Contracts Outline

Introduction: The Purpose of Contract Law

a. Contract – A promise or a set of promises that the law chooses to enforce.
1. §1: Promise: a manifestation of intention to act or refrain from acting in a specified way, so
made as to justify a promisee in understanding that a commitment has been made.
 K = A promise that someone makes w/ expectation that if they breach it the other party
can get $ damages.
b. As a society, we want people to make and rely on promises.
c. Four basic functions that the rules and doctrines of contract law serve:
1. Initial sorting problem: Which promises will be enforced?
 Objective theory of contract, consideration, promissory estoppel, material benefit
2. Gap-filling function: Contracts often lack terms. Default rules are provided for terms that are
not expressly stipulated. Important when circumstances change. Who should bear the risk?
Default rules can either be what the majority of parties would want, or they can be
inconvenient, so as to encourage specific contracting.
 Mistake, excuse, impossibility
3. Provides rules for determining the meaning of the promises made: Contract terms can often be
ambiguous, so the court must rely on contract rules to determine what the parties meant.
 Parole evidence rule, interpretation of language, customary understanding
4. Setting limits on opting out of default rules: Which rules are so fundamental that they must be
default, and which can be negotiated around? Contract rules define the outer boundaries of
acceptable bargaining behavior and outcomes, and deny enforcement of agreements that fall
outside of these bounds.
 Doctrines of duress, fraud, unconscionability
d. Three theories underlying how people look at contracts:
1. Autonomy/morality: People have the right to contract freely. Promises reflect your intentions.
Requires enforcement of promises made by fully autonomous individuals.
2. Efficiency/Instrumental: Will the enforcement of this promise increase social welfare? Enforce
promises only when enforcement will increase beneficial reliance in future promises without
causing a decrease in promising.
3. Reliance: If you make promises, others rely on your promise. If you breech your promise, it is
wasteful of their reliance.
e. Four Basic Rationales of Contractual Liability:
1. The desire to protect private autonomy/“freedom to contract”: Individuals have the power to
change legal relationships.
2. Desire of a capitalist system as a whole to promote the exchange of goods & services
3. Reliance should be protected so that a party is compensated for hardships that result when a
promisee changes his position in reliance on a promise that’s been breached.
4. The legal system should guard against unjust enrichment
o These four principles  a workable, predictable structure of contract enforcement.
 The UCC: Sale: (1) title must pass from seller to buyer [leases aren’t sales] and (2) buyer must pay, not
necessarily in money. Goods: movable things; not money, real property, or intangible rights, e.g.,
insurance policy.
o If the seller’s labor is entirely employed in the creation of a tangible, movable end-product that
is sold, the transaction is a sale of good, e.g., hiring someone to create a marble sculpture.
o Guiding principle of UCC: Business ppl can’t be expected to follow legal formalism. When there
is a basic agmt, failure to articulate that agmt in the precise language of a lawyer won’t prevent
formation of a K.

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The Bargain Context: Requirements of a Valid Contract
A. Introduction
i. Formation of a contract requires:
a. A manifestation of mutual assent to the exchange
1) Demonstrated by offer & acceptance
a. Default rule: offer by one party then acceptance by the other
b. Consideration
1) Mutuality of obligation: Each party must either promise or perform
(full/part)
2) Special rules §82-94
c. No defenses

ii. Default Rules: Rules provided by the court to fill in gaps in the parties’ K
a. What most ppl would want in the situation
1) Attempt to facilitate the parties’ own contractual arrangement
2) Economically efficient–lowers transaction costs, so more parties will
contract. Most parties will be fine w/ default rule, so they will leave gap.
3) The goal of the parties is to maximize their gains from the transaction
4) Problem: Can be too speculative.
b. Incentivizing future parties [penalty default]
1) Courts sometimes have a default rule that is not what the parties would
want, so that future parties are forced to contract around it [equitable]
2) Ex: Information forcing–penalize the party who has the info which would
prevent a mistake, but didn’t disclose it
c. Fairness
1) The court weighs the harm each party would experience w/ application of
default rule; apply rule if it can avoid disproportionate harm to one w/out
causing harm to the other
a. Ex: ALCOA–the parties left a gap w/ regards to what would happen in
the face of a catastrophic event bc it was so unforeseen. The court
was able to avert disproportionate harm to ALCOA w/out harming
Essex by changing the K.
2) Assure each party enjoys the fruits of her contract
a. Courts try to avoid using default rules that would be catastrophic to
one party and a windfall for the other.
b. Sol’n should roughly preserve the benefit of the bargain
3) Courts tend to penalize parties who acted unreasonably
a. E.g., parties who didn’t form a K when they should have (Agreed to
buy 1 million gallons of sugar w/out a K)
d. UCC: Good Faith Performance is imposed
1) Good faith performance is a stab at approximating the terms the parties
would have negotiated had they foreseen the circumstances that have given
rise to their dispute.
2) Asserting an overreaching interpretation of K language = bad faith

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 a. Ex: Employment K gives salesman commission on sales in excess of a
stated minimum. Employer has discretion to raise the minimum
retroactively w/out prior notice or reason. Employer raises and
employee sues; claims employer did so in bad faith.
i. Language interpreted to give employer ability to raise min
if clear reason, e.g., business isn’t making money, but not
to prevent salesman from getting commission
ii. Interpreted this way bc no reasonable salesman would
agree to the interpretation employer proffered. No
reasonable employer would agree to that either–
reasonable parties intend to incorporate the meaning of
terms society would find just and fair.
3) Failing to Cooperate = bad faith
a. Parties in relationship Ks can’t expect their counterpart to place their
interest above their own (fiduciary duty), but they can reasonably
expect cooperation and flexibility.
b. Even if express terms don’t rule out uncooperative conduct, a good
faith performance implied term might

iii. Should a K be enforced: Think of the agreement ex-ante (i.e., at the time of contract).
What did they bargain for, how would a reasonable person interpret the exchange, what
would most people want in this situation?
a. Default Rule: Only promises made in a bargain context will be enforced
b. Optimal default rules enforce promises only when the increase in beneficial reliance
offsets the decrease in promising caused by enforcement.
I. Ex: Very few people would break their promises if the punishment was
getting your hand cut off, but very few people would make promises.
II. Enforcing promises that the promisor intended to be legally enforceable
won’t deter similar would-be promisors from making similar promises in the
future, but enforcing promises the promisor didn’t intend to be legally
enforceable will deter people from making similar promises in the future.
III. It’s reasonable for a promisee in a bargain context to suppose the promisor
intends his promise to be legally binding, even if she hasn’t explicitly
bargained for it.

iv. Legal enforcement is costly and often inaccurate, so we don’t want to and can’t enforce all
promises.
a. There are other forces that lead people to keep promises. (E.g., reputational
reasons, family pressure, etc.)
b. Ex: Most customers won’t sue a business if it doesn’t follow through with its
warranty promise, but companies honor it to maintain their reputation.
c. Courts try to figure out when these other forces are sufficient to enforce promises
and when they are not, and they withhold legal remedy in the former cases.
d. Two actions/words that signal formality to courts:
 Evidentiary ritual: writing down and signing the contract, attaching a seal.
 Quid pro quo, bargained-for consideration
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Complete Uncertainty Invitation to negotiate Offer Absolute Certainty

Certainty about a mutually beneficial deal materializing

A. Offer and Acceptance [Mutual Assent]

a. Subjective and Objective Tests of Mutual Assent
i. Balance: Not binding a party who did not intend to be bound while protecting the
expectations of the party who reasonably relied on the appearance of assent.
ii. Subjective or “actual intent:” Requires a meeting of the minds. No longer req’d bc
too hard to figure out what party’s intent was.
iii. Objective: Relies on outward manifestations of a party’s intent. Contractual
obligation is imposed based on what a reasonable person would believe was said and
done rather than what the party intended.
iv. Ex: A thinks K isn’t binding until B sends a letter w/ the terms. A doesn’t tell B about
this add’l req’t. A refuses to perform bc B didn’t send letter.
1. Subjective test: no K bc A didn’t intend there to be one
2. Objective: A should bear the liability if most ppl similarly situated as B would
reasonably believe that the K was concluded w/ a handshake.
a. A is the atypical party; easier for her to either conform her beh to the
norms or communicate req’s to B than to req B to think of and guard
against every idiosyncrasy A might have.
b. Imposing liability on A makes future idiosyncratic As either conform or
inform.
v. The law attributes to a person an intention corresponding to the meaning a
reasonable person would give to his words or acts. [only objective matters]
1. E.g., Lucy v. Zehmer: P and D were at a party talking about whether P had $50K.
P challenged D to write and sign that he would sell his farm for $50K to P. D
wife both signed. P believed offer was legit. D later refused to sell, said he was
joking. Court ordered specific performance; D behavior showed he made an
offer and P accepted.
2. Meaning a reasonable person would give, not what offeree gave
a. E.g., Leonard v. PepsiCo: Pepsi contest. Commercial showed various
prizes w/ corresponding points underneath; last image was a boy flying a
harrier jet and it said 7,000,000 points. P sent a check and order form.
Pepsi said it was obviously a joke and no reasonable person could have
understood the commercial to be offering the jet. Price was way lower
than actual cost, harrier jets are offensive weapons used by the military.
vi. If a party’s intention is not what is reasonable and probable, they have the
responsibility of making that intention explicit.
1. E.g., Jacob & Youngs, Inc. v. Kent: P builds a home for D. K said Reading pipe
was to be used. 1 yr after move-in D discovered the pipes weren’t Reading. D
told P to re-do the work; it would req demolishing parts of the home, so P
refused. D still owed P money, but refused to pay, and P sued.
a. Court said D needed to pay P. D didn’t make his desire for Reading pipe
explicit. The provision calling for Reading was just a standard provision
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 (not bargained for) in the K. Reasonable person would interpret it to say
Reading, or pipe of comparable quality, which is what P did.
vii. Mutual assent can be implied in fact
a. Parties’ intention is not expressed, but
b. An agreement may be implied from their acts
I. Req’s more than just words; look at totality of circumstances
2. K can’t be implied in fact if the facts are inconsistent w/ its existence
3. E.g., Bailey v. West: D discovered horse was lame, ordered it sent back to seller.
Seller refused, so horse was taken to P’s farm. P knew horse’s ownership was
disputed when he agreed to care for it. He sent bills to D and the seller. (lack
of P’s assent). D had horse shipped to seller, not P. (lack of D’s assent). No
mutual assent.

b. Offer: Offeror is the master of the offer

i. Offeror makes an offer to offeree to enter into a K on specified terms.
ii. Gives offeree power of acceptance; her acceptance  K on terms of the offer.
iii. An offer §24:
1. The manifestation of willingness to enter into a bargain
a. Must specify the performance to be exchanged
b. should include the terms that will govern
2. Made in a way that justifies another person in understanding that his assent
to that bargain is invited and
a. Would a reasonable person understand the statement to be an offer?
b. Was it communicated to the person to whom the offer is addressed?
c. If it specifies mode of acceptance and time, they must be followed.
I. If not, court must decide if acceptance was reasonable and
timely.
3. Will conclude the bargain (result in a binding K on offer’s terms).
a. Upon acceptance, a K will arise w/out further approval req’d from the
offeror

iv. Is it an offer or an invitation to negotiate?

1. At some point during the negotiation process an invitation to negotiate leads
to an offer. The point at which that occurs can be tricky.
2. Look at totality of the circumstances–Key indicators:
a. The language used by the parties
I. Use of terms of art such as “offer” may be helpful but aren’t
conclusive if the context indicates that they weren’t used in their
legal sense. (Ex: For sale sign, “offered for sale” is not an offer)
II. An offer  K upon acceptance, so the more comprehensive and
specific the terms are, the more likely it is an offer.
b. The surrounding circumstances in which the language is used
i. How far along in the negotiation process are the parties
ii. Previous communications in this transaction
iii. Common practices/trade usages, prior dealings btwn the parties.

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3. E.g., Fairmont Glass: P sent D a letter asking for the lowest price D could offer
for P’s proposed order. D replied w/ prices and said for immediate acceptance.
P accepted next day, D said they can’t fulfill. D said no offer, so no K. D’s
language showed an intention to make a present offer, which, if accepted
immediately would close the contract. P accepted seasonably, so K formed.

4. A manifestation of willingness to enter a bargain isn’t an offer if the other party

should know the offeror doesn’t intend to enter a K until he’s made a further
manifestation of assent.
a. E.g., Courteen Seed Co: D mailed samples of seeds w/ a note stating the
asking price. P telegrammed “Price too high. Wire firm offer.” D said I
am asking for x. We already have another buyer willing to pay y. P wired
back accepting the “offer.” D refused to ship. No K bc it wasn’t an offer,
just invitation to negotiate bc D was trying to sell for best price.
I. Key language: “Asking for ___.” Not “Offering ___”

5. A quotation of prices isn’t an offer; K won’t result if offeree places an order

after receiving price quote–offeror needs to accept still
 Policy: Price quotations are part of commerce–allows parties to gain
information and enter into better Ks.

6. Advertisements are presumptively solicitations, not offers, but if they are

clear, definite & leave nothing for negotiation they may be held to be offers
a. Lefkowitz v. Great Minneapolis Surplus: Ad stated: Date of sale, item
sold, $1 [price], worth $139, 1st come 1st served.
b. P was 1st to show up and tried to accept the offer. D refused. Valid
offer bc it was clear, definite, explicit, and left nothing for negotiation &
there was mutuality of obligation. D breached by not giving coat to P
when he gave $1–performed.
c. If court thinks advertiser is trying to take advantage of unsophisticated
readers, they might hold a clear, definite advertisement to be an offer.

7. An offer that seems too good or outrageous to be true might not be an offer
a. E.g., Leonard v. Pepsico: Offering harrier jet for millions less than value.
b. Should reasonable person know it was an obvious joke?

8. Why would parties prefer not to be bound at the invitation stage?

a. Risk averse: Parties prefer to forego uncertain gains rather than incur
equally uncertain losses of the same magnitude.
b. Regulate reliance: At this stage each bargainer can regulate his own
reliance (take precautions, make fewer plans) more readily than he can
control the other party’s reliance.
c. Cheap talk: Nonbinding statements made by the parties aren’t
enforceable, but they are informative & truthful, and lead to a better K.
9. Why would anyone want their promise to be legally enforceable?

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 a. If prospect of gain measurably outweighs risk of regret, mutual
enforcement increases the benefits each side expects to receive.
b. This is when the respective representations made by the parties are
deemed “offer” and “acceptance” (and liability is imposed)

B. Revocation of Offers: Termination of Offeree’s PoA

a. Revocation in General: Offeror may generally revoke offer before offeree accepts

 We want to encourage reliance on promises, but we also recognize ppl make offers they
regret and/or don’t want to be bound by. We let them revoke, so long as reliance was
unreasonable and not substantial.

i. §36: An offeree’s power of acceptance may be terminated by:

1. Rejection by the offeree

a. §38: Rejecting offer = termination of PoA. Manifestation of intention not
to accept = rejection unless offeree manifests intention to further
consider the offer.
I. Ex: Employee offers his resignation at a meeting w/ employer,
but employer didn’t accept. A few days later employer sent a
telegram saying he accepts the resignation. Court said the offer
to resign was no longer open since D rejected them.
b. Failure to respond = rejection, unless §69 applies

2. Counter-offer by the offeree

a. §39: Counter-offer is an offer made by the offeree relating to the same
matter as the original offer and proposing a substituted bargain.
b. §39(2): Counter-offer terminates PoA unless offeror has manifested a
contrary intention or counter-offer manifests contrary intention of the
offeree.

3. Lapse of time
a. §41: An offeree’s PoA is terminated at the time specified in the offer, or if
no specified time, at the end of a reasonable time.
b. Reasonable time depends on the circumstances existing when offer is
made
I. What amount of time would be needed to receive, consider, and
reply to the offer under all the circumstances of the transaction?
II. Trade usages, course of dealing, prior dealings, method of
communication used
III. If the offer is made w/in a personal conversation, the reasonable
time for acceptance typically ends when the conversation ends.

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 c. Unless indicated otherwise, an offer sent by mail is accepted in a
reasonable time if acceptance is mailed any time before midnight on the
day the offer is received.
d. Late acceptance isn’t dispositive. Decided case by case. If offeror treats
it as acceptance, it might be. Or it could be treated as a counter offer by
the offeree which gives offeror PoA.

4. Revocation by the offeror

a. An offer may be w/drawn anytime before it is accepted
i. But §41: Must be open for reasonable time or time specified
b. §42: If offeree receives from the offeror a manifestation of intention not
to enter into K, offeree’s PoA is gone.
c. §43: An offeree’s PoA is terminated when:
i. the offeror takes definite action inconsistent w/ an intention to
enter into the proposed K and
ii. the offeree acquires reliable info to that effect.
iii. Ex: Alice finds out you sold the piano to someone else
d. The offeror has the responsibility to w/draw the manifestation of
contractual intent created by the offer, and until he does so must assume
that it could still be acted upon.

5. Death or incapacity of the offeror or offeree.

6. The failure of the offeree to comply w/ any condition of acceptance

a. Offeror can prescribe manner of acceptance, offeree must satisfy all
conditions
i. If offer req’s acceptance by performance, offeree can’t “accept” w/
a promise.

b. Irrevocable Offers: When the offeror cannot revoke her offer

1. Option contracts, firm offers and construction bids can fxn as irrevocable offers.

a. §25: An option K is:

a. (1) a promise which meets the req’s for the formation of a K and
b. (2) limits the offeror’s power to revoke an offer.

b. Most straightforward option K: Offeree pays offeror to hold offer open

c. Ex: On Jan 17 Bob offers to sell Alice his piano for $400 and promises to keep
the offer open until Jan 31. Bob can revoke on Jan 20 bc the promise to keep
the offer open was a gift, unsupported by consideration. If Alice paid $10 to
keep the offer open until Jan 31, Bob could not revoke; enforceable promise.
i. The option K is secondary to the principal proposed exchange (sale of
Bob’s piano).
ii. Alice’s $10 has purchased the right until Jan 31 to have the option to
accept Bob’s offer, i.e., purchase the piano.

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2. Construction bids are offers for bilateral Ks: We promise to do the work if you promise
to pay us $15K.

3. §87(1) An offer is binding as an option K if it:

a. is in writing,
b. is signed by the offeror,
c. has a purported consideration for the making of the offer,
i. doesn’t have to be real, bargained-for consideration (can be ¢.25)
d. and proposes an exchange on fair terms w/in a reasonable time.
 OR is made irrevocable by statute (i.e., UCC §2-205 for sale of goods)

1. §87(2) A bilateral offer which the offeror:

a. should reasonably expect to induce action or forbearance of a substantial
character
b. on the part of the offeree before acceptance and
c. which does induce such action or forbearance
d. is binding as an option K
e. to the extent necessary to avoid injustice.

 If it was reasonable for offeree to rely on the offer and take substantial action
or forbearance in accordance w/ it, the offer must be held open for a
reasonable time to allow offeree to accept.
o PoA closed by offeree taking too long, submitting counter offer, etc.

 E.g., Drennan: Subcontractor D submitted a bid (offer) and P used that # to

submit its bid to the client. P received the bid and visited D. D revoked offer
due to miscalculation. Enforced bc D had reason to know P would rely on it
and did rely on it, so only fair to allow P an opportunity to accept.
o Default rule: The loss should fall on the party causing it; gives sub an
incentive to avoid error bc he is assigned the risk of mistake.
 Sub can opt out by saying offer is revocable
o No K under §87(1) bc sub didn’t promise to hold it open in exchange for
P’s promise to use the bid (which would be consideration)
o P’s use of the bid in their bid ≠ acceptance of D’s offer bc a reasonable
person wouldn’t think P’s use of the bid manifested an intention to be
bound.
 Custom in construction is for general to use sub’s bid $ in their
bid, but still have the option to pick a different sub.
 To accept the offer, P would’ve had to promise to use D before
D revoked.
o How to determine if general contractor actually and reasonably relied:
 Evidence of “bid shopping” shows lack of reliance
 Prompt notice by general that he intends to use sub = reliance
 If sub-bid is so low that a reasonable prudent general would not
rely on it, fact-finder may infer that general didn’t rely.
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  E.g., Pavel Enterprises: P was general contractor and received a bid from sub-
contractor, D. P wasn’t given the bid, but then got it. P sent fax to all pot’l
subs asking them to resubmit their bids. D didn’t resubmit. P “accepted” D’s
original bid and sent its bid to client. D refused to perform, said their bid was
revoked bc they thought P hadn’t won the bid, they reasonably didn’t think P
was relying. §43: D not resubmitting was contrary intention shown by offeror.
§38: P’s bid shopping was a manifestation of intention not to accept D’s offer.
P’s PoA was terminated before they accepted D’s offer, no K.
o No option K under §87(2) bc Pavel’s “bid shopping” showed no reliance
on D’s bid, and D knew P wasn’t awarded the bid, so they reasonably
believed P wasn’t relying.

4. Option K created by Part Performance: [unilateral offers]

a. Old Common Law: Offeree’s acceptance of unilateral K is when full
performance is rendered, so offeror can revoke anytime before then.
a. Ex: A offers to pay B $100 to walk across the Brooklyn Bridge. Once B walks
across there is a K and A is bound to pay $100. A may stop B when B is 4/5
across and w/draw the offer w/ no liability.
b. Modern Common Law §45:
a. If offer is for unilateral K, once the offeree has begun the requested
performance the offer may not be w/drawn until the offeree has had a
reasonable opportunity to complete the performance.
i. Commencing performance = consideration for holding offer open
ii. Protects offeree, but doesn’t hold offeror to anything beyond his
offer
iii. Offeree must exercise reasonable diligence to notify offeror if the
offeror otherwise reasonably wouldn’t learn of the performance
(§54(2)(c))
iv. Ex: If Alice offers to pay Bob $400 if he sells and delivers his piano
to her, once he begins wheeling the piano to her house she must
give him a reasonable opportunity to deliver the piano (complete
performance).
b. The offeror’s duty to fulfill his promise is conditional on offeree completing
the performance in accordance w/ the terms of the offer.
i. Alice has no duty to pay Bob if he doesn’t end up delivering w/in a
reasonable time.

2. UCC §2-205 Firm Offer:

i. A merchant offers to buy or sell goods
ii. In a signed writing
1. Meant to prove the offer is a “firm offer” & not invitation to negotiate
a. Formal signature may not be needed, depends on circumstances
i. Typically, at least an initial near the clause is req’d
2. Oral promise is not irrevocable, even if usage of trade/prior dealings
iii. The terms give assurance it will be held open
iv. No consideration is necessary

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 v. Held open for time stated; if not stated, a reasonable time (3 months max)
1. If consideration has been given for holding offer open, longer OK
vi. If offeree supplies the form, offeror must sign separately

a. I.e., A promise by a merchant in a signed writing to leave an offer open for 2

mos is enforceable w/out consideration for two months. A promise by a
merchant in a signed writing to leave an offer open for 6 mos is enforceable
w/out consideration for 3 mos. A promise to leave an offer open w/ no
stated end date would be open for a reasonable time, but 3 mos max.

C. Statute of Frauds: When an Offer Must be in Writing

a. Purpose: to prevent fraud
b. Offers for Important Ks must be in writing:
i. Transfer of real property
ii. Ks that cannot be performed w/in 1 year of the formation of the K
1. Hiring a man to work for you for the rest of his life doesn’t need to be in writing
bc he could die 1 mo after formation and the K would be performed.
2. Hiring a 98 yr old to work for you for 366 days does need to be in writing. Even
if he dies 30 days in, the K is excused, but not performed.
iii. Sale of goods worth at least $500 (UCC governs)

c. §131: A K w/in one of these categories is only enforceable if it is in a writing signed by the
party charged w/ breach, which
i. Reasonably identifies the subject matter of the K
ii. Is sufficient to indicate that a K has been made btwn the parties or offered by the
signer to the other party, and
iii. States w/ reasonable certainty the essential terms of the unperformed promises in K
1. [Stricter than UCC; meant to protect the weak from being defrauded.]

d. Partial Performance: Part performance of an oral K not to be performed w/in a year

generally isn’t an exception unless the part performance is reliable evidence of the agmt.
i. Securing financing isn’t evidence of a K for the purchase of a home.
ii. Full Performance is an exception to statute of frauds

e. E.g., McIntosh v. Murphy: P lived in CA and interviewed for a job in HI. D called P and
offered him the job; said he needed to come to HI in 1 week and the job was to last for 1
year. P accepted and moved to HI, fired for poor performance after 2 months. Was K
enforceable? Performance was to be complete in just over 1 yr and no writing. Court
shifted dates to make it fit w/in statute of frauds. Could’ve enforced w/ promissory
estoppel.

f. Problem: Sophisticated parties can insist on oral promise in order to get out of the K if they
want to.
g. Promissory Estoppel is commonly argued when statute of frauds makes K unenforceable;
recover reliance damages.

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 i. Reliance must have been reasonable. Relying before final K is signed is often not
reasonable, as a matter of law.

h. UCC §2-201: If for sale of goods for ≥ $500, there must be a writing from some time that
supports oral testimony of the likely existence of a K and signed by party charged w/ breach
1. Writing can be very informal, doesn’t have to list material terms (e.g., price,
dates, warranty).
2. “Signed” is any symbol executed or adopted by a party w/ a present intention
of authenticating a writing §1-201(39)
a. Preprinted or stamped authentication, letterhead.
3. Quantity of goods must be stated. Doesn’t have to be accurate, but a # greater
than what’s written won’t be enforced.
a. P can’t say there was an oral agreement for D to deliver more goods than
what the writing says.
I. If writing says 500 widgets and D delivers 500 then P says there
was an oral agmt for 1,000 widgets, court won’t enforce oral
agmt.
4. Insufficient: An offer written down, preparatory notes.
5. Sufficient: Memo indicating the promisor’s acceptance of the promisee’s offer
b4 agmt becomes finalized.

i. Part Performance Exceptions: [when oral K is enforceable]

1. If the goods are specially made for the buyer & aren’t suitable for sale to others
in the ordinary course of seller’s business & the seller has begun manufacturing
or committed to procurement b4 receiving notification of revocation.
2. If the party against whom enforcement is sought admits in court that a K for
sale was made. Won’t be enforced beyond the quantity of goods admitted.
3. If goods have already been paid for or accepted.
a) If you have an oral agreement to sell Ann 3 pianos for $6,000, you deliver
1 and she doesn’t pay so you don’t deliver the rest. Statute of frauds
doesn’t bar enforcement, but you can only recover for the price of the
piano you sold (not the other 2).
b) If Ann pays for 1 piano and you don’t deliver, she can recover the $ for
that 1 piano, but can’t request specific performance for the sale of other 2.
1. Still must show it was a valid K (offer, acceptance, consideration)
ii. Typical case 2-201 applies to: Deal made over phone & evidenced by confirmation slip
iii. E.g., Monetti v. Anchor Hocking: P agreed to make D the sole U.S. distributor for 10
yrs. P sent draft agmt, parties allegedly agreed, but D didn’t sign. D had a memo w/
all the terms of K and his typed initials, but it was written b4 the final K. P turned
over its entire operation. Relationship deteriorated and P sued. D raised statute of
frauds. This wasn’t pure sale of goods bc it included trade secrets and intangibles.
Unlike typical case UCC is trying to prevent, P’s partial performance is in fact evidence
of a K; P wouldn’t have given up control of operation if it didn’t believe there was a
10-yr agmt. P isn’t trying to get more out of D than what was agreed to.

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D. Acceptance: Did it come in form requested by offer & before revocation?
i. An offer gives offeree a continuing power to complete the manifestation of mutual
assent by accepting the offer. Can’t accept offer after PoA has been terminated (§36)

ii. §52: Only the party whom the offer invites to furnish the consideration may accept

iii. §50: Acceptance

1. Acceptance is a manifestation of assent to the terms of the offer made by the
offeree in a manner invited or req’d by the offer.
a. Would a reasonable person believe the offeree intends to accept the
offeror’s terms and form a K?
b. Manifestation must reasonably show offeree definitely and
unequivocally intended to be bound by the offer

2. Unilateral K: Acceptance by performance req’s that at least part of what the

offer requests be performed. (then option K formed under §45)
a. Commencing performance or tendering part performance = promise to
render complete performance, BUT mere preparation ≠ acceptance.
I. Exception: Prep may create an option contract under §87(2) bc
prep  promise to perform (bilateral formed), so prep was
action reasonably induced by the offer.
3. Bilateral K: Acceptance by a promise req’s the offeree to complete every act
essential to the making of the promise.
a. May be made in words or other symbols of assent, or implied from
conduct, so long as it is in a form invited or req’d by the offer.

iv. Methods of Acceptance

1. Issue: What method of acceptance did offer specify?
a. §30(2): Unless otherwise indicated by the language or circumstances, an
offer invites acceptance any way that’s reasonable in the circumstances
b. §32: In a case of doubt, an offer is interpreted as inviting the offeree to
accept either by a promise to perform or by performing.
I. How would a reasonable person interpret the offer?
c. UCC §2-206: Unless unambiguously indicated by the language or
circumstances:
I. An offer invites acceptance in any manner & by any medium
reasonable in the circumstances
II. An order/offer to buy goods for prompt shipment is construed as
inviting acceptance either by prompt promise to ship or prompt
shipment of conforming or non-conforming goods.
a. Non-conforming goods≠acceptance if seller tells buyer
the shipment is offered as an accommodation to them
a. They = counteroffer for buyer to accept/reject
b. If seller doesn’t notify buyer that shipment is an
accommodation, shipment of nonconforming goods =
acceptance of offer & BREACH of K
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 d. Oral acceptance instead of written is ok as long as it’s the method the
parties agreed to. Req’s totality of circumstances
I. Whether there has been an express reservation of the right not
to be bound in the absence of a signed writing
II. Whether there has been partial performance of the K
a) Partial performance is evidence of oral acceptance ok
III. Whether all of the terms of the alleged K have been agreed upon
a) Lack of agmt of terms is evidence of only oral not ok.
IV. Whether the agmt at issue is the type of K that is usually
committed to writing
e. E.g., Ciaramella v. Reader’s Digest: P sued his former employer (D) and
was negotiating a settlement agmt which said P must accept by signing. P
signing made K effective  req’d P to drop the suit (perform) and D to
pay (perform). P’s lawyer said “we have a deal” after a round of
negotiations. P didn’t like the terms, refused to sign. D said lawyer’s oral
acceptance = acceptance of K.
I. The parties expressly didn’t intend to bind themselves until agmt
was signed. Bargained for consideration only kicks in when P
signs K: “W/ intent to be legally bound hereby”
II. No evidence of partial performance. Neither party gave the
bargained for consideration (payment or drop suit)
III. They hadn’t agreed to all material terms. P wasn’t finished
bargaining; wanted new letter of rec.
IV. Settlements are generally req’d to be in writing. They are complex
agmts w/ long term promises.

2. Acceptance by Performance (unilateral)

a. §53: Offeree may accept by rendering performance only if offer invites
such acceptance
b. §54: When the offer invites acceptance by performance, notification isn’t
necessary to accept offer unless the offer requests it.
c. If the offeree should know the offeror will not learn of the performance
w/ reasonable promptness and certainty, offeror is not bound by K unless
I. Offeree exercises reasonable diligence to notify, or
II. Offeror learns of the performance w/ a reasonable time
III. Offer indicates that notification isn’t req’d

3. E.g., Ever-Tite Roofing v. Green: P was hired to roof D’s house. Offer invited
acceptance by writing (bilateral) or commencing performance (unilateral). P
needed to run a credit check–D knew it would take time. P sent workers next
day to begin work. D had hired other crew, said offer revoked. Offer didn’t
specify a termination time, so D must allow reasonable time for acceptance.
P’s delays were reasonable given credit check. P loading trucks and driving over
= commencing performance = acceptance, which was before D’s revocation.

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 a. Loading trucks could also = prep = promise to render complete perform =
option K 87(2) bc D knew offer would induce substantial action.
b. Information forcing: It was D’s responsibility to tell P when offer was
made that they were receiving bids from multiple roofers. Penalty on the
party who has the info req’d to prevent the mistake and doesn’t disclose
it. (prevents opportunism)
4. UCC §2-206(2): Offeror may treat the offer as having lapsed if offeree doesn’t
notify the offeror w/in a reasonable time that he has started performance.

5. §56: Acceptance by Promise (bilateral)

a. Offeree must exercise reasonable diligence to notify the offeror of
acceptance, or offeror must receive the acceptance in a reasonable
amount of time.
b. Offeree can accept an offer for a bilateral K by beginning performance if a
reasonable person would believe the offeree’s beginning of performance
= a promise to perform.
I. §4: A promise may be stated in words either oral or written, or
may be inferred wholly or partly from conduct.
II. Ex: Property owner told builder, “upon an agmt you can
commence performance at once.” Builder didn’t sign agmt, but
bought wood and started preparing it at his shop. Didn’t
constitute acceptance bc owner didn’t know. If builder had gone
to owner’s store to work, it likely would’ve been acceptance.
III. Exception: Offer manifests a contrary intention, or §69 (silence)

v. Silence or Dominion as Acceptance

1. Default rule: Silence suggests a party doesn’t accept bc usually a reasonable
person wouldn’t believe the silent offeree intends to be bound by offer.
a. Ex: Bob mails Alice a letter offering his piano for $400. Reasonable
person would not believe Alice’s silence means she accepts the offer.
2. §69: An offeree’s silence and inaction operates as an acceptance if:
a. An offeree (1) takes the benefit of offered services (2) w/ reasonable
opportunity to reject them and (3) reason to know that they were offered
w/ the expectation of compensation.
I. Ex: Music club sends out CDs to its members & requires CD to be
sent back if you don’t want it, otherwise you will be
automatically billed.
II. Part of the agreed upon bargain was for silence to = acceptance

b. The offeror has stated or given the offeree reason to understand that
assent may be manifested by silence or inaction, and the offeree intends
for his silence to = acceptance.
I. Ex: Utility company changes terms and says customer will get
new terms unless they opt-out.

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 c. Previous dealings or otherwise make it reasonable that the offeree should
notify the offeror only if he doesn’t accept.

vi. The Mailbox Rule

1. §63: An acceptance made in a manner and by a medium invited by an offer =
acceptance as soon as it leaves the offeree’s possession, whether or not it ever
reaches the offeror.
a. Acceptance by mail takes effect as soon as offeree sends it off.
b. §66: mail must be properly addressed, stamped, etc. to insure safe
transmission.
2. §63(2): An acceptance under an option K isn’t operative until received
3. Common law: a revocation of an offer is ineffective if received after an
acceptance has been properly dispatched. Revocation doesn’t become
effective until the offeree actually receives the letter communicating the
offeror’s w/drawal.
a. Mailbox rule + common law protects offeree. Provides a rule to rely on;
they know K is binding once they send acceptance.
4. E.g., University Emergency Med v. Rapier Invs.: Acceptance was mailed b4 end
of offer period, but received after. Offer specifically provided for acceptance
by mail, so mailbox rule triggered, and acceptance OK.

E. Counteroffer or Acceptance?
a. When is an “Acceptance” a Counteroffer? The Common Law View
i. Mirror Image Rule
1. The terms of the acceptance must be identical to the terms of the offer. If
there are any differences, it is not an acceptance but a counter offer.
a. Default Rule: Counter offer ends offeree’s PoA and gives original offeror
PoA for the counter-offer.
I. Purpose: We want to be sure parties really agreed to the terms
before enforcing a K. If acceptance terms don’t match offer
terms, it doesn’t look like there was really mutual assent.
b. Exception: In an option K parties can negotiate back and forth w/out the
offer terminating.
ii. The Last Shot Doctrine
1. Comes into play when one or both parties perform even though the mirror
image rule has not been satisfied.
2. Both parties are bound by the terms of the last offer (or counteroffer) given by
one party to the other before commencement of performance.
3. Ex: Beth offers to buy from Sam 10 bushels of wheat at $1.10/bushel, shipping
charges included. Sam replies that he will sell 10 bushels of wheat at $1.10 per
bushel, shipping not included. Sam ships the wheat and Beth accepts it. Beth’s
acceptance of Sam’s wheat = acceptance of his counter offer.

b. UCC Section 2-207

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 i. Rationale: Most parties don’t expect a dispute to develop when they enter into an
agmt, so most will proceed w/ the transaction even if they know the terms of their
form wouldn’t be enforced.
ii. Three ways a contract can be created when offeree’s acceptance adds add’l or
different terms to the offer:
Acceptance of
1. A definite and timely expression of acceptance that includes add’l or different
goods ≠ an terms  K on terms of offer. Offeree’s add’l terms = proposals
acceptance of a. If both parties are merchants  K on terms of offer + the add’l terms
seller’s terms,
I. Bc assumption is that the offeree’s primary focus was on making the
Ionics
sale and its intent was to accept the offer, e.g., didn’t really care about
forum selection clause.
b. Add’l terms included unless: [most add’l terms will not be included]
I. The offer expressly limits acceptance to its terms
II. They materially alter the offer
a) I.e., contrary to what is customary
b) E.g., offer: court adjudication, “acceptance:” arbitration
III. Offeror has given notification of objection to the terms or w/in a
reasonable amount of time after notice of them objects.
a) Sending a form w/ different terms = notification of
objection, Ionics
IV. [if I-III apply, K is formed, but add’l terms aren’t included].

2. If offeree’s acceptance is expressly made conditional on offeror’s assent to

add’l or different terms and offeror accepts these terms  contract formed
on offeree’s terms.
a. Offeree must demonstrate an unwillingness to proceed w/ the
transaction unless the add’l or different terms are included in the K.
I. Burden is on the party asking the court to enforce its form to
demonstrate that a term is part of the parties’ bargain.
II. E.g., Step-Saver: TLS didn’t prove they were willing to forego the
transaction w/ Step-Saver if SS didn’t consent to the box-top
license bc TLS and SS agree that certain terms in the box-top did
not govern their relationship–court couldn’t infer that some
terms were essential when others clearly weren’t.

3. If the writings conflict too much to establish a K, but both parties’ conduct is
sufficient to establish one  K formed w/ the terms in which the writings do
agree + default rules of UCC to fill gaps.
a. Applies in cases where the forms hopelessly conflict and obviously don’t
establish an intention to be bound, but the parties act as if they have a
contract, e.g., delivery or payment for goods.

4. E.g., Ionics, Inc.: Ionics sent purchase order: terms–all state law remedies
available. D sent acknowledgement: limited liability. Ionics received D’s form
b4 goods arrived; and accepted the goods.

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 a. When the terms in the forms are contradictory, each party is assumed to
object to the other party’s conflicting clause, so §2-207(3) applies.
b. Mere acceptance of goods ≠ clear and definite acceptance of seller’s
terms, so §2-207(1) doesn’t apply.

5. If a new term, e.g., disclaimer, is sent after K formed §2-207 applies.

merchants included unless materially alters. Non merchantsnot included
a. Step-Saver

6. If neither party cared enough to expressly limit the terms of the agmt, it
doesn’t make sense to arbitrarily have last terms govern. Step-Saver

7. E.g., Step-Saver: Step-Saver had computer packages which included D’s

software. P ordered program on the phone, D accepted the order and
promised to ship promptly. P sent P.O. w/ items, price and shipping/payment
terms. D sent invoice w/ identical terms. When goods arrived the package
included a box-top license that disclaimed warranty and said it was final
expression of terms and opening package = acceptance.
a. The box-top license is a material alteration
b. TLS didn’t prove an unwillingness to proceed if SS didn’t accept box-top
terms.

8. Rolling Contract Transaction–K is formed once buyer goes home, has a chance
to read the terms, & doesn’t return the product.
a. §2-207 doesn’t apply bc it’s just 1 form. K is formed once buyer goes
home, so there are no add’l or different terms.
9. E.g., Hill v. Gateway: P’s bought a computer over the phone and gave credit
card #. Computer arrived in a box w/ the terms (including arbitration agmt),
terms governed unless P return the computer w/in 30 days. Ps kept computer
past 30 days, sued in court, D said it needed to be arbitrated. ProCD: Terms
inside a purchased good are binding when buyer uses the product after an
opportunity to read the terms and doesn’t reject by returning.
a. §2-204(1) and §30: Offeror can invite acceptance in any reasonable way
he chooses. Buyer must accept in accordance w/ the offer. Vendors can
say opening and keeping product (i.e., silence) is the form of acceptance.
I. Reasonable person would think Gateway’s offer was the terms
sent w/ computer bc offeror gave no terms b4 that. Reasonable
person would think retaining the goods is offeree accepting.
b. Where there is only one form §2-207 is irrelevant
c. Buyers don’t want to hear all of the terms before they make a purchase,
and sellers can’t feasibly do this.
d. Buyers have 3 ways to discover unknown terms before purchasing:
I. Ask the vendor to send a copy of the terms
II. Consult public sources
III. Inspect the documents after the product arrives.
e. Terms must not be unconscionable.

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B. Consideration
i. Unless promissory estoppel or material benefit rule apply, courts will only enforce
promises that are supported by bargained-for consideration.
a. Consideration doctrine permits enforcement of a promise when the promisor made
the promise in order to obtain the consideration–the return performance or return
promise.
1. Ex: Employer promises to pay employee in order to obtain her services.
2. Not too much focus on promisor’s mental state/actual motivation as
long as there appears to be reciprocal intention.

ii. Functions and Concerns

I. Evidentiary: Provides evidence that an agreement/promise exists
II. Cautionary/deterrent: A check against rash, impulsive actions bc
consideration req’s each party to perform or promise to perform.
III. Channeling: Offers a means to legally, effectively express intention.
IV. Two concerns: ensuring that the promisor intended to be legally bound, and
distinguishing promises that are socially valuable from those that are not.

iii. Bargain Versus Gift

a. Restatement §71
1. To constitute consideration, a performance/return promise must be
bargained for.
2. A performance or return promise is bargained for if it is sought by the
promisor in exchange for his promise and is given by the promisee in
exchange for that promise.
a) Measured objectively. Based on promisor and promisee’s
manifestations.
b) Neither party needs to inquire into promisor’s motives
3. The performance may consist of:
a) An act other than a promise
b) A forbearance: Refraining from exercising a legal right,
c) The creation, modification, or destruction of a legal relation.

b. There must be a bargain! One party asks for something; other party gives it.
c. E.g., Hamer v. Sidway: Uncle nephew $ if he didn’t smoke, drink, swear, or gamble.
Parties bargained for nephew to forbear legal right; nephew did bc of the promise.
1. Would lack consideration if nephew had already given up these acts.
Consideration bc the promise induced the forbearance.

d. A performance/promise that is merely a condition of the promise, but is not

bargained for by the promisor is not consideration.
1. Conditional gift is unenforceable even if promisee experienced a
detriment
2. E.g., Kirksey v. Kirksey: P’s brother-in-law offered to let her live w/ him.
P moved a 300mi to his property. He later kicked her out. Unenforceable

19
 bc no consideration. P moving wasn’t bargained for; it was just a
necessary condition of the promise to let her live w/ him.
e. The consideration must be given after the promise is made. You cannot bargain
for consideration which was given in the past.
1. E.g., In Re Green: P had affair w/ D. Official K; D promised to give P life-
long benefits. Alleged consideration was her paying him $1 (she never
did), and dropping all legal claims against him (she had none). Their past
relationship doesn’t = consideration, so not enforceable K.
a) Court didn’t like this K. Felt like blackmail. D was bankrupt & other
creditors were more appropriate than P. Bc society subsidizes courts,
they can police somewhat, but not supposed to over police contracts.

f. If a return promise is given as consideration, it’s a bilateral K.

1. Each party is a promisor and a promisee
a) Ex: Alice promises to give $400, Bob promises to sell piano.

2. There must be mutuality of obligation.

a) A promise is only supported by or provides consideration if it creates an
obligation; in bilateral Ks both parties’ promises must create an
obligation for themselves.
b) E.g., De Los Santos v. Great Western Sugar Co: P agreed to transport in
its trucks “such tonnage of beets as may be loaded” by D. P knew D had
identical agmts w/ other parties. D terminated the agmt, P claimed
breach. Court: D made no promises other than the promise to pay for
the transportation of the beets they load onto P’s trucks. D didn’t have
an obligation to load any beets. Void K; lack of mutuality of obligation.
c) Ex: Alice promises to pay $400 in exchange for Bob’s statement that he
will sell the piano if he wants to. Bob’s statement is an illusory promise,
which is not a promise. So, Alice’s promise to pay $400 is not supported
by consideration, which makes it a gift promise, which is not
enforceable. Agreement void.

3. K as a whole may reveal mutuality even if no specific term does

a) E.g., Wood v. Lucy, Lady Duff-Gordon: Exclusive right to sell products.
Profit sharing agmt. P sued for breach. D said there was no mutuality of
obligation bc P wasn’t obligated to do anything. Even though no explicit
obligation, D wouldn’t have given P the exclusive right if he hadn’t
committed himself to use reasonable efforts to bring profits bc D would
receive no $. If this wasn’t an implied promise in the K, the K wouldn’t
have the effect the parties intended.
 “Reasonable efforts” inserted to find consideration/obligation

g. If performance is given as consideration it’s a unilateral K, and the full act or

forbearance done in accordance w/ the promise = consideration.
1. E.g., St. Peter v. Pioneer Theatre Corp: Theater held a drawing, P’s name
was drawn, but D refused to pay. Argued there was no consideration. D

20
 made a unilateral promise bargained for promisees to wait in line and
sign their name. When P did the requested acts [fulfilled performance]
 acceptance of and consideration for the unilateral contract. D got the
consideration they bargained for.
2. Ex: Bob promises to deliver piano to Alice if she pays $400. Once she
pays $400 it’s an enforceable K bc paying the $ is consideration for Bob’s
promise to deliver.
h. Hypo:
1. Organ donation swap: It is illegal to sell or trade organs. These swaps
include bargains–I’ll give your mom my kidney if you give my husband
your kidney. Even though it looks like a contract that is supported by
consideration and not a gift, the justice dept. doesn’t find swaps illegal
bc it they are good for society.

i. Promises lacking consideration are gratuitous, and presumptively unenforceable.

a) A promisor has less reason to make his promise legally enforceable when it is
non-reciprocal (i.e., lacks consideration).
b) Promisor may opt-out by showing intention to be bound by his promise
c) E.g., Ricketts v. Scothorn: P’s grandpa gave her a note stating his promise to pay
her so that she wouldn’t have to work anymore. P immediately quit her job and
didn’t work for a year. Before he died he showed intention to fulfill the
promise; said he wanted to sell his farm to give her $. He intentionally
influenced her position for the worse on the faith of his promise, so it would be
inequitable to not enforce due to lack of consideration. He could reasonably
expect his promise to  forbearance by P.

j. Adequacy of Consideration
I. Consideration is adequate if it is what was sought by the promisor.
1. §79: If the req’t of consideration is met, there is no add’l req’t of
equivalency of values exchanged.
II. Mere inadequacy or inequivalency of consideration will not void a contract.
1. E.g., Batsakis v. Demotsis: P lent D $25 w/ 8,000% interest while in war
torn Greece. D signed a note saying she promised to repay the money on
those terms. There was consideration; D got exactly what she contracted
for: P sold $25 in consideration of the execution of the note.
III. As long as there is no fraud, and a party gets all the consideration he
contracts for, the K will not be void due to consideration.
1. E.g., Wolford v. Powers: D asked P to name his son after him, and in
exchange he promised to provide financially for the son. D’s own son
died many yrs earlier, at D’s request, P and his wife took care of D when
he was sick. P naming his son after D and taking care of D were what D
bargained for, so court found consideration.
k. Nominality Doctrine: Great disparity in value sometimes indicates that the
purported consideration was not in fact bargained for, but was a mere formality or
pretense. Sham/nominal consideration isn’t consideration. May be a red flag that
one party took advantage of the other during the formation stage.

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 1. E.g., In re Green: Parties can shout consideration from the rooftops, but
unless it’s actually present, there isn’t a legally enforceable contract.
2. But, a party seeking lack of enforceability due solely to inadequacy of
consideration is fighting an uphill battle!

 Modification of Contracts

a. Common Law: Was there an existing K? Is this new K modifying the existing K or totally
separate? If modifying, is it supported by independent consideration?
b. The right to modify a K is a mandatory rule, not a default rule.
i. Parties cannot “opt-out” by writing a no modification clause.
ii. Those who made a K can unmake it and alter it.

c. Termination of a K isn’t modification; doesn’t need consideration.

d. §73 Pre-Existing Duty Rule: A promise to perform, or finish performing, an act which you
are already under a K or other legal obligation to perform isn’t consideration.
i. E.g., Alaska Packers Ass’n: Had K for fishing, demanded a K w/ more $ once they got
to AK. D refused to honor new K once back in CA. Court said new K void bc no
consideration–they were performing same task.
1. Meant to deter opportunistic demands to renegotiate.

ii. Exceptions: §89

Common 1. If the party agrees to do something in add’n to her existing obligation;
Law v. UCC especially if circumstances are different or more burdensome than originally
conflict: pre- contemplated.
existing duty
a. New K w/ an additional $10K/yr was allowed when a city greatly
rule
expanded after K formation and garbage men had to do more work as
a result. Extra work = consideration.
2. Parties may enter new K for same performance if 1st is rescinded b4 2nd.

e. Modification under UCC §2-209: An agmt for sales of goods which modifies a K doesn’t
need consideration to be binding, but must be done in good faith.

C. When Consideration is Lacking: Promissory Estoppel

i. Allows a court to enforce a promise or obligation that is otherwise unenforceable, i.e.,
lacks consideration, indefinite, lack of writing, etc.
a. The promisor is estopped from claiming unenforceability due to lack of
consideration, or other related claim.
ii. Restatement §90: Promise Reasonably Inducing Action or Forbearance
a. Elements:
1. One who makes a promise
1) Must not be a mere present intention, e.g., I intend to keep the
business open. If business fails, promisor isn’t liable bc he never
promised that the business would stay open.

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 2) A conditional promise, e.g., I will continue running the business if it is
profitable, doesn’t make promisor liable (can stop running if he isn’t
profitable, and employees can’t recover based on promissory
estoppel)
2. That reasonably can be expected to induce action or forbearance
1) Was promisee’s action reasonable? E.g., It’s unreasonable for
employee to sign 10-yr lease if employer promised 6 mo employment
3. By the promisee or a third party
4. And that does induce detrimental action or forbearance by that person
i. Promisee’s action/forbearance must have been induced by the promise
a. E.g., If nephew stopped smoking before uncle made
promise, he couldn’t recover based on promissory estoppel
5. Shall be bound to the promise
6. To the extent necessary to avoid injustice
1) Factors: the degree of reliance, reasonableness of reliance, the
culpability of the promisor in making a careless promise, formality w/
which the promise is made, the extent to which other policies are
relevant (e.g., preventing unjust enrichment, enforcing bargains, etc.).
2) Ex: Court enforced newspaper’s promise to keep a source confidential
bc of the importance of honoring promises of confidentiality and bc
the source suffered harm due to the broken promise.
3) Ex: Court refused to enforce a promise of long-term employment bc
doing so might undermine the employer’s discretion and independent
judgment in employment decisions.

b. A charitable subscription or a marriage settlement is binding under Subsection (1)

without proof that the promise induced action or forbearance.
1. A probability of reliance is enough
 But, most courts are reluctant to actually apply this subsection! (want
consideration or clear reliance).

iii. Concerns: All promises induce reliance. We don’t want to enforce promises that were
made during negotiations or otherwise w/out the intention of being bound.
a. Focus on the point when the promise was made.
b. Was part of the promise that there would be state enforcement?
c. Did parties think they could be sued for breach?
d. What did they anticipate was their right to w/draw from the promise?

iv. A vague promise is never enforceable if it stands utterly alone.

a. Reasonable detrimental reliance is the substitute for consideration, so there must
be a change of position in reliance on the promise.
b. E.g., Haase v. Cardoza: D’s husband left money for his sister (P) in his will. D never
gave P the $. D was sick and gratuitously promised to give P $ each month. After 8
mos P asked for the sum total. D got mad and stopped paying; w/drawing after the
request for a formal contract shows D’s intent not to be bound. Not enforceable: no
consideration for D’s promise, and P showed no change of position. Unlikely that D

23
 would’ve wanted court enforcement when she made the offer. Injustice doesn’t
require enforcing this promise.

v. If the promise is clearly a conditional gift, it will be held unenforceable even if the
promisee experienced a detriment.
a. E.g., Kirksey v. Kirksey: P’s brother-in-law offered to let her live w/ him bc her
husband died. P left all her possessions and moved a few hundred mi to his
property. 2 yrs later he kicked her out. The agmt wasn’t enforceable bc no
consideration. P moving wasn’t bargained for; it was just a necessary condition of
the promise to let her live w/ him. P’s detriment was not sufficient.

vi. Promissory Estoppel: Preliminary Negotiations

a. An agreement to agree is not an enforceable K
b. There must be a clear showing of reasonable reliance based on promises or
assurances made during the negotiations for the court to apply promissory estoppel
1) E.g., Coley v. Lang: D and P were negotiating for D to buy stock of P’s corp.
D’s lawyer sent P a “letter agmt” which stated the basic terms & both
signed, but said a definitive agmt would need to be made on or before
9/18. P completed various actions in accordance w/ the agmt. D backed
out of the deal, P sued for damages based on costs incurred preparing for
the final agreement. No enforcement.
a) Valid K wasn’t formed: There was no full & definite agmt on terms
b) Not enforceable under §90: There wasn’t so much action or
forebearance by P to make enforcement req’d in order to avoid
injustice.
c) Negotiations not working out does not of itself call for the
application of §90. Coley

c. Even if final agmt hasn’t been entered into, if promisor has reason to foresee
substantial action by promisee in reliance on the promise, §90 may be applied.
1) E.g., Hoffman v. Red Owl: Hoffman wanted to open a Red Owl grocery store
franchise. Red Owl told him he could open a store for $18K, but then kept
changing the price and making him do more (sell his bakery, pay for a lot,
move cities). Red Owl called off the deal, P sued for breach of D’s
representations.
a. P’s actions in reliance were reasonable and D had to pay damages
b. No K was ever formed so can’t say D violated good faith
c. When you add up all events it looks like D is treating him unfairly
d. Case is an outlier! Courts are still hesitant to apply §90 when parties
did not intend to be bound.

vii. Promissory Estoppel: Employment Contexts

a. Big issue: Whether there was an actual promise made.
1) §1: A promise is a manifestation of intention to act or refrain from acting in
a specified way, so made as to justify a promisee in understanding that a
commitment has been made.

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 b. Expanded Bargain Theory: If we expand the bargain theory, which supports the
enforcement of those promises made in a bargain context, beyond just actual
bargains, it’s possible to explain enforcement in promissory estoppel cases.
1) If the promisee could have bargained for the promise, the promise is more
likely to be enforced.
2) If the promisee could not have easily bargained for the promise (e.g.,
soliciting the promise would’ve been inappropriate, given the social
context), the promise is less likely to be enforced.
c. Illustration of reasonable reliance on the part of the promisee
1) E.g., Feinberg v. Pfeiffer: P worked for D for almost 40 yrs. At the Board of
Directors meeting it was decided that P would be given a raise, the privilege
of retiring at any time she wanted, and paid $200 per mo for life. P was told
about this; retired 2 yrs later. New mgmt. decided the pension was mere
gratuity and sent P only $100. Promise was enforceable: P retired in
reliance upon D’s promise; very hard for old woman to get another job. D
could reasonably expect the forbearance.
a. P likely could have bargained for the retirement package–she was a
very highly valued employee who they wanted to please.
d. A vague promise made after P planned to change his position isn’t enforceable
under promissory estoppel.
1) E.g., Hayes v. Plantation Steel: P decided to retire in 6 mos, spoke to D 1 wk
before leaving and D told him the company “would take care of him.” No
mention of the amount of money, no formal authorization, no pension plan
in place; it was “a token of appreciation.” P received $5,000/yr for 4 yrs.
Each yr P visited the company, thanked them for the $, and asked how long
they continued to pay him. Business was taken over and $ stopped. P
decided to retire before the promise of the pension; D didn’t expect
reliance, not unjust to not enforce: P received $20K over 4 yrs and was
uncertain about the continuation of the $.
a. It’s not clear whether P could’ve bargained for his promise. The
promise he received was very vague.

a. Promissory Estoppel: Charitable Promises

I. Expanded Bargain theory doesn’t work. It’s typically inappropriate for donor
or donee to negotiate over the donation.
II. Courts especially care about enforcing promises to charities (policy reason)
III. Charities rely on the goodwill of ppl to support them
a) How will enforcement of a promise to a charity effect future promises?
b) E.g., Allegheny College: P promised to pay Allegheny College $5,000
after she died. She stipulated how she wanted the money to be used.
Paid $1,000 up front. 1 yr later P told D promise was off. After P died D
sued for the remainder of the $ promised. Cardozo ordered D’s estate
to pay $4,000. Cardozo used consideration to justify enforcement; hard
to enforce under reliance bc D knew P repudiated the promise.
II. A hope or expectation, even if well founded, is not reasonable reliance.

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 1. Congregation v. DeLeo: D was dying and was visited by a Rabbi multiple
times; D made an oral promise to give the congregation $25K. P planned to
build a library in D’s name w/ $. P allocated $25K in its budget. P argued
either consideration or reliance  enforcement. No consideration bc no
benefit to D or detriment to P; lib didn’t induce the promise. No reliance bc
allocating the money merely reduced P’s expectation to writing. There is no
injustice by not enforcing the promise.

D. When Past Consideration Suffices: The Material Benefit Rule

i. 2nd Exception to Consideration Requirement
ii. Restatement §86. Promise for Benefit Received:
1. A promise made in recognition of
2. A benefit previously given by the promisee to the promisor
3. Is binding to the extent necessary to prevent injustice
4. A promise is not binding if
1) the promisee conferred the benefit as a gift or for other reasons the
promisor has not been unjustly enriched; or
2) to the extent that its value is disproportionate to the benefit.
iii. Limited to promises in which the benefit was conferred w/ an expectation of payment;
promises based on past gifts or moral obligations aren’t enforced.
a. Concern remains over not enforcing gift promises
iv. Very rarely used; Often used for bargains over ideas and information
a. A has info that B wants, but B doesn’t know if it’s info he’s willing to pay for. Once
A reveals the info she loses all bargaining power–B now has the info and can refuse
to pay. A could make B agree to pay a “reasonable value,” but this would be
unenforceable under common law indefiniteness doctrine.
v. E.g., Desney v. Wilder: P wrote a screenplay, called producer to share idea & had to tell
secretary. P told her he wanted to be paid if idea was used. Secretary said of course.
Producer used his idea, but didn’t pay. Court ordered enforcement of the promise.
a. The seller of info has less bargaining power. Once idea is shared all his work is
gone, and no way to get it back.

vi. Other factors to consider: [Did promisor intend to be bound]

a. Was a benefit conferred on the promisor or a 3rd party?
b. How long did promisor reflect on his promise?
c. Did promisor ever repudiate his promise?
d. Did promisor partially perform his promise?
e. Did promisor receive a substantial benefit from promisee?
f. Did promisee incur a substantial detriment?
g. E.g., Mills: Employee blocked a plank from falling on and killing his boss, he was
permanently disabled. Boss made a promise (28 days later) to pay him for life. Paid
for 8 yrs until he died. Promise was enforceable.
h. E.g., Webb: P took care of D’s dying son, once the son died P told D. D promised to
repay him (4 days later), but later repudiated and never paid anything. P only
incurred cost of caring for son. D didn’t receive a benefit–his son died.

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 vii. Provides assurance to a party who confers a benefit in absence of a definite agreement
for compensation that a subsequent promise from D to pay for the benefit will be legally
enforceable.

E. Unjust Enrichment
i. The law wants to encourage ppl to bargain b4 performing services, but if a performance
was given that unjustly confers a benefit to another, there may be restitution.
a. Person performing can’t be a volunteer; must reasonably expect payment.
b. Exs: 1) Doctor performs services on unconscious patient. Patient must pay
1) Gardner fixes yard thinking it is owned by person who hired him, but it’s not
2) NOT unjust enrichment: Someone mows your lawn, knowing it’s your lawn
and that you didn’t offer to pay. Can’t receive payment for forcing benefit.

Interpreting Terms: What Was the Bargain?

a. The practical interpretation the parties give to their Ks while they are performing,
before things go south, is one of the best indications of the parties’ intent. Eastern Air
Lines
b. Judges enforce what a K says unless it is unambiguously ambiguous

A. Indefinite Promises and Open Terms

1. Common Law: If an agmt is indefinite as to material terms it is unenforceable
a. Unless the parties intend some external reference point to fill the gaps (e.g., state
that market value will be used to determine price).
2. Courts want to help ppl contract if that is their intention, so they will fill gaps w/ default
rules, but if there are too many gaps or the material terms are missing and can’t be
inferred, the court won’t enforce.
a. Too many gaps shows an intention not to be bound
b. Valid K req’s the parties’ agreement to be certain and explicit so their full intention
may be ascertained to a reasonable degree of certainty. Can’t be vague or
indefinite. Outside (parol) evidence can’t be used.
3. E.g., Trimmer v. Van Bomel: Woman promised to support P and give him a “sumptuous
life.” D stopped paying him and P sued for breach. Court refused to enforce bc the agmt
was too vague in all material terms: no amount of $ specified, no length of agmt, no
mechanics for the payments, no specification of what P had to do to get $.
4. E.g., Morone v. Morone: Parties had agmt that all net profits would be shared equally.
Even though the $ amount wasn’t specified in the agmt, “net profits” is easily calculated by
either party, so not too vague.

5. A promise may be lacking but the writing as a whole may express a material term
a. E.g., Wood v. Lucy, Lady Duff-Gordon: P had exclusive right to sell and license D’s
clothing in the U.S. P was to give ½ the profits to D. D sold her products in the U.S.
and didn’t share profits. D said it wasn’t a valid K bc there was no consideration
for her promise to give him the exclusive right. Cardozo found consideration
implied in the K bc P’s promise to sell & market would be valueless if there wasn’t

27
 the implied term that he would do so w/ best efforts. D would’ve only entered K if
she believed she would get a profit by doing so.
I. Once the parties’ intention is considered, P’s promise has value.

6. Common fact patterns:

a. Indefinite bonus contracts: “fair share of the profits” is too indefinite
b. Agreements to agree: Parties decide to agree in principle, but leave many of the
details unresolved, opting instead to bargain over them in later negotiations.
1. Traditional Common Law: Unenforceable if any essential term is open.
2. Leval framework: Parties may make binding agreements to agree  good
faith obligation to continue working towards final K

7. A party who has performed under an indefinite, and thus, unenforceable K, may try to
recover based on quasi-contract.
a. Requires an implied obligation to compensate, which arises from those things we
expect to pay for.
b. Elements of quasi contract:
i. A benefit is conferred by P
ii. The benefit is appreciated and accepted by D
iii. The retention of the benefit would unjustly enrich D
c. Ex: P promises to mow D’s law, but doesn’t specify price. D can’t get out of paying
due to indefiniteness. Quasi contract bc P conferred a benefit to D, which D
appreciated and would be unjustly enriched by.

8. UCC: Open terms ok if the parties intended a K & remedy is determinable

a. §2-204(3): If the parties want to create a binding K even though one or more terms
are left open, a K for sale of goods won’t fail for indefiniteness as long as there is a
reasonably certain basis for giving an appropriate remedy.
i. There doesn’t need to be certainty as to what the parties were to do or
the exact amount of damages due to P.
ii. Agreement to agree ok
iii. Commercial standards & other UCC provisions fill gaps
iv. The more terms left open, the less likely it was intended to be binding
 Figuring out if the parties intended to make a K must be determined in
light of the facts and conduct of the parties.
 There is a realization that all Ks are indefinite to some extent, this
indefiniteness doesn’t speak to the parties’ intent to be bound.

b. §2-305: all about giving effect to the agmt which was made
i. If the parties intend, they can conclude a K for sale even though the price
is not settled. The price is construed as being a reasonable price at the
time for delivery if:
a) nothing is said as to the price
b) the price is left to be agreed by the parties and they fail to agree

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 c) the price is to be fixed in terms of an agreed market or other
standard set or recorded by a 3rd person and it’s not set or
recorded.
ii. A price to be fixed by seller/buyer must be fixed in good faith
iii. When the fault of one party causes a price, which is to be fixed otherwise
than by agmt of the parties, not to be fixed, the other party may cancel
the K or fix price himself.
iv. If the parties intend not to be bound unless the price be fixed or agreed
and it isn’t fixed or agreed, there is no K.
a) Ex: A known and trusted expert is to determine the value of the
painting, for which there is no known market vale.
b) The buyer must return any goods already received or pay their
reasonable value and seller must return $.

 E.g., Wagner Excello Foods v. Fern Int’l: P and D had 5 yr agmt for the
manufacture of fruit juice. The sales price of the drink was not set. Parties
agreed they would review the price every 4 months and P would notify D of any
proposed price changes. D had option to object, then they would mutually
agree, if they couldn’t mutually agree, K terminated. D didn’t purchase enough,
P sued for breach, D said agmt failed for indefiniteness.
a. K had all other essential elements: non compete, indemnification,
liability insurance, consent. Shows an intention to be bound for the 5
yr term, so it can’t fail for lack of agreed upon price.

9. Relational Contracts: Binding Preliminary Agreements [Agreements to agree]

a. Common fact pattern: Two commercial parties agree to transact w/ each other &
agree on the nature of their respective contributions, but neither the transaction nor
the contributions are precisely described. In order for the project to be realized one
or both of them must make an investment before the uncertainty is resolved. The
investment can’t be recovered unless the parties perform the K.
i. The investment is a “sunk cost”
ii. One party abandons the project after the other has invested. At common law
the agmt fails for indefiniteness, so party who invested first can’t recover.

b. Competing Policy Concerns: (1) avoid trapping the parties in surprise contractual
obligations that they never intended, (2) enforce and preserve agmts that were
intended as binding, despite a need for further documentation or negotiation.
i. Goal is to enforce a preliminary agmt only to the extent that the parties intend
it to be binding.
ii. Type II gives parties flexibility to make plans in reliance upon preliminary agmts
and present market conditions w/out expending enormous sums negotiation
every detail before they know if they have an agmt, and on what terms.

 Leval Framework (Minority Trending CL Rule) Default Rule; parties may opt out
by saying agreement to agree isn’t binding

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 c. Type I “Complete”: Parties have agreed to all necessary elements of the K. Parties
are fully bound to perform the ultimate objective of the K despite the fact that a
more formal writing hasn’t yet been, or may never be, produced.
i. A party may demand performance, even if formal agmt never created
ii. Factors:
a) Whether there is an expressed reservation of the right not to be bound in
the absence of a more formal writing
a. If agmt expressly anticipates future preparation & execution of
contract docs, likely not Type I
b) Whether there has been partial performance
c) Whether all the terms have been agreed to
d) Whether the agmt at issue is the type that is usually in writing

d. Type II: Binding only to a certain degree, reflecting agmt on certain major terms, but
leaving other terms open for further negotiation. The nature of the agmt is that it
commits the parties to negotiate open terms in good faith.
i. Party has no right to demand performance of the transaction
ii. If final K is never agreed upon, the parties may abandon the transaction as long
as they’ve made a good faith effort to close the deal
iii. Factors:
a) Whether the intent to be bound is revealed by the language of the agmt
b) The context of the negotiations
c) The existence of open terms
d) Partial performance
e) The necessity of putting the agmt in final form, as indicated by the
customary form of such transactions
iv. Whether the parties have agreed to proceed within an open framework toward
a contractual goal, leaving necessary terms for later negotiation.

e. E.g., Brown v. Cara: P & D signed a “Memorandum of Understanding (MOU)” in

which they agreed to work together to develop, build, market, and manage a real
estate venture. Final K w/ terms was dependent on P getting the lot rezoned (didn’t
want to waste $ negotiating final K when if project wouldn’t work out). P had to
front the costs up to $75K. MOU was a Type II Binding preliminary agmt, so parties
were bound to negotiate in good faith terms necessary to work towards the real
estate venture. Factors:
i. They “agree to work together to complete the project”
ii. They agreed to negotiate a general framework w/in which they could proceed
while preserving flexibility in the final K’s terms
iii. Key terms left open due to rezoning the lot
iv. P provided extensive, valuable performance, so he was entitled to D’s good faith
in negotiating remaining open terms
v. The MOU clearly contemplated future agmts; parties even tried to negotiate a
final agmt after the rezoning.

10. Interpretation of Vague Terms in Ks governed by UCC

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 [Good Faith & Best Efforts]

a. The practical interpretation that the parties give to their Ks while they are engaged in
their performance, before things go south, is one of the best indications of their true
intent. Eastern Air Lines

b. Output and Requirements Contracts [Good Faith]

i. Output & Req’ts Ks allow the parties to form Ks w/ flexible terms.
ii. Req’ts: Meant to give buyer discretion over the quantity they need in the future
a. Seller has the flexibility to find other buyers if first buyer’s needs are
insufficient.
b. If K price > market price the buyer will seek to purchase fewer items than it
would otherwise. Seller can sell to other buyers, but for less $ than to
buyer.
c. If K price < market price buyer will seek to purchase more. Price indexes,
e.g., Eastern Air Lines, can help protect seller.
d. Risk Allocation:
i. Buyer: Seller doesn’t produce enough, and K price > market price
ii. Seller: Buyer wants too much only w/in good faith range, K < MP

iii. Output: Meant to give seller a guaranteed market for their uncertain production;
buyer agrees to purchase everything the seller produces.
a. Buyer can still purchase add’l goods from other sellers, but seller can only
sell the output to that buyer.
b. When K price < market price seller will produce less. Buyer can meet her
needs from other sellers, but has to pay the greater market price.
c. When the K price > market price seller will want to sell more to buyer.
Buyer is vulnerable; this is where price controls, i.e., price indexes come in.
Good faith meant to limit too.
d. Risk Allocation:
i. Buyer: Seller produces too much, K > MP
ii. Seller: K < MP

iv. UCC §2:306(1): A term which sets the quantity as the output of the seller or req’t of
the buyer means the actual output or req’ts that may occur in good faith, but can’t
be a quantity unreasonably disproportionate to a stated estimate, or in the absence
of a stated estimate, to any normal or otherwise comparable prior output or req’ts
may be offered or demanded.
a) Buyer can’t demand disproportionately more than amount estimated bc if
buyer could request a large # when market price raise above the K price
then buyer could resell and become a competitor of seller.
b) Buyer is allowed to take disproportionately less than amount estimated,
but only if it’s in good faith. Buyer can’t arbitrarily say he has 0 req’ts.
1) E.g., Empire Gas Corp v. American Bakeries: Agmt to buy approximately
3,000 units of propane tanks more or less depending on buyer’s req’ts.
D ended up buying 0 units bc they decided not to convert cars to

31
 propane. P sued for breach and won bc D could offer no reasons for
their reduction in req’ts.

ii. §2-103(1)(b): Good faith in the case of a merchant means honesty in fact and the
observance of reasonable commercial standards of fair dealing in the trade.
a) Commercial standards: course of performance/dealing, trade usages
iii. E.g., Eastern Air Lines v. Gulf Oil: P and D had been in a K for over 15 yrs for the sale
and purchase of aviation fuel. Entered a new K based on D’s req’ts for oil and set
the price of oil in the K to an external price index. The index no longer reflected
market value–D was able to buy oil from P at an artificially low price. D bought a
lot more than they had in the past, P thought they were taking advantage. Court
found no violation of good faith by D.
a) P never complained in the past about D’s variance in the amount of fuel
they picked up, and P knew picking up extra fuel when price was low was a
standard industry practice.
b) Should have argued impracticability. The lynchpin of the K was the price
index which no longer worked.
c) If P really thought D was acting w/ bad faith they should have spoken up
earlier; it’s unconvincing now.
1) Ex: Gulati has an agmt w/ his wife to do the dishes everyday, but he
never does the dishes. He does grocery shopping instead. If wife is
find w/ this for 20 yrs then all of a sudden alleges him of acting in bad
faith for not doing dishes it doesn’t seem right.

c. Exclusive Dealings Contracts [Best Efforts]

 How much discretion did the principle give to the agent? At what point does the agent’s
conduct constitute a breach of best efforts, given that discretion?

i. Exclusivity meant to motivate the agent to promote and market the product.
a. Removes the threat of someone else coming along and getting the benefit for
his work. He knows he will be paid for the work he performs.
b. E.g., Author hires publicist (agent). Publicist might fear that he will promote
the author then the author will fire him and the new publicist will benefit
(through increased publicity) from his work.

ii. Buyer/distributor is the sole agent who can distribute

iii. Sellers are vulnerable–they can be harmed by lazy/incompetent distributor
a. Parties must limit the agent’s discretion w/ best efforts clause or other
constraints, but don’t want to limit agent’s discretion so much that he
doesn’t perform well.
b. Goal is to incentivize the agent to do a lot for you (by granting discretion),
w/out the principle taking on too much risk of the agent damaging them
through bad decisions or laziness. Interests are aligned.

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 iv. UCC §2-306(2): An agmt by either the seller or the buyer for exclusive dealing imposes
an obligation by the seller to use best efforts to supply the goods and by the buyer to
use best efforts to promote their sale.
a. Need to figure out what exactly the parties were promising to do
1. The promises are vague in relational Ks; best efforts doesn’t mean no
work or perfect work, but there is a lot in btwn, so point of breach is
hard to determine.
b. Risk Allocation:
1. Seller/Principle: Agent will do a poor job selling the product
2. Buyer/Agent: Seller won’t supply the goods; foregoing other, more
profitable, opportunities

v. An agent handling competing brands isn’t a violation of “best efforts” if some other
distributor on the market would similarly treat the competing product.

vi. The obligation to use best efforts may be ended if the production or sale of the item
would cause the party to go bankrupt or would genuinely imperil the entire business
a. Making less profit than expected does not end the obligation. (Feld)

vii. E.g., Bloor v. Falstaff Brewing: D bought P’s brand for $4 mill + a royalty agmt based on
volume of sales. D agreed to use best efforts to promote & maintain a high volume of
sales. D’s business was struggling; they made changes which greatly decreased the
sales of P’s beer, as compared to other beers. D had the obligation to use best efforts
to sell P’s beer, and failed; had to at least try to take steps to avoid drop in P’s sales.
a. “Best efforts” is in the K, but court needs to interpret. D was req’d to treat all
brands equally. Only excused if selling P’s beer would lead to substantial loss
or bankruptcy.
1. D was free to exercise its judgment as to how to maximize profit, but
bc they assumed this best efforts obligation, they didn’t have this
freedom w/ respect to P’s brand.
b. Could come out the other way: P knew D had multiple beers it was selling
and that it made 100% profit on some of those. P should have known D
would favor some beers over others.
c. P granted discretion to D, judge gave context to the grant of discretion.
Some underperformance ok, but at some point it’s a breach. In this case,
judge says complete abandonment of P’s product is breach.

a. E.g., Wood v. Lucy, Lady Duff-Gordon: Court implied a best efforts clause into the K bc of
the structure of the agmt. Exclusive dealings only makes sense, due to profit sharing, if
there is implicit term that P will use his best efforts to promote D’s products.

b. E.g., You lend $ to Zimbabwe. Lots of stuff could happen. You give them $ and ask them
to invest it and hope to get your $ + interest back. You give them some discretion to use
your $ as they see fit, and they are usually skilled at investing. What if something happens
unexpectedly? Ex: Defaulting on debt. Zimbabwe isn’t as trustworthy as U.S. is at repaying
debt, so lenders give them much less discretion than they give the U.S.
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B. Excuses for Lack of Performance
 Excuses based on supervening event: impossibility, impracticability, frustration of
purpose
 Excuses based on the K itself: Misunderstanding, Mutual Mistake, Unilateral Mistake
 Courts must interpret the K to determine whether the parties assigned the risk of the
mistake or of the supervening event.
o If parties didn’t assign the risk, court may apply a default rule or void the K.
 Excuse doctrines are controversial bc they allow a party to avoid duties under an
otherwise enforceable K
o Ex: Excusing ALCOA from K bc market price went up might make future
companies less willing to make or rely on K’s w/ indexed prices–the buyer
entered the K bc the risk was assigned to the supplier. But freedom to contract
and fundamental fairness show that ALCOA should not be held to a K that causes
astronomical losses/huge windfall profits that were not reasonably foreseeable.
I. How was risk allocated?
a. Executory contracts (Ks for the promise to perform future actions) always involve risk
i. Ex: You want to go on vacation so you make a reservation in advance w/ the hotel
& pay a down posit. The purpose of this K is to prevent the risk of the hotel being
booked when you arrive. But, by entering the K you accept the risk that you
might not be able to go or market prices might drop lower than what you agreed
to pay.
1. The risk of contracting is believed to be less than the risks the parties would
bear in the absence of any contract.

b. §154: When the Risk of a Mistake is Allocated to a Party

 If any of these apply, K cannot be voidable under mistake doctrine

i. Express allocated in the agreement of the parties

1. E.g., Contractor explicitly agrees to build the house regardless of subsurface
soil and water conditions. He bears the risk of these conditions making the
task impossible, more challenging, etc.
2. E.g., Force majeure clauses: Parties may condition a promisor’s performance
on the non-occurrence of an event. (e.g., excused from performance if there
is fire, war, etc.)

ii. Implied allocation: The risk is allocated to a party by the court on the ground that it
is reasonable in the circumstances to do so.
1. Implied-in-fact: Court tries to figure out where the parties intended the risk
to be allocated. Look at parties’ negotiations and purposes, trade custom,
course of dealing.
a. The allocation often corresponds w/ the expectation of the parties, e.g.,
equity traditionally put the risk of casualty losses on the buyer of land.

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 2. Implied-in-law: Based on policies of high generality, e.g., Ks are generally to
be enforced and land sales are generally to be treated as final.
a. Ex: A farmer who contracts to sell land may not escape the obligation to
sell if minerals are discovered on his land which make the land more
valuable than he knew at time of K.

iii. One or both parties enter a K in a state of conscious ignorance

1. If you know you have insufficient knowledge about the “mistaken” term at
the time you enter the K, but treat your insufficient knowledge as sufficient,
you are deemed to risk the burden of having the facts turn out to be adverse.
2. E.g., Parties agree to sell/buy a stone. Neither knows if it’s glass or a
diamond. Choose not to get it inspected, and decide on a price that reflects
the uncertainty. K is enforceable whether stone ends up being glass or
diamond.
a. But, if both parties mistakenly believe the stone to be glass and it ends
up being a diamond, it’s mutual mistake and the seller may void the K
(he’s the one adversely effected bc he lost $ due to the mistake).

II. Impracticability of Performance and Frustration of Purpose

I. An unforeseeable event makes a condition precedent impossible to perform.

i. Different from mistake doctrine, where there was a false belief about a condition
precedent at the time the contract was formed.

A. K is rescinded if performance is impracticable/frustrated

B. Unforeseeability is key: The parties didn’t assign the risk bc they didn’t anticipate it.
i. If risk was anticipated but not assigned, the unconditional language requiring
performance might mean they assigned the risk to whichever party is adversely
affected by it.

C. An intervening event has radically changed one or the other party’s valuation of the K;
that party now wants to void the K so that she (Seller) doesn’t have to perform at high
cost or he (Buyer) doesn’t have to pay for something he doesn’t want.

D. These arguments are presumptively disapproved of.

a. The parties took on the risk that their valuation would change as a result of
unforeseen or low-probability events
b. Party always has the option to breach and pay damages instead of performing; other
party still gets what she bargained for.

E. Sellers can sometimes escape obligation to perform when cost of performance rises too
high, & buyers can sometimes escape obligation to pay when their valuation sinks too low.

F. If it’s not truly impossible, court will find implied allocation of the risk and enforce K

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 i. If a risk materializes in a positive K which hasn’t been allocated, & performance
isn’t impossible, the promisor is bound to perform his obligation.
1. Court finds an implied risk assignment; who would have been assigned the
risk if the parties had contemplated it, or who is better able to bear the
risk?
a. Who can guard against the risk materializing? Purchase insurance,
perform due diligence to prevent risk from materializing, etc.

ii. E.g., Stees v. Leonard: P had K for D to construct a building on their lot. D tried
twice to construct it, but the building collapsed both times due to poor soil. D
refused to perform the K. P sued for breach. D said they followed the
specifications of the K, but performance was impossible. Court said performance
was more burdensome than anticipated, but not impossible. D had a duty to do
w/e was necessary to perform the K.
2. Not mutual mistake bc it didn’t cause a severe imbalance. More
inconvenient to D, but P didn’t benefit from the mistaken belief that the
soil was suitable.
3. Court implied an assignment of the risk to D
a. Gives future Ds incentive to expressly allocate risk to the land owner.
b. Based on general principle that Ks should be carried out
c. Precedent assigns risk to the contractor

G. When a party’s performance is made impracticable w/out his fault by the occurrence of
an event, the non-occurrence of which was a basic assumption on which the K was
made, his duty to render that performance is discharged.

i. Exception: if language or the circumstances indicate otherwise.

i. If the parties knew performance of the K depended on something’s continued

existence (it’s continued existence was a basic assumption), there is an implied
condition precedent that the performance shall only be req’d if that thing
continues to exist.
ii. E.g., Taylor v. Caldwell: K for P to rent D’s music hall. A fire burned the hall down
before the first concert. K said the existence of the music hall in a state fit for
concert was essential for the fulfillment of the K. No express allocation of the risk
of something happening to the hall. Both parties are excused from performance
since the existence of the hall was essential to performance of the K; it’s now
impossible to perform.
1. The court chose to leave the loss where it fell.
iii. UCC § 2-615(b) [same rule]

iv. The continued existence of a person or thing is ordinarily a basic assumption.

1. Death/destruction  unenforceable K. §262 (death) & §263 (destruction)

v. The continuation of existing market conditions and of the financial situation of the
parties are ordinarily not basic assumptions.

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 1. Market shifts or financial inability do not usually effect discharge.

vi. Ex: In July A and B enter K for delivery of goods in October at a port. Port is closed
all of October due to a quarantine regulation and no commercially reasonable
substitute performance is available. A fails to deliver. A’s duty to deliver is
discharged bc her promise to deliver was conditioned on the availability of the
port. A is not liable to B for breach.

vii. Ex: A contracts to produce a movie for B. B knows A’s only source of funds is a
$100,000 loan; loan doesn’t go through. A isn’t discharged, and is liable to B for
breach. A’s promise was unconditional.

viii. When a condition is impossible to comply w/, the K is still in effect, but the
party faced w/ the impossibility is excused from complying w/ the condition
i. E.g., Insured’s right to her insurance payout was conditional on her giving
notice w/in 24 hrs of an accident. She was unconscious during the full 24 hr
period, so she was excused from giving notice, as long as she did so w/in a
reasonable time after regaining consciousness.

H. Doctrine of Frustration: Invoked by buyer when unforeseen event  loss of value of

seller’s performance

i. If an unforeseen circumstance makes the seller’s performance virtually worthless

to the buyer, the buyer may no longer have to perform.
ii. the frustration must be substantial and
a. So substantial that it wasn’t reasonably w/in the risks that he assumed
under the K
iii. the purpose that is frustrated must be the basis of the K
iv. the non-occurrence of the event must be a basic assumption of the contract.

v. Ex: Henry entered a K w/ Krell to use his apt for 2 days during the coronation of
the King. The King became ill and the coronation was cancelled. Did Henry have
to perform still (pay for the apt)? Henry’s value of the apt dramatically decreased.
Henry was excused from performance bc a state of things essential to contract
performance failed to be in existence, and this failure can’t reasonably be said to
have been the contemplation of the parties at the time of contract.
a. King’s illness wasn’t foreseeable

III. Mutual Misunderstanding: Void K bc no mutual assent

I. A misunderstanding exists when:
i. The parties’ contract is ambiguous, i.e., it is reasonably susceptible to more than
one meaning
ii. The parties actually had in mind different interpretations of the language
iii. The misunderstanding is material

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 II. If the 3 elements are satisfied, the K is unenforceable bc neither party can be assigned
the greater blame for the misunderstanding, so there is no nonarbitrary basis for
deciding which party’s understanding to enforce.
i. Ex: Raffles: Two ships named Peerless arriving on two separate days. Seller and
Buyer thought “Peerless” referred to different ships. Misunderstanding:
“Peerless” was ambiguous (no way of knowing which ship K referred to), the
parties actually thought they were referring to different ships, it’s a material
misunderstanding bc the 2 ships arrive at different times, so unenforceable K.
III. Court may find misunderstanding when one K was a newcomer to a trade and other
party used trade usage term that is contrary to plain meaning term.

IV. Mistake: Voidable K

I. §151: A mistake is a belief that is not in accord w/ the facts
i. Facts which are unknown but presently knowable and facts which presently exist
but are unknowable are both mistakes. Sherwood
1. E.g., Rose’s pregnancy in Sherwood was knowable, but was unknown

II. Mistaken assumptions about future conditions typically aren’t the sort of mistakes
which make K voidable. (not basic assumption)
i. Exception: If the parties are unconscious of their ignorance; both parties
mistakenly believe they know the vital facts about the future.

III. §152: Mutual Mistake: K is voidable by the adversely effected party unless he bears
the risk of the mistake (§154)
i. Mistake
ii. Mutual
1. Adverse effect doesn’t have to be mutual, but both must be mistaken
iii. Material to the K (a basic assumption underlying it)
1. Market conditions & parties’ financial situations aren’t material
2. Basic assumptions don’t have to be explicit in the K
a. E.g., A party buying an annuity on the life of another is based on the
basic assumption that the person was alive at the time
iv. It caused a severe imbalance in the agreed exchange
1. The resulting imbalance must be so severe that adversely effected party
can’t fairly be req’d to carry it out.
a. Requires showing that the mistake has not only made the exchange less
desirable to him, but also more advantageous to the other party.
2. Party seeking relief can show he wouldn’t have made the K had it not been
for his mistaken belief.
v. Ex: Sherwood v. Walker: Walker sold Rose to Sherwood. Both believed she was
barren, and there was no way either could have known she wasn’t. Barrenness
was material bc she was worth significantly more as a fertile cow. It caused a
severe imbalance bc Sherwood fortuitously got a great deal, and Walker suffered.

vi. E.g., ALCOA v. Essex: Long term K for ALCOA to supply aluminum to Essex. K had
several price indexes included as a way to prevent unforeseen circumstances from

38
 hurting ALCOA (tried hard to prevent unforeseen risk; didn’t want to bear it). The
index for non-labor production costs no longer tracked market prices bc ALCOA’s
electricity costs radically increased. Essex was making a huge profit and ALCOA
was losing millions. Wasn’t impracticability bc the situation existed at the time of
contracting.
1. Mistake: At the time of contract the parties believed the index would fxn to
protect ALCOA from market fluctuations, this was not the case.
2. Mutual: Both parties believed the mistake
3. Material: The index fxning was a basic assumption; meant to prevent risk
4. Sever imbalance: ALCOA would lose $75 mill & Essex would gain a ~ $
 Not conscious ignorance bc both parties were unconscious of their ignorance;
both mistakenly believe they know the vital facts.
o They consciously undertook a carefully calculated, not limitless risk
 ALCOA is entitled to some relief: K is changed so that D still benefits from its
favorable bargain, but P is granted a better limit of the risk.

vii. Factors to consider when modifying these Ks:

1. The parties’ prevision of the problems which eventually upset the balance
of the agmts and their allocation of associated risks [did they foresee it]
2. The parties’ attempts at risk limitation
3. The existence of severe out of pocket losses
4. The customs and expectations of the particular business community
 An indexed price term is evidence of an attempt to limit risks in a long term
K, not evidence of prevision of the problem. ALCOA
 Judicial relief should be limited to cases where the parties manifest a desire
to limit risks & one party suffers severe out of pocket losses which weren’t
adequately foreseen and allocated by the parties.

IV. §153: Unilateral Mistake: Mistake of one party makes a K voidable by him unless he
bore the risk (§154). The standard for judicial relief is higher than for mutual mistake.
i. One party makes a mistake at the time of K
ii. About a basic assumption on which he made the K
iii. It has a material effect on the agreed exchange which is adverse to him and
1. The effect of the mistake would make enforcing the K unconscionable
2. Other party should’ve known of the mistake, or mistake was his fault
a. [A party can’t take advantage of the other’s unilateral mistake]
b. Did the other party have a duty to disclose the mistaken belief to the
other, e.g., previous murders in the home?
iv. Then, K is voidable unless mistaken party bore the risk (§154)

v. E.g., Williams v. Walker-Thomas Furniture I: P bought furniture over many yrs

from D on an installment plan. She signed Ks which stated that D retained
ownership of the first piece until all of the pieces were paid off. P didn’t read the
Ks and didn’t understand this provision. CoA said unilateral mistake and enforced
the K (§153 wasn’t adopted, so unconscionable exception not option)

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V. Performance or Breach? What Did the K Require?
A. Disputes generally arise from order of performance or standard of performance problems
B. What exactly did the promise mean? And what did the promisor actually do?
C. If a deviation from the promise occurs, however small, there has been a breach.

D. Anticipatory Repudiation: If a party announces ahead of performance that they are not
going to perform, the other party may sue for breach before the start of performance.
a. Gives the promisee an opportunity to mitigate the loss from breach so the party
repudiating the promise has to pay less in damages.
b. Ex: B is supposed to deliver widgets to C. 2 weeks before delivery C tells B he isn’t
going to purchase. B now has the option of finding another buyer so his money
invested is not totally wasted. If C isn’t sure whether she wants the widgets or not,
this encourages her to breach early so she will pay less in damages; only has to pay
difference btwn what B would’ve made on their K and what he makes on new K.

E. Order of performance: Conditional and Unconditional Promises

a. Conditional/Dependent Promise: Promises that are contingent on the occurrence
of certain events–including the performance of other promises or performances.
i. Promisor must perform only if the condition occurs
b. Unconditional/Independent/Absolute Promise: A person has an obligation to
perform or pay damages, regardless of what other party does or doesn’t do.

c. Ex: Insurance K has conditional promise that they will pay if your house burns down.
But, a clause says that insured must give notice to insurer w/in X days of a fire. Is
this a conditional or unconditional promise, i.e., is their promise to pay conditional
on insured’s giving notice, or do they have to pay regardless?

d. Explicit conditional promise

i. Court typically assumes there is not an express condition precedent; the
party asserting one must prove the condition.
1. If party can’t prove one existed, it has to pay even if other party didn’t
fully perform.
ii. E.g., It shall be a condition to the payment of any loss that Insured give
notice to Insurer w/in X days of a fire.

iii. Req’s interpreting the language of the K [courts can play w/ these to avoid
harsh results]
1. Textual approach:
a. “Pay-when-paid” may not be a condition precedent, but
“provided that the owner pays” likely is.
2. Compare the language at issue w/ other language in the agmt
a. If an agmt contains a list of express conditions, a court may
assume that other temrs omitted from the list aren’t
conditions
i. E.g., Insurance policy said it was a condition precedent
that insureds have to notify them of an accident.
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 Later in policy there was a clause that the crop
shouldn’t be destroyed until insurer can inspect.
Insureds destroyed the crop before inspection, but
insurer still req’d to pay
3. Purpose of the agmt
a. In businesses, the time of delivery of a shipment of goods is
assumed to be very important, so if delivery occurs late
courts are usually willing to release buyer from performance.
4. Usage of trade, course of dealing, course of performance
a. E.g., “Time is of the essence” may be interpreted by the
freight trade to mean that the time of delivery is a condition
precedent. Prior dealings may show that “freight express is
to deliver on or before June 4” creates a condition precedent.

5. Ex: Bob agrees to buy Alice’s home on condition that he can obtain
financing “from a bank or other lending institution” at an interest rate
which doesn’t exceed 8%. Bob can only receive a rate of 9%, but Alice
offers to lend the money at 8%. Bob doesn’t have to accept Alice’s
offer bc his promise to buy Alice’s home was conditioned on receiving
a loan w/ 8% interest from a bank or other lending institution, which
Alice is not.

e. If not explicit, court must figure out if there is an implied condition precedent

i. When parties promise to perform concurrently, each promise is treated as

conditional on the performance of the other promise.
1. If one party doesn’t perform the other party is excused.
a. E.g., Buyer will pay for boat at the time seller delivers it. If
buyer doesn’t bring $ or seller doesn’t bring the boat, the
other party doesn’t have to give the boat, or give the $,
respectively, but can sue for breach.
2. UCC §2-507: Seller’s tender of delivery is a condition to the buyer’s
duty to accept the goods and pay for them. Tender entitles the seller
to acceptance of the goods and to payment according to the K.
3. UCC §2-511: Buyer’s tender of payment is a condition to seller’s duty
to tender and complete delivery of the goods.

ii. When parties promise to perform sequentially, each promise is treated as

conditional on the immediately preceding promise (from the other side)
being performed.
1. The law generally req’s the party whose performance will take longer
to go first
a. I.e., we pay ppl after they’ve performed services, not before
2. Ex: Buyer agrees to pay in advance for seller delivering his boat.
Buyer’s promise is unconditional–he must pay. Seller’s is conditional–
he only has to deliver if buyer has paid.

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 a. Giving seller the option to not deliver if buyer doesn’t pay
prevents waste. Don’t transport the boat back and forth, etc.
3. Ex: Multiple sequential steps: Construction contract where D pays
installments for P’s work each month. D’s payment for Jan is
conditional on P working in Jan. P’s work in Feb is conditional on D’s
paying in Jan.

F. Standard of Performance: What is req’d by an implied condition precedent?

 These are default rule the court applies when parties haven’t specifically agreed on
the standard of performance that should govern the K.
o Haven’t made performance expressly conditional, but is it impliedly conditional?

1) Sale of Goods: §2-601 Perfect Tender Rule.

a. If the goods or the tender of delivery fail in any respect to conform to the K, the
buyer may:
i. Reject the whole (and not have to pay)
ii. Accept the whole
iii. Accept some and reject the rest
1. Buyer cannot partially accept in a way that produces so materially
adverse an effect on the remainder of seller’s goods as to constitute
bad faith.
b. If the seller holds the tender open, the buyer may reject then accept
i. Buyer can’t accept after rejecting if seller has already arranged for another
buyer to purchase the goods. (liable for conversion)
1. Bc it is reasonable that seller will arrange for resale of the goods after
buyer rejects them.

2) Service and Construction: Substantial Performance.

a. In the absence of an express condition precedent requiring perfect performance,

contract law usually requires only substantial performance before the other
party must perform.
i. Substantial, but not full performance = immaterial breach
ii. Promisee must pay bc you fulfilled the condition precedent, but she can
deduct the amount of damages she sustains from the imperfect
performance.

b. A party who makes a conditional promise can’t reject the performance of a

promisor who substantially (but not perfectly) complies w/ the condition.

i. Promisee is req’d to perform if the promisor has provided a “substantial

performance” + given damages for any unsubstantial omissions.

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 1. Promisor has breached, but promisee still must perform, and then can
sue to recover damages caused by promisor’s breach.

c. Has a party substantially performed?

i. The purpose to be served by the condition
ii. The desire of the aggrieved party in having the condition
iii. The excuse for deviation from the condition
iv. The cruelty of enforcing the condition

d. E.g., Jacob & Youngs v. Kent: Construction K said Reading pipe was to be used. 1 yr
after move-in D discovered the pipes weren’t Reading. D told P to re-do; it would
req tearing down parts of the home so P refused. D refused to pay P remaining $,
P sued.
i. Court said D needed to pay P (perform). Use of Reading pipe wasn’t an
express condition on D’s performance, so court applied substantial
performance standard. P’s substantial performance was a condition
precedent of D’s performance. P substantially performed, so D had to pay.
ii. Factors test:
1. The purpose of the Reading clause was to specify high quality pipe
2. D wanted high quality pipe used
3. P’s breach was inadvertent
4. P would suffer if Reading was a condition precedent. They wouldn’t
get paid when they had substantially performed the K.

e. Lack of Substantial Performance = Material Breach = Failure to Satisfy an Implied

Condition Precedent
i. Promisee doesn’t have to perform her obligation and promisor who breached
owes damages.
ii. If promisor hasn’t materially breached and promisee refuses to perform
based on her belief that promisor did materially breach, promisee is first to
materially breach and she might have to pay expectation damages.

iii. §241: Factors for determining a material breach

1 & 2: Will the
aggrieved party get 1. The extent to which the injured party will be deprived of the benefit
substantially what which he reasonably expected
she bargained for? 2. The extent to which the injured party can be adequately compensated
for the part of that benefit that he will be deprived of
3–4: What will 3. The extent to which the party failing to perform or to offer to perform
happen to the will suffer forfeiture
breaching party if 4. The likelihood that the party failing to perform or to offer to perform
the court finds a will cure his failure, taking account of all the circumstances including
material breach?
any reasonable assurances.
Reasons for breach.
5. The extent to which the behavior of the party failing to perform or to
offer to perform comports w/ standards of good faith & fair dealing.

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 iv. Ex: Bob mows Alice’s law and spills gasoline on her lawn in the process which
causes damage to the grass. Material breach?
1. Alice expected a nice, freshly cut lawn; the more sections of the lawn
that are killed by the gas, the more persuasive Alice’s arg is for
material breach [Alice]
2. The greater the damage the stronger the arg is that $ damages won’t
make her whole. She will face embarrassment over the lawn. [Alice]
3. Bob won’t be paid for his work if material breach is found [Bob]
a. if court finds material breach, he may be able to recover under unjust
enrichment if amount of benefit conferred > damage he caused
4. Bob isn’t able to cure the damage he caused other than by planting
seed, but that will take a long time. [Alice]
5. Bob didn’t know about the mower’s defect, so his breach was
inadvertent and not in bad faith. [Bob]

v. Divisible/Severable Ks and their impact on “material breach” inquiry

1. Divisible Ks: The parties’ promises can be apportioned into
corresponding pairs of part performances.
2. Entire Ks: The parties agree to a single whole; there would have been
no K agreed to if any promise or set of promises was left out

3. E.g., Drug Store orders 10 signs from Sign Company. Drug Store wants
to place them 2 mi apart along the fwy. Sign Company only delivers 5
signs.
a. Does Drug Store have to pay for the 5 signs?
b. If its an “entire” K  was the breach material? (do factors)
c. If it’s a “divisible” K  Drug Store must pay for each divisible
portion of the K that Sign Company successfully performed, i.e.,
the 5 signs.

4. Unless express, court must determine what parties intended

a. E.g., Did they intend substantial performance of all the signs to
be a condition precedent to payment (entire K)
b. E.g., Did they intend delivery of each sign to be a condition
precedent to payment for that sign (divisible K)

3) Good Faith: If K says buyer may reject a performance if it doesn’t satisfy him
a. Buyer’s satisfaction is interpreted to be an express condition precedent to his
obligation to buy the good

b. But buyer must show he acted in good faith (reasonable or honest)

c. Commercial value or quality, operative fitness, or mechanical utility: Reasonable

test applied
i. E.g., Repairing machinery. Buyer may only reject if it doesn’t conform to an
“objective” standard–when a reasonable person would not approve of it.

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 d. Satisfaction involves “fancy, taste, or judgment”: Honesty test applied
i. E.g., Painting a portrait. Buyer may reject it as long as his rejection is honest.
Difficult to prove buyer did so honestly.

e. Ex: Buyer commissions seller to paint a painting of his family and promises to pay if
he is satisfied with the painting. Buyer’s performance (paying seller) is expressly
conditional on his satisfaction w/ the painting. It’s a subjective matter, so buyer
can only refuse to perform if he does so honestly–truly isn’t happy w/ the painting.
Can’t refuse bc the painter was mean to his dog.

I. Methods of Contract Interpretation

 When Ks are ambiguous courts ask how a reasonable person would understand the
words (or actions) in a dispute.
i. Sometimes, a reasonable person would just be confused and unable to distinguish
two or more possible interpretations, see e.g., Raffles, in which case, K is void.
ii. More often, one of the possible interpretations being offered is more plausible than
the others. A reasonable person would adopt that more plausible interpretation, and
the K is enforced accordingly.
iii. Terms of written Ks are given extra weight than are words of oral Ks. Parties are
expected to write more clearly and thoughtfully than they speak, both parties are
expected to read the K before signing, & parties debate over terms, but oral Ks are
often hasty.

iv. Meaning of the language in the K is determined by reading the words in the entire
context of the transaction, i.e., course of dealing, trade usage, course of
performance.

a. Course of Dealing, Trade Usage, Course of Performance

i. Course of Dealing: A sequence of conduct concerning previous transactions btwn the
parties. (UCC §1-303(b))
a) E.g., Parties have a long-term continuing relationship in which they have
entered and executed dozens of Ks for the sale of widgets. Seller delivers
widgets and buyer claims they don’t conform to the K so he rejects them. K
refers only to “widgets,” but doesn’t have any specifications. Parties can
argue “widgets” has the same meaning as in earlier Ks, then court can
discover that meaning by looking at the widgets delivered in the past. If the
widgets are the same seller hasn’t breached.

ii. Trade Usage: 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 w/
respect to the transaction in question. (UCC §1-303(c))
a) E.g., 13 means a dozen in the bakery trade.
b) If K is ambiguous, Court might reason the parties agreed to the meaning
given by the trade.

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 c) Exception: If one party is new to the trade he might be unfamiliar w/ trade
usage. Typically, hold the K void due to a misunderstanding.
a. Burden is on the party w/ the knowledge to provide info that the
newcomer obviously doesn’t know–can’t take advantage of lack of
knowledge.

iii. Course of Performance: A sequence of conduct btwn the parties to a particular

transaction if: (1) the agmt of the parties involves repeated occasions for
performance by a party; and (2) the other party, w/ knowledge fo the nature of the
performance and opportunity for objection to it, accepts the performance or
acquiesces in it w/out objection. (UCC §1-303(d)).

d) E.g., Buyer and seller have a single long-term K for sale of widgets. Seller has
delivered n batches of widgets w/out complaint by buyer then delivers n + 1
and buyer says they are substandard. If last batch is identical as previous
ones, seller can argue that buyer’s acceptance of the earlier batches shows
that the quality of the last batch conforms to the K; buyer would’ve
complained at the start if he really thought they were substandard.

b. Parol Evidence/Interpretation of Terms by UCC and Common Law

i. When an agmt has been recorded in writing, the parol evidence rule restricts the
extent to which some contextual evidence may be considered in deciding what the
parties intended in entering the K.

ii. The clearer and more comprehensive the writing, the higher the barrier to the
admission of extrinsic evidence, but the more compelling the extrinsic evidence, the
greater the prospect of persuading the court that it should be admitted.
iii. Courts try to balance the parties’ reasonable expectations that arise from the:
a. Language of the written K, and the
b. Context in which that written K was formed.

iv. Principle: When the parties reduce their agmt to writing, they often intend the
written record to be the final expression of the agmt.

v. UCC §2-202: A finding of ambiguity isn’t necessary for the admission of extrinsic
evidence about the usage of the trade and the parties’ course of dealing, but such
evidence should be excluded whenever it is inconsistent w/ the written terms.
a. The test is whether the proffered evidence of course of dealing and trade
usage reasonably can be construed as consistent w/ the express terms of the
K.
b. Admissible unless the K carefully negates; Ks are to be read on the assumption
that these elements were taken for granted when the document was written.
Columbia Nitrogen

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 a. E.g., Columbia Nitrogen Corp.: K for sale of phosphate. K stated a set $/ton
and a min of tons D had to buy. Market price dropped, D ordered way less
than what terms of K req’d, P sued for breach. K said this expresses all the
terms & conditions of the agmt. D was allowed to introduce evidence on
usage of trade & course of dealing/performance. This evidence was
consistent w/ the express terms of the K & the K didn’t say this evidence
couldn’t be used to explain/supplement.
a. Gap in K: It referred only to D failing to pay, didn’t say what happens if
D refuses to take delivery.
b. Equities favor D: D had allowed P to buy less than was in K in prior
course of dealings. Now that P is seller they are taking advantage.
c. D wanted to use the outside evidence to show that there is a practice
of mutual adjustments so prevalent in the industry and in prior
dealings btwn the parties that it formed a part of the agmt.
d. There is an assumption that course of dealing/performance and
usage of trade meanings were taken for granted when drafting K, so
UCC v. courts allow this evidence as long as it isn’t contradictory.
Common Law
How to read
Ks. Plain b. An interpretation of the K which negates the express terms by allowing
meaning v. unilateral abandonment of its terms is unreasonable.
contextualist
c. §2-202(b) external evidence isn’t ok if the K was intended as a complete and
approach
exclusive statement of the terms of the agmt.
d. E.g., Southern Concrete: K for sale of concrete. P was to supply
“approximately 70K yards for $19/yard. D ordered only 12K yards. P sued to
recover lost profits. Court said external evidence isn’t needed. The parties put
the risk of variation in quantity needs on the buyer. The add’l terms D wants
to introduce are inconsistent w/ the expressed terms.
a. Different from Columbia: No prior dealings btwn the parties, the K is
specific w/ material terms; to allow such specific Ks to be challenged
by external evidence would jeopardize the certainty of the contractual
duties which parties have a right to rely on.
i. This court thinks Columbia interpreted UCC wrong

vi. Common Law §212: If K terms are unambiguous courts are to apply the plain
meaning of the terms, and not allow any external evidence to be presented.
a. E.g., Buyer will buy approximately 50,000 tons of concrete at a price of $13/yrd

vii. Rationale: An allegation that there was prior agreement of an oral term is suspect
when the oral term is not incorporated into the final executed writing.
a. Its absence from the written K suggests that either the party alleging its
existence is lying, or the parties intended to supersede it w/ the final K
1) Concern over lying isn’t an issue when prior alleged term is a written
note, but concern over parties’ intent to not include it in final K
remains.

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 viii. Extrinsic/parol evidence may include: Letters, memos, e-mails, oral statements, and
other evidence of promises allegedly made before the written K was entered into.

Defenses: Regulating the Bargain

 Courts enforce only voluntary promises made by informed, mentally competent adults.
 Courts must sort out fair bargaining from unfair overreaching, and reasonable terms from
“unconscionable” ones.

J. Fraud
 Did the bargaining process impair the promisor’s ability to acquire the relevant info
bearing on her promise?
i. There is a presumption that promisors can and will look out for their own interests;
ppl have the responsibility of informing themselves.
a) But when a party takes affirmative measures that she knew or should’ve
known would lead the other to reach erroneous conclusions regarding
material issues bearing on the transaction, the law won’t enforce the
promise.

ii. The law doesn’t enforce a promise if the contracting party took affirmative measures
that she knew, or should have known, would cause the other to rely on those
representations and reach erroneous conclusions about material issues.

 Elements of Fraud:
i. A false representation or concealment of a material fact susceptible of knowledge
ii. Made w/ knowledge of its falsity or w/out sufficient knowledge on the subject to
warrant a representation
iii. w/ the intent to induce the person to whom it is made to act upon it
iv. the person acted reasonably in relying upon the representation
v. to his damage.

 Major Issue: Affirmative Misrepresentation v. Omission

a) Second Issue: When does the party have to disclose? E.g., Does Reuratania
may have a duty to disclose to future investors, but doesn’t have a duty to
disclose to existing investors. Has to do w/ K formation and manifestation
of assent.

 Fraudulent and Negligent Misrepresentation

i. §164: When a Misrepresentation Makes a Contract Voidable

a) K is voidable by the recipient of a misrepresentation if:
b) The misrepresentation is fraudulent or material
c) Induces the recipient to manifest assent
d) And the recipient is justified in relying on the misrepresentation.

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 1) When representations are made by a party who is presumed to know
their truth, reliance will be presumed. Spiess v. Brandt
2) In a business transaction the recipient of a fraud misrep of a material
fact is not justified in relying if its falsity is obvious. Spiess
3) In a business transaction the recipient of a fraud misrep of a material
fact is justified in relying if it’s not obviously false, but its falsity could
have been discovered through reasonable investigation. Spiess

ii. §162(1): A misrepresentation is fraudulent if the maker intends his assertion to

induce a party to manifest his assent and the maker:
a) Knows or believes that the assertion is not in accord w/ the facts, or
b) Doesn’t have the confidence that he states or implies in the truth of the
assertion, or
c) Knows that he does not have the basis that he states or implies for the
assertion.

iii. §162(2): A misrepresentation is material if it would be likely to induce a

reasonable person to manifest his assent, or if the maker knows that it would be
likely to induce the recipient to do so.

iv. If a party makes reps about matters that the other party can learn the truth of
through reasonable means, the party must use those means, or he can’t say
the misreps induced him to enter into the K. Dannan Realty Corp.
i. Dannan Realty Corp: P argued D made false representations that
induced him into entering the K. P sued for fraud.
1. K said: P expressly acknowledges that no representations have
been made by seller and P acknowledges that it has inspected
the premises and agrees as is. There was a merger clause which
said all previous agmts merged into this K; neither party is
relying on any other statements or reps.
2. By signing the K P represented that he wasn’t relying on any
other representations. If P made a bad bargain, he can’t avoid it
by claiming fraud in this case. If this language isn’t sufficient to
estop a party from claiming that he entered the K bc of
fraudulent reprs, then no language can do so.
3. Relevant factors: arms-length relationship, sophisticated parties.

4. Merger clauses are almost always in Ks. Party can still sue if
reps in K were misreps even if there’s a merger clause. Clause in
Dannan just limits suing on previously made oral reps.

 Negligent Misrepresentation:
i. When a party w/ a monetary interest in a transaction
a. Affirmatively supplies false info (makes misrepresentation)
b. For the guidance of others in their business transactions

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 c. And fails to exercise reasonable care or competence in obtaining or
communicating the info.
d. The party must reasonably rely on the misrepresentation.
ii. E.g., Alice is selling her property to Bob & tells him it’s 5 acres, but she failed
to exercise reasonable care in learning the acres; it’s really only 3.

a. Concealment = misrepresentation
i. §160: Action that is intended or known to likely prevent another from learning a
fact is the same as an assertion that the fact doesn’t exist.

 The party takes affirmative steps to prevent the promisor from discovering a
material fact,
 knowingly fails to correct the promisor about a mistaken belief about a material
fact,
 fails to inform the promisor of a material fact that he knows the promisor is
ignorant of.
a. When seller knows of concealed defects that are dangerous to the property, health or
life of the buyer, which can’t be discovered by the buyer through careful examination,
the seller has a duty to disclose them before the sale; his failure to do so is fraud.
a. Exerting effort to hide dangerous defects is not ok. It’s a misrepresentation that is a
violation of the contractual obligation. It is contrary to what the buyer expects from
the seller when they are forming the K.

b. E.g., Obde v. Schlemeyer: Seller knew house had termites in the past and took
affirmative measures to remove the termites from some, but not all areas. The result
was concealment of the damage–a reasonable inspection by buyer wouldn’t reveal
the existence of termites. Termites are dangerous to the structure of the property, so
it is something buyers would expect to have disclosed if they aren’t able to learn of it
themselves.

i. Constructive Fraud: Parties in fiduciary or confidential relationships have a higher

duty to disclose.
i. You’re entitled to rely on representations (not investigate for yourself) if you’re
in a relationship of trust & confidence

CEO & Shareholders / Teacher & Student / Dr. & Patient / Lawyer & client

a. Party in the superior position must act w/ care and ensure that the
transaction is in the other party’s interest.
b. They don’t have to make any misrepresentations to commit fraud.
c. Higher duty bc of the special relationship

§169: To the extent that an assertion is one of opinion only, the recipient is not justified in
relying on it unless the recipient

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 If in a relationship of trust & confidence w/ the person whose opinion is asserted, it’s
reasonable to rely on it.

a) E.g., Spiess v. Brandt: D sold hotel to P. They formed a close friendship during
the process. D told P they were making “good money” and that P could pay
for the purchase w/ profits. P asked to see the books, D never let them. P
wasn’t making enough $ asked for more time to pay back loan, D cancelled K.
D made fraudulent misreps; K void and P received damages for the $ they
paid in buying the hotel.
i. Fraudulent bc D knew statements were untrue and made them for
the purpose of inducing P to manifest assent.
ii. It did induce P to manifest intent
iii. P was justified in relying due to the relationship of trust and
confidence that D had built.
iv. The situation was bad enough for court to intervene; ordinarily
“good money” is considered puffery. Court thought D took
advantage of Ps.

b. A bad motive isn’t an essential element of fraud. Spiess

 If you can characterize the seller/promisor’s conduct as a misrepresentation you

have a stronger argument. If there were no misrepresentations/concealments, you
argue one of the exceptions to duty to disclose applies (§161)

c. Duty to Disclose
 There is not an obligation to disclose everything that might impact the market
price.

i. Traditional Rule: Caveat emptor: “buyer beware” seller has no duty to disclose
anything to buyer. Buyer has the duty to discover facts, and buy at her own risk.

i. Modern Rule: Sellers must disclose facts that:

a. materially effect the value or desirability of the thing being sold
b. that they know or should reasonably know &
c. that buyers cannot discover by reasonable inspection.

a. “Materially effect value/desirability:”

i. The gravity of the harm inflicted on the buyer by nondisclosure
ii. The fairness of imposing a duty of discovery on the buyer as an
alternative to requiring seller to disclose
iii. The impact on the stability of contracts if rescission is permitted in
the case based on nondisclosure.

b. E.g., Reed v. King: P bought a home that had been the site of a 5-person
murder 10 yrs earlier. D didn’t disclose. P found out after moving in and
wanted to rescind the K. The seller had a duty to disclose bc the fact of
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 the murders materially effected the value or desirability of the property,
the seller knew, but reasonable inspection by buyer couldn’t reveal the
fact.
i. The murder of innocent ppl has a strong pot’l for disturbing pot’l
buyers so much that they may be unable to reside in the home.
1. The murders may deprive a buyer of the intended use of
the purchase
ii. Murder isn’t such a common occurrence that buyers should be
charged w/ anticipating and discovering it.
iii. These are highly unusual circumstances; letting these buyers
rescind won’t effect the stability of other Ks.

c. Buyers do not usually have to disclose facts about the thing they are buying–facts
they happen to know and the sellers do not know. But, buyer cannot lie.

 Ex-Ante: What would you expect seller to disclose? Would lack of disclosure
cause the buyer to make a mistake in entering the K?
 Meant to encourage buyer to do its own inspection.
1. Seller doesn’t know what facts are important to buyer; too burdensome to
disclose everything.
 But also not let seller get away w/ hiding material problems that buyer has no
way of learning about.

K. Duty to Read:
i. In the absence of fraud, duress, or mutual mistake, a party w/ the capacity to
understand a written doc who reads it, or doesn’t read it or have it read to him,
but signs it, is bound by his signature. Merit Music

i. Exception: Context, sophistication of parties, relationship (trust &

confidence may lower duty to read).
1. If the circumstances are appropriate, the court may determine:
a. Whether there was a genuine opportunity for the signer to
have read the clause/K
b. If he did not read it, whether a reasonable person should have
expected to find such a clause in the particular instrument he
was signing.
c. If (a) or (b) is answered negatively, courts may decide the
fairness of enforcing the K. (St. John’s Hospital)
2. Party may sometimes be excused from performance on the ground
that enforcement would be unjust and inequitable.
3. E.g., St. John’s Hospital v. McAdoo: D signed K in ER when wife was
dying. He thought it was to give his wife medical treatment and to
say insurance would pay. Didn’t know he would have to pay w/e
insurance didn’t cover. He was released from the K bc a reasonable
person isn’t expected to carefully read a K in an emergency situation.

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 a. Hospital had the burden of clearly labeling the K and making
the clause stand out.
4. E.g., Birmingham Television: Bailor put terms limiting his liability on
the back of the storage unit receipt. The front just looked like a
receipt, didn’t say see reverse, and bailor didn’t tell bailee to see the
back. Court didn’t enforce despite duty to read bc terms appeared
on something apparently unrelated to the bailment K itself; bailor
had obligation to bring the terms to the bailee’s attention.

ii. E.g., Merit Music Service, Inc. v. Sonneborn: P was purchasing a restaurant
and got loan from D, which included putting D’s juke boxes in P’s restaurant.
D gave P a standard form agmt which had blanks, the blanks were filled in
w/ the terms specific to the parties’ agmt. P claimed they didn’t read the
terms D wrote in, and that D committed fraud by changing the terms after
they had signed. Court held Ps were bound bc they signed it and had the
opportunity to read it. The terms they allege are fraudulent were those
written in–extra obvious! D didn’t hide the terms from them.
1. Aggravating factors: long-arm relationship, personalized terms

L. Unconscionability
i. Claims of unconscionability very rarely succeed; used if no better arg
ii. §2-302: If the court finds that the K or any clause was unconscionable at the time K
was made, it may refuse to enforce it, or enforce the remainder of the K w/out the
clause, or limit the application of the clause as to avoid any unconscionable result.
iii. Must consider the terms in light of the circumstances existing when K was made
iv. Includes an absence of meaningful choice on the part of one of the parties
together w/ terms which are unreasonably favorable to the other party.
v. E.g., Williams v. Walker-Thomas Furniture II: P bought multiple pieces of furniture
and signed Ks. Cross-collateral clause said D retained ownership of the furniture
until each piece was paid off in full. P didn’t understand that clause, but signed
anyway. She defaulted on payment and all her furniture was taken away. Court
said the cross-collateral clause was unconscionable.

M. Capacity to Contract
i. Both defenses are easy to adjudicate when the person who dealt w/ the infant or
mentally ill party knew or had reason to know of the incapacity of their contracting
partner.
ii. Ks entered into by infants or mentally ill ppl aren’t likely to enhance social welfare.
1. In order to prevent the mistake, the incentive is placed on the party who is
able at least cost to prevent such mistakes from happening, which is the
competent adult.
iii. Issue: When minor is reasonably believed to be an adult or person w/ mental
incapacity appears normal, courts must choose btwn (a) protecting vulnerable ppl
from themselves and (b) protecting the reasonable expectations of competent parties
and the security of transactions.

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iv. Infancy
a) The K of a minor, other than for necessaries, is either void or voidable at his
option.
1. Exceptions: by statute or Ks which deal w/ duties imposed by law such as a
K of marriage or an agmt to support an illegitimate child.
b) How a minor may disaffirm a K:
1. Any act which clearly shows an intent to disaffirm a K or sale is sufficient.
a. E.g., notice by the infant of his purpose to disaffirm a tender or even an
offer to return the consideration or its proceeds to the vendor.
c) If minor misrepresented his age, he may be allowed to disaffirm his K but be liable
in tort (i.e., fraud/misrepresentation).
1. Second option: Don’t let minor disaffirm the K if he got into it through
misrepresenting his age. Liable under contracts damages.
d) E.g., Keifer: P was a few months short of majority age and signed K to buy a car. K
said “I represent that I am 21 yrs of age or over and recognize that the dealer sells
the above vehicle upon this representation.” P was married, worked and had a
kid, but still let him get out of K. Didn’t misrepresent bc there was not requisite
intent and D was not reasonable in relying bc P looked noticeably young.
1. Dissent: A car is a necessity for a 20 yr old working parent.

v. Mental Illness
a) Difficult to draw the line btwn capacity and incapacity for mental illness.
b) Once the law allows parties who understand the nature and terms of their Ks to
escape contractual liability, confidence in Ks may be eroded if the more flexible
req’ts for the mental incapacity defense isn’t drawn clearly and predictably.

c) The K of a mental incompetent is voidable at the election of the incompetent. If

the other party can be restored to status quo, rescission will be granted upon a
showing of incompetence w/out more.

1. If the status quo cannot be restored:

a. And the other party to the K was ignorant of the incompetence and
b. the transaction was fair and reasonable,
c. rescission will be denied, notwithstanding incompetence.

d) Party alleging incompetence has burden of proving it.

1. Standard is the ability to understand, capacity to form a rational judgment
or correct conclusions.
2. Incompetence exists when a K is entered into under the compulsion of a
mental disease or disorder but for which the K would not have been made
a. (1) testimony from the person claiming incompetence,
b. (2) testimony of psychiatrists, and
c. (3) the behavior of the claimed incompetent; testimony of others as to
whether by usual business standards the transaction is normal or fair.
i. Objective beh evidence given most weight

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 e) Once incompetence has been shown, the burden of proving lack of knowledge
and fairness is upon the party asking that the transaction be enforced.
f) E.g., Faber v. Sweet Style MFG: P had manic depression and entered K to buy a
vacant lot. Negotiations occurred over a week, D had a lawyer but didn’t listen. P
took tons of action w/in a couple weeks of forming the K to start performing.
Status quo could be restored bc P only had some digging done on the lot, but it
could be returned to normal. So, if P can prove mental incapacity K will be
rescinded. P understood the transaction, purchasing the lot wasn’t irrational, nor
was making all cash K, the rapidity w/ which P moved to get started on building on
the lot was abnormal.
1. The K in question was entered into under the compulsion of P’s psychosis.

Remedies for Non Performance

A. Money damages are always preferred over specific performance.

a. Specific performance is too hard for courts to enforce, and can discourage contracting.
Contrary to efficient breach. We want ppl to have the option to leave K and P.

B. What is the appropriate monetary damage award that should be imposed on breacher?
a. What should court do if parties have failed to specify any remedy or damage
formulation in their K?

a. Unlike in torts, the parties entered the K by mutual consent and they themselves,
expressly or by implication, fix the rule by which the damages are to be measured.
b. When K was made, what liability did the D assume?
i. Same as allocation of risk analysis; in the absence of an express agmt, K is
incomplete and court must specify a damage default rule.
1. What damage measure would the parties likely have agreed to if they
had bargained over it at the time of K formation?

ii. E.g., Globe: P had K to pick up oil from D in TX. P sent trucks from KY, D refused
to perform. There were other oil sellers in TX P could’ve gotten oil from. P sued
for breach and claimed damages for market price of oil – K price and cost of
sending trucks. Truck cost denied bc P was willing to incur this cost when he
entered the K.

c. §344 Remedies serve to protect one or more of the following interests of a promisee:

i. Expectation interest: Promisee’s interest in having the benefit of his bargain.

1. Award puts her in as good a position as she would have been in had the
K been performed. Gives injured party the “benefit of the bargain.”
2. This is the award that is most often applied [majoritarian default rule]
a. Most of the time we want D to internalize the cost of their
breach
3. Theoretically, the promisee’s specific interest and value of the K are
taken into consideration, but Hadley limits.

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 ii. Reliance interest: Promisee’s interest in being reimbursed for loss caused by
reliance on the K.
1. Award puts her in position she would have been in if K hadn’t been
made
2. E.g., Party incurs expenses in preparing to perform, in performing, or in
foregoing opportunities to make other Ks.
3. Award may be equal to expectation interest, but it is usually smaller bc it
doesn’t include the injured party’s lost profit.

iii. Restitution interest: Promisee’s interest in having restored to him any benefit
that he has conferred on the other party. Prevents unjust enrichment.
1. Restores equities. D has to return any benefit P conferred on him.
2. E.g., party made a part payment or furnishing of services under the K
3. May be equal to expectation or reliance, it is usually smaller bc it
includes neither lost profit nor expenditures in reliance if they didn’t
result in a benefit to the other party.
d. Illustrations:
i. A contracts to build a building for B for $100K. B repudiates the K b4 either
party has done anything in reliance on it. It would have cost A $90K to build.
1. Expectation: $100K–$90K = $10K
2. Reliance: $0
3. Restitution: $0
ii. Same as (i), but B repudiates once A has spent $60K.
1. Expectation: $100K–$30K ($90K expected cost-$60K paid) = $70K
2. Reliance: $60K
3. Restitution: $40K (partially built building 100K–60K)

e. Consequential damages: Damages you can prove flowed from D’s breach (special
damages). Beyond the K itself; wouldn’t necessarily be experienced by every P in the
same K.
a. Could generally be classified as expectation or reliance

f. Money damages are meant to:

a. Put P in as good a position as he would have been in if D had performed,
b. at the least cost to D and
c. w/out charging D w/ harms that he had no reason to foresee at the time he
made the K.
d. Bc that’s what the parties would agree to if they had bargained over a damages
remedy in K
e. E.g., Freund v. Washington Square Press: P was a professor w/ a book agmt w/
D. D didn’t publish P’s book, P sued for breach alleging (1) delay in his academic
promotion, (2) loss of royalties, (3) the cost of publication if P had made his own
arrangements to publish. Court didn’t award any damages;
i. Restitution: P got benefit incurred back when D returned manuscript.
ii. Expectation interest: The royalties; barred b §352 bc too speculative

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 1. Default rule when $ is uncertain is 0
iii. The value to P of D’s performance is the percentage of sales of the books
published, not the books themselves, so he can’t recover for the cost of
publication.
1. P wants books published so that he can get royalty, not so that
he can have 500 copies of the book for himself.

f. Measuring $ damages req’s looking at the amount and reliability of the

available info about substitutes for the subject matter of the breached K–the
value of the K to P.
i. Specific performance will only be awarded when there is an uncertainty
in valuing the K. [Very rare]
ii. Specific performance is an equitable remedy; it shouldn’t work an
inequity itself by placing an undue hardship on D.
iii. E.g., Van Wagner Advertising v. S&M: P leased a billboard in a unique
location in NY. D cancelled K before term was over. P wanted specific
performance to keep her billboard. This would disproportionately harm
D. Value of K isn’t hard to determine bc P has 400 other billboards; this
property isn’t too unique to determine monetary damages.

iv. UCC §2-716: Essentially the same; only allows specific performance
when the goods are unique or there are other proper circumstances.
1. E.g., Ace Equip. Co v. Aqua Chem: Specific performance granted
bc other proper circumstances showed that the buyer couldn’t
purchase substitute goods in time to meet his 3rd party
commitments.
2. E.g., Klein v. PepsiCo: Specific performance not granted when
there were 2 other jets to compare to the one in the K, so value
could be determined.

g. §351: Unforeseeability of Damages (limit on consequential damages)

i. Damages aren’t recoverable for losses that the breacher didn’t have
reason to foresee as a probable result of the breach when K was made
ii. Rationale: If the breacher had known about the special circumstances
causing unforeseen damages, the parties likely would’ve provided
special damages terms, charged more for the K, acted w/ greater
caution, etc.

iii. E.g., Hadley v. Baxendale: A crucial piece of equipment in P’s factory

broke. Used D as mail currier. D delayed in shipping it (breached K). P
couldn’t operate the factory as a result, and sued for the lost profits
during the days the factory wasn’t operating (Expectation/Reliance–
could be seen as either). This was an unforeseen result of D’s breach of
K–mail is delayed frequently; they can’t expect to cause this level of
harm. D likely would’ve charged P more if they knew how important it
was.

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 1. This is a case of not wanting majoritarian default rule. We want
to give people an incentive to tell the other side of special
circumstances that would lead to huge damages.
2. W/out this default rule we would be reluctant to enter Ks if we
could be liable at time of breach for huge, unforeseen damages.
3. If you have idiosyncratic needs you need to (a) buy insurance or
(b) inform other party and contract specifically for those needs.

iv. Exception: If value of the good/performance of the K is foreseeable.

1. E.g., Hector Martinez and Co: P’s excavation machine was
damaged while being shipped by train. They didn’t notify D of its
special value, but they were awarded consequential damages bc
it was obvious that the machine has a use value, so consequential
losses are foreseeable at time of K.

v. Limit on Hadley today: Due to the size of corporations that we deal w/,
it’s impossible to serve legally cognizable notice of special
circumstances. (E.g., We can’t tell an airline our scheduled flight is for an
important job interview.)

vi. Consequential damages in the form of emotional distress damages may

be available in Ks involving items of great sentimental value, e.g.,
purchase of a home, due to foreseeability of this loss.
1. E.g., B & M Homes v. Hogan: D built P’s house w/ a series of
cracks in it that couldn’t be repaired. P’s recovered for emotional
distress damages bc they lived in fear of their home not being
structurally sound, which any reasonable builder could easily
foresee as a result.

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