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Exam Tips

Don’t fight the system


You don’t have to know case names for the essay, but everything really IS on a curve, and if the
essay has everything exactly right AND have the case names, memorize at least 10 or 15 cases
out of the class
If you can’t remember then do something like “hairy hand” case
What they mean and how they apply
Restatement or UCC numbers, don’t worry about knowing
2-207 will definitely know (and hate)
will need to know 2-204, 2-206, 2-207: § 2-204 and § 2-206 deal with formation issues.
If a contract is formed, § 2-207 is used to determine what the terms of the contract are.
Learning and knowing the stuff is only 20%
In 2:45 you must apply it to a complex fact pattern you’ve never seen in your life
Almost none of the questions have a definite answer
Probably an offer, probably not an offer.
Call of the question determines whether you need to talk about both side.
Is this an offer = both sides
You represent Ann, is this an offer = 1 side
Pick up points on exam by abbreviating
Also outline, Frank takes 5 minutes doing “conflict pairing”
Practice and do the same way ever single time
Do same way every time….laziness if you don’t.
Contracts go in chron order, do a timeline
Always put UCC and Merchant at the top of the essay
Define what a contract is: O+A+C
CoQ is there an offer?
Supra – already talked about (offer as defined supra, contract as defined supra) Ask prof if you
can do it.
Infra – haven’t talked about yet.
Answer most essays with probably not a definite. Conclusion not where you get points, it’s how
you get to it.
Def
2 pts Rule
2 Conc.
10 pts Analysis
Even if you blow the rest, analysis is 2/3 of the points
If you have an exam question on the firm merchant offer – 4 months? NO 3 is all allowed.
ON EXAM, CAN’T SAY WIDGETS ARE GOODS, GOT TO SAY WHY. LEARN THIS
DEFINITION.
EXAM – definitions, fact circumstances 4 choices this is a merchant b/c, this is not a merchant
b/c
Know in context of essay common law v. UCC.
analyze all elements of offer and acceptance first
ONLY NEED TO KNOW A FEW GAP FILLERS FOR EXAM
IGNORE REVISION TO PROPOSED UCC 2-207
probably WON’T BE ON MIDTERM? EXAM? 2-305
20 department multiple choice. More student friendly on final.
At Professor’s judgment can add more multiple choice
Scott will have short answer AND essay
Use highlighter or underline words
Title everything
New law, new paragraph (from LEWS)
Label your essay
Use outline as a crutch and start working on essays from practice exams
Good for editing the outline
Give yourself more time (55minutes instead of 45)
Para or two on consideration in exam essay
Don’t waste time restating the facts UNLESS they follow the word “because”
Discipline yourself to do one area of law at a time in each paragraph.
Don’t outline dump definitions up front and then apply facts to them afterward.
Define offer, then deal with it. Define acceptance and then deal with it.
Common law accord and satisfaction
UCC accord and satisfaction (by check) Has to be a good faith dispute
Difference between accord and satisfaction and substitute-K
ON EXAM: when you have a question dealing with C, if you cannot make case for
tradition C, look for substitute (PE or MO) before moving on. Write down whether or
not you analyzed and rejected C substitutes otherwise he doesn’t know if you even
thought about them.
=====================
Rick Frank’s Practice Essay scoring sheet.
UCC applies: goods fountain drinks are movable goods
Define Merchant. In this case both are merchants.
Signed , writing, goods, from Merchant 2-205
Reasonable time (3 months max)
Offeror is maste of O
UCC apply
Firm offer 2-205
Merchant
Signed writing
Assurance for time, reasonable time not to exceed 3 months
29th telegram revoke offer
Offer irrevocable until Oct 1
Sept 29t letter was additional terms per 2-207
Change in dickered term: No
Triggered Proviso language No
Acceptance per 2-207(2)
# of exceptions
October and Nov. deliveries do not violate either exception therefore become part of the
contract.
2-207 analysis for 2-207(3) MARTIN-SCOTT ONLY in the alternatives (DON’T DO
FOR KEVIN SCOTT)
Read comments for 2-207 about material alteration
=========================
EXAM TIP: If you’re asked how to analyze fact situation. Know difference between
Restatement 90 1st and 2nd restatement and the differences. See the slide from week 9 for
more details. IN BOTH CASES the response must be reasonable. LAST TERM he
asked what elements must be proved to show PE. GET ALL 5.
EXAM TIP: On an exam when you are analyzing a case, you look first for traditional
consideration, then you look for promissory estoppel, if not then maybe moral obligation
under the right fact circumstances.
EXAM TIP: Cite UCC 2-205, 2-207, and 3-311 when they specifically apply
EXAM: good faith, dispute, 2 parts nothing extinguished until satisfaction occurs. If no
good faith dispute, payment on account and you can still go after remainder.
Accord & Satisfaction R2nd 281 versus substitute K (BIG TIME ESSAY QUESTION.
KEY IS THE INTENT OF THE PARTIES. Was their intent to get rid of old K and form
a new one). If you just have accord & satisfaction and you renege on that too, b/c accord
and satisfaction you can sue for either original amount $1000 or $700 accord amount
Substitute K. now I renege, now I can only sue for $700. Have to look at the intent of
parties. Subclause of an essay question.

DEFINITIONS
Stare decisis: one decision is precedent for subsequent ones, building up a body of common law
Technically the only decisions that bind a given court are those from the highest court in that
particular jurisdiction.

Dica/dictum: differ from holding. Dicta are opinions without legal authority. Holding has the
authority of law.

Equitable estoppel: what you did in the past (statements or actions) you are barred from changing
in the future if another person relied on the original position.

Breach: binding agreement not honored by one or more of the parties by non-performance OR
interference with other parties performance.

Amicus/ae Curiae: A person not party to the lawsuit who petitions the court or is requested by the
court to file a brief in the action because that person has a strong interest in the subject matter.

Shrinkwarp license: becomes effective as soon as the customer tears the wrapping from the
package.

Injunction: A court order commanding or preventing an action.

Arbitrage: Attempting to profit by exploiting price differences of identical or similar assets, on


different markets or in different forms.

Mortgage: a lien against property that is granted to secure an obligation such as a debt.

Lein: a legal right or interest that a creditor has in another’s property.

Bond: long term interest bearing debt instrument…usually secured by a lien on the issuers
property.
Affidavit: pg. 23 A voluntary declaration of facts written down and sworn to by the declarant
before an officer authorized to administer oaths such as a notary public

Condition precedent: pg. 128 An act or event, other than a lapse of time, that must exist or occur
before a duty to perform something promised arises.

FOB = Free On Board (FOB) is a term -- also commonly but incorrectly referred to as "Freight on
Board". It means that the seller pays for transportation of the goods to the port of shipment, plus
loading costs. The buyer pays freight, insurance, unloading costs and transportation from the port
of destination to his factory. The passing of risks occurs when the goods pass the ship's rail at the
port of shipment.

Assumpsit ("he has undertaken," from Latin, assumere) is an action for the recovery of damages
by reason of the breach or non-performance of an informal contract, either express or implied,
and whether made orally or in writing.
assumpsit (form of action to recover damages for failure to perform a simple K)

Default pg. 188 – judgment entered against a D who has failed to plead or otherwise defend
against P’s claim.

nonsuit pg. 490 -- P’s voluntary dismissal of a case, court’s dismissal of a case b/c P has failed to
make a legal case or bring forward sufficient evidence.

Per Curiam – decision handed down by the court as a whole

motion in limine - A request submitted to the court before trial in an attempt to exclude
evidence from the proceedings. A motion in limine is usually made by a party when
simply the mention of the evidence would prejudice the jury against that party, even if the
judge later instructed the jury to disregard the evidence. For example, if a defendant in a
criminal trial were questioned and confessed to the crime without having been read his
Miranda rights, his lawyer would file a motion in limine to keep evidence of the
confession out of the trial.

sedulous \SEJ-uh-luhs\, adjective:


1. Diligent in application or pursuit; steadily industrious.
2. Characterized by or accomplished with care and perseverance.

Sources of Legal Authority


Primary Authority (the “law”)
constitutions
statutes
case law (precedent)
court rules
administrative rules
Secondary Authority (not the “law”)
restatements
treatises
periodicals
encyclopedias
ALR annotations
Sources of Contract Law
Contract law protects economic interests and generally the law favors the seller.

Restatements – Not the law, but persuasive


Restatement I and Restatement II of Contract Law
Not a statute. Merely advice to courts on what the common law should
be. Not on the same level as the UCC which is a statute and MUST be
followed if relevant to the dispute.

Treatises – Not the law, but persuasive


Murray on Contracts
Calamari & Perillo on Contracts
Farnsworth on Contracts
White & Summers on Contracts
Williston 1920 and Corbin 1950.

Precedent – Case Law (courts)

Statutes – Primarily the UCC (state legislatures)


• The Uniform Commercial Code – not necessarily uniform!
• New version of UCC (NOT ON EXAM, Scott: learn what the
law is now, not what it is going to be)
• CISG: applies if parties do not agree that the laws of some
particular jurisdiction apply. Article 6 allows parties this choice.

The UCC
Various “model” or “uniform” laws were created. Uniform Sales Act and Uniform Negotiable
Instruments Law eventually led to creation of the Uniform Commercial Code. Adopted by Penn
in 1953 and followed by all others (LA has only enacted a bit). Every jurisdiction makes its own
modifications. Good faith undergirds all of the UCC provisions

Under the UCC, a "good" is any tangible thing that is moveable. [UCC § 2-105(1)] In
addition to manufactured products, "goods" include:
• growing crops or timber, unborn young of animals and other identified things
attached to land (other than minerals or the like or structures), regardless of who
severs them from the land provided that they can be removed without causing
material harm to the land
• currency exchanged as a commodity (as opposed to the medium of payment for a good)
• minerals or the like or a structure or its materials to be removed from realty that
are to be severed by the seller
The term "goods" does not encompass:
• Real estate
• “things in action” = intangible property such as insurance policies.
• intangible rights such as intellectual property
• investment securities
• money which is the medium of payment for goods
• minerals or the like or a structure or its materials to be removed from realty that are to be
severed by the buyer

When they sign the contract, no movable good at time of contract’s signing, probably a service.
Wedding Cake hypo.

"Sale" Defined
UCC § 2-106(1) defines "sale" as the transfer of title for a price. Contracts that involve
both goods and services must be evaluated to see which constitutes the primary purpose
of the contract, with the secondary purpose being treated as incidental. If the primary
function of the contract is to provide a service, the UCC does not apply, even if an
incidental sale of goods occurs.

Applying UCC by analogy, courts do it. Should probably use common law in your analysis
where goods are not involved.

What is a Contract?
Contract: a promise or a set of promises the law will enforce.

One OR both parties make a legally enforceable promise.


A promise is a commitment or undertaking that a given event will OR will not occur in the future
A promise is legally enforceable where it:
• was made as part of a bargain for valid consideration;
• reasonably induced the promisee to rely on the promise to his detriment; or
• is deemed enforceable by a statute despite the lack of consideration.

Types of Contracts
There are 3 categories of contracts:
1. Express – in express contracts MA is actually expressed in the form of an O and A.
2. Implied in Fact - MA is shown by the surrounding circumstances, including the conduct
and declarations of the parties that makes it inferable that the contract exists. Stepp
v.Freeman.
3. Implied in Law – a “legal fiction” used to effect an equitable result. Because a contract
implied in law is a tool of equity, the existence of an implied-in-law contract DOES NOT
depend on whether the elements of a contract are proven. Stepp v. Freeman.

The rights and duties of the parties within an enforceable contract DO NOT vary by whether a
contract is an express or implied in fact contract. (pg. 15)

Hypo: Ann orally promises to sell and Bob orally promises to buy a book for $10. Ann and Bob
both think that this promise is unenforceable as a contract unless it is in writing. Are they right?
No.

Another way to look at it:


1) Formal
Contracts under seal (obsolete)
The recognizance (D promises to report for a court date)
Negotiable instrument (CD's, checks, etc.)
2) Informal - based on actions and behaviors of the parties
Uni-k = promise for an act
Bi-k = promise for a promise

Presumption of bilateral contract


Davis v. Jacoby: By provisions of the Restatement of the Law of Contracts, it is expressly
provided that there is a presumption that the offer is to enter into a bilateral contract. Section 31
of the restatement says that the reason for the presumption is that “It is not always easy to
determine whether an offeror request an act or a promise to do the act. As a bilateral contract
immediately and fully protects both parties, the interpretation is favored that a bilateral contract is
proposed.

Contracts Require:
• Offer
• Acceptance
• Consideration (or a consideration substitute)
• Legal Capacity to Contract (Contract II subject) and a
• “Legal” purpose, not barred by law or policy (Contracts II subject)

INTENT TO CONTRACT: OFFER AND ACCEPTANCE

I. The Principle of Mutual Assent


Without MA there is no K. In determining whether there is mutual assent, courts asked whether
there has been an O and an A of the O. If the Oor has clearly manifested a willingness to enter
into a K in such a way that the other party, the Oee, knows that A is all that is necessary to
“cement the deal” and the Oee accepts, the requisite MA exists.

Hypo: I’m considering selling my car to you for $1,200. No intent to K = no O = no MA

Hypo: Would it be a good deal if I sold you my car for $1,200. Soliciting opinion, no O

Hypo: You wouldn’t consider paying $1,200 for my car would you? Not clear, may be a cryptic
type of O.

Is there a meeting of the minds? Lucy v. Zehmer, 84 S.E.2d 516 (Va. 1954).
On a bar tab Zehmer wrote: “We hereby agree to sell to W.O. Lucy the Ferguson Farm complete
for $50,000, title satisfactory to buyer.” Zehmer and wife signed. Would a reasonable person in
Lucy’s position believe that the parties had mutually assented to the sale?

Hypo: seller (Greenbaum) refused to accept the tendered check and the buyer wanted to meet the
following day to complete the transaction with the cashier’s check. Both had already signed the
other’s copies of the contract but had not exchanged copies. In the case cited, the parties were
held to not intend to enter into a buy-sell contract.

Lucy v. Zehmer: In the field of contracts we must look to the outward expression of a person as
manifesting his intention rather than to his secret and unexpressed intention. ‘The law imputes
to a person an intention corresponding to the reasonable meaning of his words and acts.’ First
Nat. Exchange Bank of Roanoke v. Roanoke Oil Co.
Restatement section 71, “The mental assent of the parties is NOT requisite for the formation of a
contract. If the words or other acts of one of the parties have but one reasonable meaning, his
undisclosed intention is immaterial EXCEPT when an unreasonable meaning which he attaches
to his manifestations is known to the other party.” Recall Little Red Corvette.

Hypo: John Falstaff and Francis Feeble, it’s yours for $1500. No reasonable person would
conclude that Falstaff Oor had intention to K.

Leonard v. Pepsico, Inc. (1999): Commercial didn’t amount to an O, no reasonable person would
conclude commercial was an O, alleged contract did not satisfy NY statute of frauds.

UCC is similar in its requirements to prove a contract has been formed.


§ 2-204. Formation in General.
(1) A contract for sale of goods may be made in any manner sufficient to show
agreement, including conduct by both parties which recognizes the existence of such
a contract.
(2) An agreement sufficient to constitute a contract for sale may be found even though
the moment of its making is undetermined.
(3) Even though one or more terms are left open a contract for sale does not fail for
indefiniteness if the parties have intended to make a contract and there is a reasonably
certain basis for giving an appropriate remedy.

Social Contracts
A husband and wife are not precluded from enforcing such agreements as they may make in a
commercial transaction. OTOH, courts will not usually concern themselves with enforcing
domestic agreements controlling relationships within the marriage. Breaches serious enough to
result in litigation usually terminate the marriage. Courts limit enforcement to: dissolution,
custody of children, apportionment of property, commercial transactions.

Hypo: bridge game, Justice Wargrave cancels. He doesn’t need to pay. A was not an intent to K.

Hypo: Ann invites Bob to her house of dinner and Bob accepts. Is there an enforceable
agreement? No K, social contract

Hypo: Ann and Bob are married. Ann is about to leave on a long business trip, and she agrees
that she will send Bob a check every week while she is gone to cover household expenses. Not
an enforceable agreement.

Stepp v. Freeman, 694 N.E.2d 792 (Ohio App. 1997).


Scott asked: Did the parties intend for this to be a “social” agreement or a contract with legal
consequences? Stepp v. Freeman (Chrysler plant in Ohio, lottery group) Court held that Stepp
proved all elements of an implied in fact contract.

Hypo: document says “This contract shall not be enforceable in a court of law” problem 4 pg. 15,
also Smith v. MacDonald, 1918. This phraseology turns document from a legal obligation to a
“moral obligation”

The Offer
"Offer" Defined
An offer is a manifestation of an intent to be contractually bound upon acceptance by
another party. An offer creates in the offeree the power to form a contract by an
appropriate acceptance. [Restatement § 24] (page 183)

Scott paraphrases: An offer is the manifestation of willingness to enter into a bargain that justifies
another person to believe that assent to the bargain is invited and will conclude it.

Examples of things that ARE NOT offers:


1) opinions about future results, including professional opinions
2) statements of intention (including letters of intent which merely memorialize
negotiations)
3) invitations to submit a bid
4) price estimates – However, where the estimate is deemed to be a factual
misrepresentation because it was made by an expert, estoppel may be invoked if
the offeree relied to his detriment on the estimate.

Elements of an Offer (CCD)


An offer must:
1. be communicated to the offeree (a manifestation),
2. demonstrate a commitment to contract, (willingness to enter into a bargain that
justifies another to believe assent to the bargain is invited) AND
3. be definite in its terms (assent to the bargain will conclude it).
An offer is a “yes-able” proposition

Whether an offer has been made is measured by objective standards. Would a reasonable
person think this is an offer?

Offeror is the master of the offer & language can include anything legal

Hypo: Ann leaves the country for a two-week vacation. When she returns, there is a note on her
door stating the following: "Ann, have been watering your lawn for you for the past two weeks.
I didn't want your flowers to die. You can just leave your check for me in my mailbox to
compensate me for my time (2 hours). Your neighbor, Bob." Ann did had ask Bob to water her
lawn before she left, and she has never asked Bob to do this for her in the past. Must Ann pay
Bob? Why or why not? Ok, maybe I would apply UCC course of dealing by analogy here to
demonstrate nothing in the past to indicate Bob was expected to water flowers while she was
away. Definitely no O. Not communicated.

Duration of offer
If the offer has a stated time within which the acceptance must be made, any attempted
acceptance after the expiration of that time will fail and will merely constitute a counteroffer
by the offeree.

If no specific time is stated within which the offeree must accept, it


is assumed that the offeror intended to keep the offer open for a reasonable period of
time, to be determined based on the nature of the proposed contract, trade usage, prior
dealings and other circumstances of which the offeree knows or should know.

Generally, courts hold that in telephonic or face-to-face communications in which an


offer is made, the offer lapses when the conversation terminates in the absence of a clear
indication that the offer remains open beyond the conversation.

Revocation
With limited exceptions (see [2] below), an offer is generally revocable at any time prior
to acceptance.
[1] Communication of revocation
An offer may be revoked by any words that communicate to the offeree that the offeror
no longer intends to be bound. An offer is also revoked by action that is inconsistent with
the intent to be bound once the offeree learns of such inconsistent action.

[2] Offers that may not be revoked


An offer is irrevocable where:
1) there is an option contract in which the offeree gave consideration for an
irrevocable offer for some period of time;
2) the offeree relied to his detriment upon an implied or express promise by the
offeror not to revoke if such detrimental reliance was foreseeable by the offeror;
3) the offeree relied to his detriment upon the offer itself if the such detrimental
reliance was reasonably foreseeable by the offeror [Restatement § 87(2)]
4) in the case of a unilateral contract, the offeree began performance of the
promised act to any extent [Restatement § 45] – Upon commencement of
performance, the offeror must give the offeree the amount of time specified in the
offer (or, in the absence of a specified time, a reasonable time) in which to
complete the bargained-for promise. However, the offeree's mere preparation to
perform does not preclude the offeror from revoking.
5) in goods contracts, a merchant indicates in a signed writing that an offer to buy or
sell goods will be held open for the stated time or a reasonable time if no time is
specified, not to exceed three months, if no consideration if given [UCC § 2-205]

[3] Effective time of revocation


A revocation is effective upon receipt by the offeree.

Termination of the Offer


An offeree's power to accept an offer is terminated by:
• the death or insanity of the offeror, even without notice to the offeree of such
occurrence
• death or insanity of the offeree, unless an offer is irrevocable, such as in the case
of an option contract
• death or destruction of a person or thing essential to performance
• the offeree's rejection of the offer, which cannot be reinstated by the offeree's
subsequent attempted acceptance.
• the offeree's counter-offer, which impliedly manifests a rejection of the offer
• revocation of the offer
• expiration of the offer

Preliminary Negotiations – party A sometimes assumes too early that party B has expressed
intent to K.
***POPULAR TESTABLE ITEM
Is not an offer if the person that the bargain 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.
• how did they conduct themselves
• what words were exchanged
• have the parties had prior dealings
• what are the customs and practices of the trade

Hypo: Bob sent Ann a letter stating, "I can quote you a price of $40 each for men's overcoats."
Is this an offer? Why or why not?

Hypo: Ann sent Bob the following: "I am eager to sell my house. I would consider $100,000 for
it." Is this an offer? Why or why not?

§ 27. Existence of Contract Where Written Memorial Is Contemplated


Manifestations of assent that are in themselves sufficient to conclude a contract 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.

Continental Laboratories v. Scott Paper Co.(1990)


Holding: Scott (D) communicated its intent to e bound only by a written contract, signed by both
parties. No such contract ever existed. D’s motion for summary judgment is granted.

1. Usually in writing?
2. Need formal writing for full expression?
3. Few or many details?
4. Large or small amount?
5. Common or unusual?
6. All details agree on?
7. Writing discussed or contemplated?

• Parties can make the execution of a written document a condition precedent


to the birth of a binding contract.

• If either party intends not to be bound in the absence of a fully executed


document, no amount of negotiation or oral agreement as to the specific
terms will result in formation of a binding contract.

• It is the parties’ intent which will determine the time of the contract
formation.

• The court must determine the intent of the parties objectively from their
words and actions viewed within the context of the situation and surrounding
circumstances.
Statement of Opinion or Intention
General rule: statements that are meant to comfort are NOT legally binding. Hypo: the Doctor
that crosses the line or Attorney that both promise outcomes. As an attorney, NEVER
GUARANTEE the outcome of the case.

Solicitations (only offers if CDE)


General Rule: Advertisements are NOT offers because they are not definite enough – they lack
specifics and there is a potentially unlimited number of offerees.

Scott: Clear, Definite, Explicit

1.Ann, a clothing merchant, places an advertisement in the Lansing State Journal. The ad stated,
"Men's overcoats, $50." Is this an offer? Why or why not? No.

2.Is it an offer if it stated, "Men's overcoats, $50. 10 only."? Why or why not? No b/c size,
color, material, etc. is still missing.

Lefkowitz v. Greater Minneapolis Surplus Store, Inc. (1957)


Issue: was the advertisement an offer, and did the P’s conduct constitute an acceptance.
Reasoning: The offer by the D for the sale of the Lapin fur was “clear, definite, and explicit” and
left nothing open for negotiation.

• Where the offer is clear, definite, and explicit and leaves nothing open for negotiation, it
constitutes an offer, acceptance of which will complete the contract.

• While an advertiser has the right at any time before acceptance to modify his offer, he
does not have the right after acceptance to impose new or arbitrary conditions not
contained in the published offer.

• Whether in any individual instance a newspaper is an offer rather than an invitation to


make an offer depends on the legal intention of the parties and the surrounding
circumstances.

Acceptance (RCA) - The manifestation of assent by offeree to the terms made by offeror made in
the manner invited or required by the offer. Would a reasonable person in the position of the
offeror believe that the offer was accepted?

Once offeree accepts in the manner requested, Per Scott “terms are cemented” and can only be
changed by both parties

Acceptance must be:


• Responsive to offer: you have to accept whatever they want to sell you. Hypo: “I’ll sell
you my car for $1000, ok I’ll buy your boat.”
• Communicated to offeror
• Absolute and unequivocal: Rick Frank says you’ll spend time arguing on the test about
this

§ 50 Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise


(1) Acceptance of an offer is a manifestation of assent [objective standard] to the terms
thereof made by the offeree in a manner invited or required by the offer.

(2) Acceptance by performance [uni-k] requires that at least part of what the offer requests be
performed or tendered and includes acceptance by performance which operates as a return
promise.

(3) Acceptance by promise [bi-K] requires that the offeree complete every act essential to the
making of the promise.

Acceptance by Performance; Unilateral Contracts


In a unilateral contract, the offer empowers the offeree to only accept by complete
performance of the promise. The offeree's failure to perform does not constitute a
breach since no contract is formed until the offeree renders full performance.
(Situation II on handout from Scott)

Hypo: Bob lost his watch. He posted the following information on a community bulletin
board: "Reward. I will pay $50 for the return of my watch lost yesterday on Main
Street." Ann saw Bob's notice. She immediately sent Bob the following note: "Bob, I'm
sorry that you lost your watch. I promise that I'll find it for you." Was a contract created
here? Why or why not? No, wanted the act.

Hypo: Ann says to Bob, "If you will mow my lawn next week, I will pay you $10." If
Bob says nothing, but mows her lawn is there a contract? Why or why not? Yes if Bob
mowed it “next week”

Hypo: Ann says to Bob, "If you will mow my lawn next week, I will pay you $10." If
Bob says nothing, begins mowing her lawn, but does not complete it, is Bob in breach of
contract? Why or why not? Offeree’s failure to fully perform does not constitute a
breach.

Acceptance by Return Promise; Bilateral Contracts


In a bilateral contract, the offers empower the offeree to only accept by return promise.
Bilateral contracts are formed upon the giving of the promise to perform an obligation in
the future, and failure to fulfill such promise results in breach.

Either R(II) Section 32 says in the case of a Doubtful Offer, Oee may EITHER act OR
promise. This is the normal situation. If Oee partially completes performance of the act
then there is a K subject to the condition that the act is completed. BOTH Oor and Oee
are bound once partial performance begins per section 62(1) 62(2).
An offer invites acceptance by any means reasonable under
the circumstances, unless otherwise indicated by language or circumstances. [UCC § 2-
206; Restatement § 30(2)] This approach reflects the fact that many offers do not specify
whether acceptance is to be by full performance or promise. A contract may be formed
even if an offer clearly indicates that acceptance is to be by promise if:
1) the offeree begins to perform, in lieu of making the required promise; and
2) the offeror learns of the commencement of performance and acquiesces to such
manner of acceptance.

§ 32. Invitation of Promise or Performance


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 the performance, as the
offeree chooses.

Hypo: Ann says to Bob, "If you will mow my lawn next week, I will pay you $10." If
Bob says, "I accept," is there a contract? Why or why not? Way written right now, could
go either way. Restatement 32? No UCC because this is a service, not moveable goods.

Medium of Acceptance
Unless the offeror indicates otherwise, the offeree may use any medium that is reasonable
under the circumstances [UCC § 2-206(1)(a)] or, in non-goods contracts, the same
medium as was used to communicate the offer or any other medium "customary in
similar transactions at the time and place the offer is received." [Restatement § 65]

Notice of Acceptance
The offeror is entitled to notice of the acceptance
Pg. 51, “If the overt act is one that clearly expresses an intention to accept the specific offer AND
is in fact known by the offeror, there is an effective acceptance. This is because the offeror has
actual knowledge.”

• Notice of Acceptance by Performance

Under common law, where an offer invites acceptance by performance, no notice is


required to make the acceptance effective, unless the offeror so specifies. However, if
the offeree has reason to know that the offeror has no adequate means of learning of the
performance with reasonable promptness and certainty, the offeror's contractual duty will
be discharged unless:
• the offeree exercises reasonable diligence to notify the offeror of acceptance; or
• the offeror learns of the performance within a reasonable time; or
• the offer indicates that notification of the acceptance is not necessary.
[Restatement § 54]

Under UCC, where commencement of performance is a


reasonable mode of acceptance, if the offeror is not notified of acceptance within a
reasonable time, he may treat the offer as having lapsed prior to acceptance. [UCC § 2-
206(2)]

• Notice of Acceptance by Return Promise

Where the offeree accepts by promise, the offeree must exercise reasonable diligence to
notify the offeror of the acceptance or ensure that the offeror seasonably receives the
acceptance. [Restatement § 56]

Terms of Acceptance
Under the "mirror image" rule, applied in common law transactions, an acceptance
must conform to the terms set forth in the offer. No contract is formed if the acceptance
contains terms that are different from or additional to those set forth in the offer. Such
communication merely constitutes a counter-offer. A contract is formed if the offeree
unequivocally accepts the offeror's terms.

The UCC rejects the mirror image rule. It give effect to a definite and seasonable
expression of acceptance even though it contains additional or different terms from those
offered, unless the offeree expressly makes the acceptance conditional on the offeror's
assent to the different or additional terms. [UCC § 2-207]

Rejection of Offer (THE KEY!)


A rejection of an offer by the offeree is effective when received by the offeror. If an
offeree dispatches more than one response to an offer, regardless of whether the rejection
is sent before or after the acceptance, if the rejection is received later than when the
acceptance was dispatched, a contract is formed since an acceptance is effective upon
dispatch but a rejection is effective upon receipt. Nevertheless, estoppel may operate to
bar enforcement of such a contract where the offeror receives the rejection before the
acceptance, and acts in reliance on such rejection.

Option Contracts
An option contract is created when the offeree has given the offeror something in exchange for
the offeror’s promise to keep the offer open for the period of time agreed upon.

§ 25. Option Contracts


An option contract is a promise which meets the requirements for the formation of a
contract and limits the promisor's power to revoke an offer.

§ 45. Option Contract Created By Part Performance Or Tender


(1) Where an offer invites an offeree to accept by rendering a performance and does not
invite a promissory acceptance, an option contract is created when the offeree tenders or
begins the invited performance or tenders a beginning of it.
(2) The offeror's duty of performance under any option contract so created is conditional
on completion or tender of the invited performance in accordance with the terms of the
offer.

§ 45 of the restatement
If an offer invites acceptance by performance (unilateral K offer) and not by giving a promise
(bilateral K offer), an option contract (one that is irrevocable by the offeror) is created when the
offeree tenders or begins the invited performance.

Marchiondo v. Scheck (1967)Significance: option contract is born Issue: Whether the offeror had
a right to revoke his offer to enter a unilateral contract. Holding: We hold that part performance
by the offeree of an offer of a unilateral contract results in a contract with a condition. The
condition is full performance by the offeree. Facts: D in writing offered to sell real estate to a
prospective buyer and pay % of sales price as commission to the P, a broker. Offer had a 6 day
time limit for acceptance. D, in writing, revoked the offer. Revocation received by P on morning
of 6th day.
Option v. Option K
Option
Options simply set the time for lapse, but they are revocable at any time.

Hypo: Oct. 1 A communicates to B “I’ll sell you my car for $400. You have 7 days to
accept.” O is received on October 3. The O terminates in 7 days; it can be revoked at
any time.

This hypo is an example of a ‘Nudum Pactum’ – bare promise not enforceable by law

Option Contract
Option K’s set the time for lapse, but they are irrevocable until the time stated UNLESS
rejection of offer inside option window coupled with Oor’s reliance on rejection then
period terminates.

§ 37. Termination Of Power Of Acceptance Under Option Contract


Notwithstanding §§ 38-49, the power of acceptance under an option contract is not
terminated by rejection or counter-offer, by revocation, or by death or incapacity of the
offeror, unless the requirements are met for the discharge of a contractual duty.

Hypo: Oct. 1 A communicates to B “I’ll sell you my car for $400, and if you pay me $5,
you have 7 days to accept.” O is received on Oct. 3, and Oee agrees to pay the $5.
O terminates in 7 days; it is IRREVOCABLE before expiration.

Firm (Merchant) Offer 2-205


A firm offer is a type of option K (making the offer irrevocable)
No need for consideration
1) Offer to buy or sell goods
2) By a merchant (not necessarily “between” merchants)
3) In a signed writing
4) Which gives assurances (i.e. this offer will remain open for 7 days)
5) Is irrevocable for the time stated, or a reasonable time, but in no case
beyond 3 months.

UCC—Firm offer rule § 2-205


If a merchant gives a signed, written assurance to hold an offer for the sale of goods open, it is
irrevocable for the stated period of time, or if no time is stated, for a reasonable time, but never
longer than three months.
Elements of a Firm Offer (see Comment 2 of UCC § 2-104)
• 2-105 (p. 23) “Goods”
• 2-104 (p. 23) “Merchant”
• 1-201(p. 17) “Signed”
• 1-201 (p. 17) “Writing”

§ 2-205. Firm Offers.


An offer by a merchant to buy or sell goods in a signed writing which by its terms give
assurance that it will be held open is not revocable, for lack of consideration, during the
time stated or if no time is stated for a reasonable time, but in no event may such period
of irrevocability exceed three months; but any such term of assurance on a form supplied
by the offeree must be separately signed by the offeror.

§ 2-104. Definitions: "Merchant"


(1) "Merchant" means a person who deals in goods of the kind or otherwise by his
occupation holds himself out as having knowledge or skill peculiar to the practices or
goods involved in the transaction or to whom such knowledge or skill may be attributed
by his employment of an agent or broker or other intermediary who by his occupation
holds himself out as having such knowledge or skill.

Comment 2 of UCC § 2-104


The term "merchant" as defined…may be based upon specialized knowledge as to the
goods, specialized knowledge as to business practices, or specialized knowledge as to
both and which kind of specialized knowledge may be sufficient to establish the
merchant status is indicated by the nature of the provisions.

Hypo: our lumber equipment example. Paul B. is logger he might have the knowledge
and skill of logging equipment necessary to be considered a merchant.

Knowledge
Offeree must know of the offer before she can accept (reward)

Motive
Person’s motive for acceptance is irrelevant as long as it’s done voluntarily.

Vity v. Eley, the court held that it was there was sufficient proof to support the decision that the
information was imparted through fear of arrest, or without any expectation of receiving the
reward. Similar circumstances as our Norman Bates problem, man lived with the perpetrator of
the crime.

Manifesting Assent – how do you show you’ve accepted?

Common Law
§ 35. The Offeree's Power Of Acceptance
(1) An offer gives to the offeree a continuing power to complete the manifestation of
mutual assent by acceptance of the offer.
(2) A contract cannot be created by acceptance of an offer after the power of
acceptance has been terminated in one of the ways listed in § 36.

Corbin: The offeror can require notice of acceptance in any form that he pleases.
The offeror can specify a mode of making an acceptance of his offer, without making that
method exclusive of all others. If the offeror specified no mode of acceptance the law
requires no more than that the mode adopted shall be in accord with the usage and custom
of men in similar cases. If proof of such usage and custom is wanting or is uncertain, the
court must consider probable convenience and results…

General rule: Mode of acceptance must be as fast or faster than mode of offer
Fujimoto v. Rio Grande Pickle Co. (1969)
Facts: Rio Grande (D) raises and sells cucumbers. They hired Fujimoto and Bravo.
Both were given important jobs and demanded more compensation. D orally agreed to
pay them a salary plus a bonus of 10% of the company’s annual profits. Bravo wanted
the agreement in writing, president of Rio said he would prepare one. Both P’s got their
written contacts, signed them, and did not return them to D. P’s believed that they had
accepted the company’s offers and were working under the proffered bonus contracts.

• The mode of expressing assent is inconsequential so long as it effectively makes


known to the offeror that his offer has been accepted.

Hypo: Ann sends a letter to Bob stating the terms of a proposed contract. At the end of
the letter, Ann writes the following: "You can accept this offer only by signing on the
dotted line below." The next day, Ann receives a telegram from Bob stating, "I accept
your offer!" Is there a contract? Why or why not? Restatement 30, offeror master of
terms b/c Bob sent a telegram instead of signing on dotted line, this was not a valid
acceptance of the contract.

UCC
Beard Implement Co. v. Krusa (1991)
Who was the offeror?
Who was the offeree?
How could the offeree accept?
Did the required acceptance occur?

UCC 2-206 An offer to make a contract shall be construed as inviting acceptance in any
manner and b any medium reasonable in the circumstances.

§ 2-206. Offer and Acceptance in Formation of Contract.


(1) Unless otherwise unambiguously indicated by the language or circumstances
(a) an offer to make a contract shall be construed as inviting acceptance in any manner
and by any medium reasonable in the circumstances;
(b) an order or other offer to buy goods for prompt or current shipment shall be construed
as inviting acceptance either by a prompt promise to ship or by the prompt or current
shipment of conforming or non-conforming goods, but such a shipment of non-
conforming goods does not constitute an acceptance if the seller seasonably notifies the
buyer that the shipment is offered only as an accommodation to the buyer.
(2) Where the beginning of a requested performance is a reasonable mode of acceptance
an offeror who is not notified of acceptance within a reasonable time may treat the offer
as having lapsed before acceptance.

Reasoning: There was a key term in UCC 2-206: 1) unless otherwise unambiguously
indicated by the language or circumstances an offer to make a contract shall be construed
as inviting acceptance in any manner and by any medium reasonable in the
circumstances.” Court reasoned that if D’s offer contained on the P.O. is unambiguous in
inviting acceptance only by the signature of the P’s dealer, no contract exists until the
P.O. is signed accordingly. Of the cases presented by D, Antonucci v. Stevens Dodge,
Inc. was almost identical and found that the offer was not accepted unless dealer rep
signed the P.O. because the printed terms on the agreement said so.
• An ancient and cardinal rule of the law of contracts: the offeror is the master of
his offer. An offeror may prescribe as many conditions or terms of the method of
acceptance as he may wish, including, but not limited to, the time place and
manner.

• Where an order form, containing the buyer’s offer, requires the acceptance of the
seller, no contract will exist until the seller has manifested acceptance of the
offer.

• Contracts are generally construed against the party who drafted the document.

• Weight of authority suggests that P.O.s are not enforceable contracts until accepted by
the offeree.

ProCD: Placing the package of software on the shelf is an “offer” which the customer
“accepts” by paying the asking price and leaving the store with the goods. We talked in class
about grocery store. Depending on jurisdiction, most of the time you offer to purchase the
products when you present them at the counter and the store accepts your offer by ringing
them up and taking your cash.

Mode (Promise or an Act) sometimes critical


Davis v. Jacoby
Lower court found for D because they said that the letter of April 14th was not a legal acceptance.
Essentially they ruled it was a unilateral contract. The main issue: whether the contract was a
unilateral or bilateral contract. Holding: The offer of April 12 was an offer to enter into a
bilateral contract. The missing air mail reply of April 14th was a valid acceptance. Reasoning:
Whitehead wanted the promise of the appellants (Davises) that he could look to them for
assistance, he knew from his past relationship that if they gave their promise to performance, he
could rely upon them. By specifically requesting an immediate reply, Whitehead expressly
indicated the nature of acceptance desired by him, namely, appellants’ promise. The contract
required Mr. and Mrs. Davis to perform services until the death of BOTH Mr. and Mrs.
Whitehead. It is obvious that if Mr. Whitehead died first, some of those services were to be
performed after his death so that he would have to rely on the promise of the appellants to
perform these services.

• It is elementary that when an offer has indicated the mode and means of acceptance an
acceptance in accordance with that mode or means is binding on the offeror.

Silence as Acceptance
The general rule is that silence is NOT acceptance

Common Law
RII § 69 (p. 53) Acceptance by Silence or Exercise of Dominion
Silence may not constitute an acceptance except where:
• based on prior dealings between the parties, it is reasonable that the offeree
should notify the offeror if he does not intend to accept; or
• "where the offeror has stated or given the offeree reason to understand that assent
may be manifested by silence or inaction, and the offeree in remaining silent and
inactive intends to accept the offer." [Restatement § 69]

1. When there is knowledge or profit from


2) takes advantage of services with reasonable opportunity to reject
3) where acceptance is invited by silence
4) previous dealings indicate they only need to respond to reject

Acts Inconsistent with Offeror's Ownership or Receipt of Benefits


The common law holds that one who receives goods with knowledge or reason to know
that they are being offered for a price is bound by the terms of the offer if he exercises
dominion or control over such goods or engages in any other act inconsistent with the
offeror's ownership. If the act wrongs the offeror, it is deemed a valid acceptance only if
ratified by the offeror. Similarly, one who receives benefits from services that he knows
or has reason to know are being offered with the expectation of compensation, and where
he has a reasonable opportunity to reject them, is liable for the reasonable value or stated
value of such services. [Restatement § 69(2)]

Hobbs v. Masasoit Whip Co.: even if the offer was not such that the contract was made as
soon as skins corresponding to its terms were sent, sending them imposed on the
company a duty to act about them. Silence on the company's part, coupled with a
retention of the skins for an unreasonable time, could be found by the jury to warrant
plaintiff in assuming that they were accepted, and thus to amount to an acceptance. The
court held that conduct importing acceptance, the retention of the skins, was acceptance
in the view of the law and the jury instruction was warranted.

Day v. Canton
Facts: P built a wall, ½ on his land, ½ on the D’s. The P testified that there was an
express agreement on the D’s part to pay him ½ vlue of the wall. The D denied this and
testified that he never had any conversation with the P about the wall.

• The fact that the plaintiff expected to be paid was not sufficient of itself to
establish the existence of a contract.

• When one stands by in silence and sees valuable services rendered, such silence,
accompanied with the knowledge on his part that the party rendering the services
expects payment therefore, may fairly be treated as evidence of an acceptance of
it.

• The circumstances of each case would determine whether silence, with a


knowledge that another was doing valuable work for his benefit, and with the
expectation of payment, indicated consent that would give rise to the inference of
a contract.

• qui tacet consentire videtur: He who keeps silent is assumed to consent; silence
gives consent.

UCC
Hypo: Bob sends Ann the following letter: "Ann, I have been looking at your webpage.
Please send me 200 widgets as soon as possible. My check for $200 is enclosed." On the
morning that Ann received the letter she called and left the following voicemail on Bob's
machine. "Bob, I have received your order for 200 widgets. I will ship them out this
afternoon. Thanks!" Ann shipped the widgets that afternoon. Bob received the widgets
two days later. When was the contract between Ann and Bob created? Why?
2-204, 2-206 unless there is unambiguous language otherwise
promise to ship is an acceptance. Contract formed when she promised.

UCC 1-205 (p. 18 supp.) Course of Dealing and Usage of Trade – infra

UCC 2-208 (p. 32 supp.) Course of Performance -- infra

Conduct that demonstrates acceptance of goods: Use, consumption, resale, payment


Conduct that demonstrates rejection of goods: Refuse to pay, send items back, etc.

Federal Statute
The Postal Reorganization Act
Was it a gift?
Required to speak?
Negative option plan - refers to a contractual plan or arrangement under which a seller
periodically sends to subscribers an announcement which identifies merchandise (other
than annual supplements to previously acquired merchandise) it proposes to send to
subscribers to such plan, and the subscribers thereafter receive and are billed for the
merchandise identified in each such announcement, unless by a date or within a time
specified by the seller with respect to each such announcement the subscribers, in
conformity with the provisions of such plan, instruct the seller not to send the identified
merchandise.

Effect of Acceptance
Did the defendant know what the terms of the licensing agreement were when he purchased the
CD at the store?
When did the defendant learn about the terms of the license?
When he learned the terms of the license, had the terms of the K already been “cemented?”
Were the terms of the licensing agreement
part of the parties’ K?

ProCD, Inc. v. Zeidenberg (1996)

Holding/Reasoning: So although the district judge was right to say that a contract can be formed
simply by paying the price and walking out of the store, the UCC permits contracts to be formed
in other ways. One of the terms to which Z (D) agreed by purchasing the software is that the
transaction was subject to a license…Terms of use are no less a part of the product than are the
size of the database and the speed with which the software compiles listings.

• A contract for sale of good may be made in any manner sufficient to show agreement…A
vendor as a master of the offer, may invite acceptance by conduct and may propose
limitations on the kind of conduct that constitutes acceptance. A buyer may accept by
performing the acts the vendor proposes to treat as acceptance.

• Buyer accepts goods when, after an opportunity to inspect, he fails to make an effective
rejection.
• The UCC consistently permits the parties to structure their relations so that the buyer has
a chance to make a final decision after a detailed review.

Terminating the Power of Acceptance


§ 35. The Offeree's Power Of Acceptance
(1) An offer gives to the offeree a continuing power to complete the manifestation of
mutual assent by acceptance of the offer.
(2) A contract cannot be created by acceptance of an offer after the power of
acceptance has been terminated in one of the ways listed in § 36.

§ 36. Methods Of Termination Of The Power Of Acceptance


(1) An offeree's power of acceptance may be terminated by
(a) rejection by the offeree, or
(b) lapse of time, or
(c) revocation by the offeror, or
(d) death or incapacity of the offeror or offeree, or
(e) counter-offer
(2) In addition, an offeree's power of acceptance is terminated by the non-occurrence
of any condition of acceptance under the terms of the offer.

• Rejection by the offeree


§ 38. Rejection
(1) An offeree's power of acceptance is terminated by his rejection of the offer, unless
the offeror has manifested a contrary intention.
(2) A manifestation of intention not to accept an offer is a rejection unless the offeree
manifests an intention to take it under further advisement.

In the case cited for problem 19, the court found “that EXPRESS NOTICE of withdrawal
before acceptance of an offer for which no consideration was paid was NOT
NECESSARY.”

The general rule: Rejection terminates the power of A


o If an offeree rejects an offer, the offer is terminated, UNLESS the offeror says or
does something that suggests otherwise (aka manifested a contrary intention).
o If an offeree says or does something that suggests that the offeree does not intend
to accept, the offer is terminated, UNLESS the offeree says or does something
that suggests otherwise (aka has manifested an intention to take it under
advisement)

BIG Exception: When O kept open by an option K (or firm merchant offer under the
UCC).
Exception to the BIG Exception:
If Offeror RELIES on the rejection then offer is terminated.

• Lapse of Time
§ 41. Lapse Of Time
(1) An offeree's power of acceptance is terminated at the time specified in the offer, or, if
no time is specified, at the end of a reasonable time.
(2) What is a reasonable time is a question of fact, depending on all the circumstances
existing when the offer and attempted acceptance are made.
(3) Unless otherwise indicated by the language or the circumstances, and subject to the
rule stated in §§ 49, an offer sent by mail is seasonably accepted if an acceptance is
mailed at any time before midnight on the day on which the offer is received.

Loring v. City of Boston (1844)


What were the terms of the offer?
Who could accept the offer?
Was the offer still open?
What, if anything, revoked the offer?
Holding: 3 years 8 months not reasonable time within which offer can be considered
continuing. Reasoning: City officials bound by annual term of office. Had they made
an ordinance, case might have come out different. Ad was given some weight b/c it had
two purposes: notify citizens, notify wrongdoers. Terms of ad gave no time. Implication
there was some limit to time, general rule of law it must be limited to a reasonable time.

NOTE: When Governments make the offer, the offeree doesn’t need to know about it in
advance to be able to claim the reward.

Restatement 2nd § 46 Revocation of General Offer


Supplement p. 188 dealing with the wanted posters situation and advertisements

QUESTION:
In cited case, court held: But the case at bar is of a totally different character. Here, a reward was
offered to any one who should make discovery and give information, &c., as to a crime
committed on a previous day, specifically pointed out. The offer, it is true, is not limited in its
terms as to time, but the statute of limitations, which is applicable to the crime in question,
necessarily restricts the offer to the period within which the delinquent must be informed against
and prosecuted, three years next after the offence was committed. So long as the statute of
limitations continued to run against the offender, so long would this offer of a reward continue
good. As soon as the statute becomes a bar to the prosecution, all liability to pay the reward
of course ceases”

Problem 24
yes, bank is still responsible because there must be a reasonable amount of time for information
about revocation to be disseminated.
See pg. 188 Sec 46 of the Restatement. court found that the reward offer was revoked prior to the
time that the informant provided his information. The court held that because the revocation
was published in the same manner as the reward offer and it was published prior to the
informant's actions, the revocation was effective.
Reasonable time for revocation……greater amount of time, greater reasonability associated with
its revocation. The court held that the bank did not effectively revoke the offer in the manner
in which it was made. From the nature of the offer, the public could reasonable assume that
continuity was an intended element of the offer
Just include a time frame on the reward poster. Then no question of when the offer ends.
Practical consideration: just forget about it, if someone claims the reward just pay it if it would be
more costly to go through the revocation process.

Problem 25: If Gaston sues? Alphonse will win. By saying, “I’m not sure I wan to sell it.”
Acceptance must be RCA, this is not absolute and unequivocal. G did not give an acceptance, the
offer was opened, G says not sure, and conversation moved on. A reasonable time would have
been during the same conversation, not the next day. Lapsed due to time elapsed.

End of conversation on phone or face to face is generally held as the end of the offer.
Until tomorrow noon? 5PM no. 1PM no. THE ONLY exception is if the Oor decides to take the
acceptance after the time has lapsed. If Alphonse were hard to fine, doesn’t matter, though his
actions, the offeror made it impossible to perform acceptance (since no consideration given and
this is not a firm offer under 2-205 yes goods, no merchant, no writing, no signature) which is
basically the same as saying the deal is off.

Problem 26 (Huck)
Looking at the case, estate not responsible. Offer of guarantee on each shipment revoked at time
of Scrooge’s death. Same if he is incompetent.
Sec 48 of Restatement pg. 188 and case Swift & Co. v. Smigel (1972)
because a continuing guaranty involves a renewal of the offer on each occasion of an
acceptance thereof by the offeree it was arguable that the guaranty became invalid once
decedent was adjudged incompetent.
Guarantor = offeror
Continuous offer and acceptance, offer and acceptance

• Revocation by Offeror
An offeror is free to revoke an offer at any time before it is accepted.
Exceptions: Firm offers under the UCC and Option contracts.

§ 42. Revocation By Communication From Offeror Received By Offeree


An offeree's power of acceptance is terminated when the offeree receives from the offeror
a manifestation of an intention not to enter into the proposed contract.

Petterson v. Pattberg (1928)


Was this an offer for a bilateral or unilateral contract?
How could the offer be accepted?
Did Petterson do the required act to accept?
Could the offer be revoked?
When could Patterberg revoke the offer?
Significance of the case: dissent shows that the law is changing evolving into the option
contract. On a day in the latter part of May, Petterson went to D’s home “It is Mr.
Petterson, I have come to pay off the mortgage.” D replied he had sold the mortgage.
Holding: 4 judges in majority opinion stating that the judgment should be affirmed for D
Mr. Pattberg. 2 dissented believing the judgment should be reversed.

• Unilateral contract: the gift of a promise in exchange for the performance of an


act. If an act is requested, that very act and no other must be given. Any offer to
enter into a unilateral contract may be withdrawn before the act requested to be done has
been performed.

• Cites Dikinson v. Dodds, “An offer to sell property may be withdrawn before acceptance
WITHOUT any formal notice to the person to whom the offer is made. It is sufficient if
that person has actual knowledge that the person who made the offer has done some act
inconsistent with the continuance of the offer, such as selling the property to a third
person.”

• Williston further says: The offeror may see the approach of the offeree and know than an
acceptance is contemplated. If the offeror can say “I revoke” before the offeee accepts,
however brief the interval of time between the two acts, there is no escape from the
conclusion that the offer is terminated.

Dissenting opinion: A condition precedent to performance by the D of his


promise to accept payment at a discount. If the condition precedent has not been
performed, it is because the D made performance impossible by refusing to
accept payment when the p came with an offer of immediate performance.
Quoting Williston on Contracts 677 “It is a principle of fundamental justice that
if a promisor is himself the cause of the failure of performance either of an
obligation due him or of a condition upon which his own liability depends, he
cannot take advantage of the failure.

§ 43. Indirect Communication Of Revocation


An offeree's power of acceptance is terminated when the offeror takes definite action
inconsistent with an intention to enter into the proposed contract and the offeree acquires
reliable information to that effect.

Dickinson v. Dodds (1876)


nudum pactum
Was the offer revoked before it was accepted?
If the offer was revoked, when and how was it revoked?
Facts: P having heard or knowing that Dodds was no loger going to selling to him and
was probably selling to Allan, wanted to fix Dodds to his offer and tried to bind him.

• The promise to keep the offer open was itself a nudum pactum, an agreement
unclothed by consideration, and was therefore not binding.

• There is neither principle nor authority for the proposition that there must be an
express and actual withdrawal of the offer or what is called a retraction.

• It is admitted law that, if a man who makes an offer dies the offer cannot be
accepted after he is dead.

• The law may be “right or wrong” in saying that a person who has given another a
certain time within which to accept an offer is not bound by his promise to give
that time but it is the law.

• The offer must continue up to the time of the acceptance. If there was not such a
continuing offer, then the acceptance comes to nothing.
• Termination by Death OR Incapacity of the Offeror OR Offeree
§ 48. Death Or Incapacity Of Offeror Or Offeree
An offeree's power of acceptance is terminated when the offeree or offeror dies or is
deprived of legal capacity to enter into the proposed contract.

Exception: Option Contract remains in effect

• Counter-Offer

General rule: counteroffer is a rejection

§ 39. Counter-Offers
(1) A counter-offer is an offer made by an offeree to his offeror relating to the same
matter as the original offer and proposing a substituted bargain differing from that
proposed by the original offer.
(2) An offeree's power of acceptance is terminated by his making of a counter- offer,
unless the offeror has manifested a contrary intention or unless the counter-offer
manifests a contrary intention of the offeree.

Livingstone v. Evans (1925) demonstrates 39(2)


O I shall sell the land for $1,800 on “terms” (with financing—doesn’t have to be a cash
sale)
C-O Send lowest cash price. Will give $1,600 cash.
Or “Cannot reduce price” (indicating original offer still in place)
Oee I accept

“Clear that when O has been rejected it is thereby ended and CANNOT be accepted
afterwards without the consent of the Oor.” Issue: counteroffer a rejection?
Fact: Oor’s telegram “cannot reduce price” should have made rejection clear. Court
interpreted this to be a renewal of the original offer and gave the P the right to bind the D
to it by his subsequent acceptance.

Non-conforming Goods
Seller wants to ship non-conforming goods as an accommodation to the buyer.
Shipment of non-conforming goods does not constitute an acceptance if the seller
seasonably (within a reasonable time) notifies the buyer that the shipment is offered only
as an accommodation to the buyer. Mere accommodation is the same as a counteroffer.
When buyer (Marshall) receives the goods he can accept or reject them.

Mirror Image Rule

§ 59. Purported Acceptance Which Adds Qualifications


A reply to an offer which purports to accept it but is conditional on the offeror's assent to
terms additional to or different from those offered is not an acceptance but is a counter-
offer.

§ 61. Acceptance Which Requests Change Of Terms


An acceptance which requests a change or addition to the terms of the offer is not thereby
invalidated unless the acceptance is made to depend on an assent to the changed or added
terms.er is not thereby invalidated unless the acceptance is made to depend on an assent
to the changed or added terms.

Hypo: Sobriety assumed when you ask someone to perform. This term mentioned
subsequently, DOES NOT make it a counter-offer

“Battle of the Forms”


§ 2-207. Additional Terms in Acceptance or Confirmation.
(1) A definite and seasonable expression of acceptance or a written confirmation which is
sent within a reasonable time operates as an acceptance even though it states terms
additional to or different from those offered or agreed upon, unless acceptance is
expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract.
Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a
reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to
establish a contract for sale although the writings of the parties do not otherwise establish
a contract. In such case the terms of the particular contract consist of those terms on
which the writings of the parties agree, together with any supplementary terms
incorporated under any other provisions of this Act.

Hypo #1:
Barbara sent Samuel the following P.O.: “Ship 1,000 bolts of 200 t.c., white, cotton cloth
at the current market price.” In response, Samuel sent the following acknowledgment:
“Will send cloth standard credit terms apply.” Samuel shipped the cloth, and it was
accepted by Barbara. Do the parties have a K?
Why? (2-207(1) or 2-207(3))?
If they have a K, what are the terms of that K?
Why? (2-207(2) or 2-207(3))?

Dickered terms = REFERS TO PRICE AND QUANTITY ONLY


“Materially alters” official comment #4
if fact pattern has an item that creates HARDSHIP AND SURPRISE, alters warranty
credit terms = not materially altering

Hypo #2
Early one Monday morning, B received the following fax from S. "We are offering one
ton shipments of flour for $2,000. This offer will be held open for 30 days only—so
hurry!" B promptly returned its standard acceptance form to order one ton of flour for
$2,000. This document also contained a provision requiring all disputes to be settled by
arbitration. There was no further correspondence between the parties; S shipped and B
accepted the flour.

Is there a contract between the parties?


A. Yes, based on the documents exchanged.
B. Yes, based on the conduct of the parties.
C. No, if the arbitration materially altered the terms.
D. No, unless B specifically assented to the arbitration provision.

Hypo #3
On 12/12/04, a purchasing agent for ‘Toys R We’ faxed a purchase order to Fun Toys for
1,000, #100 count, building block sets at $10.00 per set, to be delivered to its warehouse
in Lanzing. On 12/16/04, Fun Toys faxed an acknowledgement, agreeing to ship the
block sets for the price stated. It also included an arbitration provision, and it stated:
"Seller's acceptance is expressly conditioned on the Buyer's assent to the additional or
different terms set forth in Seller's acknowledgment." The parties did not exchange any
additional documents or calls. On 12/20/04, the block sets were shipped and accepted.

Which of the following best describes whether the parties have a contract:
A. There is a contract here, unless the arbitration provision "materially alters" the parties'
agreement.
B. There is a contract here based on the parties' conduct.
C. There is a contract here because ‘Toys R We’ acquiesced to the arbitration provision
when it failed to object to it in a timely manner.
D. There is a contact here because there are no gap fillers regarding arbitration.

Which of the following best describes the terms of the parties' contract:
A. The terms of the contract will be those that were agreed to by the parties, plus any
UCC gap fillers.
B. The terms of the contract will be all those that do not "materially alter" the agreement.
C. The terms of the contract will NOT include the arbitration provision because the
acknowledgement form was not the mirror image of the purchase order.
D. The terms of the contract will depend on whether this jurisdiction finds that an
arbitration provision is a "material alteration."

Commerce & Industry Ins. Co. V. Bayer Corp.


P.O. contained an arbitration term
Invoice contained proviso language
Parties performed
Does 2-207(2) or 2-207(3) (original) apply here to determine the terms of the agreement?

Klocek v. Gateway, Inc.


Did the D add additional terms?
Were the additional terms agreed to?
Does 2-207(2) or 2-207(3) (original) apply here?
If the parties contracted, what are the terms of the contract?

When is Acceptance Effective?


Common Law (Restatement view)
1) Received (comes in the possession of the Offeror)
2) Received by a person authorized to receive the A
3) Deposited in a place where the Offeror has authorized for communications (does not
have to be read)

UCC 1-201 (26)


A person “receives” a notice or notification when
(a) it comes to his attention; or
(b) it is duly delivered at the place of business through which the contract
was made or at any other place held out by him as the place for receipt of
such communications.

The “Mail Box” Rule


BIG Exception:
• If there is a valid OPTION-K, the usual mail box rule DOES NOT apply.
• Acceptance MUST be RECEIVED prior to end of option period (either common
law or UCC Firm rule option)

Morrison v. Thoelke (1963)


Is it acceptance when mailed or when received?
Does it matter if it’s never received?
Why would we put the offeror in the position of being the last to know?
11/26 D (buyer) mails ? P (seller) an O
11-27 P (seller) mails ? D A by mail
11/27 P retracts A by phone (after mailed)
Later, D receives P’s letter and records K in Florida
Now, P (Seller) sues D to “clear title” saying the A is valid only when received (not
mailed)

The issue: whether contract is complete and binding when letter of acceptance is mailed
or when received.

• Williston, “early decided that contract was completed upon the mailing of the
acceptance….it is immaterial that the acceptance never reaches its destination” No
power to withdraw the acceptance even if you can get the letter back.

• Corbin, Contracts “the contract is regarded as made at the time and place that the
letter of acceptance is put into the possession of the post office….acceptance
operative on mailing” Get letter back? You still accepted the offer and have a
contract.

• Adams v. Lindsell (1818) “rule that a contract is complete upon deposit of the
acceptance in the mails, “deposited acceptance rule” and also known as “rule in
Adams v. Lindsell”
After a contract is formed: What’s next? Indefinite Terms and Modification

Indefiniteness
General Rule: No mutual assent exists (and thus no K) unless the agreement of the parties
is sufficiently certain.

A validly formed contract must provide a basis for determining the existence of a breach
and for giving an appropriate remedy [Restatement § 33; UCC § 2-204]. This means that the
terms must be reasonably certain; terms are deemed reasonably certain if they 1) provide a basis
for determining the occurrence of a breach and 2) an appropriate remedy.

Non-goods contracts: must include terms that are sufficiently definite and certain.
Where a contract is sufficiently defined but omits an essential term, the court may supply
a term which is reasonable under the circumstances. [Restatement § 204]
UCC contracts: do not fail for indefiniteness even if one or more terms are left
open if the parties intended to make a contract and there is a reasonably certain
basis for giving an appropriate remedy." Unspecified terms can be supplied by
course of performance, course of dealing, trade usage, and "gap fillers," provided in UCC
§ 2-305 through § 2-311.

QUANTITY MUST be on contract. There is NO gap filler.

Course of Performance, Course of Dealing, and Trade Usage


In BOTH common law and goods contracts, course of performance, course of dealing and
trade usage may supply both additional terms and aid in construction of existing terms.

In order of their significance and the weight to be given each are:


• express terms
• course of performance
• course of dealing
• usage of trade

"Course of performance" represents a pattern in the performance of the contract. If a


contract involves repeated occasions for performance by either party, and the other party
knows of the nature of the performance and has an opportunity to object to such
performance, any course of performance accepted or acquiesced to without objection is
relevant to the meaning of the agreement. [UCC § 2-208(1)]

"Course of dealing" represents a sequence of previous conduct between the parties to a


particular transaction which establishes a common basis of understanding for interpreting
their expressions and conduct. [Restatement § 223; UCC § 1-205(1)]

"Usage of trade" represents a practice that is employed with regularity in a place,


vocation or trade, justifying an expectation that the practice will be observed with respect
to the agreement in question. [UCC § 1-205(2)]

§ 2-208. Course of Performance or Practical Construction.


(1) Where the contract for sale involves repeated occasions for performance by either
party with knowledge of the nature of the performance and opportunity for objection to it
by the other, any course of performance accepted or acquiesced in without objection shall
be relevant to determine the meaning of the agreement.
(2) The express terms of the agreement and any such course of performance, as well as
any course of dealing and usage of trade, shall be construed whenever reasonable as
consistent with each other; but when such construction is unreasonable, express terms
shall control course of performance and course of performance shall control both course
of dealing and usage of trade (Section 1- 205).
(3) Subject to the provisions of the next section on modification and waiver, such course
of performance shall be relevant to show a waiver or modification of any term
inconsistent with such course of performance.

Problem 48) section 202 RII of contracts (5) Wherever reasonable, the
manifestations of intention of the parties to a promise or agreement are interpreted
as consistent with each other and with any relevant course of performance,
course of dealing, or usage of trade.

Walker v. Keith (Indefinite)


A lease executed in 1951 contained an option to extend the term for 10 years.
The term in the original lease stated that the rent amount for the new lease would
“be fixed in such amount as shall actually be agreed upon.”
When the parties failed to agree, could the court set the rent for a new term?

Rego v. Decker (Definite enough for the court to craft a remedy)


The parties lease agreement contained a purchase option.
When the tenant attempted to exercise that option, the landlord refused to
perform, claiming that the terms were too uncertain to enforce.
Were the terms of the option too uncertain for the provision to be enforceable?

Good Faith Modification


Subsequent to the formation of a contract, the parties may, by mutual assent, modify the
contract.

CONSIDERATION

Terms:
Want of consideration = no consideration
Adequacy of consideration = There is consideration, but not enough
Failure of consideration = C is recited but never carried out / never became valid
(I’ll sell you my car for $500, but you never pay)
Gratuitous promise: a promise made in exchange for nothing. No C.

Overview:
Offer + Acceptance + Consideration (or a consideration substitute) = K

Consideration is like super-glue while the 2 substitutes are weaker.


Promissory Estoppel (elmer’s glue)
Moral Obligation (paste)

Consideration is negotiated within same context of the original offer and acceptance of
the transaction, it is usually not something separately negotiated.

Exceptions: signing a surety under the UCC.


Problem 38, pg. 136
Restatement 71(4) performance OR return promise may be given to the
promisor or to some other person. It may be given by the promise OR BY
SOME OTHER PERSON.

§ 3-419. INSTRUMENTS SIGNED FOR ACCOMMODATION.


(b) An accommodation party may sign the instrument as maker,
drawer, acceptor, or indorser and, subject to subsection (d), is
obliged to pay the instrument in the capacity in which the
accommodation party signs. The obligation of an accommodation
party may be enforced notwithstanding any statute of frauds and
whether or not the accommodation party receives
consideration for the accommodation.

Another exception is modification of the contract under UCC.

Definition: Consideration is a bargained for exchange of something which in the eyes of


the law has “legal” value.

Restatement § 71. Requirement of Exchange; Types of Exchange


(1)To constitute consideration, a performance or a return promise must be
bargained for.
(2)A performance or return promise is bargained for if it is sought by the promisor
in exchange for his promise and is given by the promise in exchange for that
promise.
(3)The performance may consist of
(a)An act other than a promise, or
(b)A forbearance, or
(c)The creation, modification, or destruction of a legal relation.
(4)The performance or return promise may be given to the promisor or to some
other person. It may be given by the promise or by some other person.

Consideration Aid
1. What is the promise to be enforced?
2. What is the act or pomise sought in return?
3. Was the act or pomise bargained for?
4. Does the act or promise have legal value?

Bargained For Exchange


Quid pro quo (something for something)

Must be explicitly bargained for the benefit to the promisor


OR
Explicitly bargained for detriment to the promisee

Rick Frank test for B/4


Is there a legal detriment (can be negative i.e. not go)
Did the promise induce the detriment
Did the detriment induce the promise?

A legal detriment exists where the party:


• engages in an act that the party was not previously obligated –
whether statutorily or contractually – to perform; or
• refrains from exercising a legal right
Under the pre-existing duty rule, a promise regarding a pre-
existing obligation to the other party does not constitute a legal
detriment.

Negative example: Promises to make gifts are generally not enforceable b/c there is no
bargain.

Legal Value
Negative examples:
• Love and affection are not recognized under the law as having
legal value.
• Magic is not recognized under the law as having value (including
psychic readers)
Cooper v. Livingston (1883) Our conclusion is that "conjuring"
over a sick man "to make him well" is not [**16] a valid
consideration for a promissory note; and that no man with a
healthy mind would voluntarily give a note for $ 250, with interest
at two per cent. a month, for the services of a conjurer, who
proposes to cure a lingering disease by conjury or incantations.
• Ideas that aren’t sufficiently proprietary to have legal value.
Problem 39 (C)
Business promise to pay ½ increased profits in return for idea to
increase profits
B/4? Yes
Value? No. No value for doing the obvious.
In case cited, the court held that the contract was unenforceable due to lack of
consideration. The suggestion that the manufacturer increase profits by
raising prices was a concept common and general to the whole world
which the business consultant was not permitted to monopolize by
contract

Simple Hypos from problem 37:


1. I promise to give you $500. This is a gift not a promise. No C.
2. $500 if you go to Chicago? Enforceable uni-k unless guy is going to Chicago to
pick up the $500, then it is a gift. Maybe C.
3. $500 if you do not go to Chicago next Friday? Forbearance- not doing something
that you have a legal right to do. Definitely C.

Sufficiency v. Adequacy
Overview
Adequacy of consideration relates to whether the bargain involves an exchange of equal
value. Generally, however, courts do not concern themselves with whether consideration
is adequate, honoring the concept of freedom of contract. On the other hand, courts do
require consideration to be "sufficient", which relates to whether there is a legal detriment
incurred as part of a bargained exchange of promises or performances.
If a bargain gives a party a choice of alternative obligations, each
alternative on its own must constitute sufficient consideration for the
return promise.

Sufficient consideration: Refers to value the law will enforce.


Sufficient – Scott says think “value”
Adequacy – Scott says think “quantity”

Example of sufficient consideration:


Hamer v. Sidway (1891)
Pg. 134 at bottom
1. Promise to pay $5000
2. return promise/act: do not do x,y,z until after 21 yrs
3. bargained for? Yes, uncle would not have paid otherwise.
value? Yes nephew gave up legal right to do these acts
Hypo: minor has no legal right is forbearance consideration? No.
Hypo: legal right to smoke and drink but not to gamble. All three
needed? Scott says stay tuned for later class.
Memory Hook: Uncle promises nephew $5000 if he refrains from
“drinking, using tobacco, swearing, and playing cards or billiards
from money” until he is 21.
Rule: If a person gives up a right that is valuable to them
(forbearance) in a bargain for exchange then there is consideration,
regardless of whether the promisor benefits or not

GR: The court will inquire regarding sufficiency, but it will not generally inquire
regarding adequacy of consideration. If the court finds the exchange to have no legal
value (sufficiency), there is no consideration (ie. obvious ideas, love and affection, when
a nominal amount is “exchanged” for larger sum or for an item with a fair market value
far in excess of amount given (disguised gift). The court will inquire into adequacy if it’s
merely an exchange of money or fungible goods; the court will also inquire into adequacy
if the plaintiff is seeking equitable relief.

Fungible goods (same stuff) (gas, grain, etc.). Test: throw it in a big pot. If you don’t
care that you get a specific one back, then you are talking about fungible goods.

Adequate consideration: Refers to the quantity of the amounts exchanged. (Compare


this to that) Normally, courts do not inquire into the adequacy of consideration
Two exceptions:
1) fungible for like fungible
(US$ for US$; brick for brick)
Example: Fungible for like fungible, i.e. capable of being
Interchanged. Corn for like corn IS fungible (ct. will look
to adequacy, and likely say it’s a gift)
Schnell v Nell (1861)
Wife died, had no money in her estate, husband promised
to pay bequests for $0.01 out of his own estate.
Consideration – cannot have a bargained for exchange if
actions were in the past
W dies ? leaves bequests to people. W has no money in her
estate. H/D feels bad, so he promises to pay out of his own
pocket in return for one cent. Apparently H/D changes
mind, doesn’t want to pay the $600 after all.
H/D claims there was no consideration. P Claims loving
and dutiful wife; she helped H acquire assets. Promise to
pay $600
Return promise:
1) love/ affection/ respect of W
2) past services
3) pay 1 cent
B/4? 1) No b/4 exchange
2) no (already done in the past)
3) gift?
Value? 1) No value
2) yes
3) No – fungible (cent) for fungible ($600)
Therefore, no consideration; Past “C” no good
Memory Hook: Wife left $200 she did not have to
plaintiffs in her will; husband agreed to pay in
consideration for 1 cent and the love he had for his wife.
Rule: Gratuitous promises and moral obligations are
not enforceable. Exchange of one cent for $200 is
unconscionable & “sham” consideration since it is both
inadequate & insufficient – shows that there was no bargain
for exchange. Husband’s love for his wife and desire to do
her will are not legally enforceable.

Non-examples: Low-grade corn (for animals) exchanged for high-


grade corn (Michigan Sweet corn) NOT fungible (Ct. will
not look into adequacy)
1 dollar for $0.75 in coins so I can use vending machine.

Batsakis v. Demotsis (1949)


500,000 Drachmae for $2,000 US dollars
D Promise to pay P US $2,000
In return for P giving 500,000 Drachmae (worth $25 US) to
D during wartime
B/4? Yes
Value? Yes. 1) NOT the same currency
2) NOT fungible
Therefore= consideration
Memory Hook: During WWII, defendant received $25
from plaintiff but signed a contract saying she would return
$2000 to him.
Rule: Mere inadequacy of consideration will not void a
contract; defendant got exactly what she bargained for.
Consideration was sufficient (valuable to her).

2) before decreeing specific performance


(in equity)
Example: Problem 40 (d) (e) (f)
d) No. This is exception #2 to the general rule

Nominal Consideration
Nominal” consideration is C in name only b/c consideration must be bargained for.
Generally, nominal consideration is inadequate consideration because it is not truly
bargained for.

Lexus/Nexus says:
If nominal consideration is given as a mere formality in order to create a binding contract
rather than as a bargained exchange, the consideration is insufficient. [Restatement § 71,
illus.5] In option contracts, a payment or promise to pay nominal consideration is
sufficient consideration to make enforceable a promise not to revoke, provided the option
time is relatively short (e.g., 10 days) and the price to be paid if the option is exercised is
a fair price. [See Restatement § 87, comment b]

Exceptions:
Problems 39(b)(c) where it actually is bargained for.

Option contracts. If nominal consideration is recited (even if not actually


paid), courts will consider it to be adequate for the option K. (see p. 143,
RII § 87).

Lexis/Nexus says: False Recitals of Consideration


Where there is a false recitation of consideration, the agreement will not
be enforced for lack of sufficient consideration. Consideration must in
fact be rendered. There is some conflict as to whether a sham recital of
consideration in option contracts is sufficient to enforce the promise.
Restatement § 87, comment c, states "the option agreement is not
invalidated by proof that the recited consideration was not in fact
given." However, some courts continue to deny enforcement where there
is a false recital of consideration in option contracts.
Forbearance
Don’t forget that forbearance is more than just settlement of claims! Not doing
an act is forbearance and that can be consideration.

Good example is problem 42.


V promises to pay $ to J
J forbears on right to talk to R about insurance policy
B/4? Yes
Value? Yes
Enforceable b/c she agreed to forbear on something she had a legal right to
do (detriment to J) change word “will” to insurance policy in the problem.

Original case that inspired problem 42 was Orr v. Orr (1913). The widow
claimed that during the decedent's lifetime, she informed the father that
she was going to ask the decedent to remove him as beneficiary of the
certificate and to name her as the beneficiary, that the father did not want
her to approach the decedent with such a matter at that time because he
was ill, and that the father agreed to pay the proceeds over to her in
exchange for her promise to refrain from approaching the decedent with
the matter. The jury found in favor of the widow. The court affirmed
because the court found that the wife had a right to request that the
decedent change the beneficiary of the certificate and that her promise to
refrain from so doing constituted sufficient consideration for the father's
promise.

Settlement of Claims
Majority Rule: Forebearance to assert an invalid claim is consideration
only if there is an honest AND reasonable belief that the claim is valid
AND it is brought in good faith.
From 1st Restatement. USE THIS FOR YOUR EXAM.

Must have an honest and reasonable belief in the possible validity of


the claim (p.148)
Honest belief: Subjective standard (good faith)

Reasonable belief: Objective standard (reasonable person)

Fiege v. Boehm, (1956)


P: Feige’s promise to pay $ to Bohem
A/P: Bohem’s promise to forbear (not to sue)
B/4: Yes.
V: Yes. At the time he made the agreement, it had value.
Memory Hook: Defendant agreed to pay various expenses and child
support for plaintiff as long as she did not institute bastardy proceedings
against him. He breached contract, but blood tests showed he was not
father. Was her promise not to institute bastardy proceeding sufficient
consideration, even if there turned out to be no basis for it?
Rule: The consideration is sufficient and the promise is enforceable
because it was valuable (though wrongly) and the result of a bargain
made in good faith.
Must have an HONEST and REASONABLE belief in the possible validity
of the claim (pg. 148) Honest belief: subjective standard (good faith) did
the mother, in fact, believe she had a possible legal claim against the
father? Reasonable belief: Objective standard (RP) would a RP have
believed she had a possible claim?

Minority Rule: § 74 Restatement 2nd (p.149). There is consideration if


claim or defense is doubtful because of the facts or law OR if the
forbearing party believes that it is valid.

Restatement § 74. Settlement of Claims


(1) Forbearance to assert or the surrender of a claim or defense which
proves to be invalid is not consideration unless
a. The claim or defense is in fact doubtful because of uncertainty
as to the facts or the law, or
b. The forbearing or surrendering party believes that the claim or
defense may be fairly determined to be valid.
(2) The execution of a written instrument surrendering a claim or defense
by one who is under no duty to execute it is consideration if the execution
of the written instrument is bargained for even though he is not asserting
the claim or defense and believes that no valid claim or defense exists.

Examples of § 74(2) is problem 43


P’s promise to pay $1000 to tribe
Return Promise:
1) forbear on invalid claim (statute of
limitations ran)
2) sign quit claim deed
B/4? Yes
V?
1) No. No honest and reasonable belief in the
validity of the claim
2) Yes. They were not obligated to sign the
quit claim deed.
Promise enforceable because of quit claim deed.

Quit claim deed: A quitclaim deed is a term used in property law to describe a
document by which a person (the "grantor") disclaims any interest the
grantor might have in a piece of real property, and passes that claim to
another person (the grantee). A quitclaim deed neither warrants nor
professes that the grantor's claim was actually valid.

The Illusory Promise


Definition
An illusory promise may exist where a promise is subject to a condition which is within
the control of the promisor, especially where such condition is related to the contract
performance, or when the promisor, at the time of the promise is made, knows that such
condition cannot occur.

General Rule
If a promise is illusory, there is no consideration because the “promise”
given does not fetter the “promisor’s” future. The promisor has not
committed him or herself in any way.

Easy example:
$100 if you go to Chicago? Response: I might
Have not promised to do anything. That is not consideration.
Has the promisor limited their rights in the future toward a certain thing?
If promisor is not fettered…promisor has not committed him or herself in
any way.

Harder example:
Continuing-O K’s where there is no commitment in promise (might want,
desire, might require, etc) but would be a K after shipment accepted.

Restatement:
§ 77. Illusory and Alternative Promises
A promise or apparent promise is not consideration if by its terms
the promisor or purported promisor reserves a choice of alternative
performances unless
(a) each of the alternative performances would have been con-
sideration if it alone had been bargained for (Sylvan and McMillan v.
Price); or
(b) one of the alternative performances would have been consid-
eration and there is or appears to the parties to be a
substantial possibility that before the promisor exercises his
choice events may eliminate the alternatives which would
not have been consideration.

A promise IS illusory if it reserves a choice of alternate performances,


UNLESS
1) the two choices are separated by the word “or” each choice must have legal
value
I’ll pay you $500 if you 1) was my car OR 2) paint my house = K
I’ll pay you $500 if you 1) love me OR 2) paint my house = NO K b/c
they both don’t have legal value
2) the two choices are separated by the word “and” only one or the other
choice has to have legal value.
I’ll pay you $500 if you 1) wash my care AND 2 ) paint my house = K
I’ll pay you $500 if you 1) love me AND 2) paint my house = K
I’ll pay you $500 if you 1) love me AND 2) conjure spirits for me = NO K
neither has legal value

Requirements-K, Output-K, and Continuing-O-K


These contracts are NOT illusory even though they might appear to be at first
glance. As mentioned before, the UCC requires a quantity. There is no gap filler for this,
but in these types of contracts, the words of the agreement provide enough information
about the quantity for the court to enforce the K.

Implied Promises of Best Efforts and Good Faith Dealing (Lexis/Nexus)


Agreements for exclusive dealings may appear to be based on an illusory
promise since the promisor's performance is subject to conditions within its
control. Nevertheless, common law and the UCC have recognized an implied
promise to use best efforts in an agreement for exclusive dealings, which
furnishes the necessary consideration. [See Wood v. Lucy, Lady Duff-Gordon, 222
N.Y. 88 (1917) (involving an agreement by the defendant to give the plaintiff the
exclusive right to market its name and designs); UCC § 2-306(2)]

§ 2-306. Output, Requirements and Exclusive Dealings.


(1) A term which measures the quantity by the output of the seller or the
requirements of the buyer means such actual output or requirements as may
occur in good faith, except that no quantity unreasonably disproportionate to any
stated estimate or in the absence of a stated estimate to any normal or otherwise
comparable prior output or requirements may be tendered or demanded.

(2) A lawful agreement by either the seller or the buyer for exclusive dealing in
the kind of goods concerned imposes unless otherwise agreed an obligation by
the seller to use best efforts to supply the goods and by the buyer to use best
efforts to promote their sale.

Requirements-K or Output-K
Look for words of obligation: require, need, use, produce
Words of Obligation + Good Faith = Requirements K that is NOT Illusory

A of an O for a Requirements-K or Output-K


Requirements-K or Output-K: If the K is to run for 1 year, Acceptance of this Offer
would form a binding obligation of 1 year’s duration.
Example: “I offer to buy from you all the widgets I need during 2006.” There’s a K
immediately upon A of this O.

Output K is the “flip side” of a Requirements K (all the product you can produce v. all
the product you will need)

Continuing Offer K
Look for ambiguous words like want, wish, might want, might require, or desire.
Offer: “I offer to buy from you all the widgets I want during 2006.”
Here there is no contract unless there’s shipment and acceptance of the shipment.
A of a continuing Offer
Continuing O: If the Continuing O were to run for a year, no one acceptance would form
a binding obligation for a year; rather, you would have a series of A’s forming a series of
K’s. Unless the Continuing O were irrevocable for some reason, it could be revoked
before the 1 year had run.

UCC 2-306 and Official Comment


a) “all…produced” Output-K
b) “all…need” Requirements-K
c) “all…wished” Continuing O if she places the order there is a K

Wood v. Lucy Lady Duff-Gordon (1917)


An agreement existed between the fashion designer and the marketer, which gave
the marketer authority to make sales and advertising decisions. Essentially, the
marketer had the power to license the fashion designer's products to other
marketers. The fashion designer subsequently marketed her own products but did
not share in the obtained revenue. On final appeal, the court affirmed the ruling of
the trial court, holding that an implied contract existed between the parties.
Specifically, the marketer's implied promise to faithfully market the designer's
products amounted to fair consideration creating performance obligations by
both parties.

Is the exchange illusory? Scott says to see 2-306(2)

Wood v. Lucy, Lady Duff-Gordon (1917, pg 151)


Memory Hook: Wood receives exclusive right to market Lucy’s designs. Lucy
markets some designs on her own. Was there sufficient consideration on Wood’s
part (who did not obligate himself to do anything) to enforce contract?
Rule: Promises are not necessarily illusory even if one party’s obligation is
merely conditional. Courts try to find consideration, however, by imputing an
unconditional obligation (reasonable to assume that both parties implicitly
understood that Wood would expend reasonable efforts).

Sylvan Crest Sand and Gravel Co. v. United States (1945)


Plaintiff contracted with defendant for the delivery of trap rock to an airport
construction site. Plaintiff brought a breach of contract action after defendant
refused to request or accept delivery of the rock within a reasonable time.
Summary judgment was granted in favor of defendant on the grounds that the
contracts were illusory by virtue of defendant's unrestricted power of cancellation.
Plaintiff appealed, and the court reversed. The court held that when contracts
lacked specific details for the time of delivery and delivery instructions, delivery
within a reasonable time and a promise to give instructions were implied. The fact
that the contracts allowed for cancellation at any time did not render them
illusory, because defendant had alternatives, to either give delivery instructions or
notice of cancellation within a reasonable time, that were alone sufficient
consideration.
Promise: US promises to buy all Rock as required, but may cancel at any time
Return promise: Sell all rock required
B/4: Y
V: Y
Rule of Mutuality of obligation: Both parties are bound or neither are bound.
If the other side can cancel at any time, are they bound?
Is the promise illusory? No, this is a Requirements-K.

Other snippets of law from this case:


• The words should be so construed as to support the contract and
not render illusory the promises of both parties. This can be
accomplished by interpolating the word 'reasonable', as is often
done with respect to indefinite time clauses.

• A promise is not made illusory by the fact that the promissor has
an option between two alternatives, if each alternative would be
sufficient consideration if it alone were bargained for. A.L.I.
Contracts, Sec. 79.

• As we have construed the agreement the United States promised by


implication to take and pay for the trap rock OR give notice of
cancellation within a reasonable time. The alternative of giving
notice [**10] was not difficult of performance, but it was a
sufficient consideration to support the contract.

Scott said to not be illusory =


• Act in good faith
• Not free to do what you want
• Bound in good faith
• Future limitation

Scott: Exclusive dealings, unless otherwise stated, imposes duty to use best efforts. See
UCC 2-306 AND UCC 2-309(3) and think about how they pertain to Sylvan.

UCC § 2-306: Output, Requirements, and Exclusive Dealings


A term which measures quantity by the output of the seller or the requirements
of the buyer means such actual output or requirements as may occur in good
faith, not unreasonably disproportionate to what is estimated or as compared to
prior output/requirements

§ 2-309. Absence of Specific Time Provisions; Notice of Termination.


(1) The time for shipment or delivery or any other action under a contract if not
provided in this Article or agreed upon shall be a reasonable time.

(2) Where the contract provides for successive performances but is indefinite in
duration it is valid for a reasonable time but unless otherwise agreed may be
terminated at any time by either party.

(3) Termination of a contract by one party except on the happening of an agreed


event requires that reasonable notification be received by the other party and
an agreement dispensing with notification is invalid if its operation would be
unconscionable.

McMichael v. Price (1936)


Plaintiff contracts to buy all the sand he can sell from the defendant, who
promises to supply all the sand plaintiff needs. Defendant breaches.
Plaintiff alleged that defendant failed to furnish sand which plaintiff had sold for
shipment and that defendant renounced the contract. Defendant alleged that
plaintiff breached the terms of the contract by failing and refusing to pay for sand
shipped each month as required by the contract and advised plaintiff he would
cease making further shipments unless he paid as provided in the agreement.

• In construing a contract where the consideration on the one side is an offer


or an agreement to sell, and on the other side an offer or agreement to buy,
the obligation of the parties to sell and buy must be mutual, to render the
contract binding on either party, or, as it is sometimes stated, if one of the
parties, not having suffered any previous detriment, can escape future
liability under the contract, that party may be said to have a "free way out"
and the contract lacks mutuality.

• Where the terms of a contract are susceptible of two significations, that


will be adopted which gives some operation to the contract, rather than
that which renders it inoperative.

• A contract should be construed in such a way as to make the obligation


imposed by its terms mutually binding upon the parties, unless such
construction is wholly negatived by the language used.

Promise: S promises to sell/furnish all the sand buyer can use.


Return Promise: B agrees to buy all the sand that it can use
B/4: Yes
V: Yes
Illusory? No. B doesn’t have to buy any, but if it does, B must buy from S.

Words of obligation, e.g. “all” + Good faith = NOT ILLUSORY

Corbin on Contracts § 156: A basic test in determining whether or not a promise


to buy all you need of a particular product from someone is illusory is whether the
promise states a limitation upon the promisor’s future liberty of action. As long
as the promisor does not have an unlimited option, it doesn’t matter how great or
small that limitation is – mutuality of obligation exists.

Past Consideration
GR past consideration is NO consideration b/c it is not B/4. Recall Schnell v. Nell

Hayes v. Plantation Steel (1982)


The employee worked for the employer for 25 years. Starting one year after he
retired and continuing for three years, the employee received $5k annually from
the employer. The court held that the employee did not supply the required
consideration to make the employer's promise binding. The court held that the
employee announced his intent to retire well in advance of any promise by the
employer to pay him, and therefore the intention to retire was arrived at without
regard to any promise by the employer. The court held that the employee's long
years of dedicated service was legally insufficient consideration because his
service was rendered without being induced by the employer's promise.

Promise: company promises to pay pension to Hayes


Return promise:
1. 25 years service
2. Hayes agrees to retire
3. Hayes works an additional week
B/4: 1. No
2. No, he already announced he was retiring BEFORE promise
3. No evidence it was bargained for
V: Yes.
Illusory: No

Restatement (2nd) § 86: Promise for Benefit Received


(1)A promise made in recognition of a benefit previously received by the
promisor from the promisee is binding to the extent necessary to prevent injustice.
(2)A promise is not binding under Subsection 1
(a)If the promisee conferred the benefit as a gift or for other reasons the
promisor has not been unjustly enriched; or
(b)To the extent that its value is disproportionate to the benefit
The Preexisting Duty Rule – Modification without Consideration
There’s no consideration if you only promise to do something you are already obligated
to do. The law will not allow extortion or holdouts.

Common Law:
If a party does or promises what he is already legally obligated to do, there is no C
Exception may be when a modification is ‘fair and equitable’ in view of
circumstances not anticipated when K was made.

Tricky Example: Problem 55. You’ve got to ask the question preexisting duty
relevant to whom? Hornblower had PED to boats owner. He did NOT have a
PED to Forester Marine Works. Scott says same consideration could support both
K’s even though case cited came to different conclusion.

Lexis/Nexus: In non-sale-of-goods executory contracts, a modification must be


supported by new consideration except:
• if the modification is fair and equitable in light of circumstances not
anticipated
by the parties at the time contract was made (the "unforeseen difficulties
exception"); or
• to the extent that justice requires enforcement of the modification due to
a material change of position in reliance on the modified promise.
[Restatement § 89]

§ 89. Modification Of Executory Contract


A promise modifying a duty under a contract not fully performed on either side
is binding
(a) if the modification is fair and equitable in view of circumstances not
anticipated by the parties when the contract was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in view of material change
of position in reliance on the promise.

SCOTT: Ask question in these cases whether this is the holdup game.

Harris v. Watson (1791)


Ship Alexander bound on a voyage to Lisbon. P (seaman) proved ship was in
danger, D (master) induced the seaman to exert themselves by promising 5
guineas over and above his common wages. D performed extra work like
navigating the ship.
Law: For policy reasons, you are not allowed to hold out for more in an
emergency (other is under duress) when you have a pre-existing duty to
deliver services/goods.
Stilk v. Myrick (1809)
Voyage from London to the Baltic and back. Ships articles, P was to be paid at
the rate of 5 pounds of a month. Course of voyage, two seaman deserted. Cpt
couldn’t replace them at Cronstadt, entered into agreement with rest of crew to
add deserted crewman’s wages to theirs if they couldn’t get 2 men at
Gottenburgh. They couldn’t get replacement men. Holding: Haris v. Watson
rightly decided. In this case the agreement is void for want of consideration.
The desertion of a part of the crew is to be considered an emergency of the
voyage as much as their death and those who remain are bound by the terms of
their original contract to exert themselves to the utmost to bring the ship in
safely to her destined port. P can only recover at the rate of 5 pounds a month.

Court said: If the cpt had capriciously discharged the two men…one story. But
otherwise you’ve got a preexisting duty. Preexisting duty is not consideration for
a better contract.

Hypo: what if they only contracted to go to Cronstadt instead of London to


London and then the desertions occurred? No preexisting duty, can negotiate a
new K

Lingenfelder v. Wainwright Brewery Co. (1891)


Facts: Jugenfeld architect designing new brewery building. Found D had awarded
separate K for plant to one of his rivals. Angry he threated to quit unless D
promised him an extra payment of 5% of refrig plan cost. After brewery was
complete D refused to pay the extra $. P argued that when Jungenfeld declined to
continue his K the D had the right to sue for damages, but didn’t. Instead they
agreed to demand for additional compensation. D argued that this new K was
without consideration. Holding: It is true Jungenfeld became liable in damages
for obvious breach of original contract, but that doesn’t mean that D is estopped
from showing that revised K was without consideration.

• A promise to pay a man for doing that which he is already under contract
to do is without consideration.

• Nothing we have said is intended as denying parties the right to modify


their K’s or make new Ks upon new or different considerations.

• We hold when a party merely does what he has already obligated himself
to do, he cannot demand an additional compensation therefore and
although by taking advantage of the necessities of his adversary he obtains
a promise for more, the law will regard it as a nudum pactum and will not
lend its process to aid in the wrong.
Promise: to pay L extra $ to finish B1
Return Promise: L promises to complete B1
B/4: Yes
V: No L is under a PED to finish B1
EXAMPLE THAT IS NOT THE HOLDUP GAME
Problem 53 (Ravi Mehre)
Abby insisted on cellar, promising to pay any additional cost.
89 restatement comment b in particular p.g 201 of supplement illustration #1
almost exactly the same.
Also from Corbin on Contracts via Lexis/Nexus:
In Martiniello v. Bamel, 255 Mass. 25, 150 N.E. 838 (1926) , a building contract
was made without investigation of the soil. When excavation began, it was found
that the land was ''filled land'' and that the foundation must go much deeper than
expected. Both parties were surprised at this. They thereupon agreed that the
building should go on, that the foundation should be made as deep as the law
required, and that the owner would pay actual cost. This agreement was held to be
enforceable. The court said: ''Whether ... the original contract could have been set
aside in equity on the principle of mutual mistake need not be inquired, because
both parties acted upon the theory that there had been such mistake and that hence
as matter of fair dealing the original contract ought to be modified and a new
agreement made to govern their relations.

SCOTT: Look at 89 of Restatment pg. 200.


(a) if the modification is fair and equitable in view of circumstances not
anticipated by the parties when the contract was made; or

UCC:
Abolishes the PED rule. No new consideration needed but good faith IS needed.
It is up to the courts to determine if, for example, a party was coerced into the
modification.

§ 2-209. Modification, Rescission and Waiver.

(1) An agreement modifying a contract within this Article needs no


consideration to
be binding.
(2) A signed agreement which excludes modification or rescission except by a
signed writing cannot be otherwise modified or rescinded, but except as between
merchants such a requirement on a form supplied by the merchant must be
separately signed by the other party.
(3) The requirements of the statute of frauds section of this Article (Section 2-
201) must be satisfied if the contract as modified is within its provisions.
(4) Although an attempt at modification or rescission does not satisfy the
requirements of subsection (2) or (3) it can operate as a waiver.
(5) A party who has made a waiver affecting an executory portion of the
contract may retract the waiver by reasonable notification received by the other
party that strict performance will be required of any term waived, unless the
retraction would be unjust in view of a material change of position in reliance on
the waiver.

Problem 54: Army v. Tank Treads, Inc.


2-209 (see above) This was not a good faith modification or recision.
1-203 Obligation of Good Faith. Treads did not act in good faith, taking
advantage of Army’s plight.
1-207 Reservation of rights (Army gave in “under protest”) preserving rights to
sue later

Statute:

Federal statute and NY Penal Law make it a crime to offer or accept a gratuity for
the performance of a public servant’s official duties.

Example was a problem about a NY police officer who collared a criminal in his
spare time and wanted to claim the reward. The officer has a pre-existing duty to
catch criminals on/off duty. Policy consideations affect because police would
wait for their day off work to make the collar so they could personally profit.
Police would become mercenary, going after criminals with largest rewards.
Dangerous for police, damaging to public confidence in them.

Getting around the PED with Substitute Contracts


Unlike an accord and satisfaction which merely suspends the original contractual duty, a
substitute contract immediately discharges all duties under the original contract. If the
obligor breaches the substitute contract, an action may be brought on the substitute
contract alone.

§ 279. Substituted Contract


(1) A substituted contract is a contract that is itself accepted by the obligee in
satisfaction of the obligor's existing duty.
(2) The substituted contract discharges the original duty and breach of the
substituted contract by the obligor does not give the obligee a right to enforce the
original duty.

Examples: Michael Jordon, Tyrell Owens, Barry Sanders


How can you exceed performance and during the first year of a 5 year contract demand a
new contract?
How to get around the PED
1. Rescind old K and enter into a new K (in the same document)
2. Restructure or rewrite the K, and promise something new
old: $1 M for 3 years
new: $10 M for 5 years
(You’ve added something new on both sides)
Lexis/Nexus: Discharge of Obligation by Lesser or Greater Performance
Generally, a promise to pay a lesser amount than is owed or to partially perform a
preexisting obligation does not constitute a legal detriment since the promisor is merely
doing that which he is already obligated to do. [Foakes v. Beer, H.L. 1884] However, if
the promisor undertakes a greater obligation than is promised, such as paying or
performing before the obligation is due, he incurs a legal detriment sufficient to form
consideration for the discharge of the obligation.

Pg. 183 of casebook: Modern context an additional promise to do something additional


or in substitution such as paying a debt earlier than due, would be sufficient
consideration.

§ 73. Performance Of Legal Duty


Performance of a legal duty owed to a promisor which is neither doubtful nor
the subject of honest dispute is not consideration; but a similar performance is
consideration if it differs from what was required by the duty in a way which
reflects more than a pretense of bargain.

Corbin on Contracts: § 7.18 Compositions With Creditors


Part payment by a debtor of an already overdue debt is generally held not
operative as a full satisfaction, even though the creditor so agrees, and it is not
consideration for a promise.

Accord and Satisfaction


An accord is an agreement between parties of a pre-existing contract that the obligee will
accept the performance stated in the accord in satisfaction of the obligor's contractual
duty. Performance of the accord suspends the contractual duty but if the obligor breaches
the accord, the obligee may bring action on the original contract OR the accord.
[Restatement § 281]

Useful Terms:
Accord: An agreement whereby one party agrees to give and the other party
agrees to accept something other than that originally agreed to.
Satisfaction: The carrying out of the accord
Obligee – one to whom an obligation is owed
Obligor – one who owes an obligation

General rule:
Where you have a disputed debt, the debtor does not have to pay anything until the debt
is legally resolved.
Payment on a non-disputed debt is payment on account
Payment on a disputed debt will discharge the original debt because there is no duty to
pay the disputed debt until legally resolved.

Common Law:
§ 281. Accord And Satisfaction
(1) An accord is a contract under which an obligee promises to accept a stated
performance in satisfaction of the obligor's existing duty. Performance of the
accord discharges the original duty.
(2) Until performance of the accord, the original duty is suspended unless there
is such a breach of the accord by the obligor as discharges the new duty of the
obligee to accept the performance in satisfaction. If there is such a breach, the
obligee may enforce either the original duty or any duty under the accord. (SEE
problem 58b below)
(3) Breach of the accord by the obligee does not discharge the original duty,
but the obligor may maintain a suit for specific performance of the accord, in
addition to any claim for damages for partial breach. SEE Clark v. Elza (1979)

Problem 58a: By agreeing to forbear from legal right (Restatement section


71(3)(b) a forbearance is consideration) and pay the $750 as full satisfaction (both
promises of which have legal value and were bargained 4. This is a valid accord
and her payment will be the satisfaction.
Problem 58b: If Pecunious violates and files bankruptcy anyway claim for $1000
or $750? See Restatement of Contracts section 417c on pg. 186 of casebook “If
the debtor breaks such a contract the creditor has alternative rights. He can
enforce either the original duty or the subsequent contract”

Clark v. Elza (1979)


Proc: P (the Elza’s) suffered injuries in auto accident. P alleged D’s (Clark and
Woodward) were responsible. After case was scheduled for trial, they negotiated
a settlement verbally for $9500. Trial judge was notitified and case removed from
calendar. The next day, Mr. Elza found his injuries were more $$ so they advised
court that they didn’t want to do through with settlement. D’s filed a separate
motion within the tort action to enforce the settlement. Hearing on this motion
the P’s argued that settlement was not binding because it was an executory accord
and could only be enforced on satisfaction. Court agreed and said D’s could
procede with their original tort action for the auto injury. D’s petitioned for writ
of certiorari and it was granted. Facts: trial court refused to enforce settlement on
ground it was an executory accord and not a substitute contract. Holding: The
circuit court should NOT have permitted the P’s to proceed with tort action in
violation of their settlement agreement.

• Court had to reason whether it was an executory accord or a substituted contract.


Unless there is clear evidence to the contrary, an agreement to discharge a pre-
existing claim will be regarded as an executory accord (middle pg 185).

• An executory accord is simply a type of bilateral contract. As long as the basic


requirements to form a contract are present, there is no reason to treat such a
settlement agreement differently than other contracts which are binding.
• If a substitute K were intended, underlying tort action would go away when K
was formed notwithstanding that performance had not been rendered…on the
principle that the substitute K replaces the initial claim.

• Bottom of 186 As long as the debtor (D in this case) neither breaches the accord
nor provides a reasonable basis for concluding he will not perform, the creditor
(P) has no right to enforce the underlying cause of action. See section 417 of the
Restatement on pg. 186
• THIS IS 281(3) of Restatement

UCC:
§ 3-311. Accord and Satisfaction by Use of Instrument. (FLOWCHART THIS!)
(a) If a person against whom a claim is asserted proves that (i) that person in
good faith tendered an instrument to the claimant as full satisfaction of the claim,
(ii) the amount of the claim was unliquidated or subject to a bona fide dispute, and
(iii) the claimant obtained payment of the instrument, the following subsections
apply.
(b) Unless subsection (c) applies, the claim is discharged if the person against
whom the claim is asserted proves that the instrument or an accompanying written
communication contained a conspicuous statement to the effect that the
instrument was tendered as full satisfaction of the claim.
(c) Subject to subsection (d), a claim is not discharged under subsection (b) if
either of the following applies:
(1) The claimant, if an organization, proves that (i) within a reasonable time
before the tender, the claimant sent a conspicuous statement to the person against
whom the claim is asserted that communications concerning disputed debts,
including an instrument tendered as full satisfaction of a debt, are to be sent to a
designated person, office, or place, and (ii) the instrument or accompanying
communication was not received by that designated person, office, or place.
(2) The claimant, whether or not an organization, proves that within 90 days
after payment of the instrument, the claimant tendered repayment of the amount
of the instrument to the person against whom the claim is asserted. This paragraph
does not apply if the claimant is an organization that sent a statement complying
with paragraph (1)(i).
(d) A claim is discharged if the person against whom the claim is asserted
proves that within a reasonable time before collection of the instrument was
initiated, the claimant, or an agent of the claimant having direct responsibility
with respect to the disputed obligation, knew that the instrument was tendered in
full satisfaction of the claim.

§ 1-207. Performance or Acceptance Under Reservation of Rights.


(1) A party who, with explicit reservation of rights, performs or promises
performance or assents to performance in a manner demanded or offered by the
other party does not thereby prejudice the rights reserved. Such words as "without
prejudice", "under protest" or the like are sufficient.
(2) Subsection (1) does NOT apply to an accord and satisfaction. (EXAM
QUESTION FROM LAST TERM!)

Hypo: Let’s say you have good faith disputed debt with Sears. They say $500 and you
say it’s only $300. Then you have a disputed debt. You don’t have a legal obligation to
pay until dispute is legally resolved. If you agree to pay $400 in satisfaction for whole
disputed debt and pay it now (not in future when it will be legally resolved) then you
have done something you aren’t legally obligated to do, so this is consideration
(forbearance of a legal right)

59a You have to put “payment in full” if you want to have a chance of getting out of it.
Depending on circumstances, debtor will still pay if debt is really owed.
SCOTT: Good faith dispute. She sent and they acknowledged payment in full. Accord
and satisfaction when check was cashed.

59b
SCOTT: He has a duty to say something. Silence can be interpreted as acceptance as in
case cited below.
Hoffman v. Ralston Purina Co., 86 Wis. 2d 445
The court held that appellant's retention of respondents' check and credit memorandum
for an unreasonable length of time with the knowledge that both instruments were offered
in full settlement of the disputed claim constituted an acceptance of the settlement offer.

59c
SCOTT: THERE MUST BE A Good faith dispute for an Accord & Satisfaction.
Hayden v. Coddington, 169 Pa. Super. 174
Even though the subcontractor had cashed the check, the court rejected the contractor's
defense of accord and satisfaction because in light of the bill's acceptance without
objection, the contractor's tender of the check had not been offered in settlement of a
claim honestly disputed. Thus, the court held the contractor's denial of the subcontractor's
claim had not been in good faith.

Problem 60
3-311 revised (see above)
He immediately complained (good faith)
Check tendered as payment in full, cover letter, $150 cleaning charge and they cashed it.
3-311(d) if within a reasonable time before collection of the instrument was initiated,
agent of claimant (credit card dept) having direct responsibility knew instrument was
tendered in full satisfaction (cover letter, less than total amount, etc.)
Merchadise should not have cashed the check and returned it immediately. If they did
cash it, send back repayment within 90 days.
Cannot write under protest to reserve their rights UCC 1-207 b/c it does not apply to
accord and satisfaction.

Part b) within 90 days they can repay the $5350 and reassert their claim for the full
amount of $5500 under UCC 3-311c2
Part c) Under UCC 3-311c1 all invoices should conspicuously communicate that disputed
claims are to be addressed so that Alice Mayberry gets them so they are outside normal
processing of Accounts Receivable department. Possibly separate mail code or PO box.

Part d) by writing cashed under protest all rights reserved the company cannot protect
themselves b/c 1-207 does NOT apply to accord and satisfaction AND if they cash it
under UCC3-311(d) Alice knew (scratching it out proves it) and so it WILL discharge the
debt if she scratches it out, writes under protect, and cashes it.

Promissory Estoppel
A non-goods contract that fails to satisfy the statute of frauds may nevertheless be
enforceable if the promisor's promise foreseeably induces action or forbearance on the
part of the promisee or a third person and enforcement is the only means of avoiding an
injustice. [Restatement § 139] Mere reliance on the oral contract itself is generally not
enough to justify estoppel; most cases require some additional statement or promise.
Some courts have refused to apply promissory estoppel to cases involving goods
contracts because UCC § 2-201(3), which enumerates the circumstances under which the
writing requirement may be avoided, does not include estoppel. However, section 1-103,
which applies to all commercial transactions, indicates that principles of law and equity,
including estoppel, are to supplement the specific provisions.

Definition per Lexis/Nexus:


When a promisee foreseeably relies to his detriment on the promisor's promise,
even in the absence of an enforceable contract, the doctrine of promissory
estoppel may be invoked to make such promise binding in order to prevent
injustice. The remedy in such cases is based on the extent of the promisee's
reliance, not his expectation. The Restatement, Second, eliminated the
requirement from the Restatement, First, that the detriment be "substantial."
[Restatement § 90(1)]

Promissory estoppel is classically used in cases involving GRATUITOUS PROMISES


Allows certain contracts to be enforced even without consideration
There needs to be REASONABLE RELIANCE on the promise
Available remedy is different than under a contract: Generally RELIANCE damages
Cannot be more that the difference of the value of having the promise enforced versus not
enforced. Can, however, be less than this difference.

Promissory Estoppel (RI and II p. 196)


1. Promise
2. Which the promisor should reasonably expect to induce action or forbearance*
(Detrimental Reliance) on part of promisee*
* RI -- Action or forbearance must be of a definite and substantial character
* RII -- or Third Party
3. Which does induce reasonable action or forbearance (Detrimental Reliance)
4. Is binding if injustice can be avoided only by enforcement of the promise *
* RI -- does not have ¶ 2
5. RII -- The remedy granted for such a breach may be limited as justice requires.

Restatement (2nd) § 90 – Promise Reasonably Inducing Action or Forbearance:


(1)A promise that the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third party and which does induce such
action or forbearance is binding if injustice can be avoided only by enforcement of
the promise. The remedy granted for breach may be limited as justice requires.
(2)A charitable subscription or a marriage settlement is binding under Subsection (1)
without proof that the promise induced action or forbearance.

Non example
Allegheny College v. National Chautauqua County Bank (1927)
The concept of promissory estoppel is introduced as the equivalent of
consideration in connection with laws of charitable subscription, though it is not
used to support this case, which is decided using normal consideration doctrine.

Interlocutory promise – pledge of donation of certain amount of money in


exchange and dependant upon another donor being identified that will give a like
amount. If you cannot find other donor, then you are not required to give the
pledged amount.

Facts: Mary Yates Johnston signed and delivered an Estate Pledge. She paid
$1000 on account before she died. In July 1924 she gave notice to the college
that she repudiated the promise. She died and P tried to collect the remaining
$4k.
• It is certain that we have adopted the doctrine of PE as the equivalent of C
in connection with charitable subscriptions.
PE not necessary in this case
• Duty to perpetuate name of founder was implied by request of promisor
and result was creation of a bilateral agreement.

• A bilateral agreement may exist though one of the mutual promises be a


promise “implied in fact” an inference for conduct as opposed to an
inference from words.

• Often difficult to determine whether words of condition in a promise


indicate a request for consideration or state a mere condition in a
gratuitous promise. Aid (though not conclusive test) is whether
happening of the condition will be a benefit to the promisor. If so, it is a
fair inference that the happening was requested as consideration.
Another Non-example: Some jurisdictions don’t allow sub-contractors to be
bound based on doctrine of PE As in this case:

James Baird Co. v. Gimbel (1933)


Facts: D was a subcontractor. Their employee put together a bid that
underestimated yardage of linoleum needed by ½.
Dec 24th D’s make offer
Dec 28th P receives original O
D sends revocation by telegraph and new O
P puts bid in for building
P receives revocation and new O
Dec 30th P found out their bid for the building is accepted
Dec 31s D’s withdrawal communicated by letter received by P
Jan 2nd P formally accepts original O
Law: An offer for an exchange is not meant to become a promise until a
consideration has been received, either a counter-promise or whatever
else is stipulated. There is no room in such situation for doctrine of PE.

Example:
Drennan v. Star
Facts essentially the same as in Baird, yet court comes to a different
conclusion, finding room for PE: No contract, yet subcontractor “was
bound to realize the substantial possibility that its bid would be the lowest,
and that it would be included in [the contractor’s] bid. [The Sub] had
reason not only to expect [the Contractor] to rely on its bid but want him
to”

Banco Enterprises Inc. v. Delta Roofing, Inc. (1994)


Banco (P) was a general contractor tried to recover damages from
subcontractor Delta for Delta’s refusal to install roof (couldn’t get
certification from Owens-Corning). Judgment for P affirmed. Missouri’s
doctrine of PE applies. The written K was just a confirmation.

Hoffman v. Red Owl Stores (1965)


Memory Hook: Man really wants this grocery store franchise, and sells his bakery, small
grocery store, and home without having a formal contract (“agreement was never reached
on factors essential to the contract”).

• PE isn’t as limited in scope as D argues.


Restatement does not impose the requirement that the promise giving rise to the
cause of action must be so comprehensive in scope as to meet the requirements of
an offer that would ripen into a K if accepted by the promise.
• Conditions 1&2 of PE go to jury (reasonably foresee + did induce). Condition 3
for the court (injustice) to craft a remedy.
• PE extends to 3rd parties as well: Ordinarily only the promisee and not third
persons are entitled to enforce the remedy of promissory estoppel against the
promisor. However, if the promisor actually foresees, or has reason to foresee,
action by a third person in reliance on the promise, it may be quite unjust to refuse
to perform the promise. 1A Corbin, Contracts, p. 220, sec. 200.

PE Damages:
"Enforcement of a promise does not necessarily mean Specific Performance.
[**277] It does not necessarily mean Damages for breach. Moreover the amount
allowed as Damages may be determined by the plaintiff's expenditures or change
of position in reliance as well as by the value to him of the [*702] promised
performance. Restitution is also an 'enforcing' remedy, although it is often said to
be based upon some kind of a rescission. In determining what justice requires, the
court must remember all of its powers, derived from equity, law merchant, and
other sources, as well as the common law. Its decree should be molded
accordingly."

"The wrong is not primarily in depriving the plaintiff of the promised reward but
in causing the plaintiff to change position to his detriment. It would follow that
the damages should not exceed the loss caused by the change of position, which
would never be more in amount, but might be less, than the promised reward."

Universal Computer Systems v. Medical Services Association of Pennsylvania


(1980, pg 198) Facts: Universal relied on Blue Shield’s promise to pck up it’s
bid a the airport in order to make it in time under the deadline. Blue Shield didn’t
go, and Universal lost bid.
Holding: Universal reasonably relied (and acted on its reliance) on Blue Shield’s
promise to its detriment and can be compensated under promissory estoppel.
In this case, damages awarded were equivalent to the contract not awarded, which
was more than the reliance interest.

Moral Obligation
GR MO is NOT sufficient C, unless there is a MO where there is an express
promise, some preexisting obligation that has become inoperative by law, that the
promisee voluntarily revives.

Example: Mills v. Wyman (1825)


Rule: “mere verbal promise without any consideration cannot be enforced
by action” Facts: D is the father of 25 yo Levi Wyman. Levi returning
from voyage at sea got sick. P acted as good Samaritan and gave him
shelter and comfort for 15 days until Levi died. D felt grateful, promised
in writing 4 days later to pay P for expenses. Holding: nonsuit of P was
correct.
In class analysis:
P: Dad will pay $
A/P: Take care of son (in past and past C is NO C)
B/4? No already occurred by time dad promised
Legal Value: yes
Illusory: no
PE? Promise could not induce action b/c action had already
occurred.
MO?
Debts incurred by infants? No son was 25 yo

4 Exceptions to the GR:


• A promise to pay an indebtedness that is now barred by a statute of limitation;
• A promise to pay an indebtedness incurred as an infant after the infant reaches
majority;
• A promise to pay an indebtedness discharged in bankruptcy (controlled now by
Federal law);
• A promise made in recognition of a benefit previously received by the promisor to
the extent necessary to prevent injustice (material benefit to promisor).

1. statute of limitations
Policy reasons for statute of limitations: peace of mind, memories fade, etc. Is not
obligated to pay
47b) rests upon past consideration “In all these cases there is a moral
obligation founded upon an antecedent valuable consideration” pg. 169
Revives the past valuable consideration
47c) yes, $5000 Mills v. Wyman “the mere acknowledgement of the debt
OR the part payment of principal OR interest may be found to be an
enforceable implied promise to pay the obligation” 82(2)(a) 82(2)(b)
47d) 82(2)(a) and 82(2)(b)

§ 82 Promise to Pay Indebtedness; Effect on the Statute of Limitations


(1) A promise to pay all or part of an antecedent contractual or quasi-
contractual indebtedness owed by the promisor is binding if the
indebtedness is still enforceable or would be except for the effect of a
statute of limitations.
(2) The following facts operate as such a promise unless other facts
indicate a different intention:
(a) A voluntary acknowledgment to the obligee, admitting the
present existence of the antecedent indebtedness; or
(b) A voluntary transfer of money, a negotiable instrument, or
other thing by the obligor to the obligee, made as interest on or part
payment of or collateral security for the antecedent indebtedness; or
(c) A statement to the obligee that the statute of limitations will not
be pleaded as a defense.

2. promise to pay infant incurred as an infant


Hypo: Columbia records, minor, walks away upon majority
Stevie Wonder, as approached majority record label nervous because he
might try to avoid K.

3. promise to pay indebtedness by bankruptcy

4. promise made in recognition of a benefit previously received by the promisor


to extent necessary to prevent injustice (rare)

Restatement 86 - Promise for Benefit Received


1. A promise made in recognition of a benefit previously received by
the promisor from the promisee is binding to the extent necessary to
prevent injustice.
2. A promise is not binding under Subsection (1)
o if the promisee conferred the benefit as a gift or for other reasons
the promisor has not been unjustly enriched; or
o to the extent that its value is disproportionate to the benefit.

Webb v. McGowin (1935)


Scott: Most courts won’t extend MO quite this far
Riding the block. His estate has to pay it. (Guy was paying while alive,
now his estate should continue the payments)
Theory that in this case, it was easier for two employees who knew each
other to accept that there was an obligation here. Sympathetic P in this
case.
Consideration? No
P’estoppel? No
Moral Obligation?
1. SoL
2. Infancy
3. Bankruptcy
4. Material Benefit received

4 things are needed for the promise for benefit exception to work:
The promisor must have received a material benefit from the promisee,
The material benefit was received under circumstances that raised a moral
obligation,
There must have been a subsequent promise to compensate, AND
The nature of the circumstances make it reasonable for the promisee to
expect compensation.

Problem 49
Promise: $50 a week for rest of your life
Return: past consideration, took care of him while he a minor. PC is !C
B/4: No
V?
GR services from one family member to another family member is looked
at as a gift.

EXAM TIP: if you are told there is a K, believe that there is a K.

REMEDIES

Damages
Reliance + Restitution IS possible
Reliance + Expectation IS NOT possible
Look to Expectation damages FIRST

Theories of Monetary Damages (most common damages awarded)


Expectation (uncertainty can limit/eliminate damages)
ALWAYS START WITH EXPECTATION DAMAGES FIRST
TAYLOR: IF YOU DO NOT HAVE LOST PROFITS YOU CANNOT
SEEK EXPECTATION DAMAGES
give the pomisee the value of the expectancy which the promise created
Most common form of damage award.
FORMULA: Lost value (usually profits & gains) + incidental loss +
consequential loss – costs avoided – loss avoided = $$$
Put the non-breacher into the position he or she would have been in if the
K was fully performed. “Benefit of the bargain.”
The purpose is to compensate the P the amount that gives him or her the
value of what was B/4.
Typically lost profits

Sec. 347, Measure of Damages in General


Subject to the limitations stated in Secs. 350-53, the injured party has a
right to damages based on his expectation interest as measured by:
(a) the loss of in value to him of the other party's performance caused by
its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by
the breach; less
(c) the cost or other loss that he has avoided by not having to perform.

347:
Loss in value (*****GET FROM SLIDE WEEK 9)
If there has been NO PERFORMANCE the loss in value
Other losses: All loses actually suffered (except…
Costs avoided: If the P avoids cost or losses by the breach, those must be
subtracted from the P’s damage award.
Hypo: Ann spent $500 for building materials for K with Bob. Bob
breaches. If she can resell those building materials to Chris for
$300, Ann can recover only $200 from Bob.
Hypo: seller to sell land for $20k that was worth $25k. Seller breaches.
What does buyer get as expectation damages. Answer: $5000. Loss of
value (lost profits) + any other loss - costs avoided

What was expected Reality

Look at Hypo 2 calculation on slide.


$2k + $10k = $12k
$12K expectation
$5k other loss NOT reliance

Reliance (foreseeable can limit/eliminate damages)


pomisee has changed position. Undo the harm that reliance on D’s
proimise has caused him. Put P in as good a position as he was in before
the promise was made.
Put the non-breacher back into the position he have been in before the K
was created. “Restore the status quo.”
Out of pocket expenses
put the non-breacher back into the position he or she would have been in
before the contract was created). The purpose is to compensate the
plaintiff the amount that gives him or her the expenses that have been paid
out of pocket in reliance on the bargain Put the plaintiff in as good a
position as he was in before the promise was made.

Restitution (unjust enrichment) (Avoidability can limit/eliminate damages)


pevention of gain by the defaulting promisor at the expense of the
promise; the prevention of unjust enrichment
Put the D back into the position before the K was created. Purpose is to
compensate the P the amount that the D has received as a benefit from the
P but for which the D has not paid for.
Recover the value f a benefit conferred upon the other party.
eliminate any unjust enrichment
promisor breaches and pormisee has already paid money or benefit.
put the defendant back into the position he or she was in before the
contract was created).
The purpose is to compensate the plaintiff the amount that the defendant
has received as a benefit from the plaintiff, but which the defendant has
not yet paid for.
Allow one party to recover the value of a benefit conferred upon the other
party
Prevent unjust enrichment

Wrap up with
Liquidated damages
If there is a damage clause in K that says if you breach..then you get $x
Equitable Remedies
Injunctions
Specific performance
Writ of Mandamus

SCOTT PUTS IT THIS WAY:


Expectation Damages:
Always look at what the plaintiff would recover in expectation damages first.

Sec. 347, Measure of Damages in General


Subject to the limitations stated in Secs. 350-53, the injured party has a right to
damages based on his expectation interest as measured by:
(a) the loss of in value to him of the other party's performance caused by its
failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the
breach; less
(c) the cost or other loss that he has avoided by not having to perform.

Loss in Value
If there has been no performance, the loss in value is equal to the value
that the promised performance would have had to the plaintiff. (Often it is
the lost profit amount). If there has been defective performance or partial
performance, the loss in value is equal to the value of the performance
expected and the value of the performance received.

Other losses
All loses actually suffered (except those necessary to receive the loss of
value), including incidental and consequential losses.
Incidental losses are those incurred in a reasonable effort to avoid loss.
Consequential losses are those such as injury to a person or property
resulting from the breach.

Consequential damages – expenses or losses beyond general


damages that the P would never have incurred but for the breach.
Losses that do not flow directly from an injurious act, but that
result indirectly from the act.

Incidental Damages – generally, a type of consequential damages


incurred in ascertaining and trying to prevent the breach.

Costs avoided
If the plaintiff avoids cost or losses by the breach, those must be
subtracted from the plaintiff’s damage award.
For example, if Ann has spent $500 for building materials to perform a
contract with Bob, who breaches the contract, if she can resell those
building materials to Chris for $300, Ann cannot recover that $300 from
Bob.

THE BOOK STATES IT THIS WAY:


General Damages:
Expectancy damages representing a “loss in value” to P because of breach.
It is generally presumed that the general damage is measured by the cost
of substitute performance.

Hypo: builder of motel fails to build structure as promised, loss in value


damages are cost of substitute performance or diminution in value
occasioned by the defective performance.
Special Damages – damages that arise out of a peculiar set of facts “special” to this K.

Incidental –
Damages incurred in ascertaining and trying to prevent the
breach.

Hypo: storage costs incurred by a nonbreaching seller who hols


goods for a buyer for a reasonable time after the buyer fails to pick
up the goods as promised.

Consequential – expenses and other losses beyond general damages that


the P would never have incurred “but for” the breach.
Hypo: faulty furnace blows up, consequential damages are P&S
and medical expenses.

Hypo: commercial setting often these are lost profits for the
nonbreaching buyer

Hypo: motel is not ready b/c contractor breached and a convention group cancels.
Consequential damages include the lost profit from the convention group.

§ 2-715. Buyer's Incidental and Consequential Damages.


(1) Incidental damages resulting from the seller's breach include expenses
reasonably incurred in inspection, receipt, transportation and care and
custody of goods rightfully rejected, any commercially reasonable
charges, expenses or commissions in connection with effecting cover and
any other reasonable expense incident to the delay or other breach.
(2) Consequential damages resulting from the seller's breach include
* (a) any loss resulting from general or particular requirements and
needs of which the seller at the time of contracting had reason to know and
which could not reasonably be prevented by cover or otherwise; and
* (b) injury to person or property proximately resulting from any breach
of warranty.

LIMITATIONS for BOTH general and special damages are subject to doctrines of
1. Certainty (“Chrysler”)
P is denied relief that is too speculative b/c P cannot prove:
Fact that the breach caused the type of injury that the P alleges
AND/OR
Extent to which the P suffered from the breach
A party cannot recover for damages for loss beyond the amount
proven with reasonable certainty.
There’s no recovery if the loss is too speculative.
May be too speculative because they are too uncertain as to
Whether the breach cause the type of injury that P
alleged
Extent of the injury that P alleged
OR
Both the cause and the extent of the injury alleged
Absolute certainty is not required but reasonable certainty is.

Certainty applies to primary and secondary damages


Must prove the damage occurred AND amount of
injury
P has burden of proof
If P does not present sufficient evidence of some portion of
the damages, the P will not recover
May require expert testimony, market analyses, econominc
and financial data
2. Foreseeability (“Ford”)
P must show that the damages were within the reasonable
contemplation of the breach.
Is determined by looking at what the breaching party knew or
should have known (objective test) at the time that the contract was
made.
The breaching party must have been able to foresee the probable
loss that would result from a breach
The way the loss occurred does not have to be foreseeable

3. Avoidability aka Mitigation (“AMC”)


Injured party must use reasonable efforts to mitigate (avoid)
damages. This is an affirmative duty even if you are the non-
breaching party.
Problem 66
I’m out $15k + lost profits $4k - $2k I can avoid by salvage - $5k you paid = $12k

Taylor: Lost profits: $4k $24k - $20k


Reliance expenses: $15k (out-of-pocket)
Restitution interest: -$5k (keep non-breacher from being unjustly enriched)
Salvage -$2k
=====
$12k

RICK FRANK FORMULA: Lost value (usually profits & gains) + incidental loss +
consequential loss – costs avoided – loss avoided = $$$

Hypo: Buyer and seller entered into a K for the sale of land for $20,000.
The land has a fair market value of $25,000. Seller repudiates. $5k
The loss of value=$5,000—the lost profit plaintiff expected by performing
the contract ($25,000 (value of land) - $20,000 (the cost that the plaintiff
still expected to pay to the defendant to realize that profit)) PLUS
Any other loss (does not include those costs necessary to receive the lost
value of the K), including incidental or consequential loss caused by the
breach MINUS
Any cost or loss avoided by not having to perform.
Buyer’s expectation measure of damages would be $5,000. The amount
that puts the Buyer into the position the Buyer would have been in if the K
was fully performed.

Hypo: Buyer and seller enter into a K for the sale of land for $50,000.
The land has a fair market value of $52,000. Buyer puts $10,000 down on
the land as a down payment. Seller repudiates.
What amount puts the buyer into the position the Buyer would have been
in if the contract was fully performed?
The loss of value=$52,000 (the value of the land that the plaintiff
expected to receive by performing the contract (value of land) PLUS
Any other loss (does not include those costs necessary to receive the lost
value of the K), including incidental or consequential loss caused by the
breach MINUS
Any cost or loss avoided by not having to perform=$40,000 (plaintiff’s
remaining costs under the K).
Buyer’s expectation measure of damages would be $12,000. This amount
puts the buyer back into the position that the Buyer would have been in if
the K was fully performed.

Hypo: Buyer and seller enter into a K for the sale of land for $50,000.
The land has a fair market value of $52,000. The Buyer incurs costs of
$300 to obtain a mortgage and title insurance necessary to buy this
property. Buyer puts $10,000 down on the land as a down payment.
Seller repudiates.
What amount puts the buyer into the position the Buyer would have been
in if the contract was fully performed?
The loss of value=$52,000 (the value of the land that the plaintiff
expected to receive by performing the contract PLUS
Any other loss (does not include any other costs that the plaintiff must
necessarily incur to receive the lost value of the K calculated above),
including incidental or consequential loss caused by the breach MINUS
Any cost or loss avoided by not having to perform=$40,000 (plaintiff’s
remaining costs under the K).
Buyer’s expectation measure of damages total $12,000. This amount puts
the buyer back into the position that the Buyer would have been in if the K
was fully performed. (The Buyer does NOT get the $300 b/c the Buyer
expected to pay that money to receive the benefit of the bargain.)

Hypo: Buyer and seller enter into a K for the sale of land for $50,000. The
land has a fair market value of $52,000. The Buyer incurs costs of $300 to
obtain a mortgage and title insurance necessary to buy this property. Buyer
puts $10,000 down on the land as a down payment. Buyer, with Seller’s
knowledge, also pays a nonrefundable $5,000 down payment on adjoining
property to use as a parking lot. Seller repudiates.
What amount puts the buyer into the position the Buyer would have been
in if the contract was fully performed?
The loss of value=$52,000 (the value of the land that the plaintiff
expected to receive by performing the contract PLUS Any other loss
(does not include any other costs that the plaintiff must necessarily incur
to receive the lost value of the K calculated above), include-ing incidental
or consequential loss caused by the breach=5,000 (paid as down payment
for adjoining property—a consequential loss resulting from defective
performance by the defendant)) MINUS
Any cost or loss avoided by not having to perform =$40,000 (plaintiff’s
remaining costs under the K). Buyer’s expectation measure of damages
total $17,000. This amount puts the buyer back into the position that the
Buyer would have been in if the K was fully performed. (The Buyer does
NOT get the $300 b/c the Buyer expected to pay that money to receive the
benefit of the bargain.)

Hawkins v. McGee (1929)


Operation for removal of (9 year old burn) scar tissue from palm of P’s right hand
and grafting of skin taken from P’s chest. D said “I will guarantee to make the
hand a hundred percent perfect hand or a hundred percent good hand.” Holding:
Damages were in error. True measure of P’s damage is difference between the
value to him of a perfect hand or a good hand such as the jury found the D
promised him, and the value of his hand in its present condition. Pain and
suffering not included, part of legal detriment P expected to suffer as part of the
K.
• The measure of recovery on a contract is based upon what a defendant
should have given a plaintiff, not what plaintiff has given defendant or
otherwise expended. Prof Taylor: bring in expert witnesses to establish the
value of a good hand and value of a bad hand.

• The only losses that can be said fairly to come within the terms of a
contract are such as the parties must have had in mind when the contract
was made, or such as they either knew or ought to have known would
probably result from a failure to comply with its terms.

• As a general rule, the measure of the vendee's damages is the difference


between the value of the goods as they would have been if the warranty as
to quality had been true, and the actual value at the time of the sale,
including gains prevented and losses sustained, and such other damages as
could be reasonably anticipated by the parties as likely to be caused by the
vendor's failure to keep his agreement, and could not by reasonable care
on the part of the vendee have been avoided.

Peevyhouse v. Garland Coal & Mining Co. (1962)


Facts: P had a farm with coal deposits. They leased it to the D for 5 years
and D strip mined it. D specifically agreed to perform certain restorative and
remedial work at end of the lease. Would have cost them $29k. All parts of
lease except remedial work were formed by both parties. D argued
“diminution in value” of farm. P argued “cost of performance” Holding:
Special provisions of the lease K pertaining to remedial work were incidental
to the main object involved. Prime consideration in Restatement was
“economic waste” and “relative economic benefit” is proper basis for
analysis. Looked to tort damages section 96 and 97. The $29k of
improvements will only lead to increase in value of the farm of $300. Court
modified judgment to $300. Taylor: there are cases that have followed that
support the “economic waste” theory. Peevyhouse is still the law of the land.

• The measure of damages in an action by lessor against lessee for


damages for breach of contract is ordinarily the reasonable cost of
performance of the work; however, where the contract provision
which was breached was merely incidental to the main purpose in
view, and where the economic benefit which would result to lessor by
full performance of the work is grossly disproportionate to the cost of
performance, the damages which lessor may recover are limited to the
diminution in value resulting to the premises because of the non-
performance.
Per Prof. Taylor above highlighted in purple has been stricken. Today the
Peevyhouse rule: “Where the economic benefit which would result to P is
grossly disproportionate to the cost of full performance, the damages which P
may recover are limited to diminution in value.”

Note 4, pg. 239: The burden is on the breaching party to show that the cost
of repairs is unreasonable when compared to the diminution of value due to
the breach. Andrulis v. Levin Construction Corp. (1993)

Note 2: As in dissent in Peevyhouse, where the D is guilty of a willful breach,


some courts opt for the cost of repair even where this arguably results in
economic waste, in effect imposing a form of punitive damages on the bad
faith party. American Standard, Inc. v. Schectman (1981)

Couple ways to protect yourself: in the case of breach damages are $x. Or get
$29k upfront, OR clause in K that explicitly says economic waste recognized
and waived.

RELIANCE INTEREST
• Out of pocket
• Consequential damages
• Pain & Suffering
• And in a minority of jurisdications, costs incurred by non-breaching party before
and after K was formed
• Presumption of breaking even

Note on the presumption of breaking even:


P is entitled to recover out of pocket expenses UNLESS the D can prove
that the K was a losing one and that the P would not have made enough
from the K to make up these expenditures.

If D can carry the burden of showing the K was really a losing one the
court will deduct the loss from the P’s outlay.

Out of Pocket, Consequential damages, P&S


Sullivan v. O’Conner (1973)
Facts: P was a professional entertainer, wanted to shorten her nose. First
two operations actually worsened her appearance. Third operation did not
correct it and no further improvement was expected from further surgery.
Holding: P will get out-of-pocket expenses, worsening of her condition,
P&S and mental distress in 3rd operation. Items were compensable on
either an expectancy or reliance view.
Taylor: Significance is reliance: out of pocket, consequential damages
for making condition worse, P&S and ED damages for first as well as
subsequent operations. Not the same as Hawkins v. McGee (expectation
damages limit P&S). If you’re willing to forego expectancy damages,
you can pick up additional P&S damages under reliance theory of
damages. Ask Scott about Bill Clinton hypo.

Breach of patient-physician agreements, restitution seems too meager


while expectancy may be excessive, especially where Dr. has been
absolved of negligence. They decide on applying a reliance measure.
Finally address question of recovery on reliance basis.

• Suffering or distress resulting from the breach going beyond that


which was envisaged by the treatment as agreed is compensable on
the same ground as the worsening of the patient's conditions
because of the breach. Compensation for this waste may be
required in order to complete the restoration of the status quo ante

TAYLOR: Anglia decision AND Restatement 349 is the MINORITY VIEW. Majority
view is damages incurred AFTER the K was formed.

Restatement §349: Damages Based on Reliance Interest


As an alternative to the measure of damages stated in §347, the injured party has a
right to damages based on his reliance interest, including expenditures made in
preparation for performance or in performance, less any loss that the party in
breach can prove with reasonable certainty the injured party would have suffered
had the contract been performed.

Anglia Television, Ltd. V. Reed (1971)


Facts: Robert Reed (Mike Brady) actor concluded a K with Anglia TV to star in a
90 minute TV drama, but at the last minute due to double booking, he backed out.
D contends that P cannot recover for expenditures incurred before the contract
was concluded, only those incurred after 854.65. Judge rejected this, held that
Anglia could get full amount and D appeals.

• P can claim either his lost profits or, if he cannot prove what his profits
would have been, he can claim the expenditure which has been wasted by
reason of the breach.

• All of the wasted expenditure can be recovered when it is wasted by


reason of the D’s breach of K.
LIMITATIONS
CERTAINTY

Freund v. Washington Square Press (1974)


Facts: P author and college prof wrote a book on modern drama. D
publisher agreed to pay a $2000 advance, publish the work hard bound
and afterward paperback paying royalties at a specified percent. P
performed and got his $2k advance but D merged with another publisher
and stopped issuing hardbound books. D refused to publish book in any
form. Lower Court Holding: Cost of hardcover publication was the
natural and probable consequence of the breach and P was awarded $10k
to cover this cost. Holding: cost of publication not appropriate remedy
and P may recover nominal damages only. An award of the cost of
publication would enrich P at D’s expense. Promised performance –
publication – was a % of sales of the books published NOT the books
themselves. Reduced award from $10k to 6 cents.
Reasoning: restitution interest = return of manuscript. Reliance losses, P
alleged none. Expectation damages: 1) advance 2) royalties. Got advance
and no proof of royalties that would have been earned (failed for
UNCERTAINTY). Strike 3 you’re out. You get nominal only.

• It is axiomatic that, except where punitive damages are allowable,


the law awards damages for breach of contract to compensate for
injury caused by the breach -- injury which was foreseeable, i.e.,
reasonably within the contemplation of the parties, at the time
the contract was entered into.

• The law attempts to secure to the injured party the benefit of his
bargain, subject to the limitations that the injury -- whether it be
losses suffered or gains prevented -- was foreseeable, and that the
amount of damages claimed be measurable with a reasonable
degree of certainty and, of course, adequately proven. But it is
equally fundamental that the injured party should not recover more
from the breach than he would have gained had the contract been
fully performed.

Note on nominal damages: six cents, “An award of nominal damages


may be better than an outright dismissal of the P’s action. In awarding
nominal damages, the court is necessarily finding that the P’s position
concerning breach is correct. This may influence other parties’ behavior
in dealing with the P.” Sometimes nominal damages entitle you to attny
fees and court costs. Can also support other claims for punitive damages
(“smart money” to teach the breacher a lesson)

Even if P cannot prove loss court may still award nominal damages.
This technical win may permit the court to award costs, attny fees or both
to the winning P.

Hypo on eliminating uncertainty:


Problem 68: Taylor: easy solution to eliminate the uncertainty issue is for all 3 of
the dog owners to sue as a class action suit. Will guarantee 1/3 of the $25k purse.

Humetrix, Inc. v. Gemplus S.C.A. (2001) CERTAINTY


Proc: Health careconsulting company Humetrix P contracted with Smart card
technology company Gemplus SCA. Humetrix sued Gemplus for breach of K
and breach of fiduciary duty and wanted a declaration that Humetrix was entitled
to use the Vaccicard trademark. Holding: H was entitled to trademark and lost
profit damages (expectation damages). Reasoning: P made an estimate of lost
profits supported by testimony of two expert witnesses. Court called this
“substantial” Gemplus was able to cross-examine and bring forth its own experts.
Trial court was correct that authority to resolve battle of expert witnesses is the
jury. Gemplus argued ‘new business’ theory. Humetrix not exactly a new
business, ten years. Gemplus argued that profits were too speculative. H’s profits
were in some part dependent on and derivative of G’s profits. Profits were not so
speculative that court abused its discretion by allowing jury to hear evidence
regarding profits.

• Both federal and California state courts recognize that lost profits are
necessarily an estimate, and that their amount cannot be shown with
mathematical precision. The court upholds awards of lost profit
damages so long as they are supported by substantial evidence.

• As to the reasonableness of the assumptions underlying the experts' lost


profit analysis, criticisms of an expert's method of calculation are a
matter for the jury's consideration in weighing that evidence. It is for the
trier of fact to accept or reject the evidence, and the evidence not being
inherently improbable provides a substantial basis for the trial court's
award of lost profits.

• The new business rule is not a hard and fast one, and loss of prospective
profits may nevertheless be recovered if the evidence shows with
reasonable certainty both their occurrence and the extent thereof…
.”Cases applying the ‘new business rule’ generally involve businesses
which have been in operation only a very short period of time.

Taylor: significance: New business can sue for lost profits on the same basis as an old
business. Used to be a hard and fast rule.

LIMITATIONS
A. Uncertainty
a. Damages are not recoverable for loss beyond amount that the evidence
permits to be established with reasonable (Restatement 352)
b. P has burden of proof for certainty
i. May require expert testimony, financial data, etc.
Consequential Damages
Not the ‘primary’ damages
Lost profits – ONLY USE IF PROF SCOTT GIVES THEM TO
YOU
4 tests
yardstick – comparison with profit of businesses in
similar size nature and location
comparison with profit history of P’s successor
where applicable
comparison of similar businesses owned by P
himself
use of economic and financial data and expert
testimony
Technical Win
Nominal damages only but may award costs
Punitive Damages – GR: no
Goal of K law is not to punish
B. Foreseeability

Cannot recover damages for loss that the party in breach had no reason to
foresee at the time the K was created.
Determined by what a reasonable party would know (obj test)
Hadley v. Baxendale – 1) what a reasonable person should have
foreseen or 2) what the reasonable person with particular knowledge should
have foreseen. (Like Palsgraf in Tort, outside the foreseeability)
Recovery for ED will be excluded unless
K is of nature that breach would likely cause ED (mortician loses
body)
Would cause bodily harm

Problem 69
a) Under Hadley v. Baxendale mere knowledge is enough
b) Plane crashes are foreseeable if rare. Under Hadley v. Baxendale test, only the
consequences (damages) of the breach has to be foreseeable, not the breach itself.

AM/PM Franchise Assn. V. Atlantic Richfield Co. (1990)


Facts: P’s bring a class action suit on behalf of 150 franchises of ARCO. The products
agreements they operated under stipulated that the franchisees could sell ONLY ARCO’s
petroleum products. ARCO created an oxinal blend of gas and required the franchises to
sell it instead of regular blend of unleaded gas. Numerous purchasers experienced poor
engine performance and damage to their fuel systems. P’s suffered a precipitous drop in
the volume of their business and attendant loss of profits.
Rule: Consequential damages, or lost profits due to breach of a sales contract, must have
been reasonably foreseeable at time of contract and able to be proved with appropriate
certainty. They include: (1) loss of primary profits (gas); (2) loss of secondary profits
(slurpees, etc); and (3) good will damages, defined as a loss of prospective profits or
business reputation. Different way of getting to x – y calculation of expectation damages.

Hadley v. Baxendale (1854)


Facts: P were millers. The crankshaft broke and their employee took the shaft to the D’s
Pickford & Co. to transport the shaft to Greenwich for repairs. P’s employee told D’s
clerk that mill was stopped and that the shaft must be sent immediately. New shaft
wasn’t delivered for several days and during that time the P’s mill was shut down.
Taylor: Hadley v. Baxendale rule had 2 parts. First, there need not be any
contemplation of damages to recover for those damages that arise “naturally” from the
breach.
Second: contemplation by both parties. Today: only has to be the contemplation of the
breaching party at the time of the breach (within breacher’s foreseeability)
Taylor, HvB today: “An injured party may recover those damages which arise naturally
from the breach or which should have been reasonably contemplated (foreseeable) by the
breaching party at the time the K was made.”