Fall

Fall

08 08

Contracts
Professor John C. Coates
Contract law is the study of legally enforceable promises, normally exchanged as part of a bargain. Contracts are the main means by which transactions are made and legal obligations are voluntarily incurred. Among the topics that may be covered are: when a contractual promise exists and which are too indefinite; whether consideration should be required and what that means; whether there was offer and acceptance forming a contract; whether and when contracts should be voided because of duress, nondisclosure, a failure to read, unconscionability, or immorality; how to interpret contracts; implied and explicit contractual conditions; the material breach and perfect tender rules; whether performance is excused by mistake of fact, impossibility, impracticability, or frustration of contractual purpose; what remedies to reward and how to measure them; and whether and when damages should be limited because of failure to mitigate, unforeseeability, or use of penalty clauses.

Harvard Law School

Table of Contents
Table of Contents....................................................................2 Part I: Grounds for Enforcing Promises.....................................3 Part II: Formation of Contracts...............................................10 Part III: Policing the Agreement.............................................22 Part IV: Remedies for Breach of Contract................................49

Part I: Grounds for Enforcing Promises Consideration

A promise as such is not legally enforceable. The first great question of contract law, therefore, is what kinds of promises should be enforced. Consideration is really just a synonym for enforceability. For a time during the nineteenth century, a will theory, under which a promise was enforceable because the promisor had willed to be bound by the promise, was prevalent. That notion has since given way to one based on bargain. Initially, the promisee was required to give something in exchange for the promise that was either a detriment to the promisee or a benefit to the promisor. That requirement has since been replaced by the simple requirement that the consideration be bargained for. Rest.2d 71.

Unilateral and Bilateral Contracts

When consideration for the promise is some performance by the promisee, the contract is said to be unilateral, because a promise is made on only one side. When consideration for the promise is a return promise, the contract is said to be bilateral, because promises are made on both sides

Unenforceable Promises
The practical importance of the doctrine if consideration is limited, because of the ease with which its requirements can be satisfied. It does, however, make some promises unenforceable, either because there is no exchange at all, or because, although there is an exchange, there is no bargain. Gratuitous promises, such as promises to make gifts and illusory promises, are unenforceable because there is no exchange. See Congregation Kadimah v. DeLeo. Promises are unenforceable because the exchange is not bargainedfor where: (1) the promisor was not seeking to induce action by the promisee for instance, promises supported by past consideration or unsolicited action; and (2) the action the promisee took was not induced by the promise i.e., the promisee took action independently or in ignorance of the promise. See Whitten v. Greeley-Shaw.

Formality
There are numerous instances in which contracting requires certain formalitiesfor instance, to make a gift, delivery is needed. Consideration and Form, Lon Fuller The doctrine of consideration has both formal and substantive elements. The substantive aspect relates to the subject matter or content of the contract, whereas the formal aspect relates to the manner in which it is made. Consideration serves three formal functions: 1. An evidentiary function: providing evidence of the existence and content of the contract in case of controversy. 2. A cautionary function: deterring inconsiderate action. 3. A channeling function: allowing parties a legally effective meant to express their intent. Consideration serves one substantive function: 1. Promises made without consideration (gratuitous promises) are not sufficiently important to society to be enforced. Craswell & Schwartz 1.1 There are three situations in which contracts may be held legally binding. 1. Benefit-based contracts: A contract or promise may be found binding after a price has been paid for it. Liability rests on notions of unjust enrichment. 2. Liability-based contracts: A contract or promise may be found binding where the promisee has acted in reliance on the promise. A common example is the typical contract of guarantee, in which A lends his money to B only because C guarantees repayment. 3. Wholly executory contracts: Unlike the first two cases, in the case of wholly executory contracts there is no basis for enforcing the promise apart from the promise itself. The reasons for enforcing such contracts include protecting expectations, allowing for risk allocation, and the moral principle that contracts should be enforced simply because a promise has been made. In Congregation Kadimah v. DeLeo (188-90) a gratuitous oral promise to give the Congregation $25,000 was held unenforceable against a mans estate because it lacked consideration in the form of a legal benefit to the promisor or detriment to the promisee.

Bargain
Rest.2d 71 Requirement of Exchange (1) To constitute consideration, a performance or a return promise must be bargained for. (2) bargained for means sought by the promisor in exchange for his promise and given by the promisee in exchange for that promise. In other words, the promise and the consideration must purport to be the motive each for the other.1 (3) The performance may consist of: (a) an act other than a promise; (b) a forbearance, or (c) the creation, modification, or destruction of a legal relation. (4) The performance or return promise may be given to the promisor, or to some other person. It may be given by the promisee, or by some other person. In Hammer v. Sidway, an uncle promised his nephew $5,000 if he would refrain from drinking until his 21st birthday. The court enforced the promise, even though the uncle argued that refraining from drinking was not a detriment but actually a benefit to his nephew, the promisee. Hammer stands for the proposition that, under the bargain theory, courts will not inquire into the adequacy of considerationany promise not do to something which one has a legal right to do, or to do something which one has a legal right not to do will suffice. Legal detriment is to be distinguished from detriment in fact. Allegheny College v. National Chautauqua County Bank, a colleges promise to set up a memorial fund in honor of a dying woman in exchange for $5,000$1,000 up front and $4,000 to be paid upon her deathwas sufficient consideration for the enforcement of the contract, enabling the college to collect the outstanding balance from the womans estate though she repudiated the offer before dying. In Earle v. Angell, a womans written promise to pay her nephew $500 should he come to her funeral was enforced against her, even after her death, and even though the boy probably would have attended anyway. However, it could be argued that because the boy would have attended anyway, the promise to pay him to attend was an unenforceable promise to make a gift. If person A says to person B, Ill give you my skis if you walk over to my car and pick em up, there is no contract because there is no considerationperson A does not purport that his motive for giving person B his skis is to induce person B to walk to the car. Person Bs detriment in walking to the car is said to be incidental to the agreement.
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In Whitten v. Greeley-Shaw, a mistresss promise not to disturb a married man was not consideration for his promise to support her financially since the promise was not bargained for, in the sense that it was neither sought after nor motivated by a desire for the return consideration. In Kirksey v. Kirksey, a man wrote to recently widowed sister-in-law that if she were to come and stay with him, he would let her have a place to raise her family. The woman relied on the promise, relocating her family at great expense, only to be kicked out by her ex-husbands brother two years later. The court refused to enforce the contract because it regarded the sister-in-laws coming down as merely incidental to the promise of a place to stayhis desire to have her come down did not induce him to make the promise. Rest.2d 74 Settlement of Invalid Claims Forbearance to assert or the surrender of a claim which a party knows to be invalid is not consideration. However, forbearance to assert or the surrender of a claim is valid consideration if the claim is valid or if there is legal uncertainty as to the validity of the claim and the claim is asserted in good faith.

Prior Consideration
A promise to pay for a prior benefit is generally unenforceable. However, there are various exceptions by which a promise to pay for good or services conferred in the past may be enforced. A first exception is made for the promisors moral obligation to pay the promisee for prior some conduct or exchange: A promise to pay any antecedent contractual or quasi-contractual debt owed to the promisee is enforceable. For instance, if a debtor promises to pay a debt that has been discharged in bankruptcy proceedings, or an adult promises to pay a debt incurred while he was a minor. A second exception is made for emergencies. Where there is no possibility for prior bargaining and a clear benefit for which there would normally be an expectation of compensation, the party conferring the benefit may recover just compensation on the theory that there was an implied contract since no reasonable person would have refused the services. For instance, if a doctor happens upon you while youre having a heart attack, they can send you a bill, because if you were able you obviously would have entered into precisely that agreement. Rest.2d 86 Promise for Benefit Received (CSS 228) (1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. (2) Such a promise is not binding if (a) the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or (b) to the extent that its value is disproportionate to the benefit. Cmt b. Rationale: In general, a person who has been unjustly enriched at the expense of another is required to make restitution. There are exceptions to this rulee.g., to protect persons who have had benefits thrust upon them [by officious intermeddlers]; and to guard against false claims, stale claims, etc. In many such cases a subsequent promise to make restitution removes the reason for denial of relief, and the policy against unjust enrichment then prevails. Cmt i. Partial enforcement: A promise of disproportionate value suggests unfair pressure by the promisee such that justice does not require enforcement. In Mills v. Wyman, Mills, who had cared for Wymans 25-year-old son for several weeks after the son had fallen ill on return from a voyage at sea, was denied recovery on a promise to pay for the care made by Wyman in a letter. In ruling the fathers promise unenforceable, the court distinguished cases of debts barred by the statute of limitations, of debts incurred by infants, [and] debts of bankrupts on the ground that

subsequent promises merely remove an impediment created by the law to the recovery of debts honestly due and are not promises to pay something for nothing. For promises as the fathers, the court leaves enforcement to the tribunal of conscience. In this case, the moral obligation was not enough to constitute consideration for the subsequent promise because the prior benefit was conferred on a third personnamely, Wymans son. In Webb v. McGowin, McGowin promised to pay Webb $15 every two weeks for life after Webb saved his life by an act of heroism that left Webb badly crippled for life. Although the law gave Webb no claim against McGowin for his services, Webb was able to recover on the subsequent promise against McGowins estate. The court noted that the promise was enforceable because McGowin, having received a material benefit from the promise, [was] morally bound to compensate him for the promise. In Edson v. Poppe, a landowner promised after the fact to pay for a well drilled on his land. The promise was enforced, even though only past consideration was alleged, because the work was not done as a gift and the nature of the work was such that compensation would ordinarily be expected. In Muir v. Kane, a promise to pay for previously rendered real estate brokerage services was enforced against the purchaser of a home though it did not comply with the statute of frauds since the promise merely removed the impediment (the statute of frauds) to enforcing a pre-existing contractual obligation.

Illusory Promises
An illusory promise cannot serve as consideration. An illusory promise is one that is subject to a condition fully within the control of the promisor or a condition that, at the time the promise is made, the promisor knows cannot occur. A promise conditioned on the assent or judgment of a third party is not illusory. The common law and the UCC have recognized an implied duty of good faith/best efforts under which some seemingly illusory promises turn out to be adequate consideration for a return promise.

Alternative Performances
Restatement, 2nd 77 Illusory and Alternative Promises (CSS 224) A promise is in which the promisor reserves a choice of alternative performances is only consideration if (a) each of the alternative performances would be consideration if it alone had been bargained for; or (b) one of the alternative performances would be consideration, and there is or appears to the parties to be a substantial possibility that 8

before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration. In Gurfein v. Werbellovsky, a contract to deliver plate glass within the next three months was enforced against the seller, even though the contract allowed the buyer to terminate the agreement at will any time before shipment. The agreement was supported by consideration because there is a set of circumstances under which the buyer would be compelled to paynamely, if the seller ships

Implied Duty of Good Faith/Best Efforts

According to UCC 1-203, every conduct or duty within the UCC imposes an obligation of good faith in its performance or enforcement. The obligation of good faith is immutablei.e., it cannot be waived by the agreement of the parties. In Wood v. Lucy, Lady Duff-Gordon, Lady Duff-Gordon, a fashion designer, entered into an exclusive licensing agreement with a distributor, on which she reneged. When the distributor sued, Lady DuffGordon argued there was no agreement since the distributors promise was illusoryhe had not in fact promised to do anything in exchange for her promise not to turn elsewhere. Judge Cardozo found that there was consideration for Lady Duff-Gordons return promise because the distributor had an implied duty to use best efforts, and as such, his promise was not illusory. In Paul v. Rosen, a would-be buyer of a retail liquor business was unable to recover for breach of an agreement to sell the business because the agreement was conditioned on the buyer securing a new lease from the owner of the premises. Because the would-be buyer was free to get the lease or not as he willed, his promise was illusory and thus not consideration for the sellers return promise. It would be unfair to enforce the promise, because even if the buyer had used his best efforts, there is no way to know whether he would have been able to secure the lease and bind the parties. In Omni Group, Inc. v. Seattle-First National Bank, a clause whereby Omni agreed to purchase reality only if it should find a report on the feasibility of commercial development to be satisfactory did not render the promise illusory, because Omnis implied duty of good faith meant that there were some imaginable set of circumstances in which Omni would be held liable for breach. In Corenswet v. Amana, a refrigerator manufacturer was allowed to terminate a longstanding distribution agreement at will, even arbitrarily and without cause, despite the UCCs immutable duty of good faith. While the duty of good faith cannot be disclaimed, the parties are free to specify what constitutes bad faith in the terms of the agreement, so long as the agreement is not unconscionable.

Part II: Formation of Contracts

A bargaining process only results in the formation of a contract if both parties assent to be bound and their agreement is definite enough to be enforceable. The first requirement, that of assent, follows from the premise that contractual liability is consensual. The second requirement, that of definiteness, is implicit in the premise that contract law protects the promisees expectation interesta court must be able to determine the scope of the promise with some precision in order to put the promisee in the position he would have been in had the promise been performed. UCC 2-204 Formation in General (CSS 33) (1) A contract can be made in any manner which shows agreement, including conduct by both parties which recognizes the existence of such a contract. (2) A contract may be formed though the moment of its making is undetermined. (3) Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonable basis for remedy.

Objective vs. Subjective Theories

Current law favors an objective standard for determining a party's intent to be contractually bound. In determining whether a party has assented to an agreement, what matters is the partys apparent intent, rather than his actual intentthat is to say, communications are given the meaning that the recipient should reasonably have understood. An exception is made when one party knows that the other does not intend to be bound; in such cases, no contract is formed. However, as Wittier points out in The Restatement of Contracts and Mutual Assent, In most cases, the outward manifestation of assent is in fact accompanied by mental assent. Only in rare cases do parties claim not to have assented while the other party reasonably believes them to have assented. Usually, in such cases, the party who did not subjectively assent to the contract has carelessly led the other party, by the outward manifestation of intent, to reasonably think that there was assent. In Embry, an employer whose words reasonably communicated the intent to renew an employees contract for another full year was held to the objective meaning of his speech and made to pay the employee a whole years wages.

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In Kabil, the court allowed a party to challenge the formation of a contract by presenting evidence of his subjective intent, though his objective, outwardly-manifested intent was clear. Ordinarily, courts do not allow evidence of subjective intent to be presented where the objective meaning of a communication is clear, because there is great temptation for the party seeking to avoid liability to lie about his intent at the time the agreement was formed.

Offer Intention To Be Bound

Rest.2d 24 Offer Defined An offer is a manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. An offer gives offerees the power to form a contract by an appropriate acceptance. No formalities are generally required for an offer. It may be made by spoken or written words or by other conduct. Sometimes a contract that results from words is described as express, while one that results from conduct is described as implied in fact, but the distinction as such has no legal consequences. The fact that a proposal uses the word offer or is sent in response to a request for an offer is deserving of weight, but it is not controlling, and court may decide that what is called an offer is merely an invitation to the recipient to make an offer. For example, in Moulton v. Kershaw, a letter sent from a salt dealer to known consumers of large quantities of salt boasting low prices was construed as an advertisement rather than an offer because to construe the letter as an offer would make the dealer liable to provide an unlimited quantity at the bargain price. In Promissory Liability, Sharp argues that what distinguishes an offer from a mere statement of intention or invitation to deal is that an offer includes a promise. According to Rest.2d 2, 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 [to future action or forbearance] has been made. The offeror is the master of the offer. He may limit the means of acceptance as he so chooses, if he does so within the terms of the offer. But according to Rest.2d 32, when the means of acceptance invited by the offer is ambiguous, the offeree is free to choose to accept either by a promise to perform or by rendering performance. In Davis v. Jacoby, an elderly man with a dying wife wrote her niece, Caro, and the nieces husband, Frank, that if Frank could come out here 11

and be with me and look afater my affairs . . . Caro will inherit everything. Although the man committed suicide before the couple arrived, the couple had previously replied in a letter that they would be there soon, and, since the offer was vague as to the means of acceptance, the court construed the couples letter as a return promise constituting acceptance of the offer.

Terminating the Offer

According to Rest.2d 36, an offerees power to accept an offer is terminated by: (a) rejection or counter-offer by the offeree; (b) lapse of time; (c) revocation by the offeror; (d) death or incapacity of the offeror or offeree; or (2) non-occurrence of any express or implied condition of acceptance under the terms of the offer.

Revocation and Irrevocable Offers (Option Contracts and Firm Offers)

An offer may be revoked by any words that communicate to the offeree that the offeror no longer intends to be bound. An offer is also revoked by action that is inconsistent with the intent to be bound once the offeree learns of such action. An offer is generally revocable at any time prior to acceptance. In Petterson v. Pattberg, a mortgagee who offered to discharge the entire mortgage debt if the mortgagor paid a smaller lump sum by a stated date was allowed to revoke the offer even after the mortgagor showed up on his doorstep with the money in hand, because the offer could only be accepted by actual tender, which had not yet taken place. But there are five ways in which the offerors power to revoke may be limited: 1. Acceptance of the offer forms a bilateral contract. 2. Acting in reliance on the offer allows for a promissory estoppel claim. 3. Beginning performance converts the offer into an option contract. 4. The offer may constitute an option contract from the beginning if the offeree pays to make the offer irrevocable. 5. Even without reliance, there may be an implied promise to leave the offer open for a commercially reasonable timei.e., a firm offer.

Options Contracts/Firm Offers

When the offeror invites acceptance by performance but not by return promise, the offeree becomes vulnerable to revocation insofar as the invited performance takes time. In such situations, Rest.2d 45 protects the offeree inferring the creation of an option contract once

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the offeree has begun tender or performance, thereby providing an exception to the general rule that an offer is revocable at any time prior to acceptance. According to Rest.2d 25, an option contract is a promise which meets the requirements for the formation of a contract and limits the promisors power to revoke an offer. Rest.2d 45 Option Contract Created by Part Performance (1) An option contract is created when the offeree begins performance of the promised act to any extent. However, the offeree's mere preparation to perform does not preclude the offeror from revoking. And the offeree is not bound to complete performancehe may abandon performance at any time. (2) The offerors own duty to perform is conditional on completion of the invited performance. Rest.2d 87 Options Contract (1) An offer is binding as an option contract if it is (a) made in writing and signed by the offeror, recites a purported consideration, and proposes an exchange on fair terms within a reasonable time; or (b) is made irrevocable by statute. (2) An offer which the offeror should reasonably expect to, and which does in fact, induce action or forbearance of a substantial character on the part of the offeree before acceptance is binding as an option contract to the extent necessary to avoid injustice. In Brackenbury v. Hodgkin, an old lady induced her younger relatives to move a long distance to come live on her farm in exchange for a promise that they would inherit the farm when she died. The promise was enforced against her when she tried to give the farm to her son instead, as part performance of a unilateral offer makes the offer non-revocable. In James Baird v. Gimbel Bros, a subcontractor who discovered a mistake in his bid before the bid had been accepted by the general contractor was allowed to revoke it in spite of reliance by the general contractor. Judge Learned Hand found that the notion of estoppel based on reliance was misplaced where the offer sought acceptance by a promise. In Drennan v. Star Paving, Star, a subcontractor, refused to honor its bid after discovering a mistake in its calculations, but Justice Traynor held that the bid was irrevocable because Drennan, the general contractor, had acted in reliance on an implied subsidiary promise to keep the offer open for a commercial reasonable time. The notion of an implied subsidiary promise is reflected in UUC 2-205. According to UUC 2-205, an offer by a merchant to buy or sell goods in a signed writing that gives assurance it will be held open is not revocable, for lack of consideration, during the time stated or if no time 13

is stated for a reasonable time [not to exceed three months]. In E.A. Coronis v. M. Gordon Construction, a subcontractor was allowed to revoke his bid before the general contractor could accept because the offer did not by its terms gives assurance that it [would] be held open as required by UUC 2-205.

Promissory Estoppel
The doctrine of promissory estoppel protects offerees by making the offer irrevocable once the offeree has acted in reliance on the offer. The doctrine of promissory estoppel may create liability even where the statute of frauds bars recovery on the contract. Rest.2d 139. According to Rest.2d 90, a promissory estoppel claim has four requirements: 1. There must be a promise. 2. The promisor must have had reason to expect reliance on the promise. 3. The promise must have actually induced reliance, in the form of action of forbearance by the promisee or a third person; 4. Injustice can be avoided only by enforcement of the promise. According to Rest.2d 90, the remedy granted for breach may be limited as justice requires. This means that in promissory estoppel cases courts have the discretion to award the expectation interest, and when the expectation interest is unknown, the reliance interest may be awarded instead. Rest.2d 90 Promise Inducing Action of Forbearance (1) A promise which the promisor should reasonably expect to induce action or forbearance [reliance] by the promisee or a third person, and which does induce such action or forbearance, is binding if injustice can be avoided only be enforcement. Remedy for breach may be limited as justice requires. (2) A charitable subscription or marriage settlement is binding without proof of reliance. In Wheeler v. White, it was clear that the parties intended to reach an agreement so although the terms of the agreement were too indefinite for the plaintiff to recover his expectation interest on the contract, the plaintiff was allowed to recover his reliance interest on a theory of promissory estoppel. In Hoffman v. Red Owl, Hoffman, a store owner, spent considerable money and energy because a Red Owl representative assured him that he would be granted a franchise, only to be told that he needed to raise a considerably larger sum than he had previously been told he would need. Hoffman was unable to recover his expectation interest because no specific offer had yet been made, but he was able to recover his

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reliance interest on a theory of promissory estoppel.

Equitable Estoppel
The doctrine of equitable estoppel holds that when a representations of fact are made by one party and relied on by the other, the party making the representations is estopped, or precluded, from alleging facts that contradict its representations. The doctrine of equitable estoppel is distinct from but related to the doctrine of promissory estoppel. Promissory estoppel involves a clear and definite promise, while equitable estoppel involves only representations and inducements. The representations at issue in promissory estoppel go to future intent, while equitable estoppel involves statement of past or present fact. The major distinction between equitable and promissory estoppel is that equitable estoppel is available only as a defense, while promissory estoppel can be used as the basis of a cause of action for damages. The remedy in equitable estoppel cases is the reliance interest. In Goodman v. Dicker, a would-be franchisee was allowed to recover for expenses incurred in anticipation of doing business (its reliance interest, rather than its expectation interest) when the company refused to grant the franchise despite prior assurances that it would. In Mahban v. MGM Grand Hotels, a lessor who wrote to a lessee that the premises, which had burned down, would be reopening soon, but who subsequently terminated the lease as allowed by a destruction-ofpremises clause in the lease agreement, was held not to have waived his right to terminate by sending the letter informing the lessee of the reopening, because the lessor did not have the intent to relinquish any right, but the case was remanded on the theory that the lessor might properly be equitably estopped from asserting his right to terminate, since the lessee relied on the information in the lessors letter. The case stands for the proposition that waiver requires intent, but equitable estoppel requires only reliance.

Acceptance
According to Rest.2d 30 and UCC 2-206, unless the language or circumstances of the offer indicate otherwise, an offer may be accepted in any reasonable manner or medium. Under UUC 2-204 and 2-207(3), all that is required to form of a contract for the sale of goods is conduct by the parties that recognizes the existence of a contract. In Cobaugh v. Klick-Lewis, a man who hit a hole in one after seeing a sign beside a golf tee offering a free car for hitting a hole in one was held to have accepted the offer even though the car dealership asserted that the sign was there by mistake, since a reasonable person would 15

have believed he could accept the offer by performing the act requested.

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Silent Acceptances and Course of Dealing

As a general rule, acceptance will not be inferred from mere inaction. Restatement, 2nd 69 Acceptance by Silence / Exercise of Dominion(CB 467) (1) Silence may constitute an acceptance only in the following types of situations: (a) The offeree takes the benefit of the services, with reasonable opportunity to reject them, and reason to know that the offeror expects compensation. (b) Offeror gives the offeree reason to understand that remaining silent will be taken as an acceptance, and by remaining silent the offeree so intends. (c) Based on the prior dealings between the parties, it is reasonable that the offeree should notify the offeror if he does not intend to accept. (2) Exercise of Dominion: An offeree who does any act inconsistent with the offerors ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him. In Hobbs v. Massasoit Whip Co., a vender who received eel skins from the manufacturer and kept them so long that they were destroyed, never giving notice that he rejected the offer, was held to have accepted the skins, as the prior dealings between the vendor and the manufacturer created a duty to speak. In Monroe v. Monroe, the court refused to enforce an implied agreement between a couple that split up after living together for about 25 years during which time the husband forbid the wife from working but provided for her. An express agreement with the same terms would have been enforceable, but the court is wary of imposing contractual duties on the husband absent clear assent.

Requirement of Definiteness
Under UUC 2-204 and 2-207(3), all that is required for the formation of a contract for the sale of goods is conduct by the parties that recognizes the existence of a contract. Any unspecified termseven material onesare then filled in by the court according to the rules of Battle of the Forms, so long as there is a reasonably certain basis for giving the appropriate remedy.

Misunderstanding
At common law, when the parties to an agreement attach materially 17

different meanings to their manifestations, no agreement is formed. Raffles; Rest.2d 20(1). But when one of the parties knows or should know the meaning attached by the otherperhaps because that meaning is customary the agreement operates according to the others meaning. Flower; Rest.2d 20(2). Restatement, 2nd 20 Effect of Misunderstanding (CSS 203) (1) There is no manifestation of mutual assent [and thus no contract formation] if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know of the others meaning; or (b) each party knows or has reason to know of the others meaning. (2) The manifestations of the parties operate according to the meaning attached by one of them if: (a) That party does not know of any different meaning attached by the other, and the other knows the meaning attached by him; or (b) That party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party. In Raffles v. Wichelhaus (the Peerless case), the parties agreed upon the sale of cotton to be shipped to the buyer aboard the ship Peerless from Bombay. When there turned out to be two ships of that name leaving from Bombay, one in October and one in December, and neither interpretation was more reasonable than the other, the court had no choice but to void the agreement for mutual mistake as to a material term (the choice of ship affected the date of delivery). Restatement, 2nd 220 Usage of Relevant Interpretation (CSS 220) An agreement is interpreted in accordance with a relevant usage if each party knew or had reason to know of the usage and neither party knew or had reason to know that the meaning attached by the other was inconsistent with the usage. In Flower City Painting v. Gumina, Flower, a neophyte painting subcontractor, entered into an agreement with Gumina, to paint various units in an apartment complex, believing he only had to paint the interiors. Gumina, relying on common trade usage, assumed Flower knew he would have to paint the exterior too. When Flower demanded more money, Gumina found a new subcontractor. Gumina was not liable to Flower because the mistake was unilateral and Flowers interpretation was unreasonable in light of trade usage.

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Uncertainty and Gap Filling

When the parties make what purports to be an enforceable agreement but leave one or more terms to be fixed by later agreement, but later fail to agree, the court may fill in the gaps, so long as there is a reasonable basis on which to do so. Rest.2d 33 Certainty (1) An offer cannot form the basis for the formation of a contract unless the terms of the contract are reasonable certain. (2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of breach and for giving an appropriate remedy. (3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended as an offeror as an acceptance. UCC 2-204 Formation in General (CSS 33) (1) A contract can be made in any manner which shows agreement, including conduct by both parties which recognizes the existence of such a contract. (2) A contract may be formed though the moment of its making is undetermined. (3) Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonable basis for remedy. In Filling the Gaps in Incomplete Contracts, Ayes and Gertner argue that there are two types of legal rules of contracts: default rules that parties can contract around by prior agreement (e.g., warranty of merchantability), and immutable rules that parties cannot change by contractual agreement (e.g., duty to act in good faith). Default rules come in three types: 1. Penalty defaults are rules purposefully set at what the parties would not want in order to encourage the parties to reveal information to each other or to third parties (especially the courts) by contracting around the default rule by affirmatively stating the provision they prefer. 2. Tailored defaults attempt to provide a contracts parties with precisely what they would have contracted for. 3. Untailored defaults provide the parties to all contracts with a single, off-the-rack standard, usually representing what the majority of parties would want. Rest.2d 2-305 Open Price Term (CSS 42) (1) Parties may conclude a sales contract though the price is not yet fixed. The price is a reasonable price if: 19

(a) nothing is said as to price; (b) price is left to be agreed by the parties and they fail to agree; or (c) price is to be based on some agreed market or standard or third-party which fails to adequately set the price. (2) Price to be fixed by one party implies a duty to use good faith in fixing it. (3) When a price to be fixed in a manner other than by agreement of the parties fails to be fixed through the fault of one party, the other party may at his option treat the contract as cancelled or himself fix a reasonable price. (4) There is no contract if the parties do not intend to be bound unless the price is fixed or agreed. In such a case, buyer must return goods or pay their reasonable value, and seller must return any payment already received. In Southwest Engineering v. Martin Tractor, the court noted that when it is clear that the parties have intended to make a contract and there is a reasonably certain basis for filling in a missing term, the contract does not fail for indefiniteness. An open price term is construed to mean the market price at the time for delivery.

Letters of Intent/Agreements to Agree

In Joseph Martin, Jr. Deli vs. Schumacher, a renewal provision in a contract whereby the parties provided that they would agree on a rate was not enforced. A mere agreement to agree, in which a material term is left for future negotiation, is unenforceable. To have been enforceable, the agreement would either have had to have specified the rent or to have provided some other objective means for determining it. May Metro. Corp. v. May Oil Burner Corp. In Empro Mfg. v. Ball-Co Mfg., Empro was not liable for reneging on a letter of intent to buy Ball-Co because the whole agreement was conditioned on the parties being able to reach a subsequent agreement as to the specific terms, one of which was the security for the 10-year promissory note which was to undergird the whole transaction.

Counteroffers and Battle of the Forms

In response to conflicting terms, the common law applies the mirror image rule, by which any attempt to add to or change the terms of the offer turn the offerees response from an acceptance into a counteroffer and a rejection of the offer. A corollary of the mirror image rule is the last in time rule, whereby the party who fires the last shot in the battle of the forms wins. Performance by both parties makes it clear that there is a contract, and since each subsequent form is a counteroffer, rejecting any prior offer of

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the other party, the resulting contract must be on the terms of the party who sends the last counteroffer, which is then accepted by the other partys performance. In goods contracts the last in time offer usually comes from the seller (maybe just prior to tendering the goods or accompanying delivery), so this rule systematically favors the sellers terms. Furthermore, buyers have more expense in rejecting the goods than the sellers have in rejecting the payment. In Livingstone v. Evans, the offerees reply, which contained a request for a lower price quote and an offer to pay less than the full amount, constituted a rejection of the original offer and a counteroffer. However, the offerors reply, cannot reduce price, was a revival of the original offer. UUC 2-207 fundamentally changes the rules for the battle of the forms. It reduces the number of situations in which a party can seize upon a discrepancy in the forms as an excuse for not performing, and gives the original offerors terms preference. (first in time rule) Under Section (1), a discrepancy in the terms does not prevent the purported acceptance from creating a contract unless the offeree takes pains expressly to say that it does. Under Section (2), additional terms are merely proposals by the original offeree to modify the contract thus formed, which the offeror may choose to accept or reject. However, under Section (3), a contract for the sale of goods may be formed merely by conduct that recognizes the existence of a contract; conflicting terms are knocked out and gaps are filled in by the court. If both parties are merchants, the offerors silence will amount to acceptance so long as the proposed terms do not materially alter the agreement and the original offer does not expressly limit acceptance to the terms of the offer. However, if the offeree adds a term that does materially alter the contract, subsection (1) holds the offeree to a contract on the offerors terms and subsection (2) does not make the offerors silence an acceptance of the added term. When the transaction is closed and a dispute arises later over an issue on which the terms of the exchanged writings conflict, such as when both parties expressly limit acceptance to their terms, but both perform as though a contract has been formed, conflicting terms are assumed to be mutually objected to, resulting in a mutual knock out of conflicting terms, leaving the court to fill in the gaps. UUC 2-207 Additional Terms in Acceptance or Confirmation. (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms 21

additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. (3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. In Richardson v. Union Carbide Industrial Gases, the court considered the three generally recognized approaches to the issue of conflicting terms in contracts for the sale of goods. The common law follows the last in time rule. The minority approach, based on UCC 2-207(2), holds that the offerors terms control when the offerees reply proposes different terms, rather than additional terms. The majority approach, which the court adopts, relies on UCC 2-207(3) to knock out the conflicting terms, leaving the court to fill in the gaps according to the rest of the UCC. The majority approach is preferable because it is often difficult to establish whose form came first, and because even if one form did come first, there is no reason to favor its terms where such terms were not actually bargained for.

Part III: Policing the Agreement Statute of Frauds

Contracts that are within the statute must be memorialized and signed. The purpose of the Statute of Frauds is to prevent the enforcement of alleged promises that were never made. Corbin, The Uniform Commercial Code; Should It Be Enacted? 59 Yale L.J. 821, 829 (1950). A signature may include any mark or symbol with which the signer intends to authenticate a writing. The signed document need not be the contract itself. Generally, the writing need only certify that a contract was in fact formed

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and be signed by the party against whom enforcement is sought. Parol evidence may be admitted to prove the terms of the actual agreement. In contracts for the sale of goods there are three definite requirements as to the memorandum: It must (1) give evidence that an agreement was reached; (2) be signed; and (3) specify a quantity. A non-goods contract that fails to satisfy the statute of frauds may nevertheless be enforceable through an action for promissory estoppel if the promisor foreseeably induces action or forbearance on the part of the promisee or a third person and enforcement is the only way to avoid injustice. Rest.2d 139. The following types of agreements fall within the Statute of Frauds in most states: 1. An agreement that by its terms cannot be performed within a year. 2. A contract to be enforced against a party after his death. 3. Contracts for the sale of goods for $500 or more. UCC 2-201. 4. Promise to answer for the debt of another. 5. Agreements made in consideration of marriage. Note: if the parents of a son and the parents of a daughter agree each to contribute $5,000 toward a house for their children upon their marriage to one another, the contract is outside the statute of frauds because the marriage is a condition, but not the consideration. 6. Agreements for the sale of land and for an interest in land. Note: An unwritten contract for the sale of real property will be enforceable if the buyer has taken possession and has made permanent improvements upon it. Rest.2d 129, cmt. a. 7. Agreements for the lease of real property for longer than one year. 8. Agreements to pay a commission to a real estate agent. UUC 2-201 Formal Requirements; Statute of Frauds (1) A contract for the sale of goods for a price greater than $500 is not enforceable unless there is some writing sufficient to indicate that a contract has been made between the parties and signed by the party against who enforcement is sought. A writing is not insufficient because it omits or misstates a term, but it is only enforceable up to the quantity written. (2) A contract for the sale of goods between merchants may be enforced against a merchant that did not sign it if within a reasonable time of the making of the oral contract, one merchant sends a signed writing to the other which would satisfy the statute of frauds as against the sender; the other merchant receives the writing and has reason to know of the writing's contents; and the non-signatory merchant fails to send a written notice of 23

objection within 10 days of the date of receipt of the confirmation. (3) A contract which does not satisfy subsection (1) but which is valid in other respects is enforceable (a) If the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of sellers business, and the seller makes either a substantial beginning or commitment for procurement before receiving notice of repudiation. (b) If the party against whom enforcement is sought admits that the contract was made, it may be enforced up to the quantity of goods admitted. (c) With respect to goods for which payment has been made and accepted or which have been received and accepted. Partial performance can validate a conduct in lieu of the a memorandum only for the quantity of goods which have been accepted or paid for. 2-201(1) and (3)(c) defend against the possibility of a buyer who orally agreed to purchase one commercial unit for $10.00 falsely asserting the agreement was for 100 units and then, by asserting the $10.00 payment was part payment on the 100 units, convincing the trier of fact to enforce a contract for 100 units. Part payment for a single indivisible commercial unit validates an oral contract for that unit under UUC 2-201(3)(c).

The Parol Evidence Rule

The parol evidence rule operates in situations where there is a writing that represents the final embodiment of the contract or some of its terms. The rule governs whether parties may introduce evidence of prior or contemporaneous extrinsic agreements to prove the existence of additional or modified terms. Parol evidence isnt limited to oral promises, but includes other communications and even other writings, for example a side letter or an e-mail, that one would expect to be wiped out/captured in the final written agreement. According to Rest.2d 214, the PER does not bar extrinsic evidence offered: to aid in the interpretation of existing terms to show that a writing is or is not an integration (final agreement) to establish that an integration is complete or partial to establish subsequent modifications to show that terms were the product of illegality, fraud, duress, 24

mistake, lack of consideration or other invalidating cause The PER only bars extraneous evidence of prior or contemporaneous promises. Promises made after the written agreement are admissible, but their effect is determined by the doctrine of modification. Furthermore, the PER only operates to bar evidence of collateral agreementsthose relating to the main agreement such that one would ordinarily expect them to be mentioned in it.

Integration and Additional/Inconsistent Terms

Two types of documents serve as a final embodiment of the parties agreement: 1. a complete integration is an expression of the agreement in its entirety; 2. a partial integration is an expression of only a portion of the agreement. If a writing is found to be a complete integration, the rule precludes evidence of prior or contemporaneous agreementswritten or oralto contradict or supplement the contract. If a writing is found to be a partial integration, the rule precludes extrinsic evidence of all prior agreements, both written or oral, and contemporaneous oral agreements, to contradict the written agreement. Consistent additional terms to a partial integration may be established by contemporaneous writings, course of dealing, course of performance, or trade usage. See Hatley. A merger clause expressly establishes that a writing is a complete integration. In the absence of a merger clause, there are several ways to determine if a writing is a complete or partial integration: the "four corners" or "plain meaning" rule: a writing that appears complete and final on its face is presumed to be a complete integration. the "collateral contract" concept: All final writings are deemed to be partial integrations. the "reasonable person" approach (Williston): If a writing appears to be a complete expression of the parties' agreement, it is a complete integration unless the additional terms are such that it would be natural to enter a separate agreement as to such terms, in which case the writing is a partial integration. This is the majority approach. the "intention of the parties" approach: allows all relevant evidence on the issue of intent, including evidence of prior negotiations. This is the approach endorsed by Rest.2d 210, cmt 25

b; and UCC 2-202. Rest.2d 209 Integrated Agreements (1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement. (2) The court must determine whether there is an integrated agreement before interpreting the contract or applying the parol evidence rule. (3) A written agreement that appears to be reasonably complete and specific is presumed to be an integrated agreement unless other evidence shows that the writing did not constitute a final expression.. Rest.2d 213 Effect on Prior Agreements (Parole Evidence Rule) (1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them. (2) A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope. (3) An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement if it had not been integrated. Rest.2d 216 Consistent Additional Terms (1) Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds the agreement was completely integrated. (2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is (a) agreed to for separate consideration, or (b) such a term as in the circumstances might naturally be omitted from the writing. In Mitchell v. Lath, a sellers alleged prior oral promise to remove an ice house that the buyer of real estate found objectionable was not enforceable because it was not contained in the written sales agreement, as would be expected. In Hatley v. Stafford, evidence of an oral promise not to enforce a clause allowing for early termination of a lease was admitted in a case involving unsophisticated parties, apparently because the oral promise (1) was not inconsistent with the written lease; and (2) might naturally be made as a separate agreement. In Hayden v. Hoadley, one of the parties to an agreement to exchange properties agreed to make certain repairs before conveyance. The other party alleged that the repairs were to be completed by October 1 because the parties chose that date in a separate oral agreement, but 26

the court did not allow evidence of the oral agreement to be admitted because the contract, though silent on the amount of time, contained an implied-in-law allowance for a reasonable time. The parol evidence rule can be restated as follows: 1. (a) Is the written agreement integrated? If the parties are sophisticated, they will have included a merger clause that makes integration visible on the face of the agreement. If integration is not obvious, you must look to the sophistication of the parties to determine whether they believed the writing to be the exclusive final embodiment of their agreement: Is the agreement handwritten or typed? Were the parties assisted by lawyers? Are the parties businesspeople who ordinarily do business according to some custom or course of dealing? (b) Are the terms of the alleged oral promise such that, had the parties agreed to them, one would ordinarily expect them to be in the written agreement? The Mitchell court collapses prongs (a) and (b) by asking, is it natural that the oral promise would be separate? If the written agreement is integrated, then one would expect everything on the topic to be within it. 2. Does the oral promise contradict the express terms of the written agreement? Or, if youre in Vermont or certain other states, does it contradict the default terms? Note: It is best to think of these tests, not as bright line rules, but as competing factors. For example, the more completely integrated the agreement seems to be, the less likely it is that parol evidence will be admissible.

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Ambiguity (1st Exception to the PER)

An exception to the PER is made to resolve ambiguity. There are two approaches to determining whether a contract is ambiguous: 1. The four corners or "plain meaning" rule: If a writing or term appears to be unambiguous on its face, it must be interpreted solely on the basis of such writing. The majority of jurisdictions apply this rule. See Bethlehem Steel. 2. "Reasonable expectations of the parties" approach This approach, endorsed by the UCC, allows all relevant extrinsic evidence to assist in interpretation, including the subjective understanding of the parties. See Hatley v. Stafford, Robert Indus. v. Spence and PGE v. GE Thomas Drayage & Rigging. Unlike the Restatement, the UCC reads all contracts in context, regardless of what meaning would be attributed to them by normal legal canons of construction, and allows extrinsic evidence to be admitted without first determining that the language in the written agreement is ambiguous. Rest.2d 212 Interpretation of Integrated Agreements Interpretation of an integrated agreement is a question of law unless such interpretation depends on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence. In Bethlehem Steel v. Turner Constr., the court applied the four corners/plain meaning rule, disallowing one party to a construction contract from producing evidence of his subjective understanding of the meaning of the agreement and the trade usage of the phrase at issue, even though the meaning suggested by the trade usage and the partys subjective understanding contradicted the objective meaning. UCC 2-202 Final Written Expression: Parol or Extrinsic Evidence Terms in a writing intended as a final expression of the agreement between the parties may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement, but may be explained or supplemented by (a) course of performance, course of dealing, or usage of trade; or (b) evidence of consistent additional termsas stated, for instance, in a contemporaneous oral agreement unless the court finds that the writing was intended by both parties as a complete and exclusive statement of all the terms.

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In Robert Indus. v. Spence, the court retreated from the four corners rule, instead taking a contextual approach: When the written agreement, as applied to the subject matter, is in any respect uncertain or equivocal in meaning, all the circumstances of the parties leading to its execution may be shown for the purpose of elucidating, but not of contradicting or changing its terms. According to PGE v. GE Thomas Drayage & Rigging, parol evidence may be admitted to determine whether a written agreement is ambiguous. If, in light of the admitted parol evidence, the written agreement turned out not to be ambiguous, the parol evidence would not be allowed to modify the terms of the agreement. But if, in light of the parol evidence, the written agreement seemed ambiguous, the parol evidence could be used to modify the terms of the written agreement.

Fraud (2nd Exception to the PER)

In the context of contracts, two types of fraud can occur: factual fraud occurs when a party forms an agreement on the basis of facts that have been misrepresented by another party. promissory fraud occurs when a party forms an agreement on the basis of another party making a promise he has no intention of keeping. Fraud is the first exception to the parol evidence rule. A party that claims fraud in the inducement usually seeks to rescind the contract and go back to the status quo ante (restitution damages). Ordinarily, parol evidence may be introduced in support of a claim of factual or promissory fraud. In Lipsot v. Leonard, parole evidence was admitted in a suit for fraud brought by an employee who claims he was tricked into working under a false promise that he would be given an opportunity to buy an equity stake in the business. In Sabo v. Delman, the plaintiff assigned his patent to the defendant, who orally promised to share in the profits from the manufacture and sale of the patented device. When the defendant failed to develop the machine as agreed, the plaintiff was allowed to present parol evidence, and was thus able to have the transfer agreement cancelled for fraud, since the defendant had misrepresented a material existing fact namely, his intention to develop the device. (This is really a promissory fraud case disguised by the courts as a factual fraud case.) However, in LaFazia v. Howe, the buyer of a deli which turned out to be less profitable than the sellers oral promises suggested was denied recover in for intentional misrepresentation because the buyer was held to have affirmed the contract by making payment on it after 29

discovering the fraud, and also because the buyer himself had fraudulently claimed, in the written agreement, not to have relied on any prior representations by the seller. (double-liar problem) Some jurisdictions, such as California, restrict the admissibility of parol evidence to claims of factual fraud on the grounds that allowing parol evidence to be introduced in a promissory fraud claim would completely gut the parol evidence rule. In Bank of America Nat. Trust & Savings Assoc. v. Pendergrass, Pendergrass alleged that the bank broke an oral promise not to call a loan, though the promissory note said the loan would be payable on demand. The PER blocked evidence of the oral agreement in the contract action, and the tort claim was dismissed since its effect would just be to modify the terms of the contract by extending for one year the otherwise unconditional obligation. Parties may contract to allocate the risk of factual error (negligent misrepresentation) in the terms of the agreement, but may not contract to allow one party to lie (intentional misrepresentation) In Rio Grande Jewelers, a buyer of a computer system was denied recovery for negligent misrepresentation as to the systems capabilities, because the sales contract contained an integration clause and disclaimed all warranties in a manner permitted by UCC 2-316. However, in Abry, the Delaware Court of Chancery held that parties could not use a contract to limit their liability for intentional misrepresentation. In DUlisse-Cupo v. Board of Notre Dame High School, a school board was held liable for the tort of negligent misrepresentation when it failed to rehire the plaintiff despite indicating she would be given a new contract. The tort cause of action does not require that the representations be promissory in nature, but merely that the defendant fail to exercise reasonable care in communicating with the plaintiff.

Defenses to Contract Formation

Mistake
Mistake is erroneous belief about facts as they exist at the time of contracting. According to Rest.2d 152, the adversely affected party may void a contract based on mutual mistake made at the time of the contract formation where: the mistake concerned a basic assumption on which the contract 30

made; the mistake materially affects the agreement; and the adversely affected party does not bear the risk of the mistake. In Sherwood v. Walker, a contract for the sale of a cow was voided for mutual mistake as to a material factnamely, whether the cow was barren or fertile. The court believed that neither party entered the contract to purposefully speculate on whether the cow was barren or fertile. Unilateral mistake is generally not a ground for rescinding or reforming a contract. See Cobaugh v. Klick-Lewis, supra. However, in Elsinore, a building contractor was not held to his bid and the contract was voided. Under Elsinore, a contract is voidable for unilateral mistake if it can be shown by clear and convincing evidence that: 1. it was an honest mistake; 2. the other party was notified of the mistake in a timely manner (or the other party had reason to know of the mistake), and 3. the offerors mistake was not due to his own negligence. In S.T.S. Transport, the court made clear that the defense of unilateral mistake is never available for miscalculations of judgment.

Nondisclosure
According to Rest.2d 161, a partys failure to disclose a fact known to him is equivalent to an assertion that the fact does not exist only if he knows that the other partys mistaken belief as to the nonexistence of the fact is a basic assumption on which the other party is making the contract and non-disclosure is a failure to act in good faith. In Eytan v. Bach, a contract or the sale of three paintings was not voided for mistake or fraud when the buyer discovered that the paintings, for which she paid only $50, were not original productions of unknown nineteenth-century artists, but were recent reproductions that had been placed in old frames. Because of the low price, the buyer should have inferred the fact that the paintings were not authentic; as such, the seller had no duty to inform the buyer of that fact. In Laidlaw v. Organ, a contract for the sale of tobacco was voidable for nondisclosure because the seller, who knew that prices were about to rise as a result of the War of 1812 coming to an end, did not disclose that fact to the buyer, who specifically asked the seller if he expected the price to fluctuate.

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Breach of a Warranty
All contracts for the sale of goods carry an implied warranty of merchantability and an implied warranty of fitness for a particular purpose unless such warranties are expressly disclaimed by the seller. One important difference between the mutual mistake doctrine and the implied warranty doctrine is that under mutual mistake, both parties can seek rescission as a remedy, but with implied warranty, the remedy is available only to the buyer. In Hinson v. Jefferson, the court held that when county officials denied to issue a permit for a septic system, making it impossible to construct a single-family dwelling on the land, the seller of a parcel of land breached the implied warranty of fitness for a particular purpose he owed to a buyer he knew intended to use the land for that purpose. UUC 2-314 Implied Warranty: Merchantability (CSS 50) (1) Unless excluded or modified pursuant to 2-316, a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. (2) Merchantable goods must: (a) pass without objection in the trade under the contract description; and (b) be of fair average quality within the description; and (c) be fit for the ordinary purposes for which such goods are used; and (d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and (e) be adequately contained, packaged, and labeled; (f) conform to the promise or affirmations of fact made on the container or label if any. UUC 2-315 Implied Warranty: Fitness for Particular Purpose (CSS 52) Where the seller has reason to know of the particular purpose for which the goods are required and that the buyer is relying on the sellers skill or judgment to select or furnish suitable goods, there is, unless excluded or modified under 2-316, an implied warranty that the goods shall be fit for such purpose. UCC 2-316 Exclusion or Modification of Warranties (CSS 53) (1) Words that create express warranties or negate/limit warranty are allowed so long as they are consistent with each other (2) To exclude or modify the implied warranty of merchantability or implied warranty of fitness, you must do so explicitly and

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conspicuously. (3) (a) As is, with all faults, etc., means there is no implied warranty; (b) when the buyer inspects the goods, sample, or model as fully as he desires, or refuses to do so, there is no implied warranty with regard to defects which an examination ought to have revealed to him; (c) implied warranty can be excluded or modified by course of dealing, course of performance, or usage of trade. (d) remedies for breach of warranty can be limited in accordance with UCC provisions on liquidated damages. UUC 2-714 Buyers Damages for Breach in Regard to Accepted Goods (CSS 100) (1) A buyer who has accepted goods may recover as damages for nonconformity resulting in the ordinary course of events from the sellers breach. (2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount. (3) Incidental and consequential damages may also be recovered per 2-715.

Impossibility and Impracticability

The defense of mutual mistake is available when something that the parties thought was true at the time of contract turns out not to have been true. Impossibility, impracticality, and frustration of purpose, on the other hand, are available when the situation changes after the contract is made. The rationale for the doctrine of impossibility/impracticability is that, although contracts are intended to eliminate some risks for each party in exchange for others, certain risks are so unusual and have such severe consequences that they are assumed to be beyond the scope of the risks assessed. Where the intervening circumstance is one that neither party contemplated, performance may be excused. According to Rest.2d 261 and UUC 2-615, if circumstances arise which make a party's performance impossible or impracticable, his duty to render that performance is discharged. In order to prove impracticability: 1. an event must have occurred that makes performance, or performance in the contemplated sense, impossible or impracticable; 2. the party seeking relief must not be at fault in causing the event 33

to occur; 3. non-occurrence of the event must have been a basic assumption upon which the contract was made; and 4. the party seeking relief must not have assumed the risk of the event occurring. According to Rest.2d 261, cmt. d, Events that may make performance of the contract impossible include: death or disability of an indispensible party destruction of the subject matter of the contract or other thing necessary for the performance of the contract, provided the destruction is not the fault of the party asserting impossibility. See Taylor v. Caldwell (a rental agreement was voided when fire caused the destruction of the Music Hall that was the subject matter of the agreement, and there wasnt enough time to rebuild before the scheduled concert.) failure of a specific thing necessary for performance to come into existence supervening governmental action that makes performance illegal where performance would subject the party to potential harm shortages or significant price increases in materials due to embargo or war other circumstances that would involve "extreme or unreasonable difficulty, expenses, injury or loss." Increased cost alone does not excuse performance but an alternative performance that requires an unreasonable expenditure of resources may make performance of the contract impracticable. In American Trading & Prod. Corp. v. Shell Intl Marine, a shipper who was forced to take a longer route at an additional cost of about one-third of the original cost as a result of the closure of the Suez Canal on account of war unable to have the contract set aside and recover in quantum meruit, because the contract makes no mention of the specific route to be taken, so the shipper was assumed to have borne the risk of moderate fluctuations in cost should an alternate route become necessary. In Mishara Constr. v. Transit-Mixed Concrete, an unanticipated labor dispute constituted commercial impracticability, discharging a concrete suppliers duty. In Tompkins v. Dudley, the guarantor of a contract to erect a schoolhouse was held liable when the building burned down, after the date on which the school district was supposed to take possession, because it was not yet 100% complete and the district had not actually taken possession.

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Frustration of Purpose
According to Rest. 2d 265, if circumstances arise after the contract is formed that substantially frustrate a partys purpose in entering the contract, the partys remaining duties are discharged, provided: the party seeking discharge was not at fault; the nonoccurrence of such event was a basic assumption on which the contract was made; and the language or the circumstances do not prohibit excuse based on frustration of purpose.

Unlike impossibility/impracticability, which reset the parties to the status quo ante (reliance interest), frustration of purposes simply discharges their remaining duties. A prepayment may be refunded if it was not already due, but any payments due at the time performance is excused remain payable. Furthermore, a partys duties are not discharged for mere "economic" or "commercial" frustrationi.e., where all that is frustrated is the party's ability to make a profitbut not the actual purpose of the contract. UCC 2-614 Substituted Performance (Transportation and Payment) (CSS 87) (1) Where without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercial impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted. In Krell v. Henry, performance on a contract to rent an apartment to be used for watching the coronation of King Edward VII was excused when the King fell sick and the coronation had to be rescheduled. In Chase Precast Corp. v. John J. Paonessa, a general contractor was excused from its duty to purchase concrete barriers from a supplier when the state scaled back the highway reconstruction project for which the barriers were to be used.

Duress
Duress by threat, like fraud in the inducement, makes the resulting contract voidable should the victim sue. For more see Economic Duress under Modification.

Form Contracts (Reasonable Expectations and Unconscionability)

An adhesion contract is a contract drafted by one party and reduced to a 35

form that generally presents no opportunity for negotiation (take it or leave it). The reason adhesion contracts are popular is that they are efficient and stop front-line employees from taking bribes. Including arbitration clauses in form contracts is popular because, so long as a agreement itself is not struck down for being unconscionable, the possibility of a class action is avoided, as there is no such thing as class action arbitration. While not objectionable per se, contracts of adhesion will not be enforced if they are unconscionable or beyond the reasonable expectations of the parties. There are two types of unconsionability: procedural and substantive. A defense based on unconscionability must make an argument for both, but the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa. OMelveny. Procedural unconscionability, which is manifested by unfair surprise, relates to the aggrieved party's understanding of the contract terms due to factors such as: inconspicuous print in the writing unintelligible legal language lack of opportunity to read the contract or seek clarification of terms illiteracy imbalanced bargaining positions (such as in adhesion contracts) Substantive unconscionability relates to contracts that are deemed to be oppressive, because they contain: provisions that deprive one party of the benefit of the agreement or an adequate remedy for the other party's breach provisions that bear no reasonable relation to the risk involved provisions that are substantially disadvantageous to one party without producing a commensurate benefit to the other party a great disparity between the cost and the selling price of the item that is the subject of the contract in absence of objective justification for such disparity Restatement, Second 211 Standardized Agreements (1) A party who signs a standardized agreementi.e., he has reason to believe that like writings are regularly used to embody terms of agreements of the same typeadopts the writing as an integrated agreement with respect to the terms included in the writing. (2) Such a writing is interpreted wherever reasonable as treating 36

alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing. (3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement. In Richards v. Richards, a woman who was injured while riding as a passenger in a truck operated by her husband was able to sue her husbands employer despite having signed an exculpatory agreement because the agreement was both unconscionable (both procedurally and substantively) and beyond the reasonable expectations of the woman who signed it, having been mislabeled Passenger Authorization despite actually containing broad and sweeping liability waivers. In Broemer v. Abortion Services of Phoenix, a unmarried, pregnant young woman with little education who went to a clinic to get an abortion was released from an arbitration agreement she was required to sign before being admitted for the procedure. The agreement was both unconscionable (both procedurally and substantively) and beyond the reasonable expectation of the woman who signed it, because it was not explained to her and provided that a panel of OB/GYNs should arbitrate any disputes that might arise. In Williams v. Walker-Thomas Furniture, the court struck down a crosscollateralization agreement as unconscionable. In Brower v. Gateway 2000, the court invalided an arbitration agreement that was very substantively unreasonable, calling for arbitration by an agency located in France, which required a $2,000 registration fee that was not refundable even if the consumer prevailed at the arbitration, but not procedurally unconscionable. In Davis v. OMelveny and Myers, a paralegal who sued under the Federal Fair Labor Standards Act various wage related labor violations was able to have an arbitration agreement contained in her employee handbook set aside. The court noted that a sliding scale applies to unconscionability: the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa, [though] both [must] be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability.

Modification
After a contract has been formed, the parties may modify it by mutual assent so long as the modification is a product of good faith and fair dealing. A contract can be modified orally even if it provides that all

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modifications must be in writing. Universal Builders, Inc. v. Moon Motor Lodge, Inc. According to UCC 2-209(1), in contracts for the sale of goods, modification need not be supported by new consideration. In contracts for something other than sale of goods, modification must be supported by new consideration, unless the modification is fair and equitable in light of circumstances not anticipated by the parties at the time contract was made (the unforeseen difficulties exception); or to the extent that justice requires enforcement of the modification due to a material change of position in reliance on the modified promise. In Duncan v. Black, Black contracted to sell farm land to Duncan. When it was later discovered that the Secretary of Agriculture had denied to renew the cotton allotment from the year before, Black agreed to refund $1,500 of the sale price, giving Duncan a promissory note. When Black defaulted on the note, the court refused to enforce it, the promise to refund $1,500 was a modification unsupported by consideration. In Brian Constr. & Dev. Co. v. Brighenti, a contractors demand for more money when the excavation work he agreed to perform turned out to be substantially more difficult than originally anticipated was enforceable because the unforeseen circumstances meant that separate consideration was not required. In Schwartzreich v. Bauman-Basch, an employer agreed to tear up an old employment contract and form a new one with an employee at a higher rate after the employee threatened to breach., and the new contract was deemed valid. Usually, however, novation is not allowed to circumvent the requirement in Rest.2d that modifications be supported by adequate consideration unless made in response to unforeseen circumstances.

Legal Duty Rule

Under the legal duty rule, a modification, the only consideration for which is a promise to do what the promisor is already legally bound to do, is not supported by adequate consideration. In Levine v. Blumenthal, an oral promise by a lessor to accept less than the full rent was ruled to have not modified the original rent agreement, as the modification was not supported by adequate consideration, the promisor having merely promised to do what he was already legally bound to do. (legal duty rule).

Economic Duress
A modification or new contract resulting from an improper threat of breachreferred to as "economic duress" or "extortion of a modification"will be held unenforceable. Two factors that indicate economic duress are: (1) the inability to 38

cover; and (2) the inadequacy of ordinary damages (expectation interest). Austin. In Austin Instr. Inc. v. Loral Corp., a supplier threatened to breach an agreement to supply parts to a radar manufacturer when he knew the manufacturer would not be able to cover and would suffer significant reputational harm as a result. The supplier used the threat to extort a new contract and an increase in price on an existing contract. The court held that the modification and the new agreement were both unenforceable, and ordered the supplier to pay the manufacturer damages in the amount of the extra expenditure. In Wolf v. Marlton, a developer accepted a down payment on a house from a buyer who later tried to back out of the purchase. When the developer refused to refund the down payment, the buyer threatened to go to through with the purchase and then resell to an undesirable purchaser. The developer sold the house to another party and when the buyer sued to recover the down payment, the court held that the developer had a right to sell due to economic duress. In Batsakis v. Demotsis, a woman who agreed to pay $2,000 plus interest for $25 in the midst of Nazi occupation of Greece was not allowed to raise a defense of economic duress. In Alaska Packers Association v. Domenico, fisherman who refused to work unless they captain paid them more than was originally agreed, knowing that their refusal would cost their captain a considerable sum, were made to refund the money on the theory that the modification was not supported by adequate consideration, the fisherman being already bound to work by their prior agreement. The purported modification failed the legal duty rule and also constituted economic duress. In Hackley v. Headley, Hackley, knowing that Headley was in dire financial circumstances, refused to pay a pre-existing debt unless Headley agreed to take a lesser amount as full payment. The court held that withholding payment was did not constitute duress.

Waiver of Conditions
Parties are generally allowed to waive conditions without consideration, in spite of the legal duty rule, unless the condition is a promise and is basically the only thing the party is getting in return for the overall contract. A waiver is only effective against an existing contractual right and cannot create a new obligation. Waivers can generally be retracted unless the other party has relied on such waiver to his detriment. Universal Builders, Inc. v. Moon Motor Lodge, Inc.

Conditions and the Duty to Perform

A condition is the occurrence or non-occurrence of an event that gives

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rise to or extinguishes a contractual duty. A conditional duty becomes due upon either the fulfillment or excuse of a condition. There are three types of conditions: A condition precedent is an event which must occur before performance becomes due. Rest.2d 224. The phrase concurrent condition reflects the fact that for promises capable of being performed simultaneously, neither party has a duty to perform until the other has performed. Rest.2d 234. A condition subsequent is an event, occurring after a duty has arisen, that discharges such duty. The distinction between conditions precedent and subsequent is purely formalistic. The parties can, at the time of drafting, make any condition precedent into a condition subsequent by providing that the underlying duty shall exist unless the event occurs, rather than arise only when the event occurs it occurs. When it is ambiguous whether a given clause is a condition or a promise the clause is to be construed so as to avoid forfeiture. Rest.2d 227. See Howard v. FCIC (a provision requiring an insured farmer to leave his destroyed crops untouched until they could be inspected by the insurer was construed as a promise, not a condition, of payment on the insurance policy, because to hold otherwise would lead to disproportionate forfeiture.) In Kingston v. Preston, Lord Mansfield distinguishes three kinds of promises: (1) mutual and independent promises where either party may recover damages from the other for breach, and it is no defense that the party seeking recovery didnt perform his own part of the bargain, See Howard (FCIC must pay even though Howard broke the promise to leave the crops alone.); (2) sequential promises in which the performance of one depends on the prior performance of another, and until this prior condition is performed, the other party is not liable, See Kingston v. Preston; and (3) mutual promises to be performed at the same time, in which if one party was ready and offered to perform his party and the other neglected or refused to perform, he who was ready has fulfilled his engagement and may maintain an action for breach against the other.

Fulfillment and Discharge of Conditions

Implied conditionswhich are imposed by the law in the interest of justicemay be fulfilled by substantial performance. Express conditions must be strictly fulfilled before a duty arises. 40

See Gray v. Gardner (the arrival of a quantity of sperm oil is an express condition requiring strict fulfillment). The non-occurrence of a non-material condition may be excused by the court in order to avoid disproportionate forfeiture. Rest.2d 229; Howard v. FCIC. A condition may also be excused: by improper rejection of tender or performance by wrongful prevention or hindrance of performance by waiver of a non-material conditione.g., time or manner of delivery. by equitable estoppel where a party states that an event has or has not occurred and the other party relies on that statement to his detriment. Parsons. to avoid disproportionate forfeiture unless the occurrence of such condition was a material part of the bargain. Rest.2d 229; Howard v. FCIC. In Parsons v. Bristol, failure of a builder to obtain a construction loan discharged his duty to pay an architect on the project, as the builder had made a good faith effort to secure the loan, and had not misrepresented the status of the loan to the architect, which would have made available a defense of equitable estoppel.

Order of Performances
Promises capable of simultaneous performance are each due simultaneously and each being conditioned on tender of the other. Rest.2d 234(1). According to Rest.2d 238, where performances are due simultaneously, it is a condition of each partys duty to perform that the other party either render or offer, with manifested present ability to do so, performance of his party of the exchange. Where the performance of only one party requires a period of time, such performance is due first. Rest.2d 234(2). Where the contract provides for a series of performances and payments, performance of one part is a condition precedent to payment, which in turn becomes the condition precedent to the next performance installment. Under UCC 2-307, unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender. If the agreement gives either party the right to make or demand delivery in lots, the price, if it can be apportioned, may be demanded for each lot. In Nichols v. Raynbred, performances due simultaneously were not conditioned on one another, contrary to modern law. 41

In Kingston v. Preston, a silk merchants promise to sell his business was not enforceable because when the buyer failed to meet a condition requiring that he provide a security. In Conley v. Pitney Bownes, an insurer that failed to provide an employee with information about how to take administrative action to secure disability benefits was held to have waived an exhaustion of remedies clause so long as the insured employee did not in fact know how to take the prescribed administrative action. In effect, the infers that the insurer had a duty to provide the employee with information regarding his administrative remedies that was a condition precedent to the employees duty to exhaust such remedies, which in turn was a condition precedent to payment. Failure of a condition to a condition excuses non-occurrence of the latter condition. In Stewart v. Newbury, the court held that a contractor was not required to pay a subcontractor for his work in monthly installments because the substantial performance required before payment became due according to Rest 234(2) was substantial performance of the subcontractors entire job, not one months work.

Breach: Substantial Performance and the Perfect Tender Rule

Failure to perform a contractual duty that has become due constitutes breach.

Repudiation
Anticipatory repudiation also serves to breach a contract. According to Rest.2d 250, a party repudiates a contractual duty by: (1) making a statement indicating that he will breach the contract; or (2) engaging in a voluntary affirmative act that renders him unable to perform the duty. According to UCC 2-610, when one party repudiates, the other has the right to: (a) await performance for a reasonable time; or (b) resort to any remedy for breach; and (c) in either case, suspend his own performance. Under UCC 2-611 and Rest.2d 256, a repudiating party can retract his repudiation until the his next performance is due, unless the aggrieved party has since materially changed his position or otherwise indicated that he considers the repudiation final.

Substantial Performance
In most contracts other than for the sale of goods, only substantial performance is required before a party can recover under the contract. When a party has substantially performed, he may recover the full price, less any damages to which the other party is entitled

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because of the breach. The rule is often applied in the context of construction contracts. The more willful the breach, the less likely the court will be to find substantial performance. In Massachusetts, for instance, almost any intentional breach will sustain a finding of no substantial performance. In Plante v. Jacobs, a builder was allowed to recover on the contract because misplacing a wall, which narrowed the living room of a house by more than a foot, did not preclude a finding of substantial performance where the absence of blueprints and the use of stock floor plan that was not very detailed suggested that the details were not of the essence. In Plante, the breacher was allowed to recover on the contract, having substantially performed. This differs from Briton v. Turner, in which the breacher only able to recover in quantum meruit. In Jacob & Young v. Kent, no damages were awarded for use Cohoes brand pipes than Reading brand, as required by a contract to build a country home, because the value of the property was not diminished by the breach and the mistake was not willful.

The Perfect Tender Rule

In the nineteenth century, sellers were required to deliver goods that complied exactly with the sales agreement. That rule, known as the perfect tender rule, remained part of the law of sales well into the twentieth century. See Prescott v. J. B. Powles (supplier who sold 300 creates of onions to be delivered aboard the only ship sailing each month from Australia to San Francisco was unable to recover for losses he sustained when the buyer rejected the shipment, which was short 60 crates, even though the reason for the short shipment was that the U.S. government had at the last minute commandeered the space on the ship) The harshness of the perfect tender rule leads courts to seek to ameliorate its effect by bringing the law of sales in closer harmony with the law of contracts, which allows rescission only for material breach. In Beck & Pauli Lithographing, a lithography business was able to recover from a customer despite delivering the letterhead a week late. Although the UCC requires perfect tender for goods, the court refused to allow rejection for such a trifling delay because the letterhead required substantial skilled labor to prepare and the buyer did not inform the lithographer that time was of the essence.

The UCC
The UCC retains the perfect tender rule to the extent that, under UCC 2601, a buyer can reject goods for any nonconformity. However, the UCC mitigates the harshness of the perfect tender rule

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by allowing the seller to cure after the buyer has rejected the goods, UCC 2-508, and by not allowing the buyer to revoke acceptance, UCC 2-607(2). UCC 2-601. Buyer's Rights on Improper Delivery. If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may: reject or accept the whole ; or accept a portion and reject the rest. UCC 2-711 Buyers Remedies in General (1) If a seller fails to make delivery or repudiates, or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract, the buyer may cancel, recover whatever has already been paid, (a) cover (See 2-712), and (b) recover damages for non-delivery (See 2-713). (2) The buyer may also have a right to the goods, and recover them by a court order of specific performance or replevin (See 2716). (3) Also, on rightful rejection or justifiable revocation of acceptance a buyer has a security interest in any goods already in his possession, and may hold them or resell them in like manner as an aggrieved seller ( 2-706). UCC 2-508. Cure by Seller of Improper Tender or Delivery; Replacement. (CSS 69) (1) Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery. (2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender. UCC 2-607. Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance; Notice of Claim or Litigation to Person Answerable Over. (1) The buyer must pay at the contract rate for any goods accepted. (2) Acceptance made with knowledge of a non-conformity cannot be revoked

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(3) Where a tender has been accepted: (a) the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach; (b) the burden is on the buyer to establish any breach with respect to the goods accepted.

Third Parties
Third Party Beneficiaries
Intention is the touchstone of third-party standing. In order for a third party to be entitled to enforce a contract of which it is the beneficiary, the principle parties must have intended to create legally enforceable rights in the third party (intended beneficiaries). A third party upon whom the parties to the contract did not intend to bestow enforcement rights is classified as an incidental beneficiary to the contract. Incidental beneficiaries may get their enforcement rights when intent is implied, rather then express, or when there is a conflict of interest between the principal parties and the third party, as when the third party relies on the promise to his detriment. According to Rest.2d 311, the principal parties generally retain the power to discharge or modify the duty owed to a third-party beneficiary. However, if the beneficiary materially changes position in justifiable reliance on the promise, the principal parties can no longer discharge or modify the duty to the beneficiary without the beneficiarys consent. Rest.2d 311, cmt. g. Furthermore, even if there is no change of position by the beneficiary, once the beneficiary manifests assent to the promise in a manner invited by the promisor or promisee, the principal parties can no longer discharge or modify the duty to the beneficiary without his consent. This rule rests in part on an analogy to the law of offer and acceptance and in part on the probability that the beneficiary will rely in ways difficult or impossible to prove. Rest.2d 311, cmt. h. According to Rest.2d 302(1), third parties possessing the right of enforcement fall into two categories: (a) creditor beneficiaries third parties to whom the promisee owes a debt, which is to be satisfied by performance of the promise; and (b) donee beneficiaries third parties upon whom the promisee attempts to confer gift. In Lawrence v. Fox, Lawrence successfully sued on a contract in which Holly loaned Fox $300 so Fox could pay Lawrence the next day on a debt owed to Lawrence by Holly. Lawrence had standing to sue as an incidental creditor beneficiary. 45

Assignment (of Rights) and Delegation (of Duties) to Third Parties

According to Rest.2d 328, unless the contract indicates otherwise, (1) an obligee may assign its right to receive performance from the obligor; and (2) the assignor then becomes a surety for performance by the assignee. Under Rest.2d 317, rights are freely assignable unless the assignment would: 1. materially change the duty of the obligor; 2. materially increase the burden or risk imposed upon the obligor; 3. impair the obligors chance of obtaining return performance; or 4. materially reduce the value of the return performance to the obligor. Thus, rights are not assignable if the performance is personal or assignment would change the credit risk. In Macke Co. v. Pizza of Gaithersburg, the duty of a supplier to maintain cold drink vending machines in pizza shops was delegable, even though pizza shops may have chosen the supplier because they preferred the way it conducted its business. In Crane Ice Cream, an ice cream manufacturers assignment of its rights and delegation of its duties under a contract for the delivery of ice was held to be a repudiation of the contract since the effect was to increase the burden or risk imposed upon the supplier, who supplied the ice on credit and who wasnt sure he could meet the demand of the new manufacturer. According to UUC 2-210(5), ambiguous languagee.g., an assignment of the contract or of all my rights under the contractis to be interpreted as both a delegation of duties and a transfer of rights. But Rest.2d 328(2) notes that that contracts for the sale of land may constitute an exception to the usual rule of interpretation. See Langel v. Betz (court refused to infer from the acceptance of an assignment of a bilateral contract for the sale of land that the assignee had assumed the assignors duties). An assignment is a present transfer of a right by its owner to another, as opposed to a contract, which is a promise of future performance. As such, an assignment need not be supported by consideration. However, a gratuitous assignment remains revocable unless the formal requisites of a valid gift are met. Rest.2d 332. The traditional tests are intention and delivery, which together strip the donor of dominion over the thing given. See Herzog v. Irace (a lawyer who paid his client the proceeds from a personal injury settlement was held directly liable to a doctor to whom the client had previously assigned his right to the proceeds, the lawyer having been informed of the assignment. The 46

assignment was not revocable because a written letter stating the assignment had already been delivered to the assignee.)

Employment Relationships
Courts often conceptualize at-will employment as a unilateral contract that is accepted by the employees continuing to work. See Pine River State Bank. However, when an employer issues a manual that substantially interferes with an employees legitimate expectations about the terms of employment, the employees continued work after notice of those terms cannot be taken as conclusive evidence of consent to the terms. This must be so, else an employee with a termination-onlyfor-cause contract would have no way to insist on his contractual rights; his only choices would be to resign or continue working under the modified agreement, either of which would result in the loss of the very right at issue. Moreover, an employee suing to enforce a promise in the handbook need not show knowledge of the promise, lest those who read the handbook would be treated differently from those who did not. (As a result, the employee can sue on an implied contract, the handbook providing the requisite objectively manifested assent, rather than on a theory of promissory estoppel, which would require proof of reliancei.e., that the employee actually read the handbook.) In McDonald v. Mobil Coal Producing, the court held that an employee handbook established baseline procedures which an employer had to use before terminating the employee. Although the handbook contained a disclaimer that it was not to be construed as a contract, the disclaimer was invalid because it was not conspicuous.

Public Policy: Non-competition Clauses

In most jurisdictions, a CNC is enforceable so long as it is: 1. in writing; 2. ancillary to an otherwise valid transaction or relationship; 3. reasonably limited in duration and geographic scope; 4. necessary to protect the employers legitimate interests; and 5. does not cause undue burden to the employee. A CNC that fails to satisfy the foregoing criteria is unenforceable on grounds of public policy. Rest.2d 186-188. In California, a CNC is unenforceable per se. Two principlesthe freedom to contract and the freedom to work conflict when courts test the enforceability of covenants not to compete (CNCs). An employer is more likely to invest in the professional development of an employee if the employer has some assurance that 47

the employee will not soon become a source of competition. As such, CNCs create value for society by increasing employment. Nevertheless, the common law policy against agreements in restraint of trade is one of the oldest and most firmly established. As a consequence, the initial burden is on the employer to prove the covenant is reasonable and necessary to protect his legitimate business interests. Jurisdictions vary as to whether an unenforceable CNC can be reformed or partially enforced (all-or-nothing vs. blue pencil rule). Partial enforcement creates a perverse incentive for employers to write sweeping non-compete clauses, which, though they may be reformed, will give maximal protection. The upside to partial enforcement is that a clause which, though imposed in good faith, is still unduly broad, can be reformed and enforced. The all-or-nothing rule creates an incentive for employers, who are better equipped to understand the law and who are usually responsible for setting the terms of the employment agreement, not to overreach. In Summit 7 v. Lasker, a CNC was enforced against a prior employee of a printing business because she received promotions and pay raises in consideration for accepting the CNC. Although on its face the CNC may have been unduly broad, the actual enforcement sought was not unconscionable the employees new job was very nearby. (Under an allor-nothing rule, the CNC would have been unenforceable.) However, no damages were awarded because none could be adequately proven, and no injunction was granted because the CNCs 3-year limit had expired by the time the trial ended. In Allpets, a CNC was enforced against a veterinarian who left a clinic to join another nearby. The court shortened the 3-year durational limit, which it found unreasonable, to 1-year (blue pencil rule), to be enforced from the time of judgment (unlike Summit 7, in which the time did not toll). In WebMD v. Martin, a CNC was not enforced against Martin, a medical journalist, who left WebMD to work for About.com, because WebMD could not provide clear and convincing proof that Martin had access to specific business knowledge or proprietary information that she took with her to About.come.g., knowledge of WebMDs customers, or sponsors. Rest.2d 186(1) Promise in Restraint of Trade (CSS 256) A promise is unenforceable on grounds of public policy if it is unreasonably in restraint of trade. Rest.2d 187 Non-ancillary Restraints on Competition (CSS 256) A promise to refrain from competition that imposes a restraint that is not ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade. 48

Rest.2d 188 Ancillary Restraints on Competition (CSS 256) (1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if (a) the restraint is greater than is needed to protect the promisees legitimate interest, or (b) the promisees need is outweighed by the hardship to the promisor and the likely injury to the public. (2) Promises imposing restraints that are ancillary to a valid transaction or relationship include the following: (a) A promise by the seller of a business not to compete with the buyer in such a way as to injure the value of the business sold; (b) A promise by an employee or other agent not to compete with his employer or other principal; (c) A promise by a partner not to compete with a partnership. Rest.2d 184 When Rest of Agreement is Enforceable (CSS 255) (1) If less than all of an agreement is unenforceable under the rule stated in 178, a court may nevertheless enforce the rest of the agreement in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange. (2) A court may treat only part of a term as unenforceable under the rule stated in Subsection (1) if the party who seeks to enforce the term obtained it in good faith and in accordance with reasonable standards of fair dealing.

Part IV: Remedies for Breach of Contract Types of Damages

Expectation Interest Forward looking. A partys interest in realizing the benefit of the bargain. The aim is to put the promisee in as good a position as he would have occupied had the defendant performed his promise. Reliance Interest Backward looking. A partys interest in recovering losses suffered by virtue of reliance on the contract, regardless of corresponding gain to the opposite party. The aim is to put the promisee in as good a position as he was in before the promise was made. Restitution Interest A partys interest in recovering values conferred on the other party. The aim is to prevent unjust enrichment. Equals the amount transferred by non-breaching party to breaching party.

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General Damages
Expectation Interest
According to Rest.2d 347, the usual award for breach is the expectation interest, measured by the value to the non-breaching party of the breaching partys performance; plus incidental and consequential damages; minus costs avoided by the non-breaching party by virtue of not having to perform. In Hawkings v. Mcgee, a doctor who botched a skin graft operation he promised that would leave a boy with a perfectly good hand was held liable for the difference between the value of a perfect hand and the value of boys hand in its present condition (expectation interest), rather than the difference between the value of the hand before and after the operation (reliance interest). According to UUC 2-708, a sellers damages for non-acceptance or repudiation is the expectation interest, measured by the market price (at time and place for tender), minus the amount unpaid on the contract, plus incidental damages, minus expenses saved as a consequence of the buyers breach. According to UCC 2-713, a buyers damages for non-delivery or repudiation is the market price at place for tender at the time when the buyer learned of the breach, minus the contract price, plus any incidental and consequential damages, minus expenses saved in consequence of the sellers breach. In Acme Mills & Elevator Co. v. Johnson, a supplier of wheat breached a contract to deliver 2000 bushels of wheat by selling to a third party at a higher price and was not liable for damages because the market price at the time of delivery was less than the price the seller was supposed to pay under the contract. This is an example of efficient breach, which is protected by the default award of the expectation interest.

Reliance Interest
According to Rest.2d 349, where the expectation interest cannot be proven, or in the case of a losing contract, courts award the reliance interest, which includes expenditures made in preparation for performance or in performance, less any loss that the non-breaching party would have suffered had the contract been performed. For instance, in L. Albert & Sons v. Armstrong Rubber Co., when the seller of rubber refiners breached, the buyer was able to recover the amount he spent preparing foundations for the machines (reliance interest) rather than his expected profits, which could not be proven. A party who enters a loser contract, is not entitled too a recovery that would lead to a net profit, regardless of whether the claim is framed as reliance or expectation.

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Building Contracts: Cost of Performance vs. Diminution in Value

According to McCormick, Damages 168 and Rest.2d 348, with regard to building contracts, where the defect is one that can be repaired or cursed without undue expense the cost of completion is the proper measure of damages, but where the cost of reconstruction would be disproportionate to the value, the diminution in value is the proper measure of damages. The important question is whether the trier of fact believes the property owner will use the money to actually complete performance, or is merely interested in the maximum immediate economic gain. When the property is held for investment purposes, damages are limited as a matter of law to the diminution in value. In Groves v. Wunder, a man who leased his land to be stripped mined was awarded the cost of leveling the ground when the lessor failed to level it as promised, even though the cost of performance was disproportionate to the increase in value. In Peevyhouse v. Garland, the court awarded the diminution in value caused by the breach of a clause to smooth the surface of land from which coal was extracted by strip mining, rather than the cost of completion, which would have been more than the property would have been worth after completing the work. In Advanced, Inc. v. Wilks, the court invoked the reasoning of Rest.2d 348 to award of a cost-of-repair figure that greatly exceeded the diminution in market value of a defectively constructed home because the court believed the homeowner actually intended to use the money to complete the work.

Promissory/Equitable Estoppel
See Promissory Estoppel under Terminating the Offer, supra.

Limitations on the recovery of expectation damages

Avoidable Damages (Repudiation and the Duty to Mitigate)
When a contract is repudiated, the injured party is entitled to recover expectation damages, minus: 1. expenses saved due to breachi.e., variable costs; 2. gains that could not have been made had there been no breach; and 3. losses that could reasonably have been avoidedi.e., without undue risk, burden, or humiliation. Rest.2d 350.

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In Rockingham County v. Luten Bridge Co., the builder of a bridge who continued performance after he was informed of repudiation was only allowed to recover expenses already incurred at the time of repudiation plus additional damages up to the expected profits from full performance. In Leingang, a landscaper who had a contract with the city to cut weeds on designated lots was awarded the total value of jobs that were improperly assigned to another contractor, even though the landscapers profit margins were only 20%, because the expenses saved due to breach include only variable costs, not fixed overhead costs reflected in the overall profit margin. In Kearsarge Computer, a provider of data-processing services whose contract was terminated halfway through a one-year term was awarded his expectation from the full contract, without a deduction for income for new business, as businesses are deemed expandable and the majority of Kearsarges costs were fixed, rather than variable. In Parker v. Twentieth Century-Fox, Shirley McClain was able to recover the salary she was promised to appear in Bloomer Girl, a musical comedy film to be shot in California, when Twentieth Century-Fox cast another actor, even though McClain was offered the same amount of compensation as lead in another film, Big Country, Big Man, a western, to be filmed in Australia, because she was under no obligation to accept replacement work that is both different and inferior.

Availability of Cover
According to UCC 2-712, cmt. 2, the buyer is always free to choose between cover and damages for non-delivery. A buyer who chooses to cover can recover the cost of cover and consequential damages, but a buyer who chooses not to cover cannot recover consequential damages caused by his failure to cover. UCC 2-712 Cover; Buyers Procurement of Substitute Goods (1) Buyer may cover by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller. (2) Buyer may recover cost of cover, minus the contract price, plus incidental and consequential damages, minus expenses saved by the sellers breach. (3) Failure to cover does not bar other remedies. According to UCC 2-723, in cases of anticipatory repudiation, damages based on market price shall be determined according to the price prevailing at the time when the aggrieved party learned of the repudiation. In Missouri Furnace v. Cochran, when Cochran breached a contract for 52

the weekly delivery of coal, the court held that Missouri Furnace should have used the spot market to cover on a weekly basis, rather than entering a forward contract for the coal once, at the time it discovered the breach. This case is at odds with UCC 2-723, which sets the market price at the time at which the buyer learns of the breach.

Incidental/Consequential Damages
Early cases relied on the tacit agreement test to limit consequential damages to those for which the party in breach had assumed the risk. For instance, in Globe Refining v. Landa Cotton Oil, Justice Holmes, applying the tacit agreement test, denied Globe consequential damages because it seemed that, although Landa was aware that Globe would suffer the losses it sustained when Landa breached, Landa had not agreed to take on liability for those loses. Both the Rest.2d and the UCC reject tacit agreement test in favor of a foreseeability test. Rest.2d 351 allows foreseeable damages to be limited as justice requires. While the UCC 2-715 requires sellers who do not wish to take the risk of consequential damages to expressly disclaim liability. Rest.2d 351 Unforseeability as a Limitation on Damages (CSS 311) (1) Damages for loss that the party in breach did not have reason to foresee as a probable result of the breach are not recoverable. (2) Foreseeable losses include those that follow from breach (a) in the ordinary course of events, or (b) as a result of special circumstances that the breaching party had reason to know. (3) Court may limit damages for foreseeable loss by excluding lost profits, by allowing recovery only for reliance interest, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation. The justice language is used by courts to limit recovery for foreseeable losses when circumstancesfor instance, disproportionaltity of the price to the loss or the informality of dealingindicate that the parties did not intend to assign the risks in such a way as to make the loss compensable. (a la tacit agreement test) UCC 2-715 Buyers Incidental and Consequential Damages (1) Incidental damages resulting from the sellers breach include expenses reasonably incurred in inspection, receipt, transportation and care of goods rightfully rejected. (2) Consequential damages resulting from the sellers breach include: (a) any loss resulting from general or particular

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requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise. The UCC rejects the tacit agreement test for the recovery of consequential, holding the seller liable for consequential damages in all cases so long as he had had reason to know of the buyers general or particular requirements at the time of contracting, regardless of whether he consciously accepted an insurers liability. Any seller who does not wish to take the risk of consequential damages must expressly disclaim such liability. In Hadley v. Baxendale, a shipper who delayed in transporting a broken mill shaft so another could be made in its model was not liable for the loss incurred by the mill, which was rendered inoperable in the meantime, because the shipper was not adequately alerted to the mills circumstancesi.e., the loss was unforeseeable. In Victoria Laundry, the installer of a boiler was held liable for lost profits from routine business, but not from particularly lucrative and undisclosed dying contracts, on which a launderer was unable to perform when the installation of the boiler was delayed. Although some lost profits are foreseeable, particularly lucrative or unusual business arrangements are not foreseeable and thus not compensable unless the party in breach has reason to know of them. In Lamkins v. International Harvester, a farmer claimed that a tractor manufacturers failure to provide him with lighting equipment he needed to use his tractor at night rendered him unable to plant and harvest a 25-acre tract. The manufacturer was not held liable for the loss, because though foreseeable, it was incommensurate with the consideration paid by the buyer. This is an application of the tacit agreement test. Under UCC 2-715, the loss would be compensable since it was not expressly disclaimed, but under the justice language in Rest.2d 351, the seller would likely not be liable. In Hector Martinez & Co. v. Southern Pacific Transp., a carrier who was a month late in delivering a dragline to be used in a strip mine was held liable for the rental cost of the dragline since it was foreseeable that the very thing being shipped would be needed immediately.

Uncertainty
According to Rest.2d 352, damages are not recoverable for losses that cannot be established with reasonable certainty. According to Rest.2d 353, a party may not recovery for emotional disturbance unless the breach also caused bodily harm (in which case there is almost certainly a potential tort action), or emotional disturbance was a particularly likely result of the contract or the breach e.g., breach of a contract to bury the corpse of a loved one.

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Note: It is not the severity of the emotional disturbance, but its a priori likelihood that determines whether damages may be awarded. In Valentine v. General American Credit, a woman whose employment contract was terminated was entitled to expectation damages, but denied damages for mental distress, though they were foreseeable, because the dollar value of mental distress damages cannot be determined with reasonable certainty. Profits too speculative: In Freund, an author who granted a publisher exclusive publishing rights to his book was awarded only nominal damages when, after being purchased by another company, the publisher chose not to publish the book, because there was no way to determine how many of the books would sell and thus how much the authors royalty would be. Future profits awarded, not too speculative: In Fera v. Village Plaza, a new shopping center that leased the plaintiffs spot to another party was able to recover its expectation interest though it was a new business because it was able to establish its expected profits with reasonable certainty.

Restitution (Recover For Tort Claims and QuasiContracts)

Restitution compensates a party for the benefit conferred on the other party as a result of partial performance, and is aimed at preventing unjust enrichment. Restitution may be available: in cases of total breach, to either party where a contract proves unenforceable (e.g., for lack of consideration or writing) where a contract is voidable where a duty is excused or discharged due to impracticability, frustration of purpose, non-occurrence of a condition any other case of unjust enrichment. See Laurin v. DeCarolis. The restitution interest may be measured by: what it would have cost to obtain such benefit from another source the increase in value of a partys property or other interests. According to Rest.2d 373, a party injured by a breach is entitled to restitution for any benefit he conferred on the breaching party by way of partial performance or reliance. However, restitution is not available if the injured party has performed all of his contractual duties and the breaching party owes no performance other than

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payment for a definite sum of money for the injured party's performance. In U.S. v. Algernon Blair, a subcontractor who suspended performance when the general contractor refused to pay the sub for providing cranes was able recover the reasonable value of his services in quantum meruit, even though he would expected to lose more money on the contract than was presently owed (meaning he had a negative expectation interest and would not have been able to recover anything on the contract). According to Rest.2d 374, the breaching party is entitled to restitution for any benefit he conferred by way of part performance or reliance in excess of the loss that he caused the aggrieved party by his breach. In Britton v. Turner, a farm hand who quit after working 9 months on a 1year contract was allowed to recover in quantum meruit for the work performed even though he willingly breached his employment agreement, minus the losses the farm owner sustained as a result of the breach (which were not mentioned in the case). A party who has fully performed is not allowed to recover his restitution interest. This discontinuity at full performance is necessary in order to keep parties who have knowingly entered into loser contracts from breaching and suing in restitution in order to extract a profit; and because, assuming that a party who agreed to enter a loser contract expects to get something out of the deal beyond the return performance, he has most likely already received that thing by the time he has fully performed. See Oliver v. Campbell (a lawyer who was fired by his client on the eve of settlement was not allowed to recover more than the agreed-upon fee, though the reasonable value of his services was more than that fee, because he had fully performed prior to being fired).

Tort Cases
Under Rest. Tort. 2d. 901, when a party to a contract brings a tort claim against another party, the remedy is the restitution interest, rather than the expectation interest. And, because the law or torts includes elements of punishment and deterrence, willful wrongdoers may be held liable for punitive damages in addition to actual damages.

Other Instances of Unjust Enrichment

In Laurin v. DeCarolis, the seller of land removed a significant amount of gravel from the property before the buyer took possession. Though the market value of the property was unaffected by the removal, the buyer was able to recover the value of the gravel. Because the defendants breach was deliberate and willful, an award of restitution damages 56

was appropriate to deprive the seller of his ill-gotten gains.

Liquidated Damages
At the time the contract is formed, the parties may agree to a fixed sum of money or a set formula for setting damages in the event of a breach. Stipulated damages will be enforced if they were a reasonable estimate that reflects an honest effort to anticipate the harm caused by a breach, but not if they represent an attempt to punish the breaching party. According to Rest.2d 356 and UCC 2-718, a stipulated damages clause is only enforceable if it is reasonable in light of the: anticipated harm at the time the contract was formed (ex ante); or the actual harm at the time of breach (ex post); difficulties of proof of loss; and inconvenience/nonfeasibility of otherwise obtaining an adequate remedy. A liquidated damages clause is likely to be unenforceable if it is too crude, Wilt, or so subjective that it seems punitive, Muldoon. In Muldoon v. Lynch, a widow who hired sculptors to erect a monument to her dead husband was made to pay the full amount for the work despite a liquidated damages clause providing for a $10 forfeiture for every day completion was delayed, because the clause was an unenforceable penalty. In Wilt v. Waterfield, a liquidated damages clause that limited the sellers liability for breach to ten percent of the agreed sale price was stricken down because the undifferentiated, or shotgun, liquidated damages clause was didnt take into account the varying ways in which the contract could have been breached. In Samson Salves v. Honeywell, a liquidated damages clause in the contract for expensive alarm service was unenforceable because it limited the alarm companys liability for failing to call the police to $50, a sum that is manifestly disproportionate to either the consideration paid . . . or the possible damage that reasonably could be foreseen.

Liquidated Damages Clauses and the Duty to Mitigate

The inclusion of a liquidated damages clause removes the duty to mitigate. Unlike the duty of good faith, which is immutable, the duty to mitigate is merely a default rule, and where the parties have considered the prospect of breach sufficiently to have specified a damages rule, the court infers that their failure to include a duty to mitigate clause reflects their intention that there be no such duty.

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Arguments For and Against Enforcement of Penalty LD Clauses

The strongest arguments for enforcing liquidated damages clauses even when they are punitive are: (1) When the promisor does not know the probability of breach but the promisee does, a LD clause serves a vital signaling function. A promisee who is willing to accept a high even, punitiveliquidated damages amount presumably believes (hopes?) that the probability he will breach is low. And (2) what seems like a punitive liquidated damages clause is often nothing more than a reflection of the idiosyncratic or subjective value a party places on the performancei.e., precisely what is needed to put the injured party in the same position he would have been in had the other party performed. If that is the case, allowing a penalty clause accords with the objective of damage remedies in generalnamely, protecting the benefit of the bargain. Finally, (3) liquidated damages clauses should always be enforced because of the value of individual autonomy parties should be free to order their own affairs by entering into consensual agreements on any terms they choose. The strongest arguments against enforcing punitive liquidated damages clauses are: (1) punitive liquidated damages clauses have the in terrorem effect of discouraging breach, including efficient breach. This is a weak argument because the parties remain free to negotiate a release from the original contract so that one party may pursue a more efficient outcome vis--vis a third party while still compensating the original counter-party. And (2) that an over-compensatory damage clause may signal some impairment of the bargaining process, such as fraud, duress, or mistake. This explanation does not justify the general rule invalidating penalty clauses, for invalidation occurs even when the clause is shown to have resulted from a fairly-bargained exchange. Furthermore, modern contract law provides an arsenal of more particularized weapons for striking down agreements that do not result from fair bargaining. So, this is a weak argument too.

Specific Performance
Specific enforcement is a remedy in the form of a court order that the breaching party render performance of the contract. Specific performance is only available when expectation damages are inadequate to put the aggrieved party in as good a position as he would have been had the contract been fully performed. According to Rest.2d 360, other factors relevant to the determination of whether the remedy in damages would be adequate include: (a) the difficulty of proving damages with reasonable certainty; (b) the difficulty of procuring substitute performance by 58

means of money awarded as damages, and (c) the likelihood that an award of damages could not be collected. Expectation damages are deemed to be an inadequate remedy: where the subject matter is unique (heirlooms, works of art, etc.) in real property transactions in goods contracts, "where goods are unique or in other proper circumstances"e.g., where the goods are in short supply. UCC 2-716(1). In Van Wagner v. S&M, specific performance of a billboard lease was not ordered because the court believed there was an adequate remedy at law, and specific performance would be an undue hardship on the lessor, who planned to tear down the building on which the billboard was attached to build a new one. In Curtice Bros. v. Catts, specific performance of a contract to sell tomatoes was awarded in the form of an order that a farmer not sell his tomato crop to someone other than the cannery to whom he had originally agreed to sell them. By rendering the tomatoes worthless to the farmer should he choose not to sell them to the cannery, the court shifted considerable bargaining power to the cannery. By so doing, the court helped ensure that the recalcitrant farmer would not perform poorly, for instance, but allowing the tomatoes to squish or rot. It is generally understood that the UCC preserves the historical adequacy test reflected in the Restatement. However, the official comment provides: The test of uniqueness under this section must be made in terms of the total situation which characterizes the contract. Output and requirements contracts involving a particular source or market present today the typical commercial specific performance situation, as contrasted with contracts for the sale heirlooms or priceless works or art which were usually involved in the older cases. In Eastern Rolling Mill v. Michlovitz, Eastern was ordered to specifically perform a contract to sell all the scrap steel that it would produce over the next five years as a by-product of its milling operations. A damage remedy would have been inadequate at the time of the suit, because of uncertainty as to the amount of scrap Eastern would produce.

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