Barry Adler Contracts Fall 2010

OBJECTIVE THEORY OF ASSENT..............................................................................................................................................2 KEY KS DEFINITIONS ...................................................................................................................................................................2 GENERAL THEORY........................................................................................................................................................................2 Existence of an Offer............................................................................................................................................................3
Preliminary Negotiations..........................................................................................................................................................................4

Agreements in Principle.......................................................................................................................................................5 Revocation and Acceptance..................................................................................................................................................7 MIRROR-IMAGE RULE....................................................................................................................................................................7 ACCEPTANCE BY ACTION...............................................................................................................................................................8 ACCEPTANCE BY INACTION...........................................................................................................................................................10 BATTLE OF THE FORMS................................................................................................................................................................10 E-COMMERCE & MUTUAL ASSENT...............................................................................................................................................13 CONSIDERATION DOCTRINE...................................................................................................................................................14 PAST OR MORAL CONSIDERATION.................................................................................................................................................15 EXCEPTION : MODIFICATION AND PREEXISTING DUTY.......................................................................................................................16 EXCEPTION : PROMISSORY ESTOPPEL..............................................................................................................................................18 STATUTE OF FRAUDS...................................................................................................................................................................20 NATURE AND LIMITS OF KS.....................................................................................................................................................21 UNENFORCEABLE PF VALID KS....................................................................................................................................................21 WRT Public Policy/Legislation..........................................................................................................................................21 WRT Capacity, Duress, and Undue Influence....................................................................................................................21
Incapacity ...............................................................................................................................................................................................22 Duress and Improper Threat...................................................................................................................................................................22 Undue Influence.....................................................................................................................................................................................22

WRT Unconscionability......................................................................................................................................................23
Definitions..............................................................................................................................................................................................23

INTERPRETING THE AGREEMENT........................................................................................................................................25 HIERARCHY OF INTERPRETATION....................................................................................................................................................25 GAP FILLING..............................................................................................................................................................................27 Illusory Promises...............................................................................................................................................................28 Gap Filling and Good Faith...............................................................................................................................................29 EXTRINSIC EVIDENCE...................................................................................................................................................................30 BREACH............................................................................................................................................................................................33 EFFICIENT BREACH HYPOTHESIS....................................................................................................................................................33 PHILOSOPHY OF PROMISE..............................................................................................................................................................34 BREACH AND CONSTRUCTIVE CONDITION.......................................................................................................................................34 FAILURE OF A BASIC ASSUMPTION.......................................................................................................................................37 DAMAGES.........................................................................................................................................................................................40 Farnsworths Three Damage Interests:..............................................................................................................................40 Damage calculation...........................................................................................................................................................40 LIMITATIONS ON DAMAGES............................................................................................................................................................42 Remoteness of Harm (Foreseeability)................................................................................................................................42 Uncertainty of Harm..........................................................................................................................................................44
Speculative Damages..............................................................................................................................................................................44 Wasted Expenditures..............................................................................................................................................................................45

Avoidability of Harm (Mitigation Obligation)....................................................................................................................45

Mitigation and Efficient Breach.............................................................................................................................................................46 Mitigation and Burdensome Cover [R.2d 350(1)]............................................................................................................................47 Mitigation and Buyer Breach/Sellers Remedy......................................................................................................................................48

SPECIFIED DAMAGES...................................................................................................................................................................49 SPECIFIC PERFORMANCE................................................................................................................................................................51 RESTITUTION..............................................................................................................................................................................53

Restitution for Breaching Promisor........................................................................................................................................................54 Restitution & Quasi-K............................................................................................................................................................................56

Barry Adler Contracts Fall 2010

Objective Theory of Assent

KEY KS DEFINITIONS
Contract: a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. (R.2d 1) Promise: a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made. [R.2d 2(1)] o Promisor: the person manifesting the intention [R.2d 2(2)] o Promisee: the person to whom the manifestation is addressed [R.2d 2(3)] o Where performance will benefit a person other than the promisee, that person is a beneficiary. [R.2d 2(4)] Parties to a bargain can be both promisor and promisee, each to the other o A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct. [R.2d 4] Agreement: a manifestation of mutual assent on part of two or more persons [R.2d 3] o Bargain: an agreement to (1) exchange promises or to (2) exchange a promise for a performance, or to (3) exchange performances [R.2d 3] the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration. [R.2d 17(1)]

GENERAL THEORY
Saying meeting of the minds b/t parties forms K is incorrect; subjective intent to agree is not required for an enforceable K What is req. is that ea. party behave in such a way that gives the other party reason to believe that there is a bargain b/t them o R.2d 17: the formation of a K req. a bargain in which there is a manifestation of mutual assent to the [bargained-for] exchange AND as a result of which o R.2d 33: there is a basis for determining the existence of breach and for giving an appropriate remedy. o R.2d 18: provides that manifestation of mutual assentrequires that ea. party either make or promise or begin or render performance o R.2d 19: provides that, depending on the context, a manifestation of assent can be conveyed by many diff. forms of conduct: writing, spoken, other acts, or (rarely) failure to act. If a party intentionally acts in a way that he knows or has reason to know another will interpret as assent, the conduct is sufficient to bind the actor even though he does not in fact assent. Embry v. Hargadine (290) [P sought renewal of employment K Question: whether the company, through manager (D) granted K P was later fired w/in what would have been the term of the renewal] o What was the business setting of the transaction? According to P: the holiday rush, which P may be able to use as leverage According to D: just before a major mtg, when D is unable to negotiate o What do the parties agree was said? That P would quit if not renewed o Ps version of Ds response: Go ahead, youre all right and dont let that worry you o Ds version of his response: I have not time to take it up now How would P interpret the Go ahead response? 2

Barry Adler Contracts Fall 2010 As an assent to Ps proposal, otherwise he would not considered himself all right w/o extension How would D interpret the Go ahead response? As a deflection of Ps request, an attempt to defer the issue, otherwise he would have been more definitive (to make sure P was properly motivated) o Holding: on Ps version of the facts [Go ahead] there was a K as a matter of law because no reasonable man would construe Ds answer.otherwise than an assent to Ps demand. Lucy v. Zehmer (296) [re: the sale (or not) of a farm by D at a restaurant After P bet D he wouldnt sell farm for $50k, D said he would (offer) P accepts the alleged offer both orally and writing Offer signed by both D and his wife] o Ds arg: No K b/c it was an agreement after several drinks, though perhaps not sufficient for intoxication capacity D, is consistent with a joke/bluff Also, the written offer (on the back of a restaurant check) was an unusual place for a document memorializing the sale of land o Ps arg: The is a K b/c D took steps that suggest his intent to sell the farm Peharps the overall context was a joke, but these steps werent a part of it, P had no reason to believe that he was being bluffed (besides challenged to come up with money) o Holding: Ds subjective intensions did not matter. P reasonably interpreted Ds actions as assent Consistent with the std. statement that K formation depends on objective theory K was under negotiation for 40mins Multiple drafts Signing by D AND his wife Sophisticated provisions re: examination of title, etc. Would it have mattered if P had believed D was joking, even if a reasonable person would not? Yes: if D took actions that failed to convince P that offer was seriousNO K **Re: extrinsic evidence. another crt might decide the case on the four corners of the signed writing alone, excluding evidence that that P knew it was a joke

Existence of an Offer
R.2d 22: observes that the manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties R.2d 24: says that an offer is the 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 R.2d 33: provides that even if a communication takes the form of an offer, it cant be accepted (and serve as the basis of a K), unless the terms to be accepted are sufficient to form a K, that is provide a basis for determining the existence of breach and for giving an appropriate remedy (also in 1) UCC o UCC hypo e.g. BA says to me I offer you some books and I say I accept What books? At what price? How many books?, etc. Books=UCC o BUT a crt may fill many gaps and thus enforce a lightly specified offer (see R.2d 204) o UCC 2-204: provides that a sales K may be made in any manner sufficient to show agreementi.e. w/o identification of an offer or acceptanceand does not fail for indefiniteness despite open terms if there is merely a reasonably certain basis for giving an appropriate remedy 3

Barry Adler Contracts Fall 2010 The UCC is expressly permissive also in that a sales K can be formed despite, e.g., The absence of a specified price (2-305) The absence of a specified place for delivery (2-308) The absence of a specified time for delivery or duration of the agreement (2309) The absence of a specified time for payment (2-310) Cf. w/ R.2d 33, which treats the omission of terms as a possible manifestation that no offer is intended Despite the in tone b/t the R.2d and UCC , dont be misled into thinking that there is necessarily a b/t a case under the CL and one under the UCC. o The question is ultimately the same, whether there was a manifestation of intent to be bound, if so, whether there is a basis for remedy in the event of breach Preliminary Negotiations o Nebraska Seed v. Harsh (305) [D issued a letter to P informing them that he was willing to sell a certain seed at a particular price, but was indefinite as to quality P responds and accepts] Note that UCC 2-206 provides that unless otherwise or unambiguously indicated by the language or circumstance, an offer to make a K shall be construed as inviting acceptance in any many and by any medium reasonable in the circumstance It was customary for farmers to receive flyers in the mail that were not offers Why no K, given laws general flexibility? Missing terms can be supplied if there is manifestation of an intended offer, but the absence of terms may still be evidence that no offer was intended (See R.2d 33) Holding: that Ds communication was an advertisement, not an offer, noting the lack of quantitywhich a crt will not try to supply absent direction of the partiesand the missing term for time of delivery There is little reason to think that the case would come out differently today (at least w/ a like-minded crt) How might you re-characterize the ad as a valid offer (capable of acceptance)? o (1) An implicit offer that could be accepted of approx. quantity, while supplies last, perhaps reasonable b/c communication was individualized (not like in Leonard) o (2) An implicit offer for reasonable delivery terms that are unspecified (like time) On ads in general, R.2d 26 provides that a manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent o R.2d 29: makes clear that it is up to the offerorthrough her manifestationsto determine the person or persons in whom is created the pwr of acceptance or, implicitly, whether there are any such persons. E.g. communication that is best understood as an invitation to consider offers from the recipient is an ad, not an offer, despite its form. o o Leonard v. Pepsico (308) [re: TV ad, which announces that various items were available to ind. of amassed Pepsi pts Pepsi pts via buying Pepsi products or buying the points themselves (10 4

Barry Adler Contracts Fall 2010 cents/pt) one item that was mentioned was a Harrier jet for 7MM pts] Holding: crt finds that in a widespread communication (like TV commercial) there is a presumption against an offer, to ob overcome only by clear, definite and explicit terms An application R.2d 33trying to fill in K gaps when the gaps imply that there is no offer Also, the commercial refers to a catalog and the catalog does not include a Harrier jet, while the commercial additionally states (in fine print) that the offer is not available everywhere Further, the fact that an offer for a WMD in a soft drink commercial (for less than 1/20th of its value) is obviously a joke, and that the P should have known this (see Lucy)

Agreements in Principle
We have to interpret agreements in principle, sometimes written in letters of intent, and sometimes referred to as agreements to agree In connection w/ whether a communication is an offer or an ad, we looked at R.2d 26 (see above) o Now consider R.2d 27, which provides that manifestations of assent that are in themselves sufficient to conclude a K will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations. The task is to distinguish b/t an agreement w/ open terms and a preliminary negotiation (that does not affect an agreement at all) 4-ways to approach agreements in principle o 1) Do not enforce as binding K [Empro] o 2) treat the areas of apparent agreement b/t the parties as binding even though the negotiations continue as to supplemental terms [Texaco] Either added by parties later on, or supplied by crt if parties fail to do so o 3) Treat the open terms as options granted by each party to the other, whereby if the parties do not agree each party has an option to enforce the K on the reasonable terms most favorable to the other R.2d 34(1): which provides that the terms of the K may be reasonably certain even though it empowers one or both parties to make a selection of terms in the course of performance. o 4) Treat the parties as having agreed to negotiate in good faith unlikely (ultimately) top bind either party in a meaningful way Empro Manufacturing v. Ball-Co (319) [re: letter of intent b/t P (Empro) and D to purchase Ds assets letter provided that Ps purchase shall be subject to certain conditions (inc. approval by Ps board) negotiation breaks down over collateral P sues D to enjoin from selling assets to anyone else] o Holding: crt affirmed dismissal for lack of K b/c the agreement was subject to a later definite agreement (Asset Purchase Agreement) and board approval Based on what the crt sees as an objective interpretation of the letters terms (regardless of parties subjective intent) P was free to walk at any time, so there was no bilateral agreement Crt also dismisses Ps claim for reliance expenditures, b/c there was no promise on which P could rely On reliance, why isnt the reasoning of Anglia of benefit to Empro here? o B/c, according to the crt there was never an agreement (whereas in Anglia there eventually was one) 5

Barry Adler Contracts Fall 2010 o If letter of intent is not binding the why use it? B/c it does no more than sets the stage for negotiations on details Allows for the parties to approach in stages w/o fear that they have bargained away their privilege to disagree on the specifics o The parties only disagreed only abt the collateral for the purchase loan. How could P use this fact? P could argue that the crt should fill in the collateral term crt might have no basis to do this Still, P might have argued that it had an option to purchase if it granted the disputed collateral Texaco v. Pennzoil (323) [re: Memorandum of Agreement for merger b/t Getty and Pennzoil (D), which was ratified by Gettys board of directors Getty/Pennzoil had a press release and announced an agreement in principle Texaco (P) was accused of tortiously interfering w/ a sales K b/t Getty and Pennzoil Texaco argued no K] o Holding: there was a binding agreement (and thus interference) Crt used 4-part test to determine whether parties manifested an intent to be bound by informal agreement (1) whether a party expressly reserved the right to be bound only when a written agreement is signed o P argued that Getty had reserved the right to be bound only by subsequent agreement b/c the press release said so Crt: the press release as a whole is written in indicative terms (i.e. shareholders of Getty Oil will receive); an agreement in principle can mean a binding agreement that the parties expect to supplement later (2) whether there was any partial performance by the party disclaiming the K o P argues that the lack of partial performance by either party suggests that neither treated the agreement as binding Crt: Ps alleged interference w/ the K relationship occurred so soon after the release that lack of partial performance is not dispositive (3) whether there was agreement on all essential terms o P argues that there were too many open terms for such a complex merger Crt: the jury had a right to decide that the open terms did not preclude an effective manifestation of intent to be bound (implicitly at least), b/c open terms can be filled by a crt if not later on by the parties See R.2d 204 (4) whether the complexity/magnitude of the transaction suggests that formal writing is req. for assent o P argues that the deal is too complex to be w/o formal writing of assent Crt: concedes this point, but as a matter of law this factor is [not] determinative of the question of the parties [manifest] intent

[secret negotiations fall under the category of subjective intent]

Barry Adler Contracts Fall 2010 Is Texaco reconcilable w/ Empro? o Arguably so in that no two cases are identical, but it is hard to find facts in Texaco that would have led Judge Easterbrook in Empro to reach a different decision here o The may simply be one of whether a judge/jury gets to decide how to interpret the parties words and conduct As a matter, should the law favor or disfavor enforcement in close cases? o Perhaps favor, so that parties get the benefits of their bargain despite formal lapses o Perhaps disfavor, so that parties do not find themselves accidentally bond o Maybe it doesnt matter, at least to a well represent party.

Revocation and Acceptance

An offer, which is the 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, (R.2d 24), gives the offeree a continuing pwr to complete the manifestation of mutual assent by acceptance until that pwr is terminated (R.2d 35) o The pwr of acceptance is terminated by the offerees rejection of the offer, or a counteroffer that is not also an unequivocal acceptance, or the lapse of time, or revocation by the offeror, or death or incapacity of the offeror or offeree, or the non-occurrence of any condition of acceptance under the terms of the offer (R.2d 36) o Exceptionoptions Ks: a promise which meets the requirements for the formation of a K and ltds the promisors pwr to revoke an offer (R.2d 25) Keep in mind that there are two potential Ks to consider. Timing issues can arise. o Absent an exception (enforceable option K above), revocation terminates the right of acceptance But acceptance forms K, thus making any attempt at revocation ineffective There may be a race b/t revocation and acceptance Dickinson v. Dodds (328) [re: race b/t revocation and acceptance over the sale of property, D left the offer open until a certain date P attempted to accept an offer after he learned of Ds intent to revoke before the deadline] o Holding: Ps knowledge deprived him of the right to acceptthat knowledge was, in essence, a revocationa rule stated in R.2d 42, 43 When communication is not instantaneousmailbox rule (aka deposited acceptance rule) applies (339)see R.2d 66 Rule: an acceptance is effective upon dispatch, not upon receipt o However, b/c offeror is master, he can K around this (default) rule and insist that acceptance is valid only upon receipt In a modern context, this rule doesnt do much work b/c of the abundance of instantaneous communication (e-mail, fax, etc.)

MIRROR-IMAGE RULE
CL rule: to be effective on acceptance, it must be an unequivocal assent to all of the offers terms o As above, a counter-offer even if in the form of an acceptance is the equivalent of a rejection and so following a counter-offer the offeree loses the pwr to accept unless the initial offer is renewed (or unless the offeree has a binding option) o Via R.2d 61 [counter-rule to UCC 2-207] an unequivocal acceptance that also proposes a modification to a K formed by the acceptance, or that proposes additional terms, can be effective (and thus would not, under R.2d 36, terminate the offerees pwr of acceptance) 7

Barry Adler Contracts Fall 2010 BUT to be effective, the acceptance cannot be conditioned on the offerors assent to the offerees proposal for different/addtl terms Ardente v. Horan (336) [P wanted specific performance of an agreement to sell real property D had agreed to accept bid, but the P sent down payment w/ letter confirming whether furniture was included D refused to sign agreement and returned deposit $] o Holding: Ps letter of acceptance was conditional, it operated as a rejection of the Ds offer and no K obligation was created Based on facts, not likely to be an unequivocal acceptance with a proposal for addtl terms (furniture) b/c Ps offered no more $ for addition of furniture into deal. Price should have adjusted accordingly.

ACCEPTANCE BY ACTION
R.2d 30 provides that while an offeror can condition acceptance in any way she like, including by requiring a verbal promise, unless otherwise indicated by language or circumstances, an offer invites acceptance in any manner and by any medium reasonable in the circumstances o R.2d 32 follows this theme by providing that in case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering performance R.2d 62 provides that where an offer invites an offeree to choose b/t acceptance by promise and acceptance by performance, the tender or beginning of the invited performance or a tender or a beginning of it is an acceptance by performance that operates as a promise to render complete performance Thus, it may be possible to accept by performance, or the start of performance, or a tender of either, either because the offer expressly invites or requires such means of acceptance or, in the absence of such express invitation or req, b/c the circumstance otherwise make it reasonable for an offeree to accept by performance or the start of performance Partial-performance illustrations o (1) Abel says to Baker: if you want $10k to fix my roof you have to begin work on my roof by Nov. 15 Baker begins work on Nov. 12 (unbeknownst to Abel) Abel cannot revoke on Nov. 13 R.2d 54 provides that notice by promisee who begins performance is not necessary unless the offeree has reason to know that the offeror has no adequate means of learning of the performance w/ reasonable promptness and certainty o even in this case where offeror has no adequate means, acceptance remains valid if the offeror learns in reasonable timeframe o (2) Abel says to Baker: if you want $10k to fix my roof let me know or complete the work by November 15 Baker begins work on Nov. 12 Abel again, cannot revoke on Nov. 13 Via R.2d 62: let me know invited acceptance by either promise or performance o Baker performed o An offer accepted by partial perf. creates a bilateral K b/c at the moment of formation, each party (still) owed the other some performance A unilateral K is one where, at the moment of formation, the offeree has fully performed leaving only the offerors performance outstanding o R.2d 45imputes an option K, under which after the promisee begins to tender performance, 8

Barry Adler Contracts Fall 2010 the promisor cannot revoke the offer (either specified in the offer or reasonable) Complete-performance illustration Oil finding hypo o Abel sends letters offering $100k to you or to anyone who first locates oil under my land and tells me where to find it before the New Year Acceptance by promise (express or implicit) is not invited Acceptance only by complete performance is invited (i.e. being the first to discover oil and notify Abel) White v. Corlies & Tifft (358) [P sends D estimate for office construction D: Upon agreement you can begin at once P purchased lumber and began work when D revoked] o Holding: acceptance of an offer must be manifested by some appropriate actthough the manifestation need not be brought to his knowledge before (the offeror) becomes bound, he is not bound, if that manifestation is not put in a proper way to be in the usual course of events The offeree did no act that indicated an acceptance of the offer to the offeror. He purchased materials, but materials that could be used for any job, not necessarily this job This offer was one for bilateral K upon agreement language unlikely to let an offeree turn offices into work zone, and then be able to walk away w/o impunity Petterson v. Pattberg (362) [D offers P a reduction in debt providing said mortgage is paid on, or before a specified date P shows up by date w/ cash hand before date D had already sold mortgage] o Ds arg: characterization of events Ds offerPs statement of intent of acceptDs manifestation of revocationPs (too-late) attempt to accept This is the majoritys characterization o Ps arg: characterization of events Ds offerP acceptance by tender or attempted tenderDs (too late) attempt at revocation This is the dissents characterization o Under R.2d 45, presumably Ps gathering of more that $4k would be the beginning of the invited performance that would earn P an option to complete tender Gathering a specific, large sum of money, and traveling to deliver it is (arguably) unlike the carpenters generic treatment of wood in White Warranty-not unilateral K o How would you characterize $100 reward to anyone who returns my lost dog? Offer for unilateral K o How would you characterize 100 to anyone who uses my product as directed and contracts the flu? Promise, perhaps warranty, not an offer Carlil v. Carbolic Smoke Ball Co. (343) [P sues D when she gets sick to recover money like ad announced] o Holding: D should pay as per ad This is not a reward case, not a unilateral K case, not a case that includes an offer at all Prove me wrong cases are not offers

Barry Adler Contracts Fall 2010

ACCEPTANCE BY INACTION
R.2d 69 normally, an offeror cannot impose an obligation on an offeree, however, the words or past conduct of an offeree can manifest assent to an arrangement through which the offeror can treat the offerees inaction and silence as acceptance o Also, keeping goods offered for sale, or the benefit of service when they might be easily rejected, can also constitute acceptance (though beware statutory provisions to the contrary) Hobbs v. Massasoit Whip Co. (368) [P sent D eel skins and D retained them, but never formally accepted them D never used them and eventually destroyed them Hobbs sued for value of skins. o Holding: crt held that, based on prior experience, the buyer assented since he didnt return the eels in a reasonable time Past practice b/t the parties manifested a buyers assent to accepting skins unless the buyer returned them to the seller in a reasonable time Ex.: Record-of-the-month clubs, where a buyer expressly agrees to accept by inaction future transactions

BATTLE OF THE FORMS

UCCs way of handling mismatch b/t offer and acceptance UCC 2-207 Hypo: Buyer (1st) and Seller (2nd) exchange forms that agree on quantity, price and delivery terms o The is over how disputes will be handled Buyer: any dispute over quality of goods will be resolved in st. crt Seller: any dispute over quality of goods will be resolved via arbitration o Neither party notices this , and as result goods are exchanged for $ o Is there a K here? [yes] If so, will dispute go arbitration? [it will go to st. crt, if depending on drop-out rule; if using knock out rule it will be up to UCC filler rules] Under CL, the second form is a counter-offer and the shipment of/payments for goods serves as acceptance of counter-offer terms The last shot doctrine The UCC, alters the CL : why should luck (which form comes 1st vs. 2nd) determine which of the parties, ea. of whom ignored the others form, should get its preferred terms (i.e. seller)? In this hypo, there is a definite and seasonable expression of acceptance [via UCC 2-207(1)] o Sometimes a disagreement b/t forms can be so great (e.g. different goods are described) that there will not be a definite and seasonable expression of acceptance This would not imply that there is no K, only that the K isnt formed by the forms under UCC 2-207(1),(2) o What to do with the conflicting dispute-resolution terms? The arb. clause is different, not additional, so arguably 2-207(2) does not apply even if the parties are merchants Given the conflict, 2-207(2)(c) would keep the term out in any case, and if the term is material so would 2-207(2)(b) So the arb. clause will not come in under 2-207(2), but what will be the disputeresolution mechanism? Knock-out ruletreating the express K as silent on this term, and using background rules supplied by the UCC/crts 10

Barry Adler Contracts Fall 2010 o Maj. Rule Drop-out rulethe offerors term stays, the different terms drop o What if the term was not different, but instead additional? If the parties are merchants, the addtl terms would be added if not material What is material? o Would a ltd time on offerors (Buyer) complaints be material? Union Carbide suggests that it would if time is shorter than the background rule b/c consent could not then be presumed But UCC 2-207 [Comment 5] suggests that the test is whether the term represents an unreasonable surprise o Turn to the distinction UCC 2-207 makes b/t acceptance and confirmation, either of which can operate as an acceptance INTERNAL CONTRADICTION, a confirmation cannot act as an acceptance! A confirmation is intended to be of a pre-existing Kformed orally perhaps Most sensible way to deal with confirmations is to run them through 2-207(2), ignoring different terms The knock-out rule should apply to conflicting confirmations, but not to a conflict b/t a confirmation and an agreement o Once it is est. that there is a definite and seasonable expression of acceptance, a K is formed by reference to the forms themselves. o What if acceptance is conditional, and parties exchange goods for $? The forms do not create a K But a reading of the UCC suugest that the parties transaction in the goods invokes UCC 2-207(3), which allows for a K by conduct although the writings do not est. one. o A K formed under 2-207(3) consists of those terms that agree, with everything else filled in w/ UCC background rules **This is a rejection of the Last Shot Doctrine (the purpose to begin with) and a sensible result BA-everything else is not necessary Step-Saver v. Wyse (457) [Step-saver (P) ordered software from TSL (D) both agree over phone followed by exchange of purchase order/invoice forms match the telephone order, in neither case referring to disclaimers of warranties software package had box-top license, disclaiming a warranty box top also stipulated that opening this package indicates acceptance software malfunction and dispute over warranty] o Is the box top disclaimer a part of the K? o Ps arg: the telephone convo formed the K and the box-top license was a confirmation w/ additional terms Effect: Addtl terms would not become a part of the K b/c they are material A disclaimer of a standard UCC warranty is listed under UCC 2-207 (Comment 4) as an example of a material alt. o Ds arg: the phone convo and Ps purchase order constituted merely an offer, to which the boxtop was a counter offer Effect: there is no BotF; P actually accepted the terms of the counteroffer, including the warranty disclaimer, when it opened the box The crt disagrees with this reasoning in footnote 51 Ps counter arg: the box-top was no more than an ignored confirmation (going for contents of box does not manifest assent) Also, D had told P that the box-top did not apply to it (not the typical 11

Barry Adler Contracts Fall 2010 customer), making the terms irrelevant in any case o Holding: box-top was not an expressly conditional acceptance b/c there was no indication that TSL (D) would walk away absent assent. It was a confirmation and b/c material, it is rejected. Crt gets confused on Comment 2 Plausible/cleaner reading: a confirmation runs additional terms through 2207(2) and a notice that absent a pre-existing K, an expressly conditional acceptance takes the case out of 2-207(1) & (2) altogether Union Carbide v. Oscar Meyer (470) [P sold plastic casings to D per a standing purchase order P filed a action against D for beach of K to recover sales tax it had paid on products it had sold to defendant. P claimed that Oscar Mayer had agreed to indemnify it for all sales ] o Both parties agree that Ds purchase order is the offer, and Ps invoice the acceptance. Dispute is over tax indemnity clause and if part of K o Holding: the sales tax indemnification clause is not effective Indemnification would be a material alteration under UCC 2-207(2) and D never actually assented to clause Same result, if you treated invoice as a confirmation following shipment ProCD v. Zeidenberg (473) [**Easterbrook** P offered software directory w/K terms contained inside the box and notice given on outside of box option to return for refund if terms not accepted dispute over clause forbidding commercial use of the directory D used for non-commercial uses] o Holding: the prohibition on commercial use/refund opportunity were incorporated by reference in Ps offer and thus accepted upon purchase The terms were not unconscionable and were not otherwise unenforceable under UCC Crt reasoned that UCC 2-207 was not applicablesimple offer and acceptance by conduct (the latter not proposing any addtl or different terms); no writings exchanged o : deal now, terms later transactions are common (e.g. insurance industry) and should not be set aside by operation of a provision directed at the entirely different problem of inconsistent forms Hill v. Gateway (479) [**Easterbrook** P bought a computer over the phone Box computer was shipping in included a number of terms, including arbitration clause If computer not returned w/n 30 days, terms deemed assented to.] o Issue: Are the box terms effective as the K or is the K term-free b/c the order-taker did not read any terms over the phone & elicit the customers assent? o Holding: crt treats purchaser as an offeree (contrary to customary interpretation) charged w/ knowledge that computer will come w/terms. Placed on constructive notice that additional terms will follow. Purchasers order is treated as acceptance of these implicit terms. Same line of reasoning that D played in Step Saver Klocek v. Gateway (483) [**Vratil** P sues claiming D induced him to purchase computers and special support packages by making false promises of technical support D wants to enforce arbitration clause.] o Issue: How should box terms be treated? o Holding: customers oral order is the offer under UCC 2-207(1), sellers promise to deliver (or delivery) is acceptance (non-conditional) or a confirmation. Terms in box are proposals for addtl terms, which do not attach automatically b/c exchange is not between merchants 2207(2). Written offer is not express pre-requisite to application of UCC 2-207(1). Doctrine aside, who b/t Easterbrook and Vratil has the better argument as far as o Does the utility of standardization principle embodied in R.2d 211 support Easterbrook? o Does concern about unfair surprise embodied in UCC 2-302 favor Vratil? 12

Barry Adler Contracts Fall 2010 o Is UCC 2-207 the right provision to deal with this issue?

E-COMMERCE & MUTUAL ASSENT

Specht v. Netscape Communications (370) [D offers SmartDownload software for free Ds want to enforce arbitration clause included in browse-wrap agreement, which user could only see if scroll down and neednt read or agree to prior to downloading Ps are suing for violation of federal privacy and fraud statutes] o Issue: Under what circumstances does the act of downloading create a K, when 1) one may not have even seen the terms and 2) even if so, no knowledge that hed be bound by them? o Holding: 1) Mere act of downloading does not indicate assent (thus, no K). 2) Mild please review language is insufficient to put a user on notice that acceptance of the terms is a condition of the offer nor that he will be bound. Second point is inconsistent with Hill, which suggests that individuals can be placed on constructive notice of additional terms. Register.com v. Verio Inc. (379) [D obtains WHOIS info about domain name registrants from Ps database using robot and solicits thru direct mail and telephone P seeks to enjoin D based on limitation which appears w/the info produced after each WHOIS query.] o Issue: is D bound by the limiting language, which does not appear until after each query? o D arg: did not receive notice of the conditions that P seeks to enforce until after each download of data. o Holding: Ds argument fails due to the multiple, repeated queries. Think of apple stand and free apples R.2d 69 provides that an offeree who takes an offered benefit w/knowledge of the offers terms accepts those terms. UCITA: Uniform Computer Information Transactions Act o 112 provides that a person manifests assent if she intentionally engages in conduct or makes statements w/ reason to know that the other party may infer from the conduct or statement that the person assents. Not very new age o 14 an electronic agent is an agent and can bind its master. These cases illustrate the need for careful counsel to clients who want to be sure that their proposed terms are accepted o ABA Working Group on Electronic Contracting Practicesprovides techniques like requiring the user to click an acceptance of terms before having access to the product To offer a click-wrap agreement rather than a browse-wrap

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Barry Adler Contracts Fall 2010

Consideration Doctrine
Historically, not every promise was enforced o Question of whether a promise is supported by consideration was simply a matter of whether the circumstances surrounding the promise (i.e. motivating factors) were such that the law wished to enforce the promiseSimpson Essay o Over time, the term consideration has taken on a more narrow, specific meaning Now consideration = a bargained-for-exchange aka quid pro quo See R.2d 1, 3, 17, 1871: performance or return promisesought by the promisor in exchange for his promise andgiven by the promisee in exchange for the promise o If the law enforces a promise w/o a bargain, as it freq. does, it is an exception to the consideration req. justification: uncertain o Solemnity and indication of intent to be bound to a promise? But there are good substitues: the seal, or simply a signed writing o The importance of exchange to economic developmentSmith essays But bargains often go beyond business Via UCC 2-205, in the context where a merchant makes a firm offer, it doesnt need consideration to be binding o Via UCC 2-209no consideration is needed for a modification to a K Johnson v. Otterbein Univ. (620) [P signs instrument promising to pay $100 w/ interest to satisfy indebtedness of the D D accepts.] o Holding: No consideration. In general, an executory K to give is w/o consideration, and a promise to make a gift, can be revoked at any time prior to delivery of the gift. P was not induced to act b/c they have to pay their debts anyway! Making it a condition bargained for exchange But this test is misleading: Johnson might argue intrinsic value to U paying its debt (something he could not have done unilaterally) and that it resisted o These facts are unlikely Hamer v. Sidway (622) [Uncle promises nephew $5k to stop drinking and gambling Enforced] o D-estate arg: the K was without consideration because the nephew was not harmed, but benefited, and insists that unless the promisor was benefited, no consideration Otterbein test [apparently] rejected. But court points to nephews previous engagement in the bad behavior as evidence that this isnt a sham consideration. Also, evidence that abstinence was actually in response (no inherent teetotaler) to uncles offer, that is the nominal promise to give $ for compliance. R.2d 79: consideration requires no advantage to the promisor or detriment to the promisee, or equivalence in the values exchanged; only an actual bargain is necessary Motive for making a bargain is irrelevant to whether there was a bargain (i.e. consideration) (R.2d 81) o The fact that the uncle might have made a gift in the absence of a bargain is irrelevant

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Barry Adler Contracts Fall 2010 o Holding: the nephew had a legal right to engage in the contractually prohibited behavior and that his abstention from doing so amount to a bargained for exchange. Court says, It is enough that something is promised, done, forborne or suffered by the party to whom the promise is made as consideration for the promise made to him and In general a waiver of any legal right at the request of another party is a sufficient consideration for a promise and Any damage, or suspension, or forbearance of a right will be sufficient to sustain a promise

PAST OR MORAL CONSIDERATION

3 Scenarios o Moral Obligation for Previous Legal Obligation: SoL runs on debt, debtor promises to repay creditor. Renewal of an obligation discharged by time waives the discharge and enforcement looks back to the origin of the transaction. o Naked Past Moral Consideration: Worker injures himself to protect a coworker, coworker promises to compensate him for the injuries. Webb v. McGowin. [BUT cf. to Mills] A promise made after the receipt of a gift, such to the Good Samaritan, lacks support of a past bargain or quasi contract and is either unenforceable (as in Mills) or enforceable under a broader doctrine of moral consideration. Material benefit may be a factor but not necessarily. R.2d 86 (2)(a): A promise made in recognition of a benefit previously receivedis not binding if the promisee conferred a benefit as a gift orthe promisor has not been unjustly enriched Quasi-Contractual Obligation: When a promisee has conferred a benefit not gratuitously, and where there is no opportunity to bargain, the promise reinforces a claim for a quasicontractual obligation. Webb v. McGowin o This is an exception to the requirement of past bargain-for-exchange consideration Mills v. Wyman (640) [Ds adult son falls ill in foreign city; P wants to enforce Ds verbal promise to pay for sons medical expenses. Not enforced.] Does D have moral obligation to pay for adult sons medical expenses? Holding: there is no consideration. o Rule is tightened to include only cases where at some time or other a good or valuable consideration has existed (i.e. some prior legal or equitable obligation that has become unenforceable for some reason.) o Father may have general moral obligation to pay for infants debt, but not an adult son. Webb v. McGowin (649) [Worker injures himself to protect coworker. Enforced.] Holding: A moral obligation is sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit o Well settled that a moral obligation is a sufficient consideration to support subsequent promise to pay where the promisor has received a material benefit, although there was no original duty or liability. o Quasi-K obligation

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Barry Adler Contracts Fall 2010

EXCEPTION: MODIFICATION AND PREEXISTING DUTY

Stilk v. Myrick (656) [Sailors offered wages of deserters while on roundtrip voyage from London to Baltic.] o Holding: agreement void for want of consideration, b/c sailors agreed to do no more in exchange for the increased pay than the promisor was obligated to do under the original K. Alaska Packers Assn. v. Domenico (658) [Fisherman demand higher pay due to what they believe are inferior nets provided by Alaska Packers.] o Holding: No valid consideration. A party who refuses to perform and thereby coerces a promise from the other part to pay increased compensation for that which he is legally bound to do, has taken an unjustifiable advantage of the necessities of the other party. Trouble with Stilk/Alaska analysis: Promisors gave up their legal right to breach and to be answerable only in damages when they voluntarily performed. This seems like a consideration employer has bargained for relinquishment of this right and performance on the K. So why doesnt the court think so? (seemingly Holmes would agree) o Answer: Better characterization might be bad faith negotiations. If the modification is wrong, its because it is extortion, (arguably) not due to a lack of consideration o Preferred Rule: Enforce modification if fisherman would have performed anyway, but dont enforce if otherwise would not have performed. This saves Captain from being extorted but also allows him to offer raises or changes if he so fits. Fisherman hypo o Fishermen claim request for higher pay is not extortion but a reasonable reaction to the unanticipated quality of the nets (R2d 89) Had condition of nets been known to fishermen at the time of K, demand for increased pay for certainly have been in bad faithextortion OTOH, had nets been so defective as to provide Fisherman an excuse from performance, the modification would not have been in bad faith or extortion Interesting case is the middle ground- Fishermen encounter an unexpected difficulty in performance of K but are responsible to perform nonetheless (no excuse) o Policy standard- when it makes sense to enforce and not to enforce contract modification? Taken from view of protecting Captain (extortion victim), when and under what circumstances would she want her promise of a pay increase to be enforceable and when would she not want it to be enforceable? **If captain will be awarded fully compensatory damages and fishermen are solvent, Captain does not care what the legal rule is because she has no incentive to induce performance of fishermenwill get $ from either fishing or damages (when breach) o Fishermen will not even ask for a raise because they know Captain will not grant If fishermen are insolvent (most likely in Alaska Packers) and that both parties know the legal rule. If no option for a negotiated modification, fishermen might (inefficiently) choose to breach rather than expend the effort (cost) of performancewhen there is room for negotiation b/t the captain and the fishermen, you can make the Captain better off w/o hurting yourself by negotiating (i.e. Captain can compensate you and still be made better off with )

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Barry Adler Contracts Fall 2010 o Captain will want the option to make an enforceable promise of a pay increase because she could lose more from breach than pay increase Factors that will induce fishermen to breach absent a renegotiation option Initial contract price Realized cost of performance Assets subject to liability/damages So, modification can be good (efficient), so when enforce? Captain hurt by rule that says never enforcefishermen wont agree to any modifcation o Will get no damages (insolvent), no fish are caught- she makes nothing! Captain also hurt by rule that says always enforce o Fishermen will always try to get higher pay, even when they would be willing to perform w/o an increaseextortion RULE- enforcement when otherwise (w/o modification) fishermen would breach, but no enforcement when fishermen would have done work without the price increase No extortion when fishermen are in distress and it in not in their interest to perform Caveat to this rule- could the law instead simply enforce all modifications, counting on the promisee (Captain) not to make a concession where one isnt in her interest? o Maybe, but one might worry that a promisor (fisherman) could convince the promisee (captain) that it will not perform despite its incentive to do so, and induce a concession. Fisherman: Im being hurt, but you are really getting hurt Our rule protects promisee from a threat of the promisorThe promisor has no incentive to issue a threat if it knows that any concession by the promisee would be unenforceable US v. Stump Home Specialties Manufacturing (671)Posner: the sensible course would be to enforce contract modifications (at least if written) regardless of consideration and rely on the defense of duress to prevent abuse. All coercive modifications would then be unenforceable, if defense successful o Consideration is an inadequate safeguard against duress because slight consideration might be enough to enforce a contract but would be consistent with coercion this must be avoided R.2d 89: A promise modifying a duty under a contract not fully performed on either side is binding: o (a) if modification is fair & equitable in view of circumstances not anticipated by parties when K was made; UCC 2-209: An agreement modifying a contract within this article needs no consideration to be binding. [But the effective use of bad faith to escape performance on the original K is barred, and the extortion of a modification w/o legitimate commercial reason is ineffective as bad faith. o Good Faith Test among merchants is observance of reasonable standards of fair dealing in the trade.

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Barry Adler Contracts Fall 2010

EXCEPTION: PROMISSORY ESTOPPEL

R.2d 90: a promise which the promisor should reasonably expect to induce action or forbearance on part of the promisee or a third person and which does induce such an action or forbearance is binding if injustice can be avoided by enforcement of the promise R.2d 87(2): an offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option K to the extent necessary to avoid justice o See also UCC 2-205: firm offers do not need consideration to be binding Promissory Estoppel Hypo I (R.2d 90-reliance on promise) o A knows that B is debating to hire a contractor (C) who has offered to paint your house for $10k o A tells B: dont bother, Ill do it for nothing o B declines Cs offer o As promise to B will be enforceable b/c he had reason to expect that you would rely on his promise and not hire C If A refuses or fails to paint Bs house, B can sue based on promissory estoppel Std. (although not universal) remedy would be reliance damages NOTE: that Cs offer was for 10k at T0 and after B (in reliance on As promise) declines, if at T1 Cs offer is 12k, then B would pay $2k in reliance damages [if it was 10k at T1 $0 in reliance] Promissory Estoppel Hypo II (R.2d 87 (or UCC 2-205)-reliance on firm offer) o If A offers (not promises) to paint Bs house for $7k and says you have until next week to accept my offer o In reliance on offer B declines to hire the initial contractor (C) o A then attempts to revoke before Bs acceptance, B accepts anyway o A will not be able to defend a lawsuit brought by B for lack of consideration (to keep the offer open) A will be estopped from using the defense b/c he had reason to expect As commitment to keep the offer open would induce B to decline Cs offer Will be responsible for at least reliance o NOTE: that if Cs offer was for 10k at T0 and after B (in reliance on As promise) declines, if at T1 Cs offer is 12k, then B would pay $2k in reliance damages [if it was 10k at T1 $0 in reliance] See Johnson v. Otterbein wrt R.2d 90(2): a charitable subscription is binding under promissory estoppel even w/o demonstrable reliance Rickets v. Scothorn (723) [**Classic estoppel case**P quit job in reliance on her grandfathers granting of a note payable to her (gratuitous promise) and sued his estate (D) for payment after death] o No consideration b/c quitting work was not a condition of the promise (in fact she later returned to work)Cf. w/ Hamer o Gratuitous promise is fully enforced (expectation dam.) under equitable estoppel (although promissory estoppel works well too) P changed her position to her disadvantage, in reliance on promise (see R.2d 87) Baird v. Gimbel Bros. (742) and Drennan v. Star Paving (745) o In both cases, a Sub submits a bid to a Contractor, who incorporates Subs bid into Contractors own bid for a construction project 18

Barry Adler Contracts Fall 2010 Contractor wins job, but before Contractor communicates acceptance of Subs bid, Sub attempts to withdraw its bid. o Holding: (Baird) Hand the Subs bid (an offer) was withdrawn before acceptance (and cannot be accepted). Promise not enforced o Holding (Drennan) Traynor binds the Sub to its offer. Promise is enforced under promissory estoppel, yet remedy is under expectation (see below, ultimately incorrect approachBA) o Characterizations of the facts? (1) The Subs bid was a firm offer (implied timeframe) on which the Contractor reliedsee R.2d 87, before actual acceptancereliance enforced thru promissory estoppel Hand (Baird) rejects this idea b/c reasons that D didnt mean to subject himself to a one-sided obligation Traynor (Drennan) embraces this idea b/c Sub was bound to realize the substantial possibility that Contractor would accept w/in timeframe o *** but the Crt states that Sub wanted him to rely on the bid BUT rejects the idea of a Uni-K (confusion!) If Sub didnt get anything from Contractors reliance promissory estoppel If Sub does (more likely) get something from Contractors reliancebargain (at least Uni-K). No gifts! (2) The Subs bid included an offer of irrevocability in exchange for the Contractors use of its bid (tender under 45)Unilateral Option K Contractor was free to walk away (still, one sided) ** b/t (1) and (2) is consideration [(1)-no; (2)-yes (at the time of incorporation)] and remedy [(1)-reliance; (2)-expectation] (3) The Subs bid was an offer to be conditionally accepted (if Contractor didnt get project, K dissolved, but otherwise bound) by Contractors use of its bidBilateral K This is a two-way binding K This makes the most business sense-why would Sub just give Contractor a free option that could be shopped? Both crts reject the characterization of the Subs bid as an accepted offer of any kind Hoffman v. Red Owl (752) [D promised to est. a store for P for $18k. In reliance on the promise, P (1) leased a grocery store, (2) sold a bakery, (3) put a down payment on a lot, (4) moved and (4) paid rent for another move P eventually terminated the relationship and sued for reliance] o Holding: Agreement never reached on essential factors necessary to est. a K (but see Texaco!), but PEst provided ground for recovery (reliance) BUT what did the D promise, if there interactions were too indefinite to support a K? Characterization of facts o (1) a K for the franchise w/ terms to be filled in (see Texaco) o (2) D implicitly agreed (K) to cover expenses in case of breakdown in negotiations for a promise of a store o (3) No promise (of store!), No K (to reimburse)NO REMEDY Goodman v. Dicker (751) [D (dist only and not franchisor) thru conduct induced P (potential franchisee) to incur expenses in preparing to do business under the franchise D promised that franchise would be granted] 19

Barry Adler Contracts Fall 2010 o Holding: No K for the franchise, but the dist.s representations justified a reliance remedy via (equitable estoppel- broader than equitable estoppel) Alt reading: an implicit promise by the dist. to cover the would-be franchisees expensesa bargain Consideration: Dist. had potential to gain Baird, Drennan and Hoffman, Goodman show that PROMISSORY (& EQUITABLE) ESTOPPEL OUTSIDE OF THE GRATUITOUS PROMISE CONTEXT CONFUSES MORE THAN CLARIFIES SITUATIONS o Maybe there should be a stricter adherence to the consideration doctrine

STATUTE OF FRAUDS
Statute of Fraudprovides that certain agreements are enforceable only if memorialzed in a signed writing o See R.2d 110 and UCC 2-201 o Agreements covered under SoF are important ones. E.g.: Ks for sale of land Ks that cannot be performed w/in 1 yr Ks for the sale of goods above a specified price (UCC 2-201)

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Barry Adler Contracts Fall 2010

NATURE AND LIMITS OF Ks

UNENFORCEABLE PF VALID KS
WRT Public Policy/Legislation
A promise/term of an agreement is unenforceable on grounds of public policy, if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms. [R.2d 178(1)] Reasons for unenforceability based on public policy [R.2d 179]: o Legislation relevant to such a policy (see Baby M) o The need to protect some aspect of the public welfare, like Restraint of trade Impairment of family relations (marriage, divorce, custody) Interference with other protected interests, such as Commission of a tort Violation of fiduciary duty Interfering with contract with another Term exempting from liability for harm caused intentionally, recklessly or negligently Term exempting from consequences of misrepresentation Shaheen v. Knight (11) [P Ks with D (Dr.) to perform vasectomy Ps wife became pregnant after operation P sues for the future expenses of raising child D argues, not a valid K b/c vs. PP] Holding: A Dr. and his patient can bargain/K for a particular result, which if not performed, can be basis for an action for breach of K. D expressly guaranteed results Re: damagesto allow the award that P wants would be vs. PP (dehumanizing to child) P should get Benefit of Bargain, but awarding expenses may overcompensate b/c P gets joy from raising child o R.2d 346(1)-injured party has right to damages for any breach unless the claim for damages has been suspended or discharged. Matter of Baby M (22) [D, a surrogate mother, tried to maintain physical custody of her child after having agreed to give the baby to the bio father and his wife (P) Baby M is born, but the D refuses to give her to the P Trial court enforces K w/ specific performance] o Holding: that surrogate parenting agreements are invalid because they conflict with (1) existing statutes (i.e. against paid adoption, forced relinquishment of parental rights absent showing of unfitness) and (2) vs. public policy concerns (though this arg. isnt necc) [R.2d 178-9]

WRT Capacity, Duress, and Undue Influence

Void: as if the contract never happened no party can enforce it Voidable: at least one party has the option to treat the contract as if it never happened, but the contract is valid IF the party doesnt exercise that option [R.2d 7] To be bound, party must have the capacity to incur at least a voidable obligation [R.2d 12(1)]

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Barry Adler Contracts Fall 2010 Incapacity R.2d 12: categories of potential incapacities to K fully: o Guardianship [R.2d 13]-NO CAPACITY to incur contractual duties if under guardianship for reason of mental illness or defect Rationale: adjudication is a public event (assumption that everyone is aware); the guardian maintains control. o Mental Illness or Defect (but in the absence of guardianship) [R.2d 15]-A mentally ill person whos unable to understand the nature and consequences of a transaction can incur ONLY VOIDABLE duties HOWEVER, if a K is made on fair terms and the other party is unaware of the persons mental difficulty, then the person with the mental illness or defect cannot avoid the contract if this would be unjust (such as where performance has begun) o Infancy [R.2d 14]-Minors (<18) incur ONLY VOIDABLE duties (unless statute provides otherwise) No excuse for lack of knowledge Rationale: probably because being young is something that should be easily observable Some states opt out w/ statute (e.g. for performers) o Intoxication [R.2d 16]-A person incurs ONLY VOIDABLE contractual by entering into a transaction if the other party has reason to know that by reason of intoxication: (a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, OR (b) he is unable to act reasonably in relation to the transaction Secret intoxication offers no shield Duress and Improper Threat Duress: unlawful confinement of anothers person, or relatives, or property, which causes him to consent to a transaction through fear. o If physically compelled (duress), no contract formedVOID [R.2d 174]. o Does NOT matter that the terms of the bargain is fair. o Does NOT matter that the counterparty is aware of the duress (study guide) Improper threat: Duress by improper threat renders a contract VOIDABLE by the victim unless the other party acts in good faith, without knowledge or reason to know of the threat, and provides value under the contract or materially relies on the victims promise [R.2d 175] o An improper threat includes a threat [R.2d 176]: To commit a crime to tort, or to otherwise act in bad faith Of criminal prosecution (even if for a crime that was actually committed) To achieve an unfair exchange where the threatened act would harm the victim but would not benefit the party making the threat (i.e. blackmail) Undue Influence Unfair persuasion of a party over who is under the dominion of the persuader, OR believes that the persuader has a fiduciary resp. [R.2d 177] VOIDABLE by victim if the persuader is a party to the contract, but NOT if the persuader is a third party and the contracting party acts in good faith. [R.2d 177(2)-(3)]

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Barry Adler Contracts Fall 2010 Odorizzi v. Bloomfield School District (1012) [P, teacher, arrested for homosexual activity principal/super got him to resign from position P sought to recind his resignation on basis that is was procured as a result of duress, fraud, undue influence and mistake Crt finds no duress or menace; undue infl. still on table] o Holding: undue infl. is valid because the emp took advantage of his weakness of mind Two elements of undue influence: (1) lessened capacity of the object to make free contract (i.e. weakness of mind), and (2) an application of excessive strength against a subservient object (i.e. position of pwr) when no direct duty owed (employer vs. a guardian), hard to decide where persuasion has overblown normal banks/become oppressive waters Excessive strength factors Unusual place/inappropriate time Insistence on immediate decision Emphasis on consequence of delay Use of multiple persuaders vs. one Absent counsel and no time to consult Undue influence: New Orleans water hypo o A hospital in New Orleans is cut off from water post-Katrina. A water tanker comes by and offers water for $100/gallon. The hospital accepts and the tanker delivers, but later the hospital refuses to pay the $100/gallon and instead offers to pay market price. The water tanker sues. Best analyzed as a case of diminished capacity to choose (rather than econ. duress or undue influence) Incentive effects for tanker, however, we dont want to live in a society where individuals exploit dire situations of others Cf dragnet clause in Williams

WRT Unconscionability
Definitions Unconscionability is a hybrid between unenforceability because of (1) substance (Shaheen, Baby M) and (2) process (duress, undue influence, Odorizzi) of promise formation o : prevention of oppression and unfair surprise [R.2d 208 Comment B; UCC 2-302 Comment 1] the court may refuse to enforce the K, or it may enforce the remainder of the K w/o the unconscionable clause, or may ltd the unconscionable term [UCC 2-302] o Same sentiment in [R.2d 208] o It is possible for a contract to be oppressive even though there is no weakness in the bargaining process. [R.2d 208 Comment C] Form Ks: 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 [R.2d 211(3)] o Form Ks are an efficient means of doing business with a large group of people o BA: reflected in $-its the price, stupid o See Carnival and Caspi BA: unconscionability is a fall-back for courts when duress and undue influence dont apply but the contract just smells wrong Williams v. Walker-Thomas Furniture Co. (1025) [D, a poor customer, agrees in a form k to a dragnet clause (cross-collateral clause) for furniture purchased on credit clause difficult to understand and educational dynamics of D at play after a payment default, P, retailer, sought to replevy all goods prev. purchased by D] 23

Barry Adler Contracts Fall 2010 o Holding: The defense of unconscionability to action on a K is judicially recognized Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. Unfair surprise-lack of edu may have played role in lack of understanding Worries about paternalism : Crt making value judgment on how D can spend money/what she needs or doesnt need This issue also goes to buyers ltd. choice o Consequences of stricking down a pro-seller term? Increased prices (if you assume a functioning mkt) Seller is taking risk by selling to this market, protection in the form of these clauses Cf. with New Orleans hypo Seller may disappear from mkt Carnival Cruise Lines v. Shute (445) [P, sought to file suit in WA for a injury sustained on Ds cruise D had a forum-selection clause contained in ticket] o Holding: A non-negotiated forum-selection clause contained in a standard contract (Form K) is enforceable where the court determines it meets the requirements of fairness. Term was reasonable/presumably reflected in the price of ticket (presuming a mkt) Pro-seller term might be good for buyer because it lowers the price Caspi v. Microsoft Network, L.L.C. (453) [P claimed that the forum-selection clause in the online subscriber agreement with D, online provider, was ineffective b/c it lacked adequate clarity and notice] o Holding: a contracting party may be bound by the terms of a form K even if he or she has never read it Only if the clause was a result of fraud or overweening bargaining pwr would the clause be invalidated in NJ Caspi was free to scroll thru to read before agreeing

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Barry Adler Contracts Fall 2010

Interpreting the Agreement

We now turn to the question of how we interpret the words that form the basis of an agreement R.2d 200 provides that interpretation of a promise or agreement or a term thereof is the ascertainment of its meaning The role of subjectivity o R.2d 201 addresses the question of whose meaning prevails when a term is subject to multiple meanings R.2d 201(2)The meaning attached by a party w/ no knowledge or reason to know of anothers meaning cntrls over the meaning attached by a party with knowledge or reason to know anothers meaning Subjective meaning does not matter otherwise o Adler Car Sale Hypo Adler and I are buddies, and I know that: He owns a Buick and a Replicar He loves his Replcar He is financially distressed At lunch, he offers Ill sell you my car for $10k I accept on the spot The mkt value of the Replicar is $12k, while mkt value for Buick is $8k Contract? If so, for which car? Adlers love for the Replicar suggests that he meant to sell the Buick, but his financial distress suggest that he means the Replicar Likely no K via R.2d 201(3)--failure of mutual assent Likely not to be the case in a situation where there is an objective meaning to the term. o E.g., Unbeknownst to each other, Person A believes that $10k actually means $20k and Person B believes that it means $5k No failure of mutual assent in this case b/c $10k is objective

HIERARCHY OF INTERPRETATION
Situation: each party attaches different meanings to an (objectively) ambiguous term, and neither party had info that would make the others subjective meaning relevant Hierarchy Illustration: Dairy Farmer Delivery Hypo o A dairy farmer agrees to make a weekly delivery of butter to a restaurant Each delivery to occur no later than mid-week o The K is supposed to run for 1 yr o During the 1st 6mos of the K, the farmer delivers the butter sometimes on Wednesdays, but more often on Thursdays On each Thursday delivery, the restaurant expresses a desire for deliveries no later than Wednesday, but accepts each Thurs. delivery after farmer apologizes o After a Thurs delivery on the 7th month, the restaurant tells the farmer that the K is over. o The farmer and restaurant sue one another for breach and dispute the meaning of mid-week o R.2d 202 provides where language has a generally prevailing meaning, it is interpreted in accordance w/ that meaning but adds, among other things, that technical terms and words of art are given their technical meaning when used in a transaction w/in their technical field Does mid-week have a generally accepted meaning, or is it a technical meaning w/in the relevant industry? 25

Barry Adler Contracts Fall 2010 UCC 1-205 and 2-208 put the following interpretive factors in an order of importance o (1) Express terms o (2) Course of performance In this hypo, there is a relevant course of performance: for 6mos, the farmer delivered butter on Thurs and the restaurant accepted delivery UCC 2-208(3) provides that course of performance shall be be relevant to show a waiver or modification of any term inconsistent with such course of performance o Does this help the dairy farmer? Yes as to waiver of mid-week term, butdepending on how the restaurant stated its preference for earlier deliveries after each Thurs. deliverynot necessarily as to interpretation or modification o The restaurant will arg: that it did waive ea. weeks missed deliver, but that it didnt constitute a modification, but the restaurant should have made it clear after every deliver/waiver that it reserved the right to treat the nxt Thurs. delivery as a breach by farmer. o Cf. UCC 2-208(1) and R.2d 202(4), which provide that acceptance of performance w/o objection is given interpretive weight o (3) Course of dealings o (4) Usage of trade Raffles v. Wichelhaus (396) [K for cotton to be delivered on the ship Peerless 2 ships named Peerless Peerless (Oct) arrives, but seller (P) tenders no cotton Peerless (Dec) arrives later w/ cotton that seller tenders to buyer (D) buyer refuses cotton, claiming K was for earlier ship] o Holding: crt finds no basis to resolve the dispute and concludes that there is no K Industry analysis at timeguidance on what parties should be deemed to have meant Gilmore: concludes that it is not relevant to the K whether the cotton was on Peerles (Oct) or Peerless (Dec) o The term to arrive ex Peerless was a term provided by seller in case ship was lost in voyage, and thus voided the K (ltd damages paid by seller) Simpson: disagrees w/ Gilmore. Argued that selection of ship represents a gamble on arrival time that would be reflected in the price (speculation) o The seller here (P) had a winning K (the price of cotton had dropped). o Seller should have been able to benefit (at least) from what turned out to be the shipment most favorable to Buyer [Peerless (Dec)] How might Seller (P) have benefited here, were the rule in Bush different? Seller could have stipulated that he did breach K in October [as D argued] and sued for the negative damages as a result of the falling prices b/t Oct and Dec (and thus savings to D). o If permitted, would give incentives to D to take Dec. shipment (via the K) If price had risen b/t Oct and Dec: Buyer would have accepted cotton on Peerless (Dec) [winning K], no breach b/c Seller was ready to tender in 26

Barry Adler Contracts Fall 2010 Dec If price had fallen b/t Oct and Dec: In Dec: if Buyer claims Oct. breach by Seller, he would have to pay negative damages o Would be indifferent b/t paying neg. damages based on Oct breach (in Dec) and accepting delivery on loosing K in Dec, and will take in Dec (after speculating on rising price) But no NEGATIVE DAMAGES via Bush! Oswald v. Allen (407) [Sale $50k of Swiss Coins agreed to in back of car Seller (D) (says she) meant a subset of rare coins shown that were from Switzerland Buyer (P) (says he) understood deal for all coins including those from Rarity Coin Collection] o Holding: Applies Raffles ruleno sensible basis for choosing b/t conflicting understandings BAnecessarily the case? On the sellers purported understanding, if the collection was really to include all coins including the Rarity coins, one might have expected a convo re: those coins. o OTOH: language barrier may have made this expectation unreasonable

GAP FILLING
Some crts try harder than those of Raffles and Oswald to find a K o Frigailment Importing v. BNS Corp (unassigned) [P ordered large quantity of chicken from D P intended to buy young chicken used for broiling, but D assumed older chicken, which was suitable for stewing only] Holding: where extrinsic evidence revealed no clear basis for interpretation, the P had the burden of showing the chicken was used in the narrower rather than broader context But no basis is offered for the choice of broader sense as the default o Firgailment, etc. raise the question of gap filling and whether interpretation and gap filling can be distinguished meaningfully A term that needs interpretation may signal greater importance to the parties than does gap filling. An express term that cant be interpreted reliably, may justify negation of a K even where a K w/ a gap would be enforced o Cf. actual Raffles w/ a version of the case where no ship (or date of sail) is mentioned (pure interpretation issue, vs. filling a gap) Traditionally two forms of judicial gap filling: o (1) implied-in-fact terms: those that the parties actually, albeit implicitly, have agree to o (2) implied-in-law terms: are thought to be imposed on parties w/o their consent As a practical matter, where the parties are free to choose the contractual term, both an implied-in-fact and an implied-in-law determination will typically turn on an inquiry into what reasonable parties would have wanted under the conditions the parties encountered. Default rule: a gap is filled with a term that is reasonable in the circumstances (R.2d 204) You can K around default rules! Does having a default rule encourage parties to be more explicit? Thus, a b/t implied in law and fact? Mandatory (immutable) rule: may not be varied by consent and will override any 27

Barry Adler Contracts Fall 2010 express clause to the contrary e.g. good faith requirement in UCC 2-306 and output Ks Sun Printing v. Remington (422) [Sun Printing (P) agrees to buy paper (1k tons/mo for 1st 4 months and 16k in all) from Remington (D) payment to be made on 20th of each mo for balance (after 4 mos) the price of paper and length of term when price applied shall be agreed upon capped by a Canadian index for large consumers after 4 mos, D repudiates] o Ps arg: supported by R.2d 34, which provides that the terms of a K may be reasonably certain even though it empowers one or both parties to make a selection of terms in the course of performance Ps option would be part of a barained-for-exchange b/c P is bound for the 1st 4 mos of the K o Ds arg: the seller and buyer left the price to be paid and the length of time during which the price would apply open Agreement to one would be insufficient for K w/o the other. Even if you determine a price, you still need to know how long it would apply (and is not specified o Holding: that b/c the parties gave the crt no guidance on the term for which the price was to apply, the crt had no basis on which to calculate remedy for breachno K beyond the 4 mos, despite the 16k total quantity bargained for. The crt might have provided for a term on Suns optionparticularly given the quantity total in agreementas P contended BUT the crt held that there was no agreement to grant such an option The crt accepts that P might have prevailed had it provided evidence that the Canadian index price was fixed for a year at a time (rendering irrelevant the interval for the option!) o Dissent: the parties expressed a clear intent to be bound, the crt should have found a way to fill the gap on the term of Ps optiona year, mo-to-mo, or a match to the term of the Canadian index The rule of reason permits the crt to enforce a K here. o Can you define for P the terms of an option that might have persuaded the crt to rule in its favor? BAP might have claimed an option to buy paper at the Canadian index price at successive terms set by D In Texaco v. Pennzoil P arg. that the agreement was lacking as far as essential terms o The crt held that a jury was free to decide the gaps to be filled o Can Texaco and Sun be reconciled? Arguably, industry stds can be used to determine certain terms (e.g. determining payment process, or penalties, etc), but not quantity (of shares) as applied to a stated price There is a reference point thru industry standards

Illusory Promises
Sometimes agreements are attacked as illusory or as lacking mutuality, or as too indefinite to enforce. o A requirements or output K represents such an agreement, which can be recharacterized as one with a gapregarding one partys obligationthat crts can fill if they choose (and freq. do), invoking a mandatory duty of good faith or a statutory requirement o New York Central Iron Works v. US Radiator Co. (429) [US Radiator (D) agreed to provide (at a specified price) NY Central Iron Works (P) with its entire radiator needs for the yr P agreed to purchase exclusively from D D refused to fill excess demand] 28

Barry Adler Contracts Fall 2010 Ds arg: an implicit term of the agreement ltd the quantity to an amt such as had been called for in previous yrs of similar dealings b/t the parties Holding: The crt denied this arg b/c Ps needs could be indefinitely enlarged when mkt conditions allowed it to undercut competitors It did not mean to imply that P had the right under the K to order goods at any amt. o Both parties are bound to carry the K out in good faith i.e. could not use K to speculate A req. K w/ a speculator is one sided in a way that such a K is not with an inherently constrained operating business A speculators req. obligation is truly illusory, lacking in mutuality, impermissibly indefinite, etc. Would Pnot a speculatorhave prevailed under UCC 2-306? Even if Ps demand were in good faith it likely would be disqualified as a quantity unreasonably disproportionate to any stated estimate or in the absence of such estimate to any normal or otherwise comparable priorrequirements o There would be a K, but the quantity would be ltd The UCC drafters may have provided the best default rule for an output or req. K, but parties might prefer to bet on mkts and inherent constraints rather than a later determination of what is in good faith or unreasonably disproportionate o UCC 2-306 (Comment 2): good faith variations from prior req. are permitted even when the variation may be such as to result in discontinuance. A shutdown by a requirement buyer for lack of orders might be permissible when a shutdown merely to curtail losses would not. Imagine that you are req. buyer w/ competitors who buy supplies at costs below yours If you shut down b/c you have no demand for your product, is this b/c you lack orders at a price that allows you to cover your costs or b/c you choose a price to curtail losses (max in the circumstances)? Hard to say. o Wood v. Lucy (434) [**Cardozo** P given exclusive agency on placement of Ds design when P learns that D was placing products outside of their agmt, sues for performance] Holding: Ps promise to pay Lucy resulting from sale, and to render accounts monthly, was a promise you use reasonable efforts to bring and revenue into existence Best efforts default rule under UCC 2-306(2) This imputed obligation of reasonable efforts saves K from lack of mutuality, etc, and D is bound o This is arguably the case b/c the obligation is only to expend reasonable efforts However, maybe not, as the parties may have wanted to rely on Ps incentives rather than on an enforceable obligation

Gap Filling and Good Faith

An obligation of good faith is a mandatory rule o See R.2d 205 and UCC 1-203 29

Barry Adler Contracts Fall 2010 o But good faith and reasonableness are not necessarily synonymous Perhaps good faith should=no more than doing what one has promised to do NY Central Iron and Wood are cases where the crts should perhaps not be so sure parties intended to impose a binding obligation of reasonable conduct o Thought , in Wood, absent an imputed duty, one might worry abt the satisfaction of the consideration doctrine.

EXTRINSIC EVIDENCE
Extrinsic evidence=reference to circumstances beyond the four corners of an agreement TEST-When to admit EE? 1st question: Is the agreement an integrated agreement? [R.2d 209 (1): writing constituting a final expression of one or more terms of an agreement] o If yes, is it a completely or partially integrated agreement? R.2d 210 (1) a completely integrated agreement is one adopted by parties as a complete and exclusive statement of the terms of the agreement; (2) a partially integrated agreement is one other than a completely integrated agreement UCC 2-202uses final expression of agreement instead of integrated agreement and complete and exclusive statement of the terms of the agreement instead of completely integrated agreement How to determine if completely integrated? Merger clausebars use of EE by explicitly stating that agreement is final & conclusive expression of all agreements b/t the parties and discharges all others. If no merger clause, courts will sometimes hear EE to determine whether agreement was final & conclusive. R.2d 214: agreements and negotiations prior to or contemporaneous with the adoption of the writing are admissible in evidence to establish (a) that a writing is not an integrated agreement, or (b) that the integrated agreement, if any, is completely or partially integratedIMPLICATION of 216 o R.2d 216(2): An agreement is not completely integrated if the writing omits a consistent additional agreed term which is (a) agreed to for separate consideration, (b) such a term as in the circumstances might naturally be omitted from the writing Implication: an agreement is completely integrated WRT an additional outside term if that term would not under the circumstances naturally be omitted from the writing If agreement is completely/partially integrated? Parol evidence rule (R.2d 213/UCC 2-202): a writing that is a final expression of an agreement discharges any prior (or contemporaneous oral) agreements that conflicts w/ the writing or that adds a term within the scope of a comprehensive portion of the writing o Underlying principle (): a final writing is the best evidence of an agreements terms Where a writing is indisputably final, there is no reason for a crt even to admit evidence of a prior conflicting agreement o If no, you can admit the EE for consideration Thompson v. Libbey (488) [P sold logs to D terms memorialized in writing D later claims that the two had agreed orally for warranty of the quality of the logs D now claims breach of warranty and that he is not required to pay the balance.] o Holding: EE is not allowed to determine if an oral warranty was reached. 30

Barry Adler Contracts Fall 2010 To admit evidence on a purported oral warranty as proof that a written sales K was not intended to be comprehensive would be to work in a circle and permit the very evil the rule was designed to prevent. Brown v. Oliver (489) [Replevin for hotel furniture P purchased land from D on which stood a hotel dispute arose as to whether the land sale included the hotel furniture.] o General Test for whether a writing should exclude a prior or contemporaneous oral agreement is whether such agreement, if actual, would naturally have been included in the writing. [see R.2d 216(2)(b)] : to conserve resources and promote certainty, a claim likely enough to be a lie is irrefutably presumed to be a lie. R.2d 216(2): An agreement is not completely integrated if the writing omits a consistent additional agreed term which is (a) agreed to for separate consideration, (b) such a term as in the circumstances might naturally be omitted from the writing Sale of furniture presumably would have been mentioned, especially if included w/in price set out in the agreement [216(2)(a)] o BUT there is also the fact that the seller seemed to wait a long time to claim the furniture o Applying the PER (or any restriction on EE) can have its costs as well as benefits o Holding: It was unclear from the agreement whether it was meant to cover one subject or the entire range of their agreements. EE was properly allowed (which jury interpreted in favor of P). The dispute over the furniture did not contradict anything in the writing; the writing was therefore only a partial integration, complete with regard to the land only. Court takes opposite approach than Thompson. Quoting Wigmore, a court can hear evidence, then ignore it if the judge concludes that on the balance of the evidence the writing was intended to be comprehensive w/r/t subject matter of such additional terms. Nothing in the PER excludes EE in aid of interpretation of a writing o R.2d 214(c) agreements and negotiations prior to or contemporaneous with the adoption of the writing are admissible in evidence to establish the meaning of the writing, whether integrated or not o Yet crts differ on the use of EE even where permitted by rule o Pacific Gas & Electric v. G.W. Thomas (494) [**Traynor**D agreed in writing to remove & replace cover of Ps turbine P attempts to recover for damage caused by falling cover based on indemnity clause in agreement] Ds arg: the provision applied only to third-party injuries not Ps own property Holding: EE allowed. Rejects four corners approachno matter how plain words look, must look examine context Test: In order to determine whether a writing is reasonably susceptible to alternative meanings, court must consider evidence including testimony as to the circumstances surrounding the making of the agreement, including the object, nature, and subject matter of the writing. Then, if, writing deemed susceptible, EE as to meaning is admissible. o Trident Center v. CT General Life (497) [**Kozinsky ** P borrowed $56mm from D in a highly complex loan agmt agmt provides that P cannot repay loan for 12 yrs when interest rates plummet, T wants out of the agmt attempts to interpret default clause option for prepayment as permitting prepayment] Holding: crt prefered not to allow the evidence given the plain and apparent meaning of the clauses, but, citing Pacific Gas, words have no meaning in CA and thus EE must be allowed (stare decisis). o Traynor (Pacific Gas) v. Kozinsky (Trident Center) 31

Barry Adler Contracts Fall 2010 It seems that Treynor would have invited evidence in Trident Center, but likely would have dismissed the case absent proffer of evidence that something truly extraordinary occurred An Kozinski likely would have found the indemnification clause in Pacific Gas ambiguous, justify EE There are definitely in degree b/t Traynor and Kozinsky Whos right as a matter of ? o Traynors approach may be more likely to give the parties the K for which they actually bargainedat least if crts are willing to discard ambiguous/suspect EE and revert to the writingbut at the cost of litigation expense and uncertainty that Kozinskis approach would avoid. o Illustration Imagine that in Trident Center the loan agreement recited CT Generals right to collect 10% prepayment fee if it accelerated the loan on Ps default, but was silent on whether P had a prepayment option. Merger clause Would P be permitted to prove this option via EE? o In this case, even if loan docs had merger clause, Traynor would presumably permit P to present evidence supporting an interpretation of the prepayment fee as one that includes an option for P to prepay o Kozinksi would likely see the matter differently would he see it as an omitted prior agreement that should have been included, and thus blocked by PER?? Given the flexibility of the PER, or more generally the tolerance for EE among some judges, there may be less b/t the UCC, which adopts the PER and CISG, which does not, than Barnhizer suggests based on judicial approaches rather the BLL stated.

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Barry Adler Contracts Fall 2010

Breach
EFFICIENT BREACH HYPOTHESIS
Indifference to breach: Bookseller Hypo o A agrees to sell B a rare book for $100 o Later discovers could sell the book for $150 on eBay. o What are Bs damages if A breaches? Damages (2-713): $150 (mkt price) -$100 (K price) $50 o What will A do? A is indifferent to breaching or not, because will lose $50 either way Efficient breach: House Painter Hypo o A agrees to paint Bs house for $100 o A later discovers that it would cost A $150 to do the work o The value of the painted house to B (or the cover price) is $120. o What are Bs damages if A repudiates? Damages (2-712): $120 (cover price) - $100 (K price) $20 o What will A do? A will BREACH because it will cost $30 more to perform than to breach. This is efficient (Pareto improvement): B is compensated either way, A is better off by $30. Efficient Breach Scenarios o Abel agrees to paint Bakers house. C = Abels cost, V = value to Baker, P = contract price. These variables could be ordered 6 ways: o Case 1: P = $5, C = $10, V = $15 Because V > C, performance is efficient society would gain $5 Abel earns P C = - $5 if she performs; that is she loses $5 from performance Abel pays V P = $10 if she breaches Abel performs, as efficiency requires o Case 2: C = $5, P = $10, V = $15 Because V > C, performance is efficient society would gain $10 Abel earns P C = $5 if she performs Abel pays V P = $5 if she breaches Abel performs, as efficiency requires o Case 3: C = $5, V = $10, P = $15 Because V > C, performance is efficient society would gain $5 Abel earns P C = $10 if she performs Because V P = - $5, Abel pays nothing if she breaches Abel performs, as efficiency requires

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Barry Adler Contracts Fall 2010 o Case 4: P = $5, V = $10, C = $15 Because C > V, breach is efficient society would gain $5 Abel earns P C = - $10 if she performs, that is she loses $10 from performance Abel pays V P = $5 if she breaches Abel breaches, as efficiency requires o Case 5: V = $5, P = $10, C = $15 Because C > V, breach is efficient society would gain $10 Abel earns P C = - $5 if she performs, that is she loses $5 from performance Because V P = - $5, Abel pays nothing if she breaches Abel breaches, as efficiency requires o Case 6: V = $5, C = $10, P = $15 Because C > V, breach is efficient society would gain $5 Abel earns P C = $5 if she performs Because V P = - $10, Abel pays nothing if she breaches Abel would perform, since she gains $5 from performance. This would seem to be a breakdown of efficient breach theory, but the efficient outcome will still be achieved because Baker would breach The reason Case 6 doesnt come out right is the prohibition on negative damages In real life, dont always know V. In other words, contracts operate under imperfect information. To approximate, often fill in cost of substitute performance for V

PHILOSOPHY OF PROMISE
Charles Fried: a promisor is morally bound to perform because by promising she has intentionally invoked a social convention with a purpose to induce others to expect performance. o Breach erodes the institution of promising. o Liquidated damages clauses are inconsistent with this value Holmes: a promisor commits either to perform or to pay damages for failure, nothing else

BREACH AND CONSTRUCTIVE CONDITION

Principle: A determination of the appropriate remedy for a partial breach depends on whether a breach is material or if there is substantial performance. o If A partially breaches, there are 2 possible consequences: If As failure to comply with a contract is a material breach, B are not obligated to pay for work under the contract unless A cures (although, if time is important, As delay in offering a cure may entirely discharge B of having to pay). However if no cure, B would have to pay restitution (net of any damages that A owes from the breach If A has substantially performed (the breach is not material) and doesnt cure, B is obligated to pay A the contract or market price but B has a claim against A for damages from my breach. Material breach: A breach of a contracts terms by one party that is so substantial as to relieve the other party form its obligations pursuant thereto. Substantial performance: A performance of all the essential obligations pursuant to an agreement. R.2d 237: Provides that it is generally a condition of each partys remaining duties to render performance to be exchanged under and exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time. 34

Barry Adler Contracts Fall 2010 R2nd 238: Treats obligations to perform simultaneously as conditions for one another. R.2d 241: rough guidelines on materiality including consideration of the extent to which the injured party will be deprived [by the failure of performance] of the benefit which he reasonably expected and the extent to which the injured party can be adequately compensated for the part of the benefit of which he will be deprived. Breach and Constructive Condition (and Damages) Hypo: o A has agreed to paint Bs house in exchange for $10k B has agreed to pay, only after A has completed the job o A paints Bs house, but uses a lower quality pain than specified in the K o If As failure to comply is a material breach, B is not obligated to pay for the work under the K unless A cures If A delays in cureesp if time is of the essenceit may discharge Bs duty to perform under the K B would have a claim for damages for total breach (see R.2d 242, 243) Assume that at all relevant times, the contractually specified paint job has a mkt value of $8k, while the job as A performed has a mkt value of $7k. Also, assume that A and B agree to these facts, and B doesnt claim any idiosyncratic value to the work. o What result if A is deemed to be in an uncured material breach that=a total breach? B owes A nothing on the K (b/c B hasnt paid A yet) A owes B nothing on the K b/c B has not been injured by the breach B owes A $7k in restitution o What result if A substantially performed (no material breach), but do not cure the breach? B still owes $10k on the K, but B owes $1k (the b/t the value of the work promised and the value of the work delivered [R.2d 348(2)]. B owes A net $9k A crt arguably should not lightly determine that a breach is material unless the promisee is at risk of losing the benefit of his bargain. A promisee w/in reason to believe that the promisor will commit a total breach of the K can demand adequate assurance and treat the promisor as having repudiated the K if such assurance is not forthcoming w/in a reasonable time (R.2d 251, 250) o UCC 2-6092-611: covers the right to adequate assurance of performance and anticipatory repudiation Jacob & Youngs v. Kent (883)[P refused to make the final payment on a construction contract because Reading pipe was not used throughout the house as contracted for D refused to rebuild and sued for the rest of the amount owed] o Holding: Court holds that breach was trivial and innocent so D substantially performed so P is obligated to pay under the contract. Also, since breach was not material, P should recover damages which were the difference between the market and contract price but, since the pipes were the same price- damages are negligible. Court holds that Ds breach was not willful, but dissent says that their gross negligence was equivalent to willfulness and one might say that their refusal to replace the pipe was willful. Groves v. John Wunder Co. (929) [Groves sells a plant and leases land to John Wunder who, in return, agrees to pay $105,000 for the plant and upon removal of gravel, return the land to uniform grade. Wunder breaches and Groves sues At trial Court, he gets $15,000 (more than market value of land) but appeals for cost of completion damages over $60,000.] 35

Barry Adler Contracts Fall 2010 o Holding: Court holds that because breach was willful and in bad faith, groves is entitled to higher cost of completion damages. Distinguishes cases like Jacob and R.2d 348 and says that lower market-based damages would be appropriate only if they reflected economic waste Court reasons that economic waste occurs when one tears down a good building but not when one restores land to original state, but this doesnt seem to be true: why spend 15k to increase land by 10k Dissent believes that market-based measure for damages would give Groves benefit of his bargain especially since the property was not unique or personal and he was trying to get it in shape for sale. Peevyhouse v. Garland Coal Mining Co. (934) [Similar to Groves. Peevyhouses leased farm to Garland who agreed to pay for the right to extract coal and would restore the land. Garland decides not to restore land and Peevyhouses sue for cost of completion damages of $25,000. (Market-based damages would have been $300)] o Holding: Opposite of Groves. Court holds that it is highly unlikely that the ordinary property owner would pay the $29k for repairs to increase value of land by only $300. Because the Peevyhouses likely attached no idiosyncratic value to the restoration, market-based damages of $300 are awarded. o Dissent: Unless circumstances have changed since the time of the contract or it has been revealed that there was a mistake in estimation, it is reasonable to assume that the parties incorporated the cost of completion into the contract price. So if cost of completion is greater than market value, the promisee would only pay it if there were idiosyncratic value. So, one way to find appropriate measure of damages as 1) an interpretation of the parties implicit bargain and as 2) an accurate measure of true expectation damages: o Cost of completion damages: if no changed circumstances since time of contract, and no mistake in estimation, cost of completion is likely incorporated into the contract price, reflecting idiosyncratic value. o Market-based damages: if changed circumstances and/or mistake is revealed, more likely to fulfill the parties true bargain Dont want to always award cost of completion because, if there is no idiosyncratic value, this would give promisees a windfall or promisors a penalty inefficient investment

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Barry Adler Contracts Fall 2010

Failure of a Basic Assumption

Two default rules for interpreting a contract: o Treat the silence as the absence of a condition (easier for courts) or o Guess at what the parties likely intended. Look at the least-cost-avoider (from Torts) Mutual Mistake: R2nd 152: Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract is voidable by the adversely affected party unless he bears the risk of the mistake. o R2nd 154: A party bears the risk of mistake when the risk is allocated to him by agreement, when he is unsure of the underlying fact about which he later claims to be mistaken 1) but treats his limited knowledge as sufficient, or 2) when the court just plain thinks it is reasonable in the circumstances to have him bear the risk. o A conscious gamble implies that there was no mistake, or in terms of R2nd 154, the seller would be denied excuse from performance because he would have treated his limited knowledge as sufficient. See Nester; Wood. Unilateral Mistake: R2nd 153 Provides that where one party to a contract is mistaken as to a basic assumption and the mistake has for him a material, adverse effect on the exchange, the contract is voidable by that party if he does not bear the risk under 154 and enforcement would be unconscionable or the other party had reason to know of the mistake or the other partys fault caused the mistake. o More like Doctrine of Unconscionability, than mutual mistake. o When a court is trying to decide whether it is reasonable under the circumstances to force a party to bear the risk of unilateral mistake, the court may be confronted with a conflict between: Its moral judgment of what fairness requires and its Desire to have contracts law foster productive economic activity. Exp. Finding oil under land. Sherwood v. Walker [Walker agrees to sell cow to Sherwood for $850, assuming shes barren. When they find out that it is really with calf, they refused to deliver the cow because she is worth more and Sherwood brings action of replevin for Rose] o Holding: The seller had the right to refuse because the mistake was not mere quality of the animal but went to the very nature of the thing as a barren cow is substantially a different creature than a breeding one. Excused from the contract. If the thing actually delivered or received is different in substance from the thing bargained for and intended to be sold, then there is no contract But if it be only a differenced in some quality or accident, even though the mistake may have been the actuating motive to the purchaser or seller, or both of them- the contract is binding. o Dissent: What is the distinction between fertile cow (no contract) and a lame horse (contract enforced)? Nester v. Michigan Land and Iron Co. [Michigan Land & Iron (D) contracted to sell timber to Nester (P) for $27,000. Nester cut and took away all of the pine but was dissatisfied with the quality and quantity of the timber and demanded that Michigan accept of the contract price. Michigan refused Nester sued trying to force Michigan to accept of the price claiming that they both overestimated the quality and quantity of the pine.] 37

Barry Adler Contracts Fall 2010 o Holding: Court thought that parties gambled over quality of pine and held that the original contract should be enforced Wood v. Boynton [The seller unknowingly sold a diamond to jewelers for $1. Neither knew what it was but once seller found out, she wanted to buy it back for $1 + interest, but they refused and she sued] o Holding: Court held that there was no fraud, just mutual mistake. Conscious gamble (both parties) implies no mistake. Original contract enforced. Court assumed that the seller had better access to information about the stone (although hard to believe since buyer was a jeweler). Laidlaw v. Organ [Organ had been negotiating with Laidlaw to buy his tobacco, when Organ learned of the treaty of Ghent, which ended the War of 1812 and opened the British Market to American Tobacco. He knew that this would increase the market price so he tried to make a deal with Laidlaw before he found out. Laidlaws agent specifically asks if there is any news that will raise the price and Organ is silent. Facts are revealed and Laidlaw seeks to rescind contract.] o Holding: Court holds that they are bound to the original contract. Organ was not required to communicate his extra knowledge and since he was not an agent of Laidlaws, his silence (even if strategic) does not necessarily amount to fraud. Organ was an arms-length transactor. See R2nd 161(D). Intervening impracticability (or impossibility): Issue that arises where a subsequent event makes performance difficult (or impossible). o Usually when something is more expensive, or harder to execute Hurricane Concert Hypo I o A agrees to build a band shelter for B, that B will use for an upcoming concert o The K price=$10k o Prior to concert, a hurricane blows through, making it more expensive for A to construct the shelter as promised o A seeks to avoid the K based on supervening impracticability o The storm is not As fault, but was the non-occurrence of its effect was a basic assumption. o We can look to concept of least-cost avoider Because A is in the better position to avoid loss from a storm, he may be the least-cost avoider If A is the LCA, then it is less likely that the implicit bargain includes, or should include an escuse for the storm (whether or not As failure to prevent the cost-increase counts as fault) Frustration of purpose: Issue that arises where a subsequent event makes performance less valuable. o Not necessarily harder, just pointless to performer. Hurricane Concert Hypo II o Same facts and A has built shelter o B seeks to avoid the K on the grounds that the storm has destroyed the instruments of the musicians Making it difficult to put on the concert and make $ o Who is the LCA? LCA would be lest likely to be able to avoid the K. Paradine v. Jane (England) [Landlord sues for 3 years rent. Defendant tried to be excused because he had been ousted from the possession of the premises. (Wasnt there to enjoy land) Frustration Case] o Holding: Court holds that they are bound to the original contract. Just because lessee was ousted doesnt mean that the landlord should have to bear the entire risk of the loss. It was not impossible for him to pay, just frustrating. 38

Barry Adler Contracts Fall 2010 Taylor v. Caldwell (England) [Owners of music hall (D) agreed to lease the hall to lessees (P) for a series of concerts, but the hall burned down. The lessees sued to recover their expenditures for advertising and other preparations for the concert on a breach of contract theory. Impracticability ] o Holding: Court holds that both sides are excused from the contract This holding might not be right or wrong, but it could also be evaluated under the least- cost avoider approach. Under least-cost avoider, lessor would be liable because he was in best position to avoid destruction-by-fire of the music hall. Krell v. Henry [Henry (D) failed to pay the balance of the money owed to Krell (P) pursuant to an agreement to rent his flat in order to view the coronation of Edward VII, due to the cancellation of the ceremony. Krell is suing for balance. Frustration Case] Holding: Court held that both sides were excused from the contract.

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Barry Adler Contracts Fall 2010

Damages
Remedies are at the heart of what K law is

Farnsworths Three Damage Interests:

Where there is a breach by the PROMISOR: 1. Expectation damages o Benefit of the bargain o Objective: to put the PROMISEE in the position had the promise been performed 2. Reliance damages o Incurred expenses from performing or preparing to perform o Objective: to put the PROMISEE in the position had the promise never been made 3. Restitution damages o Benefit conferred by promisee in performing to promisor (e.g. profit, property improvement, etc.) o Objective: to put the PROMISOR back in the position had the promise not been made o Used as a remedy for capacity defenses in claims for breach of K

Damage calculation
Damage Calculation: House Painting Hypo (Common law) 1. Baker agrees to paint Abels house for $100. 2. Abel gave him a $10 deposit and spent $5 prepping the house. 3. When Baker breaches, Abel finds another painter who charges him $120. o Expectation calculation: $35 Formula: WEALTH W/ PERFORMED PROMISE WEALTH W/ BREACHED PROMISE Wealth w/ performed promise: o Painted house MINUS $100 contract price MINUS $5 cleaning expense Wealth w/ breached promise o Painted house (cover) MINUS $120 cover price MINUS $10 cleaning expense (inc. $5 sunk cost) MINUS $10 deposit (sunk deposit) Expectation damages: -$105 MINUS -$140 = $35 R.2d 347: includes the above calc., but wealth w/ breached promise includes (+) any loss or cost avoided by breech Ex: in the above hypo, if Abel would have avoided $10 in loss with the breach, that would offset the Wealth w/ Breached Promise by $10 (i.e. it would have been -$130 instead) o Reliance interest: $5 $5 spent on prepping house before breach But the $10 deposit might also be considered reliance o Restitution: $10 The $10 spent as deposit Would likely be returned even if the contract was voided, such as if Baker lacked capacity to form K.

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Barry Adler Contracts Fall 2010 Damage Calculation: Bicycle Hypo (UCC) 1. Wholesaler agrees to sell 250 bicycle wheels to Retailer for $100 per wheel. 2. Just before the delivery date under the contract, Wholesaler repudiates. 3. As a result, Retailer cancels a custom bike sale it had planned, rendering worthless $10 of promotional materials. 4. Retailer then buys from alt source @ $110 per wheel UCC 2-712 Cover [Retailer can claim damages $2,500 ($10 per wheel)] 1. Buyer may make good faith cover for loss from breach (by seller)see Mitigation 2. Buyer may recover the b/t cost to cover and K price PLUS incidental/consequential exps (see 2-715) MINUS expenses saved due to breach 3. Failure to cover does not bar buyer from other remedies UCC 2-715-Provides for incidental/consequential (and that the seller had reason to know) damages [Retailer can claim $10 in promotions as consequential dam.] 5. What if Retailer declines to purchase substitute wheels, but nevertheless sues for breach? UCC 2-713-the measure of damages in this case is the b/t the mkt price @ the time of breach PLUS incidentals (UCC 2-715) MINUS savings due to breach 6. What if the facts are the same, except that Wholesaler delivers 200/250 wheels before repudiation, and assume that Wholesaler sues Retailer for payment on the wheels delivered? UCC 2-717- allows deduction of damages from price still due (by withholding payment) under K on installment sales w/ partial breach] Tongish v. Thomas (86) [Tongish agrees to sell seeds to Co-op for $10 per hwt Co-op agrees to sell seeds to Bambino for $10.55 per hwt Tongish repudiates w/ Co-op and sells seeds to Thomas for $20 per hwt.] o Holding: Under UCC 1-106: remedies to be liberally administered so that aggrieved party can be made whole as if promised performed The trial court uses this methodawarded lost profits of $0.55 per hwt 1-106 vs. UCC 2-713 Crt holds that 2-713 is the proper method to use o Award b/t mkt price and K price= $10 per hwt the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages but less expenses saved in consequence of the sellers breach. When SPECIFIC rule (2-713) vs. GENERAL rule (1-106)specific wins! Rational #1: Even though doesnt reflect actual loss, it discourages breach of Ks Discouraging breach may not be desirable (see Efficient Breach Hypothesis) Rational #2: Buyer should get benefit of potential bargain. (i.e. Tongish could have resold for mkt price, but chose not to) How can we presume that Bambino had no K right to sue Co-op? (study guide) no consequential damages awarded in instant case?? If Tongish won, what would happen to similar relationships in the future?--increased price for those Ks ?? Cf Allied Canners v. Victor-seller unable to deliver on raisins to middleman b/c of shortage CA crt held that if seller knew the buyer had a resale K for the goods, and seller didnt breach in bad faith, then buyer ltd to actual loss under 1-106. 41

Barry Adler Contracts Fall 2010

LIMITATIONS ON DAMAGES
Remoteness of Harm (Foreseeability)
Almost any damages are literally foreseeable, remoteness is a better term for the limitation Why not award unforeseeable damages? o Was not a part of bargin. Give the parties what they bargained for and nothing else R.2d 351: refers to a loss that is foreseeable as a probable result of a breach b/c it arises from ordinary course of events (2a) or special circumstances that the breaching party had reason to know (2b) o Unforeseeable damages are not recoverable (1) o A crt may ltd damages for foreseeable loss by excluding recovery for loss , by allowing recovery only for loss incurred in reliance in order to avoid disproportionate comp. (3) UCC 2-715consequential damages (see above) to a buyer that a seller who has reason to know will be the result of her breach Hadley v. Baxendale (93) [Ps mill was idled by a broken crankshaft P hired Ds firm to deliver for a replacement the shipment was delayed beyond a reasonable time through Ds negligence P sued D for the lost mill during the delay.] o Holding: P could not recover for lost b/c the mills idleness was not foreseeable, and the special circumstances were here never communicated by P to D. o Hadley rule: the damages from a breached K should be such as may be considered either (1) arising naturally from breach, OR (2) supposed to have been in the contemplation of both parties, at the time they made the K, as the probable result of the breach of it. [see R.2d 351 2(a)-(b)] This is the DEFAULT rule o : the goal of compensation is to discriminate between that portion of the loss which must be borne by the offending party and that which must be borne by the sufferer. The law in fact aims not at the satisfaction but at a division of the loss. Limited liability rule: Shippers hypo o Players: Letter carrier (UPS) in competitive mkt (=$0) w/ clerks who are too unskilled to inspect every package and determine an individual price Two types of shippers: 1. Letter (worth $10)90% of shippers 2. Bearer bonds (BB) (worth $1k)10% of shippers o What if instead of Hadley rule we had an Unlimited Liability Default rule? Pooling equilibrium because of the price differential (inc. insurance) between BB and letters blended price (weighted avg.) Free ride for rare BB shippers More $$ to pay for more abundant letter shippers Separating equilibrium letter shippers would have to differentiate themselves to better inform carriers of the value of their products

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Barry Adler Contracts Fall 2010 o Instead, under Limited Liability Default rule (i.e. Hadley rule) Pooling equilibriumletter carriers charge $10 (based on most common package) Separating equilibrium--puts responsibility of declaration of value on the BB shippers to differentiate themselves More efficient because fewer actual negotiations take place, and eliminates free-riding shippers of BB Hadley takeaway: If there are special circumstancesnegotiate; if not, leave the default rule Hector Martinez v. Southern Pacific Transportation (104) [P machinery was delayed in transit, he sued D, transporter, for delay damages (i.e. the one-month rental value of the machine) D argued that lost rental value (i.e. that it would be rented vs. just sold) was unforeseeablenot recoverable under the Hadley rule] o Holding: the Hadley rule allowed for recovery of foreseeable damages not that the damages be the most foreseeable. Rental rate is an appropriate remedy BA: the court misses the point of why rental rate is an appropriate remedy Whether he was going to use, rent, or sell the dragline: rental rate is roughly the cost of cover, which applies to virtually any use. Does not take into account depreciation (in the case of a physical assetmaybe not intellectual property) Morrow v. First National Bank of Hot Spring (109) [P, coin collector, robbed. Sues D, bank, for not informing him of the availability of a safety deposit box, as it had agreed to do D knew abt valuable coins P claims theft was foreseeable] o Holding: Tacit Agreement Test: foreseeable damages not recoverable unless promisor at least tacitly agrees to extended liability (i.e. no insurance of 32k for box that cost a few hundreds) 1. Foreseeable?P must prove Ds knowledge that a breach of K will entail special damages to P, and 2. Must appear that D at least tacitly agreed to assume responsibility. D didnt agree to effectively issue a burglary insurance policy the promise to notify him of the availability of the boxes tacit agreement to be liable for as much as $32k o UCC rejects tacit agreement doctrine (2-715, Com. 2) o Tacit agreement jx vs. Express agreement jx Every jx, employs Hadley forseeability test Tacit agreement jx (minority rule)has promisior tacitly agreed to liability Express agreement jx (majority rule BA likes)what did the parties actually agree to in the case of breach Would a crt that rejects tacit agreement test award damages? Prob. Notamt of insurance policy would have been way higher than just mkt price of box. wouldnt it not award b/c the agreement/ins policy wasnt in writing? Period?

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Barry Adler Contracts Fall 2010

Uncertainty of Harm
Speculative Damages R.2d 352: Damages are not recoverable for loss beyond amt that can be est. w/ reasonable certainty. o P has right to damages for breach [but can be left with only nominal damages if uncertainR.2d 346(2)] R.2d 349: As an alt. to exp. damages, injured party has a right to reliance damages LESS any loss that the breaching party can prove w/ reasonable certainty. o Would supplement restitution Abel and Baker Concert Hypo Uncertainty o Abel agrees to sing at Bakers concert hall for $100k In reliance: Baker spends $10k in promoting the concert Before the concert, but after promotional expenditure, Abel repudiates o Baker hires Charley instead, for the same $100k Baker reasonably promotes Charleys concert with an additional $10k expenditure o At Charleys concert, Baker takes in $150k net revenue o Baker sues Abel for breach Baker believes that the Abel concert $200k in net revenue Loss from Abels breach should be (according to Baker) $60,000 [(200k-150k)+(10k)] o Probable outcome: crt might conclude that the in revenues b/t the Charley and the Abel concert were too speculative (see R.2d 352) But Bakers $10k wasted promotional expenditure (included in his $60,000 [$10k + $50k] failed expectation claim) would be awarded here as reliance damages (see R.2d 349). This is a provable part of exp. damages Chicago Coliseum Club v. Dempsey (112) [D, fighter Kd with the P, arena, for a fight D repudiated, fight is then cancelled P brought suit for damages] o Holding(s): 1. The lost were not proven w/ suff. certaintyspeculative and NOT awardable o BA: Crt got it wrongthere was a range of , and $0 wasnt w/in range o What is so special about zero?BA o Outliermodern crts would apply fig w/in range 2. Exp. PRIOR to K not awardable b/c didnt flow from/result of breach o Contra Anglia v. Reed 3. Exp. incurred (i.e. lawyers) AFTER breach were not recoverable o Incurs exp as his perilconsistent with mitigation doctrine 4. Other necessary exp. to promote fight, etc. post-K/pre-breach recoverable o Classic reliance interest

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Barry Adler Contracts Fall 2010 Wasted Expenditures Anglia Television Ltd. v. Reed (Mr. Brady) (Eng.--125) [D agreed to perform in movie produced by P D repudiates K production is cancelled and P sues D] o Holding: Crt awards claim for pre- and post-K exps. (Contra Dempsey) Crt believed that Reed must have known that exps. for movie based on him would be wasted BA reinterpretation: Crt could look at pre-K exps. as E() =at least $0 (so, E()=0) No evidence of what would beassumes $0 (i.e. broken even) [Cf. Mistletoe] o NOT RELIANCE DAMAGEEXPECTATION DAMAGE Mistletoe Express v. Locke (128) [D Kd w/ Locke (P) to perform pickup/delivery services D terminates K P sues for recovery P incurred exp. in prep.] o Holding: only unrecoverable reliance exp. may be recovered (i.e. those that cannot be resold, like cars, machines, etc.) BA reinterpretation: look at as EXPECTATION remedy w/ E()=0 To break even, awarded pre-K exp. (Cf. Anglia) D couldnt prove lost to get deduction via R.2d 349 Also works as a reliance case, b/c there was a K when expenditures made.

Avoidability of Harm (Mitigation Obligation)

Mitigation: A Ps implied obligation [mitigation obligation] to reduce the damages incurred by taking reasonable steps to prevent additional injury [mitigation opportunity]. o R.2d 350: Damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation If you are able to cover but choose not to, damages are what they would have been if promisee did cover (using price of substitute) o : (1) The mitigation doctrine helps prevent waste by giving you an incentive to cover with a substitute + (2) w/o it, customers might have to pay more in preemptive charges that sellers would imposeIts the price, stupid o Mitigation Illustration A agrees to paint Bs house for $100 B values a painted house at $200 (due to wedding) After A breaches, B does not try to cover There is a substitute painter willing to do the same job for $120 By the time that B sues A, no longer values at $200 (no more wedding) B demands $100 Personal of ($200-$100) B will not get the $100, but will only get the $20 Had a mitigation opportunity and lost it The fact that he values it at $200 (or above $120) is irrelevant o His lost $80 is his own fault If he valued the house at less than $120, he shouldnt cover o He would gain more by accepting the expectation damages

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Barry Adler Contracts Fall 2010 Rockingham County v. Luten Bridge (1929) [The county, D, Kd w/ P for construction of a bridge After political struggle, muni. board repudiated project in the middle of construction P contd to build until complete] o Holding: After repudiation of performance by one party to a K, the other party cant continue to perform and the collect damages based on full performance Stopping work in this case is not burdensome (via R.2d 350) Contra Parker P could have claimed the work done up until time of breach in restitution o Luten Bridge Hypo Abel agrees to K w/ Baker to build wall for $200 Wall to be built in 2 sections, ea. $75 Baker builds first section ($75)Abel repudiates Baker continues to build entire wall and sues Abel for $200 Crt: Baker gets the $75 from 1st section and $50 ($200-150)=$125 Mitigation and Efficient Breach Mitigation & Efficient Breach Hypo o Assume that: K price=$100 Promisor (painter) costs=$150 Competition costs=$120 o It would be efficient for orig. promisor to breach (where there is someone who could do the job for less) If the promisor didnt breach, there would be a $30 loss to society (Promisor, could have saved 50 and lost only 20) This is especially so if the competitions costs include economic rent and the true costs are even less. o Mitigation obligation ensures this efficient result If promisor breaches, the promisee would have a mitigation obligation to cover (with the painter w/ costs =$120) Expectation damages w/mitigation=$20 Promisor would SAVE $50, and only have to PAY $20incentives against inefficient performance o W/o mitigation obligation, may be able to negotiate on a release price somewhere b/t $20 and $50, BUT Transaction costs Promisee may be overcompensated Mitigation obligation allows unilateral termination ending in efficient non-performance

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Barry Adler Contracts Fall 2010 Mitigation and Burdensome Cover [R.2d 350(1)] Parker v. Twentieth Century Fox (142) [P (actress) sued D (studio) for damages resulting from D;s breach of an employment K w/ her D offered P a role in Bloomer Girl (feminist musical), then repudiated and offered her a role in Big Country, Big Man (Western) instead Ds clause: [Ds] sole obligationbeing to pay you the guaranteed compensation herein provided for P rejects movie and sues for full compensation] o Crt decides this case on mitigation and not on the guaranteed compensation clause Clause: Seems to protect D from consequential damages (e.g. injury to MacLaines career) Paid to play clause **is it important that the breaching party in this case covered?** o Ds arg: Movies are fairly identical31/34 K provisions are the same for the movie, and compensation is the same (goes to undue risk, burden or humiliation) o Ps arg: The movies are in no way substitutable: diff. genres, location, etc. Taking on the movie would be burdensome o Holding: crt held that D, failed to show that other movie was comparable, or substantially similar, to the orig. movie. The substitute movie was diff. and inferior to the orig. Dissent: questions whether different/inferior necessarily means that differences are considered unduly risky, burdensome, or humiliating. Not all inferiority NEED be an excuse for not taking substitute opportunity o Parker Hypo P was to receive $750k for Movie A, w/ a $0 net cost (joy=loss of leisure) Net personal =$750k P would receive $750k for Movie B, w/ a $250k net cost (no joy, just loss of leisure) Net personal = $500k Ds from Movie B w/ P in it would have been $750k P declines Movie B Efficient? o NO. If P had made movie, she would have created $750k in wealth (for D) at a cost of $250k to her. Lost opportunity to bargain. P could be made whole by an increase in salary to $1MM (leads to orig. $500k personal ) o D would then make $500K ($750k - $250k damages) What should her damages be? o $250k (not $750k) Would induce her to accept (in which case she would get the $250k + 750k salary) o Practical impediment: via holding in case, P gets $750k whether or not she accepts Movie B (P might have feared that accepting Movie B would be a settlement for only $750k) Would induce to reject Movie B Workaround: if she could conditionally accept on basis of damages/negotiationmovie could get made This analysis falls apart if the net cost to P is > $750kthe to D when movie is made (i.e. reputational harm is astronomical) In this case, it really would be unduly burdensome and D would not be able to compensate if movie is made You could also negotiate and P would end up somewhere b/t $1MM (w/ $250k and 47

Barry Adler Contracts Fall 2010 $1.499MM (where Ds would be barley positive, but positive) Mitigation and Buyer Breach/Sellers Remedy Goods w/o mkt price @ resale: o UCC 2-706: in case of buyer breach, allows a seller to resale goods in good faith to another, and can recover the b/t the resale price and the K price PLUS incidental damages (2-710) MINUS cost savings due to breach Incidental damages (2-710)=any commercially reasonable charges Omission of consequential damages**is this that asymmetry?** o Rare Coin Shipper Hypo (UCC 2-706, 2-710) Jan. 1: buyer agrees to buy rare coin for $10k Seller obliged to ship coins in 4 weeks Seller pays $100 shipping deposit on D1 Jan 8: buyer repudiates; seller begins search for replacement buyer Jan 22 (2 wks later): Seller finds alt buyer willing to pay $9k Alt buyer lives closeno shipping costs Retrieves from safety deposit box (which cost $75/wk) o Seller saves $75 from that last week Hypo is silent on who has to pay shipment costs Buyer to pay: o Damages= [$10k-$9k (from alt buyer)]+$100 (deposit)-$75 (1-wk savings from box) $1025 Seller to pay: o Assume total shipping costs = $150 (including $100 deposit) o Damages=[$10k-9k]-$75k (safety dep. box)-$50 (shipping savings) $875 o **key question: was the seller going to pay the shipping costs, if there had been no breach? If yes, no refund** Goods w/ mkt price @ resale: o UCC 2-708(1): provides that the measure of damages forrepudiation by the buyer is the b/t the mkt price at the time and place of tender and the unpaid K price PLUS incidental damages (2-710) MINUS cost savings due to breach (Same as common law expectations damages Seller gets benefit of bargain) SEE SLIDE 194 Mkt price is measured at time of performance rather than time of repudiation Inconsistent with the seller breach/buyer remedy (2-713), which measures mkt price at time of repudiation o BA: @ time of performance approach is more sensible o Mkt price at repudiation leads to systematic overcompensation of seller when buyer breaches Math: K price=$75 T0 (repudiation)-2-713 mkt price=$100 T1 (performance)-2-708 E(mkt price)=$100 [.5(150) + . 5 (50)] Damages w/ 2-713 (mkt price @ rep.)=$25 Damages w/ 2-708 (mkt price @ perf)=$37.50 o .5(150-75) + .5(50-75) No negative 48

Barry Adler Contracts Fall 2010 damages! Another example of UCC stepping on its own toes o UCC 2-708(2): But if 2-708(1) is inadequate to put seller in as good a place as if performance had been done, then measure of damages is lost PLUS incidental damages Neri v. Retail Marine (154) [P (buyer) Ks w/ D (seller) for purchase of boat P left unspecified deposit with D P became ill and repudiates K D sold boat for K price to a 3rd party P sues for deposit] At first glance, it looks as if D must return all but $500 under UCC 2-718(2)(b) (w/o specified damage clause limits restitution of deposit to min{$500, 20% value of perf}), BUT 2-718(3) permits greater refund if authorized by another provision2-708(2) applies when (mkt-K) is inadequate to put the seller in as a good a position as perf. would have done Holding: according to 2-708(2), the measure of damages is the expected . Had P not repudiated, D would have TWO ; therefore, D only owed P the [deposit-lost (s)] o D is a lost volume seller [fungible goods lined up to go] o No mitigation opportunity in this case (a substitute buyer is insufficient)

SPECIFIED DAMAGES
Specified damages = liquidated damages = stipulated damages Inconsistent with Charles Frieds notion that promises should be kept, and that the law should encourage promise-keeping Purposes of Specified damages: Avoid uncertainty Avoid litigation exps Substitute for anticipated inadequate judicial award Provide incentive for economic efficiency Judicial economy and freedom to K (added by Wassenaar) against enforcement: specified damages may substantially exceed the injury and may justify an inference of unfairness in bargaining or objectionable in terrorem agreement Tension b/t efficiency and potential penalty Specified damages that are ex post significantly higher than actual damagessubject to attack as penalty LINE DRAWING PROBLEM: the distinction between allowable liquidated damages and an unenforceable penalty Rule from Lake River v. Carborundum (173): liquidated damages must be a reasonable estimate at the time of contracting of the likely damages from breach, AND the need for estimation at that time must be shown by reference to the likely difficult of measuring the actual damages from a breach of contract after the breach occurs. Ex-ante calculation and BOTH prongs must be satisfied If damages are easy to determine (at the time of K) OR the estimate (at the time of K) greatly exceeds a reasonable upper estimate of what damages arelikely a penalty R.2d 356 (1) allows liquidated damages, but ONLY in an amt that is reasonable in the light of the anticipated (ex-ante view like Lake River) OR actual loss (ex-post view retrospective) caused by the breach AND the difficulties of proof of loss (also in Lake River) It seems that a stipulated amt thats unreasonable wrt the anticipated loss may be enforceable if reasonable wrt the actual loss (and vice versa). Comments suggest seem to suggest that the latitude of either prong diminishes the less well satisfied is the other o Both prongs must be satisfied, but b/c there is not bright line test for either, there is 49

Barry Adler Contracts Fall 2010 interaction (same with Lake River standard) Comments also suggest possible disqualification of liquidated damages on an ex-post view alone What work is being done by test: to combat the likelihood of a penalty R.2d 355: punitive damages are not recoverable for a breach of K o Extra high stipulated damages suggest penalty merely by amt. o Easily provable damagessuch as in a thick mktsuggest a penalty rather than a need to stipulate damages to avoid litigation expense UCC 2-718 (1): provides that damages for breach by either party may be liquidated in the agreement b/t the parties, and 2-719(1)(a) provides that the agreement may provide for remedies that are in addition to or in substitution for those otherwise provided under the UCC. With rare exceptions [like UCC 2-719(3), which restricts a sellers right to ltd a consumers personal injury claim], liquidated damages are not rejected on the grounds that they are undercompensatory Fairgrounds Hypo: Economic Efficiency of Specified Damages Overinvestment (incentive) problem o Fairgrounds enters into K with a Contractor to build a flagship rollercoaster o Fairgounds would be incentivized to overinvest in advertising, which if lost (due to incomplete rollercoaster) can be recouped in expectation damages. Contractor would then be incentivized to overinvest in construction to get rollercoaster builit and to avoid high expectation damages from breech The costs from the extra construction will get passed on to Fairgrounds in the form a higher K price. o How could this be fixed? Through a (reasonable) stipulated damage amt. clause in the K Fairground looses incentive to overinvest in advertising (b/c they would not be able to collect more than specified amt in breech) Contractor will loose its incentive to overinvest in construction b/c the stipulated amt sets the liability. o The K price would adjust accordingly Specified damages has potential to align parties investment incentives Makes Fairgrounds and Contractor behave as though they are a sole owner of both operations. o It internalizes all costs and benefits of the joint project Kemble v. Farren (163) [D agreed to perform in Ps theater K provided that if either party breached, he would pay $1000 damages was not to be considered a penalty] Holding: no enforcement b/c a very large sum should become immediately payable, in consequence for the nonpayment of a small sum Tainted the stipulation even though in the actual breach was not minor. The theory of the stipulated clause could lead to a payment of a large amount for the non-payment of a small some o Clause was open to any breach large or small R.2d 356 does not follow Kemble (via its comments FIND THIS)suggests enforcement of stipulated damages even if the amount would be disproportionately large compared to a breach that might have occurred WHY??

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Barry Adler Contracts Fall 2010 Wassenaar v. Towne Hotel (165) [Hotel, D fired P prior to their employment Ks expiration date sued for damages under liquidated damages clause in K P obtained alt. employment yet sued D for stipulated amt] Ds arg: Full salary to a fired employee seems necessarily overcompensatory o Damages are also easily calculable Ps arg: Intangible injury to personal assets like reputation means that full salary is not necessarily overcompensatory o Also, intangibles are hard to calculate (like good will) Holding: crt sides with P and rejects a reduction in stipulated damages for mitigation (i.e. finding another job) o Logically, stipulated damages preclude a mitigation obligation Remember the point abt the value of a certain remedy even where the remedy would be easy to calc, but beware of crts that reject high damages measure from hindsight alone. o Wassenaar case is similar to Parker wrt guaranteed compensation clause (or would have been had the Parker crt interpreted the clause the way Parker wanted it)

SPECIFIC PERFORMANCE
Where a promisor would be simply required to perform (if it remained possible) R.2d 357-provides for specific performance and for a negative injunction in order to avoid a promisors breach of duty o Negative injunctions can directly enforce a promise of forbearance or indirectly enforce a positive obligation o 359 (1) specific performance or injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party expectation remedy may be inadequate for multiple reasons: damages may be difficult to prove (including b/c there is no ready substituteno mkt value for the contractual performance) o Ks for the sale of unique objects or services (see R.2d 360) damages may be difficult to collect (maybe due to insolvency) Other reasons (beyond the inadequacy of money damages) to support specific performance: o It may be less likely that the cost of performance would exceed the benefit (i.e. efficient breach may be unlikely) o Cf. R.2d 364 favoring specific enforcement absent hardship There is a presumption that real estate is unique, and thus, real estate Ks are presumptively specifically enforceable o See R.2d 360 Comment e o Do you argree that ALL land should be treated as unique for purposes of specific performance UCC 2-716(1)provides that specific performance may be ordered where goods are unique (as well as in other proper circumstances, an implicit referenceat least in partto more general CL principles)

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Barry Adler Contracts Fall 2010 Loveless v. Diehl (198) [Ds leased a farm to the Ps w/ option to purchase at end of rental period for $21k Ps made improvements to farm couldnt but at end of term, but agreed to sell to third party for $22k (even though the improvements increased the value more Ds tried to repudiate and take back land Ps sued for specific performance] o Ds arg: In old terms: there is equity in avoiding overcompensation In modern terms: because the Ps expectation interest can be easily measured (as b/t resale price and the option price)there is no difficulty in proof and money damages are thus adequate o Ps arg: In old terms: Crts of equity grant specific performance as a matter of course where no hardship is imposed In modern terms: (beyond the presumption re: RE Ks) true expectation is not the Kresale , which would be inadequate (esp. with the improvements) Recall Tonishpromisee should get full value of bargain (i.e. true expectation damages) o Holding: the crt sides with Ps dismissing the idea that resale price should determine damages Ps had a perfect right to resale the land if they wanted to. Whether they kept it, sold it, or gave it away was of no concern to the sellers Tongish analysis : to refuse specific relief would est. an unsound precedent, diminishing the transferability of property b/c future buyers will be reluctant to bind themselves to a purchase K for fear that itd be unenforceable **You could still argue that this landin commercial useshould not be counted as unique and that the real debate was over the amt of money damages, not specific performance Cumbest v. Harris (203) [P sought an order specific performance to recover stereo equipment (w/ irreplaceable parts) that he tendered pursuant to an option K entered into w/ D] Holding: error in not finding the goods unique for purposes of specific performance o LINE DRAWING PROBLEM: how many parts that are difficult/impossible to replace, or what level of sentimental value sufficiently makes the good unique? Scholl v. Hartzell (206) versus Sedmak v. Charlies Chevrolet (208) [In Scholl, a 1962 Corvette was not unique/special enough to justify specific performance, while in Sedmak a 1978 Corvette was unique/ special enough] o How can you reconcile these cases esp. when in Scholl there was a specific vehicle, while in Sedmak it was one of 6,000? What was different abt the car in Scholl did not go to the essence of its value (unlike the parts in Cumbest), while the pace car characterization of the car in Sedmak did The mkt for pace car Corvettes is very thin, esp wrt a mkt for reg. used Corvettes o Principle: uniqueness, or other circumstances justifying specific performance, depend on whether essentially similar goods are available for reasonably easy cover These factors also go to whether money damages would be easy to determine adequately (thin vs. thick mkt wrt pricing) Uniqueness = a proxy for difficulty to cover Cant be determined in a vacuum Some personal services on one side of the uniqueness (remember: ease of cover!) spectruma 52

Barry Adler Contracts Fall 2010 soprano who will sing at the operawhile others are at the other extremejanitor o Similar to goods, but there may be other considerationsthe constitutional and public policy considerations re: indentured servitude Mary Clark (212) [19th century Indiana Mary Clark, blk woman, indentured herself as a house maid for 20 yrs] Holding: this K was not specifically enforceable (and would not be despite any inadequacy of the expectation remedy) b/c a promisees continual right of command over a promisor would be degrading and vs. PP o Today, indentured servitude violates the 13th Amendment; forced apprenticeships for children are also unlawful Negative injunctions-Soprano opera singer hypo Agrees to perform for a NY opera company, then repudiates o She will not be forced to perform, but in addition to paying expectations damagaes may be prevented from performing for a competing NY (or NJ or CT) opera house at the time she agreed to perform for the promisee She will not likely be enjoined from performing for a Russian company even if she expressly agreed not to perform The key to enforcing a negative injunction where specific performance would not be granted is that the effect is to prevent unquantifiable injury to the promisee rather than compel performance o See R.2d 367 The Russia mkt is distinctly different than the NY mkt. A NJ or CT mkt may have some overlap with the NY mkt, therefore we would want to prevent the competition from benefiting. The goal is to minimize the harm to the promisee. If the goal is to just strong-arm promisee into performing (by cutting off access to all national mkts) and not to minimize damage (there is no damagepresumablyfrom the Russian mkt), the provision wont be enforced o Narrower covenants are more likely to be enforced: Scope of activity (opera singing vs. all work) Geographical reach (NY vs. Russia) Length of time (the contractual time pd vs. forever) o In the end, any enforcement of a promise, by damages or negative injunction, tends to encourage performance, but in the absence of specific performance, perhaps acceptably

RESTITUTION
The restitution remedy can be best thought of as independent from a K remedy b/c it is not necessary (or at least typical) to compensate a promisee for the promisors breach (i.e. you have expectation and reliance damage) o Crts, do, however sometimes invoke restitution in the context of K breach R.2d 373(1): provides that a victim of breach is entitled to restitution for any benefit that he has conferred on the other party by way of performance o BUT the avoidance of unjust enrichment, not compensation (i.e. benefit of the bargain), is the goal R.2d 371measures the restitution interest by reference to the value of the benefit conferred (i.e. either the mkt value of the property transferred or services performed, or the increase in the recipients wealth as a result of the benefit conferred, the latter measure independent of the former only if there is no mkt substitute for the property or 53

Barry Adler Contracts Fall 2010 services) Bush v. Canfield (250) [D agrees to deliver, and P purchase, a specified quant. of flour for $14k P pays $5k in advance (deposit) at time of performance, D fails to deliver the flour, then worth $11k] o Ps arg: sues on restitution after (implicit) election to disaffirm K o Ds arg: the expectation remedy req. only a payment of $2k b/c that would yield P the benefit of his bargain, a $3k loss ($14k-11k) Ps counter-arg: NO NEGATIVE DAMAGES!!! o Holding: promisor was unjustly enriched and should return the $5k to the promisee. Promisor can not award negative damages. Under some philosophical principles, the majority is correct b/c a breacher (promisor) should not benefit from his breach Efficient breach theory and the disallowance of negative damages Under Bush, the promisor will not breach and even though a fully informed promisee will, there may be circumstances where the promisee does not know to do so o Bush No Negative Damages Illustration @ T0 K price for Painter to paint Owners house=$100 (=$0 for painter) @ T1 Labor prices shoot down (to $60), so that Painters =$40 Painter also knows about 2nd potential paint job that only Painter can do. Job will pay $80 and it will cost Painter $60, =$20 In the case of asymmetric information (only Painter knows) NO neg damages: Painter will not breach. He will not be able to collect the $40 from the breach and would then only make a $20 from 2nd job. $40>$20no breach o He also does not have incentive to tell Owner abt the job, b/c she will fire him, save $40, and pay $20 in expectation damages o w/o that knowledge, Owner will assume theres no mitigation opportunity $60, and shed have to pay the full $40 breach/no breach, a wash. Neg. damages: Painter will be incentivized to breach. He could collect $40 in negative damages from Owner and do 2nd job and collect $20 in ($60>$40 from orig. job onlybreach) o EFFICIENT RESULT: Two houses painted (inc. the one that only Painter can do) are better for society than one In the case of full (symmetrical) information No neg damages: Owner (only) will breach and pay the $20 in expectation damages, and will save $40 from the breach Neg. damages: RACE TO BREACH by both Painter and Owner o Also, an efficient result, BUT unlikely b/c information is not fully symmetrical **w/o Mitigation obligation/opportunity, the information symmetry becomes moot, b/c Owner will not be able to save $40 and pay $20, she will be liable for the entire $40** This is NOT to say the negative damages should be allowed o There are fairness objections Restitution for Breaching Promisor Can a breaching promisor collect in restitution? o R.2d 374 (1)permits a breaching promisor to collect restitution despite her breach (but only 54

Barry Adler Contracts Fall 2010 in excess of the loss that he has caused by his own breach) Goes to unjust enrichment and not benefit of bargain o Britton v. Turner (256) [a laborer works under a 1-yr emp K for more than 9mos. providing labor worth $95, then quits w/o reason (breach) laborer sues, not on the K, but in quantum meruit (for restitution)] P arg: To allow the employer to keep the $95 would allow emp. to retain more than his expectation interest Cf. w/ Bush where the crt treats the breach party as a bad actor whom the law need not rescue from the consequences of breach The employer (at least implicitly) accepted the benefits of performance as the employee provided them, and thus should be bound to pay for them o This distinguishes the case where a victim of breach might (w/in his rights) reject and thus not benefit from part performance (e.g. on an object to be created) Holding: defines restitution as the default rule and that parties could expressly agree to no-recovery-on-breach but should not presumed to have so agreed Although a crt may find that an agreement of forfeiture would be an unenforceable penalty o See Vines; R.2d 374(2); UCC 2-718; 2-711 Restitution amt is to be offset by any damage which the promisee has sustained by the promisors nonfulfillment of the K Britton illustration Laborer agrees to work for a year ($30/ quarter) Immediately after K is signed, the price of labor increases to $50/quarter After workingand without receiving payment for 3 quarterslaborer quits w/o cause and seeks restitution What award if one looked at R.2d 371 in isolation? o The amt it would have cost Employer to obtain what he received from a person in claimants position, Mkt price of $50/quarter, or $150 The presence of a mkt price logically precludes an award for increased property value ??? What will be the award in fact? o Begin w/ the K rate of $30/quarter$90 o MINUS the employers expectation damages from breach The $20 b/t mkt rate of $50 and $30 for the 4th quarter. $90-20=$70 o 374(1) permits a promisor to collect restitution despite her breach, but only in excess of the loss that he has caused by his own breach o $70 is also what the laborer would be awarded were she permitted to sue for negative damages on the K despite her breach (blocked by rule in Bush) Negative damages: (30x4)=120 (full K price for full yr)-50$70 Vines v. Orchard Hills (260) [P kd to purchase a condo down payment was stipulated as liquidated damages P (moved to another state) reneged on the K D kept down payment] 55

Barry Adler Contracts Fall 2010 o Holding: the crt allows the buyer the chance to challenge the liquidated damages clause (as a penalty) and would award restitution if challenge succeeded (i.e. the seller was unjustly enriched by the deposit and clause is a penalty) Consistent w/ R.2d 374(2), which permits retention of a deposit (i.e. not award restitution) if a liquidated damages clause is valid (same with UCC 2-718) If actual damages are zero, this alone might justify return of the deposit, an aggressive version of the penalty doctrine Restitution & Quasi-K Cotnam v. Wisdom (265) [P (Dr.) operated on an unconscious patient, who died anyway P sought repayment for services ex. of quasi-K] o Again, restitution is sometimes awarded completely outside of a K o Here: there is no K!!! A K involves (exchange of) promises. A quasi-k has no (exchange of) promises Quasi-K a/k/a constructive K or implied-in-law K An agreement that the parties would have reached had they the opportunity to negotiate o BUT not quite re: negotiating: the Ps wealth was not deemed a relevant factor (i.e. would have an affect on the K price) The law will estimate the value of services rendered w/o reference to the patient The mkt value of services (of the effort) is the measure of compensation (rather than benefit realizedb/c had the patient lived he would not owe the Dr. his life) Fairness may require the beneficiary of anothers efforts in exigent circumstances to compensate the benefactor for her effort. o Benefit is measured ex ante (i.e. it doesnt matter that patient died in Cotnam) Economic justification for quasi-K is that efficiency may req. the beneficiary of anothers efforts in exigent circumstances to compensate the benefactor for services, or might not be provided at all in the future (If E(B)>C, will perform, but w/o quasi-K, E(B) is dubious and therefore may not be >C) Application of quasi-K may be problematic o e.g. in Cotnam, one might be unsure whether the average rate the P charged should matteras an indication of skill level and thus the value of the services (surgeon v. resident)or whether this should be irrelevant to how society values the services

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Barry Adler Contracts Fall 2010 o Cotnam Hypos (1) Imagine a Dr that treats an unconscious patient not intending to charge a fee, but later, after the patient recovers and is ungrateful, the Dr. sues for restitution. What result? NO recovery, b/c the services were a gift the value of which it would not be unjust to permit the patient to retain o BUT, how can you prove this subjective intent is reality?? (2) Imagine a house painter who arrives at night and paints a house, then hands the owners a bill in the morning. What result? NO recovery b/c there was an opportunity for negotiation, and thus no moral/economic reason for the law to impose an obligation on the occupant (3) A landscaper reinforces a retaining wall undermined by a sudden flood while the landowner is out of the country. What result? LIKELY recovery if the landscaper had good reason to presume that the landowner would have agreed to pay for the services were negotiation possible o A reasonable was to think of quasi-K is as inverted tort law Tort law allows a victim to demand payment from a malefactor, while quasi-K requires beneficiaries to pay a benefactor

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