The injured party is under compensated
and stressed out.
iv. Doesnt capture idiosyncratic value-the value the
plaintiff has attached to the contract.
v. The value of contractual relationships-there is an
intangible value of the contract.
c. Note: Make sure to argue the Lukaszweski approach and
the Roth approach
d. Roth v. Speck
Facts: P owns hair salon, hires D for $75 a week or
21

50% of commissions, whichever is greater. D stops

working after 6.5 months. P tried to hire two other people
but he was making no profit. Held: couldnt measure
against Ds replacement bc D was irreplaceable so used
the difference between what D was actually worth ($100
being paid at new job) and the difference of salary at Ps
salon ($75) General Rule: Value of an employees
services may be an appropriate measure of damages
resulting from breach of an employment contract so long
as these damage can accurately be proven. (Had to use
this approach bc there was no replacement)
i. Disgorgement Principle: recovering beyond
damages and also getting the profits that the
breaching party incurred from the breach
1. S/B used in 2 types of cases:
a. Those involving appropriation of some
property or quasi-property interest
rightly belonging to plaintiff
b. Those in which deterrence is a major
factor
i. Reprehensibility of defendants
conduct
ii. Importance of duty he breached
iii. Extent of defendants contribution
iv. Justification for granting plaintiffs
windfall
ii. Policy Argument Against this Approach: the jobs
could have been different, in Lukaszewski the two
jobs could have been different; why would anyone go
to another job if you would have to pay the extra
money that you are making at your new job; it
punishes the breaching party and provides a
disincentive for an efficient breach
iii. Breaching Party bares the burden of showing the
mitigation of damages
iv. Exception: This case is an exception to the rule in
Lukaszewski; requires employee to give up earnings
they got at the new job
1. Policy Argument : this approach to
measuring damages overly deters the choice
to breach. However, court justifies it bc it was
the only way to make the injured party whole.

22

VII. Reliance Damages

A.

R90 Promissory Estoppel

a. Elements
1. Promise made
2. Promisee should reasonable expect to induce action or
forbearance
3. Does induce action or forbearance
4. Injustice can only be avoided by enforcement of the
promise
a. Remedy can be limited as justice requires
b. Changes between 1st and 2nd restatement versions
i. 1st required that the promise be of definite and
substantial character
ii. 2nd gives the court discretion to limit the remedy as
justice requires
1. Old Rule: Uncle promises nephew $1000 to buy a
car and nephew relied by purchasing a $500 car.
Nephew is still entitled to the $1000
2. New Rule: Nephew would only get $500 bc that is
all justice requires
e. Promissory Estoppel: if plaintiff actually sues on promissory
estoppel they cant get damages but can get reliance
damages
B.
Situations Reliance Damages would be sought:
a. Pre contractual reliance scenario (Walser)
b. Employment contract setting (i.e. reliance on an offer of at
will employment)
c. Where expectation damages cannot be proven with
reasonable certainty i.e. lost profits cant be proven or other
damages cant be proven (then can go to out of pocket with
reliance)
i. Under reliance damages P can get compensated for
expenses in preparing to perform and those made in
actually making part performance
d. No legally enforceable contract
e. Plaintiff is a buyer under a land contract and seller does
not want to convey the property
f. P would be able to recover what she has paid on the
purchase price plus expenses that she reasonably incurred
in connection with the transaction (however P can get the
benefit of his bargain if seller did so in bad faith or it was
fraud in refusing the conveyance)
g. NOTE: the breaching party is allowed to try and offset the
damage award by proving loss that the injured party would
have suffered had the contract been full performed.
C.
Limitations on Reliance Damages
23

a. Cant be more than the contract price

b. Most courts also refuse to allow reliance damages to
exceed expectation damages but place the burden of proof
on the defendant to show what the plaintiffs loss would
have been.
i. If D proves that P would have actually lose money on
the contract, that lost profit will be subtracted from
the reliance damages PG 314 Emanuels reliance is
compensation for the harm and reliance on the
promise
D.
Hypo: P applies to D, a radio distributor, for a franchise to
sell radios. D erroneously tells P that the franchise has been
approved, that P can proceed to employ salespeople and solicit
orders and that an initial shipment of thirty radios will be made.
P spends $1150 in preparing for the business but doesnt receive
the franchise or radios. P sues on promissory estoppel. Cant get
lost profits but can get reliance damages i.e. expenses in
preparing
E.
Walser v. Toyota Motor Sale USA
Facts: P applied to open and run a Toyota
dealership, district manager told P that they were their dealer
and the letter of intent was formally approved. In mean time P
bought land for dealership and then found out they werent
getting it. Awarded out of pocket expenses but P claim they
should also be awarded lost profits and the limit of out of pocket
expenses shouldnt just be the difference of the market value
and contract price, they should also get all their other
investment expenses which is more than $1 million Held: only
gave them difference between the value of the land now and
what they bought it for bc that was reasonable reliance based
on the promise
General Rule: damages from a promissory estoppel claim may
properly be limited to out of pocket expenses; damages may be
limited to what justice requires and that can just be to the
extent that the plaintiff relied based on what is reasonable for
the promise made i.e. compensation for what they actually lost.
a. Can limit damages less than full expectation damages to
go only as far as justice requiresthink pre contractual
reliance
b. At will employment: offered a job by law firm in NYC, sell
house, get apartment in NY, week into employment you
are let go: if the contract is an at will contract cant recover
expectation damages. Courts will sometimes award
reliance damages instead
c. If expectation damages cant be proved with reasonable
certainty: lease agreement to open a book store, make
24

some out of pocket investments, furniture shelves

inventory; then landlord breaches and says you cant rent;
bc its a new business cant show lost profits with any
degree of certainty so maybe you can recover out of
pocket damages
i. RULE: where expectation damages cant be proved
with reasonable certainty the court will go to out of
pocket expenses

25

VIII. Restitution Damages

A. Generally:
a. Defined: restitution interest is the value to the defendant
of the plaintiffs performance; want to give damages to
plaintiff for however much the defendant was enriched.
b. Goal: To prevent unjust enrichment
c. Trying to award the value rendered to the defendant
regardless of how much the cost to the plaintiff and how
much the plaintiff was injured by the defendants breach.
d. If the performance has no value to the defendant then it
has no restitution damages (regardless of how much it cost
P)
B. Restitution when the other party is in breach:
a. R373: When there is either a breach by non performance
that gives rise to damages for total breach OR a breach by
repudiation, the injured party can get restitution for any
benefit that he has conferred on the other party by part
performance or reliance
i. Non Performance: Must be a total breach and cant
be a partial breach (i.e. you accept performance w
knowledge of defects then you cant claim total
breach)
b. Exception: Cant claim restitution if the contract is
complete and all that is left to be done is a sum of money
paidthen have to claim expectation theory and just get
contract price plus interest
C. Restatement 371: Measure of Restitution:
a. Damages award is the lesser of
i. The reasonable value to the other party of what he
received in terms of what it would have cost him to
obtain it from P or someone exactly like P (essentially
the benefit D receivedusually calculated by market
price) OR
ii. The increase in property value or how much the
breaching partys interest has advanced.
iii. Limitation: Not limited to contract price
D. Restitution as a remedy for breach of contract
a. If one party commits a material breach, the other party can
rescind and recover in restitution.
b. Usually where expectation damages cant be calculated
with reasonable certainty
c. Ex: Contractor does part of the work and the owner
breaches, contractor may be unable to show what his cost
of completion would have been. Contractor will normally
be permitted to recover restitution damages, calculated as
the market value of the partially completed performance.
26

E. Restitution is not limited to the contract price

a. Work done by P prior to Ds breach has already enriched D
in an amount greater than the contract price
F. Restitution not available where P has fully performed
a. If at time of Ds breach, P has fully performed (and D owes
only money) most courts dont allow P to recover
restitutionary damagesmust go to expectation damages
b. P can sue if it is based on non performance or repudiation
i. If the breach is based on non performance it has to
amount to a total breach and not just damages for a
partial breach in order to be able to get restitution
damages.
G. Restitution for the breaching party
a. R374: Breaching party is entitled to restitution for any
benefit that he has conferred in excess of the loss that he
has caused by his own breach
i. If the contract explicitly says that performance
should continue if there is a breach, the party cant
get restitution if the value of the performance as
liquidated damages is reasonable in the light of
anticipated or actual loss caused by the breach
ii. Note: if a party purposely gives services that are
different than what was promised that person acted
officiously and will be denied recovery
H. Losing Contracts
a. Defined: if a party would lose money under the contract if
it were completed, they can still sue under restitution and
get the reasonable value of their work regardless.
b. Party in breach is only liable to the extent that he has been
benefitted from the injured parties performancesimilar
work done
c. If all is left is the to pay a certain sum, then that would be
the expectation damages and cant get restitution
damages
I. Impracticability: you can recover under restitution if the
contract is rescinded on grounds of impracticability
a. Ex: hire someone to paint house, they bring equipment,
painted half the house, and then the house is destroyed by
fire. Contract is rescinded on grounds of impracticability
even if the house has been destroyed he did confer a
benefit and would be entitled to damages measured by the
value of the benefit conferred.
J. Lancellotti v. Thomas
Facts: P bought Ds business and D agreed that he
would make an addition or else the rent would go down. P made
$25k down payment and only operated the business for one
27

summer. P wants his $25k back and D wants $52k for the rent
for the summer and compensation for damages to business,
good will, physical operation Held: it has to be determined if
$25k is actually what D lost and if they should keep that money,
if not actual damages it would be a windfall
General Rule: a
breaching party is entitled to restitution in excess of the loss
caused by the breach (r374)
a. Breaching party cant sue under expectation theory
b. Britton v. Turner: laborer agreed to work for 12 months on
employers farm for $120 to be paid at the end. Laborer
quit at 9.5 months and sued in quantum meruit for labor
performed
K. Maglica v. Maglica
Facts: Couple lived together for 20 years, not married
but acted as husband and wife; worked at husbands company
and both built it up and it is worth hundreds of millions when
they split; business boomed largely bc of her; Held: only can be
awarded reasonable value of her services bc otherwise it would
give her ownership in the company and that was not bargained
for; in quantum meruit it only matters that there was a benefit
received
General Rule: For a restitution claim the
damages are measured by the reasonable value of the services
so long as there was an actual benefit received by the defendant;
cant measure by the value of the benefit to defendant
L. US ex rel. Costal Steel Erectors v. Algernon Blair Inc
Facts: Blair had contract w US to construct a naval
hospital and subcontracted Coastal for steel work. Coastal
started working and Blair wouldnt pay for the crane rental after
28% of the work was done. Coastal stopped working and Blair
hired another. Coastal brought action for labor and equipment
and claims quantum meruit (reasonable value of services); D
claims P shouldnt get reasonable value of services bc P would
have actually lost money on the contract Held: can recover
quantam meruit (reasonable value of services) bc under
restitution damages are the reasonable value of the performance
and not diminished by loss if there was complete perf. General
Rule: When recovering under restitution, a party can recover in
quantum meruit regardless of whether they would have lost
money on the contract and not been entitled to recover for a suit
on the contract
a. Injured party can choose to sue under restitution or
expectation theory or reliance
b. If there is complete performance then it is not a restitution
claim, it is expectation damages i.e. contract price

28

c. Restitution is not to put the injured party in the position it

would have been but to give the party the value of the
benefit conferreddamages are the reasonable value of
services determined by what those same services could be
purchased form one in the plaintiffs position at the time
and place services were rendered.
d. Constantino: P had to clean 33 grain storage tanks for
$30k to be paid by D. D breached and P had cleaned 24 of
the 33 tanks. P claimed reasonable value of services was
$69k. Held: Damages are 24/33 x $30k so about $22k.
Used contract price to figure out how much
i. Pro rata: use contract price to determine the
damages
e. Majority Approach: Algernon: in a losing contract the
party can choose either restitution or expectation theory
f. Minority Approach: Constantino: sometimes can get a
prorated portion
M. Hypos
a. A and B enter into a contract. A agrees to pay B $300 if he
paints the house. After he paints the house, B sues in
restitution and the reasonable value is $500. The market
value is $500. Can he do this?
ANSWER: No because he bargained for it. If there is a
contract, he cant bring a cause
of action for restitution,
for something the parties have already agreed to. He can
only get the value under the contract.
b. Corey paints house for me and I pay him $300. Total
estimated costs for Corey are $360 so it is a losing
contract. Costs incurred at time of breach are $120.
ANSWER: he wouldnt want to sue under expectation
damage bc its a losing contract and the costs are higher
than the contract pricehe wants to sue under a
restitution theory bc the reasonable value of the services
rendered would be more than $120.
c. Corey paints my house and charges me $300. Corey
completes the work, spending $250 on labor and materials,
but his work is defective. Costs me $100 to hire Daniel to
fix the defects. Coreys work increased the value of my
house by $200
ANSWER: the reasonable value of Coreys services to me
are $200; since Corey is the breaching party we have to
subtract the damages suffered by the breach which was
the $100 I paid Daniel. So corey gets $100.
i. If its the breaching party seeking restitution you
should use the lesser of the two measures

29

VIX. Specific Performance

A.

Factors of Specific Performance:

1. Contract is sufficiently definite
a. Rights and obligations of the parties be specified with
greater definiteness than if it were for just money
damages to allow the court to frame an adequate order
2. Money damages would be inadequate or they would
be impracticable
a. Speculative or hard to calculate damages; may involve
matters of taste or sentiment i.e. contract to sell a work
of art which has sentimental value to the purchaser
b. There is no substitute available; Ex is P having contract
with D for propane for subdivision and D repudiates, P
wins specific performance bc we cant predict the future
of P finding propane bc of the unpredictable world
supply, also evidence P cant find another supplier to
enter into a long term contract
c. Land bc its unique
i. Seller refuses to convey can award specific
performance even buyer has already contracted to
resell
ii. If the buyer breaches specific performance will be
awarded to seller
iii. If the seller has already conveyed then damages
can be awardeddifference in market value.
d. Patents and copyrights; sale of a business; forbearance
(not to compete)
e. Forbearance: damages usually no adequate when
someone says they will not compete
f. Sale of business: unlikely to find a comparable business
3. Enforcement would not require excessive court
supervision
a. Construction contracts usually require thisdifficult to
judge complex work and judge the results
b. Personal service contractsalmost never award specific
performance for this (Goes for both sides of the contract
if employer or employee repudiates)
4. Performance would not create undue hardship to
defendants
B.
Injunctions
a. In employment contracts: courts will not force the
person to work for their employer but will prohibit them
from working for a competitor
b. In order to get an injunction three things must be met:
i. Unique Skills: employer has to show employees
services are unique or extraordinary (either she has a
30

special skill or has acquired special knowledge of the

employers business)usually found for athletes or
stars
ii. Other way to make a living: injunction wont be
granted if it will likely leave the employee without
other reasonable means of making a livingcant
satisfy this if the only alternative is for the employee
to perform the contract
iii. Employers willingness to perform: if there are other
ways to make a living, but its probable that the
employee will choose to just perform the contract,
the employer should be prepared to continue
employment in good faith so that the personal
relations where the enforced continuance is
undesirable.
C.
UCC Approach
a. 2-716: Specific performance can be awarded when the
goods are unique (in terms of the total situation which
characterizes the contract)
i. Rare, sentimental value
ii. Piece of art, family heirloom
b. Just bc the price of an item has risen doesnt mean
anything
c. Even if the goods were not unique, if the party can show
they were not able to cover or find substitute goods within
a reasonable amount of time then they can get specific
performance.
d. Ex: Contract to sell 1933 renovated unique automobile.
Seem that it wouldnt be
able to find it on the market.Could be seen as a unique good.
e. Ex: Contract to sell a corporate jet. Suppose that there are
2 or 3 on the market for saleMonetary damages over
specific performance would be awarded.
f. Ex: Contract to sell a shipment of steel. 5 tons of steel for
$500 a ton. Dramatic shift in market for steel. $500 a ton
to $1200 a ton. Can buyer seek specific performance for
the contract?Doesnt seem like steel isnt available.
Monetary damages should be awarded as opposed to
specific performance.
g. Ex: Contract is between the star pitcher for the Cubs for
the 2009 season and he is going to break the contract to
play for the St. Louis Cardinals. Can they get specific
performance?Courts will not affirmatively issue an
injunction for a personal services contract.
D. Liquidated Damages: Generally has to be a reasonable
amount
31

a. In order for a liquidated damages clause to be enforceable

it must be (1) reasonable in light of the anticipated or
actual loss from the breach AND (2) must be reasonable in
light of the difficulties of proof of loss (has to be uncertain
or difficult to calculate accurately)
i. Large damages that act as a penalty are not
enforceable bc of public policy.
ii. If there turns out to be no actual loss then the
liquidated damages clause will not be enforced
b. How to decide if liquidated damages are a penalty:
i. (1) Amount is reasonable to the extent that it
approximates the actual loss that has resulted from
the particular breach (even though it doesnt
anticipate losses from other types of breach);
according to the anticipated amount at the time of
contracting.
ii. (2) the greater the difficulty in proving the loss has
occurred or of establishing its amount with certainty,
easier it is to show the amount fixed is reasonable.
iii. If there is no loss at all then there a liquidated
damages clause will not be enforced.
c. Damages computed by gross revenues, etc: If
damages are calculated by Ps lost gross revenues, lost
gross profits, or something similar, courts will view it as a
poor estimate of actual losses and deem it unenforceable if
it greatly deviates from actual losses
i. Examples pg 340-341 supplement
E.
City Stores Co. v. Ammermanspecific performance
Facts: D wants to open strip
mall, needs Ps help to write a letter to convince the board for
rezoning; letter proves there was an agreement that if P helped
get the rezoning approved P would get a spot in the mall on
terms at least equal to those granted to other major tenants; D
argues the it is not an option contract bc it is not sufficiently
definite in the terms; Held: P gets the option contract bc there
are other stores in the mall already so that can be used for the
terms of this contract
General
Rule: Even if a contract contains some terms that are subject to
further negotiations, there can still be specific performance
a. D also says it would cause hardship bc they would get
sears in that spot otherwise and that would make them
more money and they can only have 3 dept. stores in the
mallmajority says it would not ruin them so it is not
hardship, D is the one who agreed to only have 3 dept.
stores in the mall so P shouldnt be punished for that

32

b. Court supervision: the fact that there is no other adequate

remedy bc this is a unique piece of property trumps the
notion that there might have to be a lot of court
supervision of the verdict.
F.Reier Broadcasting Co v. Kramer - cant apply specific
performance
Facts: Reier paid Kramer (head coach of
MSU) for exclusive rights to broadcast MSU athletics. Kramer
then gave the rights to another company. Reier says this is a
negative covenantdont want to make them give the rights to
Reier, just want to make them not give the rights to anyone else.
Held: cant enjoin Kramer from performing services w another
company bc then it is essentially forcing them to give the
services to Reir bc they wont have another option.
a. Lumley v. Wagner: Agreed to sing only at Lumleys opera
for a specified time and then went against that and sang at
another. Judge said that he could tell her not to sing at the
one but could not tell her to sing at Lumleys. If she chose
to since at Lumleys instead that was not his fault
G. Barrie School v. Patch liquidated damages
Facts: D enrolled daughter at school; liquidated
damages clause said if they didnt ask for a refund before May
31 they had to pay full tuition. Didnt ask for a refund in time; D
wants down payment back and wont pay remainder of tuition. D
says school had to mitigate by finding another student Held:
liquidated damages is reasonable bc there was no way to find
actual damages and it was not so large to be a penalty; no
reason to find actual damages bc it is a valid liquidated
damages clause therefore not requiring us to consider mitigating
damages. Ds must pay the tuition
General Rule: A
liquidated damages clause means that the non breaching party
does not have the duty to mitigate damages.
a. Barrie Approach: Assessing the liquidated damages
clause should be done at the time of the conclusion of the
contract and not later, only has to be valid at that time
(different than restatement bc R says you can use the
actual losses and how that effects the clause)
b. Assess liquidated damages from barrie approach
and R approach
c. Wassenaar v. Panos: employee had 3 year agreement with
employer and liquidated damages clause stated if
employer breaches, he will still pay the entire financial
obligation. Employee fired with 21 months remaining and
then found a job within 3 months. Clause was upheld,
taking into consideration harm to reputation and emotional
distress
H. Hypos
33

a. Paul makes a down payment and then decides not to buy

can the seller keep the $10k down payment? Paul is the
breaching party but will argue restitution to prevent unjust
enrichment on Sally; she would argue they agreed to
liquidated damagescourt would say that retaining the
$10k would be unreasonable.

34

X. Interpretation of Terms and Misunderstanding

A.

Restatement approach R201: Objective Approach

a. Defined: What a reasonable person would have
interpreted the contract to mean, sometimes neither party
intended the reasonable result.
b. Modified Objective Approach court should answer two
questions: MUTUAL ASSENT
i. Whose meaning controls the interpretation of the
contract?
ii. What was that partys meaning?
iii. Corbin based this on premise that it was absurd for a
court to give a contract a meaning that neither of
the parties intended.
iv. No longer use subjective approach Peerless case
(what parties meant) or objective approach (words
and conduct interpreted by reasonable person
standard)
c. If parties share the same meaning, that meaning prevails
d. A party that knows or has reason to know of the other
partys meaning is held to that meaning
e. If there is no sensible basis for choosing between the
parties conflicting meanings, there may be a failure of
mutual assent if the misunderstanding is material to the
contract.
B.
Omitted Terms supplemented by the court
a. Restatement Approach R204: when the parties have
made it clear they intend to be bound by a contract but
havent agreed to a term that is essential to determine
their rights and duties, a term which is reasonable is
supplied by the court
i. Usually the courts have to add in in good faith
C.Policy:
a. Contra Preferendum: ambiguity in contract terms must
be construed most strongly against the party that drafted
the contract
b. Policy Reasons:
i. Drafter is more likely to have provided for the
protection of his own interests
ii. Likely to have had a reason to know if uncertainties
iii. Could have been deliberately obscure
c. Repeated course of performance is given great weight,
d. Usually try to give a reasonable, lawful meaning to the
interpretation of terms
e. Look to whether they were separately negotiated rather
than standardized terms

35

D.

Joyner v. Adams
Facts: P leased property to Brown. The property was to
be subdivided and the rent would increase over the term of the
lease. Adams would get discounted rent as long as he
developed and divides the property into lot leases. Difference in
meaning of develop and divide the lots. Joyner thinks it means
the lots must have complete buildings and Adams thinks it
means lots must be ready for constructiongraded, w roads,
water, and sewer lines installed.
Held: Remanded to decide whether one or both knew about the
others meaning
General Rule: the rule that an agreement should be
construed most strongly against the party who drafted the
contract applies to contract construction but not contract
interpretation (no indication here who wrote or chose the
language of the contract) (Contra preferendum not applicable)
a. Burgess v. JC Penney Life Insurance Co: Burgess bought a
$100k life insurance policy from JCP. Policy excluded
benefits if the loss (of life) occurred while the covered
persons BAC was .10% or higher. BAC at time of accident
was .12%. BAC at time of death was below .10%. Court
ruled in favor of beneficiaries bc JCP wrote the clause and
they should have written it better.
E.Frigaliment Importing Co v. BNS International Sale Corps
Facts: P (in Switzerland) ordered chickens from NY and
thought they would be broiling and frying chickens but they
were fowls, suitable for stewing. BNS thought they meant any
type of chicken. Evidence considered: express contract terms,
negotiations, trade usage, course of performance (parties
conduct under the contract at issue)
Held: BNS bc Frigaliment did not meet its burden of showing
that trade usage indicates chicken mean broiling ones
General Rule: The party that asserts that there is a
trade usage of a term undefined in the contract has the burden
of proving that the party in the trade had actual knowledge of
the usage or that the usage is so generally known in the
community that his actual individual knowledge of it may be
inferred.
a. Bc the word chicken is ambiguous on its face, the court
allows in evidence of negotiations between the parties
b. Course of performance
c. Hurst v Lake: Steven sells horsemeat to Peter for $50 a
ton. Peter is entitled to a discount if a given shipment is
analyzed at less than 50% protein. Peter gets the
shipment and pays Steven the discounted price and
Steven sues for the difference. Shipment was 49.5%
36

protein. Can Steven bring in trade usage evidence that

49.5% should be rounded up to 50%? Trade usage is
objective evidence;
F. Hypos:
a. I ask Corey to paint my house. I know I have two homes
but he only knows that I have one. I think my home in
Wisconsin and he thinks my home in IL: Corey would
prevail because I know that I have two homes and that I
should specify which one.

37

XI. Parol Evidence Rule

A. Generally
a. Defined: bars the fact finder from considering evidence of
preliminary agreements that are not contained in the final
writing
B. Integration
a. Defined:
b. Partially integrated v. completely integrated: Once
you decide that a document is a final expression of the
agreement (i.e. integrated), you have to decide if it is
partially or completely integrated
i. Partially Integrated: document is not intended by
the parties to include all details of their agreement
1. You cant supplement if it contradicts the
terms of the agreement
ii. Completely Integrated: document is intended by
the parties to include all the details of their
agreement
1. You cant supplement the writing at all.
iii. Judge decides whether it is partially or completely
integrated; first considers all the evidence leading up
to the agreement
iv. If you want to supplement a term, you would argue
that it is ambiguous and needs additional evidence.
v. Ex: Pg 173 supplement
vi. Policy: the final writing should be given greater
weigh since the parties negotiated and came to a
final decision
c. R216: Completely or partially integrated
i. An agreement is not completely integrated if the
writing leaves out a consistent additional agreed
term which is
1. Agreed to for separate consideration OR
2. That type of term in the circumstances would
naturally be omitted from the writing.
C. Parol Evidence Rule Exceptions
a. Interpretation of ambiguous termsif a term is found to be
ambiguous (capable of more than one meaning), evidence
is allowed to clarify, or just to allow the court to interpret
an ambiguous term and not supplement
i. Ex: Pg 184 Supplement
ii. Used to show that the writing is or isnt integrated
this is allowed (completely or partially)
b. Post-contract modifications (statements made after
contract is concluded)

38

c. Oral conditions precedent (parties premise their agreement

on something occurringfinancing condition like in
Crabbys)
d. Contract defenses (mistake, fraud, etccant prevent a
party from trying to prove that there is not a valid contract
at all)
e. Equitable reformation
f. Collateral agreements
g. **PER Doesnt apply to statements made after the written
agreement
D. Exception: Fraud, Mistake or Other Voidability
a. Rule: Even if a contract is completely integrated, a party
can always introduce evidence of earlier oral agreements
to show illegality, fraud, duress, mistake, lack of
consideration or any other fact would make the contract
void or voidable i.e. parol evidence rule doesnt bar
evidence that would show no valid contract exists.
i. Even if there is a merger clause, can still show fraud
ii. Ex: Buyer buys apartment from Seller and contract
has a merger clause. Later Buyer finds out seller lied
about the profitability of the building. PER will not
prevent buyer from showing seller made fraudulent
misrepresentations. (Doesnt matter there was a
merger clause)
b. Collateral agreement supported by separate
consideration: if there is an oral agreement that is
collateral to the main agreement and is supported by
separate consideration, you can show proof of this even if
the contract is completely integrated
i. Ex: A and B, in an integrated writing, promise that A
will sell a car to B. They orally agree that B may
keep the car in As garage for the next year at a rent
of $50 a month. Can show evidence of this oral
agreement despite parol evidence rule bc it has the
$50 a month separate consideration in there.
c. Sherrod v. Morrison
i. Facts: Sherodd was a subcontractor and D (general
Contractor) stated that the job would involve
excavating 25,000 cubic yards. Job based on that
number then P discovered that the job would involve
more than 25,000 cubic yards, but signed the
contract anyway because work had already been
started and D threatened not to compensate P for
the work that had already been performed. P claims
D said he would be paid more. The contract included

39

a provision that it could not be modified by a verbal

agreement.
ii. Holding: Written contract governs
iii. Sherrod Approach: Fraud exception WILL NOT
APPLY if it pertains to a major term of the contract
the statement the plaintiff is trying to introduce is
completely contradicting the agreement. (different
than regular approach)
d. Conditions: If the parties make a condition to
performance or the existence of the contract and then
dont put it in the written contract, courts will allow proof of
the condition despite the PER
E. Contemporaneous and Subsequent Expressions
a. If an oral agreement occurs at the same time as the writing
is signed it proves that the writing was not intended to be a
total integration and would allow evidence of the oral
agreement to supplement (not contradict) the writing.
b. Two documents/Ancillary: If two documents are signed
at the same time they are said to just make one document
c. Subsequent Agreements: a written contract can be
modified afterwards by an oral agreement, parol evidence
rule does not apply to this situation
F. How to decide whether a contract is partially or
completely integrated: Classical vs. Modern Approach to
PER
a. Merger Clause: a clause indicating the writing constitutes
the sole agreement between the parties
i. This conclusively establishes that it is completely
integrated, unless the document is obviously
incomplete or it was included bc of fraud or mistake
ii. If there is no merger clause, then the writing as a
whole should be examined:
1. If, for example, the writing is a lease with no
mention of price or only expresses the duty of
one person, it will be treated as partial
integrationthe consistent additional terms
can be added through oral evidence
2. If, on the other hand, it seems to be a complete
expression of the rights and duties of both
parties, it should be a total integration.
b. Whether a contract is completely integrated:
i. Classical: four corners approachonly look at the
document and decide if it is ambiguousif a
reasonable person would have put the other terms in
or would have left them out. (Thompson)

40

ii. ModernRestatement approach: All extrinsic

evidence is relevant to decide if the parties intended
the document to replace oral agreements
c. Contract Interpretation:
i. Classical: Plain meaning rule: exclude evidence
unless the contract is ambiguous on its face (court
will not hear evidence about parties preliminary
negotiations)
ii. Modern: admit evidence unless it contradicts the
express terms (admissible to reveal if there is a
latent ambiguity) (Taylor)first have to look at the
evidence they want admitted and if it shows
something is ambiguous and if it contradicts
G. UCC Parol Evidence Approach
a. Terms:
i. Merchant: a person who deals in goods of the kind
or otherwise by his occupation holds himself out as
having knowledge or skill peculiar to the practices or
goods involved in the transaction.
ii. Merchant Good Faith: honesty in fact and the
observance of reasonable commercial standards of
fair dealing in the trade.
iii. Good Faith for non merchant: Honesty in fact
b. Defined: A final agreement (Integrated) can never be
contradicted by prior agreements, written or oral or by any
writing that was signed at the same time as the writing
(must show that it supplements and doesnt contradict)
c. HOWEVER, a final agreement can be explained or
supplemented by:
i. Evidence of course of dealing, trade usage, and
course of performance (applies to completely and
partially integrated contracts) and
ii. By evidence of consistent additional terms unless the
court concludes that the writing was intended not
only as a final statement but also as a complete and
exclusive statement of the terms of the agreement
(can only do this if its partially integrated and not
completely integrated.)
d. Course of Performance: a sequence of conduct between
the parties to a transaction that exists if :
i. The agreement of the parties with respect to the
transaction involves repeated occasion of
performance by a party AND
ii. The other party, with knowledge of the nature of the
performance and opportunity for objection to it,
41

e.

f.

g.

h.

i.

accepts the performance or acquiesces in it without

objection.
iii. Defined: refers to the way the parties have
conducted themselves in performing the particular
contract at handhelps to supply evidence as to
what they intended the contract terms to mean.
1. Ex: if the contract calls for repeated deliveries
of highest grade oil, evidence as to the quality
of oil delivered and accepted in the first
installments would be admissible as a course of
performance to help determine whether the oil
delivered in a later installment met the
contracts standard
iv. Policy: Parties best know what they meant by their
words
Course of Dealing: a pattern of performance between the
two parties to the contract with respect to past contracts
i. Only applies to conduct before the agreement, after
or under the agreement is course of performance
Usage of Trade: any practice or method of dealing having
such regularity of observance in a place, vocation, or trade
as to justify an expectation that it will be observed with
respect to the transaction in question.
i. Meaning attached to a particular term in a certain
region or in a certain industry would be admissible.
ii. Existence and scope of usage must be proved as
facts
They cannot contradict each other
i. Express terms prevail of course of performance,
course of dealing and usage of trade
ii. Court of performance prevails over course of dealing
and usage of trade
iii. Course of dealing prevails over usage of trade
iv. Express terms course of performance course of
dealing usage of trade
When those things are barred
i. If a contract specifically bars introducing evidence of
the three things above then they cannot be admitted
i.e. specifically say you need 1000 of something
regardless of what trade usage says.
Nanakuli v. Shell Oil
i. Facts: Nanakuli contracts to buy asphalt from Shell
under a long term contract. Written contract says
the price will be Sellers posted price at time of
delivery. Years later Shell increases its price by 75%
and refuses price protection (locking in prices for
42

orders already placed) Shell has given price

protection on prior occasions. Nanakuli says trade
usage granting price protections should be part of
the contract.
ii. Holding: the trade usage was enough evidence to
only supplement the express term and not swallow it
entirely. If it would have tried to set the exact price
then the express term would have prevailed)
iii. Good Faith Requirement: Shell was bound by the
observance of reasonable commercial standards of
fair dealing in the trade (did not give Nanakuli
advance notice of no price protection)
j. Policy: a standard merger clause is not enough bc course
of performance, etc will still be allowed in. Also cant just
say that course of performance etc wont apply, have to
specifically say which course of performance, or trade
usage will not apply (In Nanakuli had to explicitly say price
protection didnt apply)
H. CISG Parol Evidence Approach
a. Article 8(3): in determining the intent of a party, due
consideration is to be given to all relevant circumstances of
the case including the negotiations, any practices which
the parties have established between themselves, usages
and any subsequent conduct of the parties.
b. MCC-Marble v. DAgostino:
i. Facts: MCC is a US buyer and DAgostino is an Italian
Seller. MCC says they had no intention of being
bound by the terms on the back of the contract and
want to introduce evidence of oral agreement and
DAgostinos reps who can give testimony of this.
ii. Holding: considers the evidence
iii. General Rule: CISG rejects the parol evidence rule
and extrinsic evidence will always be permissible,
only way to allow parol evidence rule is to opt out of
the CISG. (Merger clause still wouldnt have made a
difference bc that is an aspect of the PER)
I. Thompson v. Libby(Classical Approach)
Facts: P owns logs and D
contracted to buy the logs. D says that there was an oral
warranty as to the qualities of the logs and is trying to introduce
evidence to show that there was an oral warranty and says its
not against the parol evidence rule bc it is collateral to the
contract; this case is about supplementing and not contradicting.
This is a completely integrated contractwe only look at the 4
corners at the writingit looks like it covers everything. (no
gaps)
43

Held: parol evidence cannot be admitted to prove there was an

oral warranty bc this is a completely integrated contract
a. Thompson Approach: Classical view: only look to the four
corners of the writing to distinguish if it is completely
integratedif there are not gaps and it all makes sense
then its completely integrated.
b. Merger Clause: language in the contract that states this
is the entire agreement between the parties w respect to
the subject matter of the contract and trumps anything
that may have come before itagreement that it is a
completely integrated contract.
i.
BUT, just bc there is a merger clause doesnt
mean a court will
always say that its completely integrated (when the
parties are not at equal bargaining power or there
are gaps in the document and it is clearly not
integrated)
J. Taylor v. State Farm (Modern approach)
a. Facts: This claim arises from a three-car accident involving
Plaintiff. Defendant is Plaintiffs automobile insurance
provider. Plaintiff received a judgment against him in
excess of his policy limits. Defendant argues that the claim
is barred by a release Plaintiff signed. P says the release
relinquished D from contractual rights and P is bringing a
bad faith suit and that should be allowed.
Holding: court used the modern view and decided, and the
extrinsic evidence was allowed for reasons of
interpretation.
General Rule: Used modern view: to determine the intent
of the parties and the extent of integration in the written
document and looks at all extrinsic evidence, then the
court applies the parol evidence rule to exclude any
extrinsic evidence that varies or contradicts the written
document.
K. Hypos:
a. Sally sells her apartment to Paul for $100k. As they are
talking, Paul notices a stereo system built in to the wall and
asks if that comes with the apartment, Sally makes verbal
promise to throw in the stereo system within the sale. In
writing the verbal promise isnt in there. So is the verbal
promise enforceable? They wrote out and signed the
contract so it is a final agreement. Would the language of
the stereo agreement contradict the contract?
i. If the contract said no fixtures are included in the
contract of sale then it would directly contradict the
contract if the stereo is a type of fixture
44

XII. Implied Terms

A. Restatement Approach
a. Rule: if its a condition that the obligor has to be satisfied
with the obligees performance, and we are able to
determine whether a reasonable person in the position of
the obligor would be satisfied, then we should interpret it
by deciding whether a reasonable person in the position of
the obligor would be satisfied
i. Good Faith: Every contract imposes a good faith
requirement and satisfaction must be in good faith.
ii. Non Merchants: Held to a standard of honesty in
fact
b. Objective Test: When reasonable person standard
applies: when the contract involves commercial quality,
operative fitness, or mechanical utility which other
knowledgeable persons can judge, then the courts will
decide it based on whether a reasonable person would be
satisfied
1. Good Faith: Even under this test, the partys
dissatisfaction must be in good faith, even
though it is unreasonable if he is honestly not
satisfied thats ok
2. If satisfaction depends on a third party, like an
architect, the court will usually take that
opinion as controlling.
3. Fraud, bad faith will excuse the condition.
c. Subjective Test: When the good faith standard
applies: when the contract involves personal aesthetics or
fancy
i. Person is held to a duty of good faith and honesty
1. Ex: to Paint a painting
2. Ex: hire a band to play at your inn, A
occasionally objects when B is absent and a
guitar is substituted for Bs string bass. A says
he is dissatisfied. B has no claim bc it is not
practicable to apply an objective test
d. Employment Contracts
i. Help to decide when an employer may terminate an
employment agreement.
ii. At will employment: most employment is at will,
without a contract specifying length of employment
and does not contain a good faith requirement
1. Either party may terminate employment for
any reason or no reason at all unless:

45

a. Theres an express statement in the as

to termination or duration ( which
wouldnt make it at will anymore)
e. Morin v. Baystone Construction Inc
i. Facts: Baystone subcontracted Morin to erect
aluminum walls and the contract said what is
customary in erecting other buildings does not
matter, approval regarding quality and type of work
done lies within GM. GM rejected the walls, removed
them, hired someone else and didnt pay Morin
ii. Holding: Morin prevails and gets paid, reasonable
person standard applies bc it was not an aesthetic
issuecontract was ambiguous and didnt suggest
approval was subject to aesthetic approval.
iii. General Rule: If common product, then personal
aesthetic isnt applicable, only if specialized or
specific product (art, specific type of marble, photo,
etc).
B. UCC Approach
a. Merchant: Subject to honesty in fact and observance of
reasonable commercial standards of fair dealing in the
trade.
b. Good Faith: Every contract imposes good faith
requirement, UCC/R2d
c. Output or Requirements Contracts: limits contract to
such actual output or requirements as may occur in good
faith
i. Best Efforts: An agreement for exclusive dealing
imposes, unless otherwise agreed, an obligation by
the seller to use best efforts to supply the goods and
by the buyer to use best efforts to promote the sale
1. Buyer cannot buy from another seller while
under the contract.
ii. Output and requirements contracts automatically
instill a good faith and best efforts standard.
iii. Also applies to exclusive dealings contracts
iv. This prohibits a party from doing things to try and
escape the contract
v. What if the market goes up and now they want to
order a whole lot more than they normally order in
an output or requirements contract? Can demand
any quantity that is unreasonably disproportionate to
prior contracts that are similar, prior dealings
become the benchmark.
vi. What if the market shifts so that they dont want to
produce what they normally produce. Can someone
46

make their output zero? Depends on if its done in

good faith, look to what was done in the past.
d. Going out of business:
i. Usually applies to situations like this: a shut down for
lack of orders might be permissible but a shut down
to curtail losses probably wont behave to look at
the good faith.
ii. Severity of Loss: usually the more severe the
financial hardship leading to the shut down, the more
likely it was done in good faith.
1. Lack of profit or small financial loss is not
enough
e. Empire Gas v. American Bakeries (Requirements
Contract)
i. Facts: D entered into a requirements contracts to
purchase their requirements of gas conversion units
from empire. D decided not to purchase any units at
all. P sued D for the estimated cost of the purchase
price of the units.
ii. Holding: $3 mil to empire gas, shifting the quantity
for no good reason was bad faith because D failed to
give the Court any reason at all why they decided not
to purchase any units.
iii. General Rule: U.C.C. 2-306(1) only prevents a buyer
from requesting an unreasonably disproportionate
amount more than was originally contracted for. A
buyer may request less than what was originally
contracted for, or even none at all, so long as the
buyers change in requirements is not done in bad
faith.
f. Wood v. Lucy Reasonable Efforts
i. Facts: D has a reputation in the fashion industry and
made a contract with P to be her manager and sell
out her designs, put stamps on things, she would get
half of all profits and contract would last one year. P
says D put her endorsement on things without telling
him so he is suing for his part of the profits]
ii. Holding: There is a contract bc P promised to pay D
half of profits and revenues and to give monthly
accounts and this was a promise to use reasonable
efforts to bring profits and revenues into existence
and also the court implied Plaintiffs good faith,
reasonable efforts to promote Ds fashion designs
iii. General Rule: mutuality or a return promise may be
implied from the circumstance surrounding the
contract and the nature of the whole writing
47

1. Best efforts as opposed to good faith means

not doing anything to deprive the other party
of reasonable expectations under the contract
implied into output and requirements
contracts.
g. Bloor v. Falstaff (Best Efforts Standard, Exclusive
Dealings)
i. Facts: Ballantine Beer was well known in 60s and
went out of business in late 70s. Sold to Falstaf in
exchange for agreement to pay $4mil plus royalties
(5 cents for every beer sold) and a best efforts
obligation to promote the beer. After 5 years they
changed advertising budget and prices dropped
significantly
ii. Reasoning: there was a breach in the implied term of
using best effortsthey were not acting in a manor
of the efforts of an average comprisable brewery and
the court found the obligation had been violated.
h. Policy Considerations:
i. Seller assumes the risk of a change in the buyers
business that makes continuation of the contract
unduly costly
ii. Buyer assumes the risk of less urgent change in his
circumstances
i. Hypo: Bakery enters into 6 mo. output contract of bread
crumbs for a certain price. Find out they would make more
money by selling the loaves of bread to a dog food
company. If the only reason it shifted its production was to
increase its profit then it is done in bad faith.

48

XIII. Performance and Breach

A. Types of Breaches
a. Partial Breach: breach which entitles one to damages but
does not give the other party the right to suspend
performance of the contract
i. Still can immediately sue for damages from the
partial breach.
b. Material Breach: a breach that is sufficiently severe to
authorize withholding fulfillment of the promise. Have to
give an opportunity to cure.
i. Automatically suspends the other partys obligation
under the contract and they may sue immediately for
damages based on the entire contract
c. Total Breach: breach that has continued to remain
uncured for a sufficient amount of time which would justify
termination of the contractthis is an UNCURED MATERIAL
BREACH
B. Condition: a condition is an event, not certain to occur, which
must occur, unless its nonoccurrence is excused, before
performance under a contract becomes due
a. If language is clear, then must follow what the language
says but if the language is unclear the court is likely to say
the language is a constructive condition rather than a
express condition
C. Express Conditions
a. Made by agreement of the parties and must be strictly
satisfiedsubstantial performance does not come into play
with express conditions
b. Language of express condition: subject to, contingent
upon, if, provided that, on condition that, unless and until,
XYZ shall be a condition to.
c. Intent: if it seems express but they clearly did not want it
to be then you cant enforce that, look to the parties intent
first
d. Oppenheimer v. Oppenheim, Dixon Co Express
Condition
i. Facts: Oppenheimer (obligee) was subleasing space
to OAD (obligor), The agreement contained a
condition stating no contract unless and until notice
is timely delivered to OAD This written consent was
to be received by February 25, 1987. On February 25,
P informed Ds attorney by telephone that the
landlord consented to the tenant work. The landlords
written consent was not received until March 20,
1987. On February 26, D informed P that the
sublease agreement was invalid because the
49

condition requiring written consent was not met. P

brought suit arguing that it had substantially
performed the required conditions.
ii. Holding: complaint dismissed bc this was an express
condition so we dont have to look at whether there
was substantial performance
iii. General Rule: The doctrine of substantial
performance is not available to excuse the failure to
perform an express condition precedent as required
by contract.
e. Maxton Builders v. Lo Galbo
i. Facts: D contracted on August 3 to buy a house, but
included in the contract the condition that if real
estate taxes were found to be above $3500 they
would have the right to cancel the contract upon
written notice to the seller within 3 days. August 4
buyer realized it would be more than $3500 and
buyers attorney called and said D were exercising
option to cancel but the letter didnt get there until
August 9.
ii. Holding: the notice was ineffective bc that was an
express condition and it didnt arrive on time.
f. JNA Realty Corp v. Cross Bay Chelsea
i. Facts: Jan 1964: 10 year lease, paragraph 58 option
to renew for 10 years to Palermo. March 1968:
Palermo sells restaurant to Chelsea and paragraph
58 modified to extend option from 10 to 24 years.
June 1973 Deadline for notice to exercise option.
November 1973: JNA informs Chelsea that lease will
soon expire, Chelsea attempts to exercise option.
ii. Three factors that affect the decision to invoke
equity to enforce the contract: balance of
equities
1. How much forfeiture is there
2. Balance that against the harm JNA is going to
suffer if theyre required to renew the lease
3. Whether the party was innocent in failing to
give notice (did they do it on purpose or was it
really just a negligent accident)
iii. Holding: new trial to decide what kind of harm JNA
would suffer
iv. General Rule: Where a tenant would suffer a
forfeiture, he is entitled to equitable relief where the
default has not prejudiced the landlord and it is a
result of an honest mistake.

50

v. Forfeiture would happen (improvements to building,

money spent for goodwill of business)
vi. No harm to the landlord
vii. Delay in giving notice was due to an honest mistake.
g. Hypo: Sally gives Paul the option to purchase her
apartment, provided that Paul provides written notice by
May 1 of his intent to exercise the option. Paul is 3 days
late with written notice. Can paul argue forfeiture that he
should be excuse of the non occurrence of the condition?
There isnt the same kind of reliance interest in this
situation as in the JNA case. Court would not allow the
forfeiture argument to prevail.
h. Satisfaction Agreements: (same as in implied terms)
i. When there is doubt to whether an objective or
subjective standard will apply, courts presume an
objective standard of reasonable satisfaction.
ii. If a party states that they are dissatisfied not bc they
actually are but just to get out of the contract, it is
not valid under either test (subjective or objective)
i. Hypo: Cross is the owner, Andrew is the general contractor
to build a building. Andrew hires Corey as a sub contractor
to paint the interior units. Contracts has provision saying
Corey has to be paid within 30 days of payment by Cross.
Then Cross goes bankrupt and never ends up paying
Andrew
Answer: this is not an express condition bc the language
is not precise, since there is doubt whether it is an express
condition, the court has to construe it to reduce the risk to
the obligee (Corey; this also just sets a time frame and
doesnt set a conditiondoesnt say unless, if, etc (court
tries to reduce the risk of forfeiture
D. Forfeiture: courts avoid applying the strict compliance rule
where a forfeiture would result; would occur when one party has
relied on the bargain (either by preparing to perform or by
actually making part performance) and insistence on strict
compliance would cause him to fail to receive the expected
benefits
a. R227 (1): In resolving doubts as to whether an event is a
condition, interpretation is preferred that will reduce
obligees risk of forfeiture, unless the event is within the
obligees control or the circumstances indicate that he has
assumed the risk.
b. A court may excuse the non occurrence unless its
occurrence was a material part of the agreed exchange, or
it would cause disproportionate forfeiture.
c. Balancing Test:
51

i. What is the extent of the non compliances

forfeiture?
ii. Was it an honest mistake?
iii. The damage done to the other party (hardship they
would suffer from the forfeiture)?
d. Defective/Substantial Performance: Usually happens
when party 1 performs partly, may be slightly different
than what the contract states, but party 2 benefits from it.
Court will say the condition is met by substantial
performance bc otherwise extreme hardship will result to
the other party (i.e. forfeiture would result)
i. Ex: denial of payment that would result to the
subcontractor bc of the non occurrence of
performance
e. Excuse of Condition: a court may also find that
fulfillment of the condition is excused where extreme
forfeiture would occur
i. R229: if non occurrence of a condition would cause
extreme forfeiture, a court can excuse the non
occurrence unless its occurrence was a material part
of the agreed exchange.
ii. Ex: Usually insurance liability cases: says that you
wont be covered unless you file written notice in ten
days, you give oral notice in ten days written notice
25 days later. Court will excuse the condition
because you let them know.
iii. However, if the person waited 6 months to notify and
destroys the damaged goods, the court will not
excuse it bc it would cause material prejudice to the
insurance cos interest
E. Constructive Conditions (based on substantial
performance)
a. Made by a term supplied by the court and can be satisfied
if only substantially performed (dont need to be strictly
satisfied)
i. Once it is substantially performed then the other
parties obligation becomes due.
b. Obligor: the party whose duty is subject to the express
condition (they put the language in the contract to protect
their own interest.
c. Obligee: the person who is attempting to enforce the
performance and who has to meet the condition for the
other to perform
d. Each partys performance conditional on others:
where each party makes a promise to the other, each
partys substantial performance of his promise is generally
52

a constructive condition to the performance of any

subsequent duties by the other party.
i. Ex: Insurer has agreement with employer covering
employers employees for a year, employer promises
to pay premium on Feb 15 but during the first 6
weeks of coverage insurer rejects 90% of claims filed
by employees without justification. Employer refuses
to pay the premium. Insurers fulfillment of the
promise (i.e. to make payment on claims) is a
constructive condition of employers duty to pay the
premiums. SO, insurer has failed to substantially
perform its promise and employers obligation to pay
does not come due.
ii. Ex: A agrees to paint Bs house, parties agree A must
complete the job before B pays the cost. As
completion of the job is a constructive condition to
Bs duty to pay. If A fails to substantially perform the
job, Bs duty to pay never arises. If A substantially
performs, but his performance deviates slightly from
the agreement, the constructive condition is satisfied
and B would have to pay but would have an action
for breach with respect to the deviation.
e. Order of Performance:
i. Periodic payments or alternative performance:
usually when payments are in installments; each
parties duty is conditioned on the others having
performed the prior duty, becomes important who
was the first to fail
1. Ex: pg 212 supplement: contract to build home
for owner, 1/10 paid each month.
ii. No order of performance agreed upon: Applies
to contracts when someone has to perform services
a party who has to perform work is obligated to
substantially complete that work before he may
receive payments. (unless there is an express or
implied agreement)
1. Ex: paint house, do half want money, unless
there is an agreement about when payment is
due then it is due at the completion of the
project.
f. Substantial performance is about mitigating forfeiture and
there are other waits to do this: interpreting ambiguous
language in a way that factors obligee, doctrine of
prevention, and doctrine of waiver
g. Substantial Performance: it is a constructive condition
of a partys duty of performance that the other party have
53

made a substantial performance i.e. if one party fails to

substantially perform the other partys obligations are not
due.
F. Material Breach: (Substantial Performance
a. Defined: When one party fails to substantially perform
their duty (have to be careful when you are deciding this
bc if you pull out and they havent materially breached
then you could be liable)
i. Essentially the same thing as asking if there is
substantial performance
ii. Important to decide if a breach is material bc if it is
the other party can recover damages but also may
suspend or be discharged from his own obligations
under the contract.
b. Suspension of duty vs. discharge of duty: CURE
i. If a party fails to substantially perform but the
defects in the performance could be fairly easily
cured, the other partys duty to give a return
performance is merely suspended. The defaulting
party then has a chance to cure his defective
performance. If the defect is so substantial that it
cannot be cured within a reasonable time or if the
defaulter fails to take advantage of a chance to cure
it, the other party is then completely discharged from
any duty to perform and may sue for breach.
c. Factors to decide if a breach is material:
i. Overall: the more the breach defeats the entire
purpose of the contract and the expectations of the
non breaching party
ii. Extent of harm caused by breach: extent non
breaching party is deprived of the benefit she
reasonably expected
iii. Extent that damages will make injured party
whole: whether damages may be adequately
calculated, if trying to decide if they should keep the
non breaching party in the contract and just get
damages, if its hard to decide what damages would
be then they would just be discharged from their
duty
iv. Part performance: greater the part performance
which has been done by breaching party, less likely
the breach is material
1. Breach that occurs at beginning is likely to be
material even though its trivial bc breaching
party will suffer no forfeiture in the beginning.
v. Potential of Forefeiture
54

vi. Likelihood of cure of breach: if breaching party

seems likely to be able and willing to find a cure and
complete the rest of the contract, breach is less likely
to be material.
vii. Willfullness of breach/Good faith: willful breach
is more likely to be material (cases where the
breaching party abandons the contract, deliberately
substitutes inferior materials, or acts in bad faith)
1. Ex: Jacobs and Youngs, even if it is a trivial
breach (but intentional) courts will usually
overlook it if there has been substantial
performance.
viii. Delay in Performance: delay in performance is a
material breach only if it operates to significantly
deprive the other party of the benefit of the contract.
1. If there is a slight time delay it wont make it a
material breach unless the contract expressly
says it has to be done by a certain time.
2. Substitute arrangements: if delay is likely to
hinder the non breaching party from making a
substitute arrangements the delay is more
likely to be considered material
a. Ex: actress gets sick, hire another bc
your scared your play will be ruined. IF
you are reasonably in thinking it was
necessary to hire a second actress to
replace, then the breach is material and I
am discharged from the contract
ix. Time: if you are the non breaching party and you
decide to take the non occurrence as a breach to
early then you will breach, if you wait to long then
you will be said to have not mitigated damages, time
is important
d. Jacob and Youngs v. Kent
i. Facts: Wrong pipes put into the house bc of an
oversight but the pipers are essentially the same
besides a different name stamped on them. To redo
the work would have to tear apart the house
ii. Holding: P to be awarded the difference in value of
the house
iii. General Rule: where a contract has been
substantially performed and the cost of replacement
would be grossly out of proportion to the difference
in value, the correct measure of damages is the
difference in value.

55

1. Trivial or immaterial deviations from the

contractual provisions do not amount to failure
of a condition to the other partys duty to
perform.
e. Sackett v. Spindler
i. Facts: Sackett contracted to buy stock from Spindler.
The contract said P was to make three payments due
on specified dates. P made the first payment on time
and the second payment a few days after it was due.
Check for the third had insufficient funds. D gave P
until Sept 29 (opportunity to cure). P failed to make
the payment on time. Oct 4, P told D he was now
ready, eager and willing to complete the
transaction. On October 5, D wrote a letter to P
saying he was not to complete the transaction due to
the Ds delay in performing the contract. Evidence of
non-performance: broken promises to pay, bounced
check payments, etc then okay to repudiate.
ii. Holding: It was a total and material breach, so P got
his money and costs
iii. General Rule: Repudiation of a contract is justified
only where the breaching partys breach constituted
a total or material breach, not merely a partial
breach.
f. Material Breach under UCC: Perfect Tender Rule:
i. As long as a contract doesnt involve installments
(i.e. multiple deliveries), unless otherwise agreed, if
the goods or the tender of delivery fail in any respect
to conform to the contract the buyer may: (a) reject
the whole or (b) accept the whole or (c) accept some
and reject the rest.
ii. Gives buyer the right to reject goods that are
defective in any respect no matter how immaterial
i.e. buyer has the right to cancel the contract and
refuse to pay if the goods deviate from the contract
terms in any respectcourts dont strictly apply it:
must be a substantial defect
iii. What the court looks at:
1. Trade usage, course of dealing, and course of
performance to determine whether tender was
actually defective
2. Did the buyer follow the code procedures for
rejecting a tender
3. Seller has the right to cure the defect, court
may decide the seller cured or was not given
the opportunity to cure.
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iv. Installment contracts:

1. More strict under an installment contract
2. Non conformity bust substantially impair the
value of the installment and CANNOT be cured
3. For a non installment contract if they are
slightly defective
v. Mechanics of Rejection:
1. Time: must be within a reasonable time and
buyer must reasonably notify seller
2. Cant accept first: if buyer accepts the goods
cant reject later (acceptance is when
reasonable time has passed, buyer doesnt
reject, buyer does an act inconsistent with
sellers ownership of the goods)
3. Revoking: once buyer accepts but realizes
there is a defect, buyer can revoke acceptance,
in two situations:
a. Accepted bc he thought it would be cured
and it hasnt been cured
b. Accepted goods without discovering their
nonconformity and acceptance was
reasonably induced by either the
difficulty of discover before acceptance
or by sellers assurances.
c. **only can revoke if the nonconformity
substantially impairs the value of the
goods to him. i.e. must show defect and
also that the defect is significant to the
particular use
vi. Cure: seller must be given the opportunity to cure
if seller reasonably thought the goods would be
accepted by the buyer, OR the buyer would be
satisfied with a money allowance, the seller gets
additional time toe cure after the time under the
contract has passed.
vii. Buyers obligation: has an obligation to hold the
items and make sure nothing happens to themobey
instructions by seller and if no instructions then make
reasonable efforts to sell it.
viii. Hypo: Seller contracts to buy 1000 bushels of corn,
delivery to be made in 10 equal installments, but
payment to be made after all 10 installments have
been made. Seller makes satisfactory delivery on 5
installments but then delivers a badly defective
installment. Buyer has in turn contracted to sell each
installment to X, and C cancels his contract with
57

buyer when he finds out about the defective

installments. Since the defective installment has
substantially impaired the value of the whole
contract for buyer, he may treat the entire contract
as being breached. He doesnt have to accept any
more installments and he doesnt have to make
payment on the contract for the first five
installments. Seller would have to sue to get those
payments for the first 5 installments.
G. Excuse of Conditions:
a. Interpret the contract as being a constructive
condition: if the contract is ambiguous, the court will err
on the side of construing it as constructive to eliminate the
risk of forfeiture.
b. Doctrine of Prevention: if a party wrongfully prevents a
condition the non occurrence of the condition could be
excused and the parties are still liable
i. Ex: T agrees to buy a tract of land for $160k if he can
obtain a zoning variance to use the property for
industrial use. Contract signed and buyer does
nothing---doesnt apply for zoning variance. Buyer
cant walk away bc he didnt get the variance bc he in
bad faith didnt even try to get the variance and has
prevented the condition from occurring
ii. Ex: P agrees to live with D, his uncle, and care for
him until he dies. While P is there D is always drunk
and made it impossible for P to continue living with
him. P can still recover on the contract bc Ds
wrongful conduct, no fault of P, caused the condition
not to occur.
iii. Intent of parties: if one party assumed the risk that
the other might act in such a way, the condition will
not be excused.
1. Ex above: P knew D was an abusive drunk. P
assumed the risk and the non occurrence is not
excused.
iv. Risk that other party will buy all supplies: party
agrees to sell commodities bears the risk that the
market price will go up, including that it will go up bc
of purchases made by the other party
1. Ex: D agrees to supple P with 2600 tons of
iron. P goes and buys a bunch from Ds supplier
making it more expensive for D to get it. D
tries to not perform but he has to bc P didnt do
it on purpose

58

2. Result is different if the buyer knew he was

exhausting sellers sole source of supply
3. More difficult by not impossible: make it
more difficult and not impossible then it is not
excused
a. If it is impossible then the person is
excused, but if it makes it so
impracticable then it is also excused.
c. Doctrine of Waiver: party can choose to waive the non
occurrence of the condition
i. Can occur in three different time settings:
1. Before or at same time as contract is executed:
standard form and parties orally agree during
negotiations a condition will not be enforced
a. Most courts permit proof that a party has
orally agreed not to insist upon a certain
condition if the other party can show he
changed his position in reliance of the
promise (dont apply parol evidence rule)
2. After the contract is executed, but before non
occurrence occurs: Consideration is usually
required bc it modified the contract; there are
some instances consideration was not required:
a. Condition was not a material part of the
bargain: if its not material the waive is
binding without consideration
b. Promissory estoppel: induces other party
to change his position in reliance on the
waiver, then it is binding without
consideration.
c. Side note: Retraction of waiver: no
consideration given and party has not
detrimentally relied, retraction of the
waiver can reinstate the condition.
3. After non occurrence occurs: after condition
has failed to occur the party may choose to
ignore the non occurrence and continue with
his performance (doesnt need consideration or
detrimental reliance)
a. Cant be retracted.
ii. Implied Waiver: two situations can happen
1. Continuation of performance by the person
who would have been benefitted by the
condition
a. Ex: P gives notice to insurance co of loss
but is late so doesnt satisfy condition in
59

contract. D starts making the claim and

then tries to cancel. Cant cancel bc prior
acts waived the condition.
b. NOTE: only implied waiver if the party
voluntarily continues to perform with
knowledge that such performance is not
required (mere fact that the party has
refrained from cancelling the contract
and is waiting for the other party to
attempt to satisfy the condition will not
give rise to waiver)
2. Acceptance of benefits under the contract by
that person
a. Ex: page 234 bottom of page
iii. Damages: Just because you waive a condition
doesnt mean you cant sue for breach, you can sue
later of the non occurrence is a breach or you can not
waive the condition, terminate the contract and sue
for total breach.

60

XIV. Anticipatory Repudiation

a. Defined: a party indicated that he will later refuse to perform
or does not intend to perform; if he indicates that he would
like to perform but will be unable to, that is not an
anticipatory repudiation, but the other party can still choose
to not perform.
iv. A party can bring a suit for breach before the
repudiators time for performance has arrived
b. Constructive Condition: it is technically a constructive
condition of each partys duty of performance that the other
party not manifest a prospective inability or unwillingness to
perform.
c. Insolvency or financial inability: this is an anticipatory
repudiation and the other party can stop performance
v. Ex: artist is painting a painting for T. finds out T is
going bankrupt and probably wont be able to pay.
Artist can stop painting.
vi. Cancellation v. Suspension:
1. Party can cancel, not merely suspend.
2. If the party does not cancel then the repudiator
has the right to retract his repudiation.
d. Hochster v. De La Tour:
vii. Facts: service contract between employer and
employee, contract to start June 1, on May 11
employer said he would not perform. May 22
employee brought action for breach.
viii. Holding: This suit was allowed, Allows the non
breaching party to treat it as a total breach.
Reasoning was that immediate suit had to take place
so plaintiff didnt have to cancel the contract himself
or give up his own rights.
ix. View Now: Courts do allow plaintiff to sue before the
time of performance has arrived
1. Courts want to try the matter promptly while
memories are fresh and witnesses are
available.
2. Aggrieved party needs to know right way if
there was a repudiation: they can then either
continue to perform or make substitute
arrangements.
3. Policy Arguments
a. Good: Facilitates mitigation (earlier
search of employment)
b. Bad: Gives her more than she k'ed for
(b/c it has not even happened yet)
e. What constitutes a repudiation:
61

x. Any statement which is reasonably interpreted by the

obligee to mean that the obligor will not or cannot
perform his duty
1. Statement by the promisor that he intend not
to perform
2. Action by the promisor making his performance
under the contract impossible
3. Indication by the promisor or via some other
means that the promisor will be unable to
perform, although he desires to perform.
xi. Statement: statement must appear that the
promisor is quite unlikely to perform either bc he
doesnt want to or bc he cant.
f. Truman Flatt v. Schupf
xii. Facts: Flatt entered into a land contract with Schupf
to purchase a parcel of land at a price of $160,000.
The contract provided that it was contingent upon
the buyer obtaining permission from the City Counsel
to construct and operate an asphalt plant. P sent a
letter to D stating he was withdrawing his zoning
request bc it seemed clear that the City Counsel
would not approve it. P asked D if he would be willing
to sell the property for a reduced amount, since P
believed the property was worth less as it was
currently zoned. D rejected this offer. P responded
that it planned to proceed with the purchase in
accordance with the original terms of the contract. D
contended that Ps failure to waive the zoning
requirement and to elect to proceed under the
contract when the rezoning was denied, along with
the Plaintiffs modified offer was a repudiation The P
filed suit seeking specific performance. The D moved
for summary judgment, which was granted on the
ground that the P effectively repudiated the contract.
xiii. Holding: D didnt change position (did not sell the
property to another party, nor did it even discuss
selling the property to another party) Also, D never
indicated to P that it was treating the contract as
rescinded until after the Plaintiff revoked its
repudiation. Further, the court reasoned that even if
P had repudiated the contract, he successfully
retracted it bc repudiation is timely retracted if it is
retracted prior to the aggrieved partys changing
position in reliance on the repudiation or if it is
retracted before the aggrieved party indicates to the

62

repudiating party that it is considers the repudiation

to be final.
xiv. General Rule: Repudiation must be clear and
unequivocal; A party may retract their repudiation
unless the other party materially changed position in
reliance on this repudiation or the other party
indicates that he considers the repudiation to be
final.
g. Not enough to explain vague doubts about willingness or
ability to perform.
h. Conduct: Sometimes language coupled with conduct is
enough to show unwillingness to perform
xv. Ex: vendor in a land contract can be held to have
repudiated where he expressed uncertainty about
whether he was willing to perform and also solicited
offers from other potential vendees.
i. Promisee: the repudiation has to be made to the promisee
and not some third party.
j. Propose new terms: request for greater performance that
that provided for in the contract is repudiation when under a
fair reading it amounts to a statement of intention to not
perform except on conditions which go beyond the contract.
k. Voluntary acts which make performance impossible: if
promisor commits an act which renders performance
impossible the vendee can immediately sue for breach.
xvi. The act must be voluntary and must make it
impossible, not just more difficult.
l. Prospective inability to perform: if it appears the promisor
cant perform but he desires to, if the inability to perform is
obvious, courts will say it is an anticipatory repudiation.
xvii. Promisee may suspend performance and also sue for
breach.
m.MATERIAL Breach: if a party cant perform it would have to
amount to a material breach and not just a partial breach in
order to be an anticipatory repudiation.
H. UCC 2-609 Assurances: when it is not clear whether it is a
repudiation, the other party has the right to demand assurances
from the other partyif that party fails to provide the assurances
it is seen as a repudiation and the other party may cancel.
a. Rule: authorizes one party, upon reasonable grounds for
insecurity, to demand adequate assurance of due
performance and until he receives such assurance he may
suspend his performance.
b. Between merchants the reasonableness of grounds for
insecurity and adequacy of assurance shall be determined
according to commercial standards.
63

c. Acceptance of improper delivery or payment doesnt

prejudice the aggrieved party to demand for assurances
later.
d. After asking for assurances other party has 30 days to
provide them
e. NOTE: courts are liberal in enforcing the writing
requirement.
f. Situations where its applicable: Examples that give
reasonable grounds for insecurities
i. Buyer fell behind in payment to seller, even though
the items for which she owes are part of contracts
completely separate form the one in question
ii. Seller under a contract for precision parts makes
defective deliveries of the same kinds of parts to
other customers and buyer finds out about these
defective shipments.
iii. Manufacturer gives a dealer an exclusive franchise
for the sale of his product, but breaches by selling
through other dealers in other isolated situations,
even though there is no default in orders, deliveries
or payments.
iv. Buyer under a contract for sale of real estate learns
the seller does not have present title to the property
and there is no indication that the seller has a
reasonable prospect of gaining title by the closing
date.
g. What you are allowed to do when you have
insecurities:
i. Suspend performance
ii. Ask for assurances
iii. If not met, can treat the contract as cancelled.
h. New Facts: a party who is demanding assurances has to
find something out that is the basis for the insecurity; cant
just do it based on second thoughts hes been having the
whole time.
i. Refusal to give assurances: if person doesnt provide
assurances then the contract is said to be repudiated.
i. Have 30 days to give assurances
j. What is adequate Assurance:
i. To be determined according to commercial standards
(at least where it is between merchants)
ii. Ask for an insane type of assurance and indicate that
you will not perform unless that happens, then that is
a repudiation on your part.
iii. Can also ask for assurances after performance has
begun.
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iv. Acceptance of any improper delivery or payment

does not prejudice the aggrieved party's right to
demand adequate assurance of future performance.
v. Ex: Where buyer can make use of a defective
delivery, a mere promise by a seller of good repute
that he is giving the matter his attention and that the
defect will not be repeated, is normally sufficient.
Under the same circumstances, however, a similar
statement by a known corner-cutter might well be
considered insufficient without the posting of a
guaranty or, if so demanded by the buyer, a speedy
replacement of the delivery involved
vi. Ex: By the same token where a delivery has defects,
even though easily curable, which interfere with easy
use by the buyer, no verbal assurance can be
deemed adequate which is not accompanied by
replacement, repair, money-allowance, or other
commercially reasonable cure.
k. Rule: a justified demand + silence = repudiation
i. Protects the interest of buyer (Peter)
ii. The essential purpose of a contract between
commercial men is actual performance and they do
not bargain merely for a promise, or for a promise
plus the right to win a lawsuit
l. Hornell Brewing v. Spry
i. Facts: Hornell granted Spry an exclusive right to
distribute Ps iced tea beverages in Canada. D kept
giving payments late. P asked D to show him a line of
credit as assurance. Kept paying late, then made one
payment and asked for over $300k in merchandise.
Meanwhile, P learned Ds company was essentially a
sham. P informed D he would not ship any more
goods until they received a letter confirming the
existence of Ds line of credit. D did not respond, nor
did it send P a copy of its credit agreement. P
brought action, seeking a declaratory judgment
terminating all contractual obligations.
ii. Holding: By not providing assurances, Spry
repudiated
iii. Reasonable grounds for insecurities: past defaults of
payment and inability to perform, rumors that
operation was a sham, asked for excessive amounts
of goods, history of defaults
iv. General Rule: One party may demand assurances
from another when there are reasonable grounds for

65

insecurity and the demanding party may suspend

their performance until they receive such assurances
1. **Note: if there is just a rumor and nothing
else, there are no grounds for demand for
assurances.

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XV. Impossibility, Impracticability, Frustration

A. Generally:
a. Defined: When something renders performance
impossible, the persons are not liable and it is not a breach
b. The parties can contract and say even if it becomes
impracticable the other person is still liable for breach
have to look whether the person expressly or impliedly
assumed an absolute duty
c. Doesnt include mere market shifts or financial inability
d. Impracticability Elements:
i. Performance is made impracticable
ii. By the occurrence of an event, the non occurrence of
which was a basic assumption of the contract
iii. Not related to the fault of either party
iv. Party seeking excuse does not bear the risk of the
event
v. (Essentially saying: event occurred after contract was
made, event was a basic assumption when contract
was made, event was not the fault of the party
seeking discharge, language dont dictate discharge
should be denied)
e. Where this usually applies:
i. Destruction of a specific thing necessary to
performance
1. If it is not the main part of the contract then it
will only be partially discharged.
ii. Death or incapacity of a person necessary for
performance
1. Make sure the contract is dependent on that
particular person performingusually has to be
personal service (to pay money usually)
2. Threat of illness or death: can be
discharged if you reasonable think you are
getting ill or going to die
iii. Prohibition or prevention by law
1. IF performance at time of contract is illegal,
neither party is required to perform
2. Also applies if the law changes after the
contract is made
3. Court order or injunction resulting from fault of
the party is not an excuse
iv. Usually acts of god or acts of third parties.
B. Bring in Lukaszewski: whether the high blood pressure was
really an impediment to her performing or was it an excuse for
her to get out of the contract.
C. Transatlantic Case:
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a. Facts: Contract between Trans (carrier of shipping vessel)

and the US. Sell shipment of wheat to buyer in Iran,
contract with Trans to take the wheat from texas to Iran.
Trans would get paid over $300k to transport the wheat.
After contract was concluded while Trans was making its
way to Iran, war erupted between Egypt and Israel and
Egypt closed the canal that was customary to transport
wheat to Iran. Trans said it was impracticable to complete
the contract but they should still be paid bc they made the
trip over there.
b. Must ask: was it a basic assumption of the contract that
Trans had to take that particular canal or that remain open?
Who should bear the risk of this event?
c. The parties contracted when they knew there was a risk of
war, US paid a higher price than would have been the
going rate, nothing said they had to use that canal so it all
suggests the risk was allocated to Trans
D. Subjective vs. Objective Impracticability
a. Subjective: I cannot do it
i. Usually cant use the defense for this
ii. Party goes bankrupt and is not excused
iii. Partys employees go on strike
b. Objective: the thing cannot be done
E. Contracts to build things
a. GOOD General Rule: In construction cases, building
repair cases, and contracts for the sale of goods, if
property which the performing party expected to use is
destroyed, that party is discharged only if the destroyed
property was specifically referred to in the contract or at
least understood by both parties to be the property that
would be used (not enough that the party just intended to
use it)
b. Contract to build structure from scratch: almost done
and it falls down, usually have to build it again, not
discharged
c. Building Renovation: burns down when just renovating
then discharged
F. UCC Approach
a. Delay in delivery or non delivery is not a breach of sellers
duty under a contract for sale if performance has been
made impracticable by the occurrence of a contingency the
non occurrence of which was a basic assumption on which
the contract was made
b. NOTE: have to look at what the parties contemplated; only
applies to seller and not buyer

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c. ALSO not a breach if breaches by compliance in good faith

with any applicable foreign or domestic governmental
regulation or order whether or not it later proves to be
invalid
d. Ways Subject matter can be destroyed:
i. Seller means of obtaining or producing goods may be
destroyed or unavailable
ii. Contract may call for the sale of particular
identifiable goods which are destroyed after the
contract was made
iii. Contract may not refer to specific, unique goods, but
instead call for any conforming goods that the seller
wishes to take out of his inventory (loss may occur
before they are shipped, during shipment or after
delivery)
e. Things that arent a justification:
i. Increased cost alone is not enough unless the rise in
cost is due to some unforeseen contingency which
alters the essential nature of the performance.
ii. Rise or collapse in the market itself (unless its a
shortage due to war, crop failure shutdown of major
supply which causess increase in cost or prevents
seller from securing supplies altogether)
f. Failure of source of supply: if contract makes it clear
the parties agreed the goods would be procured by the
seller from a specific source, failure of production by that
source is excused (if seller is excused bc of the failure of
his source, buyer has right to sue supplier)
i. Key: Look to whether one party assumed the risk of
the supplier, if they didnt they are not excused. If
the contract specifically says it will come from
another supplier then they did not assume the risk.
g. Failure of Production: if parties contemplate that seller
will produce goods herself and her means of doing so are
destroyed by factors beyond her control, she is discharged.
h. Partial Failure: only effects part of the capacity to
perform, seller may give the buyer only a portion of the
goods as long as he is allocating the goods among his
various customers in a reasonable manner.
i. Destruction of identified goods (without fault to
either party)
i. Where the risk of loss has not passed: if casualty
occurs before the risk of loss passes to the buyer, the
contract is avoided if the loss is total
ii. Where risk of loss has passed to the buyer: if
casualty occurs after risk of lass has passed the
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buyer must suffer the full effect of the loss i.e. liable
to seller for full contract price
iii. Partial Loss: if goods are only partially lost and risk of
loss hasnt passed to the buyer, the buyer can
inspect the goods and has a choice between either
cancelling or accepting the goods with a discount for
the bad parts.
j. Ex: Franks enter in a contract with Grocery store to sell
them his annual output of tomatoes as of Sept 1, after the
contract is concluded there is a drought and his tomato
crop dies.
i. Look to the same UCC factors
ii. Where you have a sale of goods contract that refers
to specific goods and where those goods have been
destroyed due to no fault of the seller, the contract
can be rescindedgoods have to be rescinded at the
time of contract and have to be destroyed before
delivery.
iii. Has to be a specific good to apply, not just tomatoes
k. Ex: Steven agrees to sell his monthly output of dog food to
peter and peter makes an agreement with a store to sell
100 crates of dog food per month to Petco. Stevens factory
is destroyed by fire. Does that excuse Peters obligation
with his contract under petco.
i. Depends on whether peters contract with Petco
specifically stated he would sell them 100 crates of
Stevens dog food.
G. Impracticability:
a. Impossibility is when the performance is literally not
possible, in impracticability it is extremely costly, time
consuming or otherwise impracticable. (extreme
impracticability is impossibility usually)
b. Cost Increase: It must be EXTREME
c. Foreseeability: the more foreseeable the risk, the less
likely it is that the parties intended the buyer of the goods
or services would bear the risk of a large cost increase
i. Fixed price contract: parties agree on a fixed price in
a contract but the rise in market price was
foreseeable then the court will say the implicitly
allocated the risk of the price rise on the party
agreeing to supply the good or service.
H. Frustration of Purpose:
a. Defined: after a contract is made and a partys principal
purpose in entering into the contract is substantially
frustrated without his fault by the non occurrence of an
event that was a basic assumption of the contract, his
70

remaining duties are discharged unless the language or

circumstances indicate contrary.
i. Frustration must be substantialmust be so severe it
is not fairly to be regarded as within the risks he
assumed under the contract.
ii. Would make the transaction make little or no sense
b. Questions to ask:
i. Has the principal purpose of the contract been
substantially frustrated?
ii. Was it a basic assumption of the parties at the time
of contracting?
iii. Was either party at fault?
iv. Does it allocate the risk i.e. does it say who should
bear the burden of the risk?
c. Restatement focuses on the allocation of riskshave to
look at what the parties intended and how the intended to
allocate risk of a particular event
i. Ex: D a contractor contracts with Mass to resurface
some roads. P subcontracts with D tp supple
concrete medians. Partway through, a citizens group
sues Mass to stop the replacement of grass median
strips with concrete medians. Mass settles by
agreeing to not install additional concrete barriers. P
has produced half of the barriers before stopping
production and has been paid by D for all barriers
produced to date. P sues D for its lost profits on the
remaining barriers under contract. Ds performance
is excused bc even though the parties knew Mass
had the right under the contract with D to cancel part
of the project, there was evidence that the parties
did not contemplate the cancellation of a major
portion of the project and did not allocate the risk of
that situation. And didnt allocate the risk to D.
d. Factors to consider:
i. Was the event foreseeable when the contract was
made--the less foreseeable the event the more likely
the court is to excuse performance under this
doctrine
ii. Did the parties allocate the risk to the promisorif
the parties implicitly allocated the risk, the court will
not excuse performance
iii. Whether the event deprived of all (as opposed to just
some) of his anticipated benefit from the contract
the more complete the benefit was thwarted, the
more likely the court is to excuse

71

Karl

iv. Whether the party seeking discharge was at fault in

bringing about the eventmajor fault will not
discharge
e. Ex: D leases property from P to run a car dealership and
gas station. Right after US enters World War II and
government restricts sale of new cars. P waives a lease
restriction allowing D to use the premises for anything he
wants. D declines alternative use of the property and tries
to claim frustration. Cannot claim frustration bc it was
foreseeable the US might enter war at that time, He could
still sell cars just had to be limited and he could use the
premises for any other business.
f. Ex: D rents apartment for two days to watch the
coronation of the king. King gets sick so its cancelled. D is
excused from performance bc his purpose was to just see
the coronation
Wendt v. International Harvester
Facts: Wendt was to be the exclusive dealer of IH goods in
Marlette, Michiganagreement had condition for termination
upon occurrence of certain condition. IH negotiated to sell farm
equipment to Case and Case did not offer Wendt a franchise
anymore. IH says the contract is impracticable bc they suffered
tremendous losses bc of the downfall in the farm equipment
market
Majority: IH should bear the risk of this event bc they are a
fortune 500 company and they would be able to better protect
against a downturn in the market, in comparison with wendt who
is a small company.
o Neither party was at fault
o Neither assumed that the market would take a fall
Frustration of Purpose: The downturn in the market didnt
frustrate the primary purpose of the agreementstill possible to
fulfill.
General Rule: Mere economic loss is not sufficient to excuse
performance on grounds of impracticability or frustration of
purpose.

Mel Frank Tool v. Di-Chem Co

Facts: Di chem is a chemical distributor and leased facility from
Mel Frank. Contract said Di chem had to comply with all city
ordinances. Fire chief told Di they didnt comply with hazardous
waste ordinances and had to remove in 7 days. Di tried to break
the contract bc they didnt want to fix the stuff. Evidence shows
the ordinance was changed after the lease agreement.
For Frustration duty is discharged if three things are met:
72

o Purpose that is frustrated is the principal purpose of the

party making the contract
o Frustration must be substantial
o Nonoccurrence of the event must have been a basic
assumption on which the contract was made
Conklin case: lease said they would use premises for iron,
metal and rag business. Month later statute was passed saying
cant store rags in that building. They had other purposes like
metal and iron. So this was not frustration
This case: DC doesnt just store hazardous waste, they make
other products so there is no frustration of purpose
General Rule: Tenant is not relieved from his obligation to pay
rent if there is a serviceable use still available that is constituent
with the use provision in the leasejust bc its less valuable or
profitable or even unprofitable doesnt mean that the tenants
use has been substantially frustrated.
o A contract may only be avoided under the idea of
frustration of purpose when an obligees entire purpose for
entering into the contract is frustrated.
o There was a force majeur clause but it only related to fire.
Force Mejeur Clause: frees both parties from liability or
obligation when an extraordinary event or circumstance beyond
the control of the parties, such as a war, strike, riot, crime, or an
event described by the legal term act of God (such as hurricane,
flooding, earthquake, volcanic eruption, etc.), prevents one or
both parties from fulfilling their obligations under the contract. In
practice, most force majeure clauses do not excuse a party's
non-performance entirely, but only suspends it for the duration of
the force majeure.
o Mike enters into Ace Sign to get sign completed by April
1st. Include a Force Majeure Clause: performance excused
in event of "strikes, fires, floods, earthquakes, acts of God,
war or other events beyond Ace's control." Ace cant get
sign done on time b/c metal worker is in hospital. Can Mike
sue for damages when he has to go out to get another
group to do the sign.
o Would this event fall w/in the language of this clause? No
b/c not type of event in clause
o Would UCC-2-613 qualify (No b/c destruction of goods)

73

XVI. Third Party Rights

A. Restatement: allows a third party to recover if she falls into the
class of intended beneficiaries. If she is an incidental beneficiary
she may not sue
a. Intended Beneficiary: giving him the right to sue would
be appropriate to effectuate the intentions of the parties. If
he meets this test he must fall into one of the next
categories:
i. Payment of Money: either the performance of the
promise will satisfy an obligation of the promisee to
pay money to the beneficiary (3rd party is a creditor
beneficiary) Or
ii. Intended Benefit: the circumstances indicate the
promisee intends to give the beneficiary the benefit
of the promised performance. (3rd party is a donee
beneficiary)
b. Incidental Beneficiary: a person that is not allowed to
sue
i. Ex: B contracts with A to erect an expensive building
on As land. Cs adjoining land would be enhanced in
value by the performance of the contract. C is an
incidental beneficiary
ii. Ex: B contracts with A to buy a new car
manufactured by C. C is an incidental beneficiary
even though the promise can only be performed if
money is paid to C.
c. Factors to determine who is an intended
beneficiary: Ask yourself whether the promisee intended
that the third party have the benefit of the contract
i. Reliance: if the beneficiary would be reasonable in
relying on the contract as having been intended to
confer a right on her
ii. To whom performance runs: if performance is to
run directly form the promisor to the third party, the
third party is usually an intended beneficiary. If the
performance is to run from the promisor to promisee,
and the third partys benefit will only be indirect, he
is probably incidental.
iii. Ex: Bank promises to give borrower a loan so he can
pay back his creditor C. Banks performance is
directly to borrower, C is incidental. But if Bank gives
the loan and pays C directly, C is intended.
iv. Carrying out parties intentions: a beneficiary
may be an intended one even if helping the
beneficiary was not the primary intent of the parties,

74

as long as giving him these benefits was a part of the

parties overall objective.
B. Lawrence v. Fox: A loaned money to B and B later made a
similar loan to C who promised B that he would make repayment
to A. C did not keep that promise and A sued C for the amount of
the promised payment. Court let the cause of action lie. This
was allowed.
Vogan v. Hayes Appraisal
Facts: Vogans got loan from Mid America to build a house, hayes
was supposed to appraise the work being done and decide when
the money would be dispersed to the contractor. Made
inaccurate appraisals and dispersed money to the contractor and
then had to pay more money to finish the house.
Majority: contract gave Hayes reason to know that the benefit
was contemplated by mid America as motivation the contract
said names of vogans, their address, gave Hayes reason to know
was to provide Vogans with some protection for the money they
invested
Conclusion: The vogans are third party beneficiaries.
Even though the other funds ($170k) had already been
dispersed, the bad reporting of the projects completion (90%)
caused the bank to disperse more funds that would have been
retained if the report was accurate
o SO the faulty reports were the cause of injury
Hadley rule is limit damages to what is reasonably foreseeable; it
was foreseeable that by giving inaccurate reports would cause
more money to be put into the project.
o SO the Vogans recovery does not violate the Hadley rule.
General Rule: Third party beneficiary can recover damages
when a party in breach has reason to know that the beneficiary
will be harmed by their negligence
Hypo: Engineer was negligent in putting in sewage disposal
system
o Test under Vogan: must show that the engineer knew or
had reason to know the developer intended to benefit
Vogan.
Identity of third party wasnt even known at this
point
o Stricter Dual Intent Test: Would have to show both
parties intended to benefit the third party.
Would fail because engineer doesnt intent to benefit
ogans
This test does pass above hypo bc it would be hard
to argue that they didnt both know that L would
benefit.
75

Hypo: Will Drafting

o Hired attorney to prepare will to bequest niece Lauren $50k
o If use vogan test must prove attorney knew or had reason
to know intended to benefit niece
o Does performance run directly to the beneficiary? No not
directly to the niece, but promise is to write a will not to
leave a bequest so performance does not run directly to
benefit the niece. (3rd party)
o Majority of courts have allowed standing on public policy: if
dont allow standing executor would be only one in position
to enforce the contract (risk of under enforcement)
o Policy argument for strict enforcement: prevents open
ended liability for promisor.

76

XVII: Assignment and Delegation

A. Two concepts
a. Assignment of Rights: a party to an existing contract
transfers their rights under the contract this is an
assignment
i. R2d defined: manifestation of assignors intention to
transfer his right to performance, his right is
extinguished and passes to assignee.
1. Like passing a football
2. Is always allowed if its just assigning the right
of payment
3. Freely assignable unless has a material adverse
affect on obligor or public policy is contradicted
ii. Can be assigned unless:
1. It would change the duties of the obligor
a. Usually when there is a special
relationship between the original parties
2. Increase the burden or risk imposed on the
other party
a. Can happen even if the risk is different
3. Impair his chance of obtaining return
performance
4. Materially reduce its value to him
5. The assignment is forbidden by statute
6. Inoperative on grounds of public policy
7. Assignment is validly precluded by the contract
iii. Cant make a future assignment , that would just be a
contract
iv. Once assignor assigns their interest they no longer
have rights under the contract.
v. Assignments dont have to be in writing
b. Delegation of Duties: an existing party to the contract
appoints a third person to perform his duties under the
contract this is a delegation
i. After the contract is made so its different than third
party beneficiaries
ii. Like passing on a cold,
iii. When you delegate you still have the obligation; if
delegatee fails to perform the original party must do
it.
iv. Rule: a duty can be delegated unless the delegation
is contrary to public policy or the terms of the
contract
1. Unless otherwise agreed, a contract requires
performance by a particular person only if the

77

obligee has a substantial interest in having that

person perform the duty
c. History: law favors free assignability of contract rights bc
it greases a wheel of commerce
B. UCC Approach
a. Assignment: All rights can be assigned unless:
i. The assignment would materially change the duty of
the other party
ii. Materially increase the burden or risk imposed on
him by his contract
iii. Materially impair his chance of obtaining return
performance
iv. NOTE: creation, attachment, or enforcement of a
security interest in the sellers interest under a
contract is not a transfer that materially changes
anything. Unless enforcement actually results in a
delegation of material performance of the seller.
Even then the enforcement will remain effective and
seller is liable for damages caused by the delegation
to the extent that the damages could not reasonable
be prevented by the buyer.
v. Usually if the person owes money its always allowed.
vi. Clause prohibiting assignability: usually allowed
with a few exceptions:
1. If a party has a claim for total breach they can
assign this claim even if the contract prohibits
it
2.
C. Sally Beauty v. Nexxus Products
a. Facts: Best made agreement with Nexxus for a distribution
agreement; Best was then merged into Sally; sally is
owned by Alberto Culver who is also a distributor and
competitor of Nexxus. Nexxus told Sally they cant sell
their products anymore.
b. Nexxus: This was a contract for personal services based
on a relationship of personal trust and confidence between
the families of the two companiesthe company could not
be assigned to Sally without Nexxus consent.
c. Majority: the UCC governs and the assignment of the
contract by best to sally is barred by the UCC rules on
delegation and performance
Doesnt make any sense that we would rely on Sally
to make their best efforts when they are owned by
the main competitor of Nexxus
That would not preserve the bargain that NExxus
made
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d. General Rule: A contract is assignable except when there

is some reason why the non-assigning party would find
performance by the other party unsatisfactory.
D. Hypo: Frank has a contractor to sell tomatoes and the store is
going to buy them. He has a right to payment and a duty to
deliver tomatoes. Grocery stores duties are opposite this.

79