1 Any contract can be viewed through a framework: 1. 2. 3. 4. 5. Sale of goods (UCC) or sale of services (common law)? Is there a contract?

What does it mean? Was there a breach? What can the defendant get (damages)?

Consideration
Restatement section 71 note B says that as long as there is something being sought in the bargain, we shouldn t look at the subjective states of mind of the parties. It just needs to look like a bargain. Restatement Section 71 tells us what a bargain is. 1. Promisor must be seeking something 2. Something must be given by promisee in exchange for that promise We look at external manifestations because it is difficult to discover motives, people can lie about their motives, and people assign different values to things (objective test v. subjective test). Consideration can be either a promise or performance. It depends on the contract. Some seek promise and some seek performance. Restatement Section 75: The promise is consideration if the promised performance standing alone could be consideration. There still has to be a meaningful act. Restatement Section 77 is about illusory promises. Bilateral contract-there are two promises, and both parties are bound after these promises are exchanged (this is how most contracts work in the business world). Either side can breach. Unilateral contract-the promisor is bound, but only after something is done. Only one side can breach.

Promissory Estoppel
Restatement Section 90 Promise Reasonably Inducing Action or Forbearance 1st Promise Action/forbearance Promisor should reasonably expect action/forbearance 1

2 Action/forbearance must be definite and of substantial character Promise must have reliance Binding if injustice avoided by enforcement of promise 2nd Remedy limited as justice requires replaces action/forbearance must be definite and of substantial character The second iteration limits the scope of the remedy.

Unjust Enrichment
The action: 1. 2. 3. 4. 5. 6. Must confer a benefit that unjustly enriches. Cannot be officious/unrequested/meddlesome. Cannot be gratuitous. (Physician services are an exception) Cannot expect compensation from another source (K). There must be a measurable benefit. Remedy can be: a) total wealth increase b) total cost avoided

Offer
An offer is an act whereby one person confers upon another the power to create contractual relations between them. There are several factors: 1) 2) 3) 4) Evidenced intent to be bound Terms Circumstances Sequence of communication

A promise must contain a meaningful exchange, not just an illusory promise (where there is no meaningful exchange in fact). Strong, Lakeland. A good faith implicit promise will sometimes save a contract that would otherwise fail (Lucy).

3 If there is no contract (missing required element), we want to look for noncontractual remedies like promissory estoppel and unjust enrichment. Promissory estoppel in section 90 of the Restatement. The remedy is limited as justice requires. Review the requirements for unjust enrichment. Offer and assent: we use an objective test most of the time. Offers must be definite enough that somebody can accept them. We look at circumstances, terms, sequence of communication. Acceptance is governed by the terms of the offer. Offer must be specific enough so that it can be accepted. Price quotations not usually offers, but can be if they are definite enough and look like they could be accepted.

Revocation
Section 42 and Section 43 of the Restatement talk about notice of revocation. Direct or indirect communication (if from a reliable source) can be notice of revocation. An offer is generally revocable until acceptance. Offers can be terminated by the lapse of time, whatever time is specified in the offer. Where no time is specified, the offer lapses after a reasonable period of time. Note that just because the offer says it will remain open until some date does not mean that the offeror cannot validly revoke the offer before acceptance. Death or destruction of the subject matter of the offer can revoke an offer. Death or insanity of the offeror or the offeree can revoke an offer. The intervening illegality of a proposed contract will revoke the offer. Option Contracts are promises made by an offeror that effectively limits his power to revoke. They can be created three ways: consideration, firm offers under the UCC, and reliance by the offeree. Section 45 says that beginning performance effectively terminates the offeror s ability to revoke the offer. This protects offerees reliance Seinterests in unilateral contracts. Rejection and the Mirror Image Rule Acceptance must be on the terms proposed by the offer, without the slightest variation. A response that does not exactly mirror the terms of the original offer is a rejection, and acts as a counter-offer. What s the problem with stringent application of the mirror image rule? The offeror might use it as a pretext for rejecting the acceptance. It gives the offeror the opportunity to get out on a technicality. Sometimes courts will rule that a term doesn t mean that the person wasn t willing to accept the offer because it isn t meaningful such that the offeror should take it as a rejection.

The Last Shot Rule The party that sends the last communication before acceptance gets to set the terms. This generally favors the offeror. The Mailbox Rule Acceptance is effective at dispatch. This terminates the offeror s power to revoke, and it terminates the offeree s power to reject. This is without regard to whether the acceptance reaches the offeror. Restatement Section 63 makes the mailbox rule applicable only if the acceptance is made in a manner and by a medium invited by the offer. The mailbox rule doesn t apply to irrevocable or option offers. In these cases the acceptance doesn t make a contract until it reaches the offeror. The old rationale was that the offeree could not get the mail back. The new rationale is that it protects the offeree s reliance. Revocation is different. It is effective on receipt. Section 42 of the Restatement. Rejection is effective on receipt. Section 40 of the Restatement. Precontractual Liability Restatement Section 45 states that if an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance. Statutes of Frauds 4 types that require writing: 1) Agreements requiring more than a year for full performance (note that if nothing inherently prevents it from being done in a year, as in it could even possibly be done in a year, it is not necessary that it be in writing) 2) Transfer of interest in real property (the exception is leasing for less than a year) 3) Sale of goods for $500 or more 4) Surety agreements (If so and so does not pay, I will pay)

Policing The Bargaining Process

Alaska Packers Association v. Domenico Preexisting Duty Rule performance of a preexisting duty is not consideration. If one party is going to pay more, the other party must be doing something more. There is the public policy consideration of coercion or duress. Even a small increase in the duty might suffice. Concealment and misrepresentation rule you don t have to tell everything that you know, but partial disclosure warrants full honesty. You cannot just tell half of the truth. However, there is no liability for bare nondisclosure. Vokes Misrepresentation of opinion when the partial disclosure is materially misleading, then we need the whole truth. Where there is a fiduciary relationship between the parties, where one party has tricked the other, where the parties do not deal at arm s length, or where one party has greater opportunity to learn the truth or falsity of the fact represented, a statement of opinion may be treated as a statement of fact.

Contract Interpretation
Parol evidence is usually ok for interpretation, but not always. When it tries to add something to the K the parole evidence rule is in effect. This test is formalized in the Restatement: sections 209, 210, 212, 213, 214, 215, 216 A merger clause can be put into a contract to basically say that the contract itself contains the entirety of the agreement. Four corners rule when a judge looks only at the contract document itself. This is similar to the parole evidence rule, but it is more stringent because it doesn t even allow external evidence as to the integration of the contract. Some jurisdictions have this and some don t. Parol Evidence Rule where an agreement has been reduced to writing which the parties intend as the final and complete expression of their agreement, evidence of any earlier oral or written expressions is not admissible to vary the terms of the writing. Only applies to evidence prior to or contemporaneous with the written agreement. Things after the contract can possibly be considered. Two-step analysis of the parole evidence rule: 1) Is the contract integrated (final)? This is presumed. 2) Is the contract total or partial? In other words, should the subsidiary agreement naturally be included in the contract? (Same subject matter, so interrelated to the fact) 3) An exception is that court s allow parole evidence when something is left out of a contract by mutual mistake or because of a unilateral mistake involving fraud. 5

6 Gianni v. R. Russell & Co. The only instances in which the parol evidence rule may not apply to exclude prior oral agreements not incorporated in the subsequent writing are those in which fraud, accident, or mistake are involved.

The use of extrinsic evidence of the parties intent. The plain meaning rule 1) Determine ambiguity 2) If it is ambiguous, extrinsic evidence may be used In California, Step 1 of the Plain Meaning Rule uses all credible evidence to determine ambiguity. In New York, Step 1 of the Plain Meaning Rule uses the language in the contract itself (Four Corners Rule) to determine ambiguity. There is no majority approach. On an exam, unless told to use one or the other, argue both in the alternative. Restatement 202 is about the rules of aid in interpretation.

The use of extrinsic evidence from commercial context Frigaliment Importing Co. v. B.N.S. International Sales Corp The making of a contract depends not on the agreement of two minds on one intention, but on the agreement of two sets of external signs. What the parties said, not what they meant is the essence of the contract. This is an objective test of what the parties said. The court looks for an objective meaning of the disputed terms. Hurst v. W.J. Lake Co. In a world where two parties have a different understanding of the term, if one party should have known the trade usage, then that party is responsible for those definitions. There has to be a CLEAR trade usage. Policy reasons: This trade usage evidence can be a protection against fraud. Raffles v. Wichelhaus When a term used to express an agreement is ambivalent and the parties understand it differently, and neither of them is aware of the other s understanding, there can be no contract.

7 Restatement 201 Whose Meaning Prevails 1) Where the parties have attached the same meaning, it is interpreted in accordance with that meaning. 2) Where the parties have attached different meanings, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made a) That party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or b) That party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party. Except as stated in this section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

Limits on the Bargain and its Performance

1) Unfairness unequal bargain/bargaining power 2) Unconscionability oppressive terms (can be procedural such as form contracts and contracts of adhesion, or it can be substantive like a term of the contract is patently unfair) 3) Public policy contracts that are bad for society (like for contracts to break the law but they aren t always illegal) Standard Form and Adhesion Contracts These are mass produced contracts and they are often take it or leave it in nature. There is no real room to bargain often times. They increase efficiency and predictability. Not all standard form contracts are adhesive. Contracts of adhesion are a subset of the standard form contract because the one party sets all of the terms and the other party can only accept or walk away. There is an asymmetry in bargaining power. Agreeing to Boilerplate The exchange has to be meaningful. The agreeing party must at least be given notice. Contracts of adhesion may be unenforceable: 1) where they contain provisions that either do not fall within the reasonable expectations of the adhering party 2) or they are unduly oppressive or unconscionable.

Williams v. Walker-Thomas The court looked at several factors to establish unconscionability: 1) absence of meaningful choice (both whether to enter into the contract or to the terms of the contract), 2) unreasonably favorable contract terms (whether the terms are so extreme as to appear unconscionable according to the mores and business practices of the time and place)

Remedies
Specific performance is most often used in regards to real estate, but not always. Determining whether a contract meets deserves specific performance is a fact intensive type of analysis. We may be able to get specific performances when other damages at law are not adequate to equal what we would have had if the contract had been fully performed (expectation interest). Moral Hazard concern that the party will behave differently from how it would if it were fully exposed to risk or they just lose certain incentives that are there in the context of a contract. Personal service contracts not usually eligible for specific performance because: 1) Bad blood issue. Courts do not want to force people to associate when they do not wish to do so. 2) Quality of performance. Someone who is forced to do something may not do it well on purpose. 3) Enforcement is often impractical. 4) Involuntary servitude. Walgreen Co. v. Sara Creek Property Co. There are benefits to substituting an injunction for damages. First, an injunction shifts to the parties the burden of determining the cost of the breach. The parties can settle the dispute and dissolve the injunction. This is preferable to costly litigation. Second, the market can determine prices and costs better than the courts, which must rely on a battle of experts. The downside to injunctive relief is that it requires court supervision, it risks a bilateral monopoly, and both P and D might have to spend a lot on negotiating. There are also costs and benefits with the damages remedy. It avoids the cost of continuing supervision, the cost of a bilateral monopoly, and the effects on third parties. However, it imposes costs less accuracy in the determination of value, the cost of preparing and presenting evidence of damages, and the time of the court in evaluating the evidence.

Damages
Specific Performance (explained on page 8) Expectation interest, which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed-try to get back to contract, but no breach Reliance interest, which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made-try to get back to no contract at all Restitution interest, which is his interest in having restored to him any benefit that he has conferred on the other party-try to get to no benefit conferred to the defendant Expectation damages are generally the best for the injured party, but not always. It depends on the situation. Restitution interest could be useful when it is hard to value something or if what the plaintiff got ends up being worth less than what he gave.

Calculating Damages Measuring Expectation Restatement 347 subject to the limitations stated in 350-53, the injured party has a right to damages based on his expectation interest as measured by (a) The loss in the value to him of the other party s performance cause by its failure or deficiency, plus (b) Any other loss, including incidental or consequential loss, caused by the breach, less (c) Any cost or other loss that he has avoided by not having to perform Lost value is: 1) If there is no performance, the value of the performance to the non-breaching party 2) If partial or defective, the value of the difference between what the party got and what was expected. Costs saved can include: 9

10 1) 2) 3) 4) Not having to perform Discontinuation Substitute usage by breaching party Salvageable materials

Reliance: Traditionally calculated as the party s expenditures Learned Hand says that it should be expenditures minus what the party expects to lose. Restatement 349 expenditures made in preparation for performance or in performance, minus any loss that the breaching party can prove would have occurred had the contract been performed.

Restitution: Restatement 371 Measure of Restitution Interest. It may be measured by: (a) The reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant s position, or (b) The extent to which the other party s property has been increased in value or his other interests advanced.

Limitations on Damages (Avoidability, foreseeability, and certainty) Avoidability: Can the injured party avoid damages?

Personal Service Contracts The rule is that the injured party must make a reasonable effort to find a substitute opportunity that is not inferior or meaningfully dissimilar. There is generally a duty to mitigate. Cost to Remedy Normally, the measure of damages for defective performance is the cost of replacement. But when the cost is grossly and unfairly out of proportion to the good to be gained, the correct measure is the difference in value between the performance expected and the performance received. (Jacob & Youngs v. Kent)

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Foreseeability Restatement Section 351: Normally damages are those which arise naturally from a breach of the contract (those which would be expected by both parties to probably flow from a breach). In addition, where there are damages because of special circumstances, they will be assessed against the defendant only where they were reasonably within the contemplation of both of the parties as being the probable consequence of a breach. Some rules on limiting damages based on foreseeability: 1. Foreseeability is determined at the time of the contract. 2. Loss must be contemplated by the party in breach (and only the party in breach is necessary). 3. The test of foreseeability is party objective. The loss must be foreseeable as a probable loss.

The issue of certainty in limiting damages Restatement Section 352 damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty. Restatement Section 348 If a breach is of a promise conditioned on a fortuitous event and it is uncertain whether the event would have occurred had there been no breach, the injured party may recover damages based on the value of the conditional right at the time of breach. Look at the examples for how this damage might be calculated. (if the chance of winning was and the prize money was $100k, then $25k awarded) Damages for loss of reputation are not usually foreseeable or certain, so they are not awarded.

Fera v. Village Plaza, Inc. When proof of prospective profits is available, however, they may be recovered, even by a new business. The jury may not speculate or guess, but if the evidence is sufficient, a new business can recover damages for lost profits. The evidence must be reasonably certain.

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Conditions
Restatement Section 224 is about conditions. Express conditions must be met exactly. Deciding whether a provision is a condition or duty can be difficult. The courts generally prefer an interpretation that avoids a condition because of the harsh results that can arise from nonoccurrence of a condition. A condition is different from a duty because a condition has to be done PRIOR to performance by the other party, while a duty has to be done but not necessarily before.

Condition of Personal Satisfaction Where the parties deliberately enter into an agreement which violates no rule of public policy, and which is free from all taint of fraud or mistake, there is no hardship in holding them bound by it.

Recap of conditions versus duties Conditions might make it more difficult to get any kind of damages. This is an extreme result, so under Restatement Section 227 an ambiguity is normally resolved in finding of a duty instead of a condition. Independent Covenant failure to perform doesn t excuse a non performance by the other party. The promises are independent of one another. Dependent Covenant the promises are dependent on each other. It s harsher to enforce an independent covenant because one party is still on the hook for its performance without getting its part in return. Restatement Section 232 says that contracts are generally presumed to be composed of dependent covenants.

Time for performance fixing the time in a contract is the way of allocating risk. If one party must perform first, then the other party might be able to hold off performance even in the covenants are independent.

Substantial Performance If a party substantially performs he is entitled to the contract price, but he will still be liable for damages. 12

13 Material Breach if the party does not perform substantially then it is a material breach and the injured party does not have to perform. Whether a performance is substantial performance or material breach is fact intensive. Restatement 241 Factors to be considered: a) The extent to which the injured party will be deprived of the benefit which he reasonably expected; b) The extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; c) The extent to which the party failing to perform or to offer to perform will suffer forfeiture; d) The likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; e) The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing

Suspending Performance and Terminating the Contract If there is a partial breach, the injured party can continue to perform and sue for damages. If there is a material breach, the injured party can suspend performance. The injured party must then seek a cure (and give enough time to remedy). If there is no cure, it becomes a total breach and the contract can be terminated. Restatement Section 242 Circumstances Significant in Determining When Remaining Duties are Discharged: a) Those states in 241; b) The extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable substitute arrangements; The extent to which the agreement provides for performance without delay, but a material failure to perform or to offer to perform on a stated day does not of itself discharge the other party s remaining duties unless the circumstances, including the language of the agreement, indicate that performance or an offer to perform by that day is important.

Anticipatory Repudiation The contract has to be utterly renounced in order for this early action. This is good for defendant because it allows mitigation of damages, and good for plaintiff because he doesn t have to sit around and wait to find another job. 13

14 Restatement Section 253 Effect of a Repudiation as a Breach and on Other Party s Duties 1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach. 2) Where performances are to be exchanged under an exchange of promises, one party s repudiation of a duty to render performance discharges the other party s remaining duties to render performance.

Defenses to Breach
Unfairness (Previously mentioned on page 7) to limit damages Unconscionability (Previously mentioned on page 7) Impracticability of Performance When alleged, the court is asked to construct a condition of performance based on the changed circumstances which involved three steps: 1) A contingency must have occurred. 2) The risk of the unexpected occurrence must not have been allocated either by agreement or by custom (foreseeability or even recognition of a risk does not necessarily prove its allocation). 3) The occurrence of the contingency must have rendered performance commercially impracticable (this is an objective test unless both parties are aware of a dealer s limited capabilities).

Restatement Section 261 Discharge by Supervening Impracticability Where, after a contract is made, a party s performance is made impracticable without his fault by occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

Frustration of Purpose Restatement 265 Discharge by Supervening Frustration 14

15 Where, after a contract is made, a party s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

Mutual Mistake Restatement Section 152 when Mistake of Both Parties Makes a Contract Voidable (1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule state in Section 154. (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise. Restatement Section 158 (1) In any case governed by the rules in this chapter, either party may have a claim for relief including restitution under the rules stated in Sections 240 and 376. (2) In any case governed by the rules stated in this chapter, if those rules together with the rules stated in Chapter 16 will not avoid injustice, the court may grant relief on such terms as justice requires including protection of the parties reliance interest.

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