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Contracts Outline

Introduction
Two key elements of a K
A promise or promises and
Enforcement
A contract is an agreement the law will enforce.
Hill v. Gateway
Judge Easterbrook pro-business opinion (U of Chicago)
Ks are formed when expectations of both sides are met
Law looks to protect those expectations
Law and Economics solving the problem through the most cost
effective method with wealth maximization in mind
Businesses can operate more efficiently when the terms of the K may
be included with the product
Overlooks the application of UCC 2-207- additional terms to a K arent
applicable unless the consumer explicitly agrees in merchantconsumer transactions
Compare with Klocek
I. Has a deal been made?
Tested through an Objective Standard
A. Mutual Assent
Lucy v. Zehmer
Facts: Parties signed contract over drinking for Lucy to buy
Zehmers farm for 50K, a reasonable price. Zehmer later
reneged.
Rule: Lucy actually believed Zehmer was serious, AND was
justified in believing so. No evidence that Zehmer was too
drunk to make contract.
Objective theory of Ks; modern theory
Reasonable meanings of actions of parties
Outward expression manifests intention over secret,
unexpressed intention
Literal meeting of the minds not required
Reduce business risk and enhance predictability
Undisclosed intentions are immaterial
Not what the offeror meant but the reasonable impression
created
Policy: This decision paves the way for a more predictable business
environment. Businesses risk less when creating a K as the other party
cannot bring in their inward intents.
Leonard v. Pepsico
Facts: Pepsi advertised junk for points, including Harrier Jet for
7M points as a joke.
Rule: An advertisement doesnt represent a valid offer unless
specific conditions are included Objective person must construe
an ad as an offer, which excludes acts in jest. No real offer
made by Pepsi.
Reasonable assessment of offers is required
Jokes dont count as valid offers
Restatement 26- most advertisements arent offers to sell
because they dont contain sufficient words of commitment

Preliminary negotiations
1. Advertising
2. Invitation of bids or other offers
Gleason v. Freeman
Facts: Sellers use E-bay auction to find potential buyer for
home, E-bay terms say not binding sales K seller added own
terms, P wins auction but didnt like 60 day provision & wants to
negotiate, no further talking, 3rd party buys the house, P sues
for breach
Rule: When the words used create a doubt to the parties
intention...review situation, acts, and conduct
Negotiation does not mean mutual assent
Objective: Unclear of intent, view situation
Ebay auction was a solicitation for offers for the house, not an
offer itself
The additional language did not override the Ebay terms &
conditions, since evidence shows that both parties continued to
negotiate terms of the contract after the auction was over
Smith v. Boyd
Facts: Boyd sell house willing to include appliances. Got
written purchase forms from Duxburys, Smiths (w/ appliances),
and Durigans (w/o appliances) accepted Duxburys purchase
form by signing Smith sue for breach of alleged oral
agreement (agreed on terms no signing)
Each party must have an objective intent to be bound
Trade practices imply knowledge of parties to what is typically
required (Real estate requires written agreement)
Expectation of informed participants- parties entering into a
business arena are expected to have knowledge of the rules
and customs that govern
Nature of real estate requires writing (Statute of Frauds)
Subjective intent may be indicative of objective intent
Considerations of objective intent
1. trade practices
2. prior dealings between parties
3. who drew up the agreement
4. statements made during negotiations
B. Offer
An offer is a statement or act that creates a power of acceptance.
When an offer is made the offeror is indicating that he is willing to be
immediately bound by the others acceptance, without further
negotiation.
Assent typically occurs by a mutual concurrence and understanding of
the parties. Important to note the context in which the agreement
takes place.
Invalid offers:
Made in jest
Expression of opinion
Preliminary negotiations
Statement of future intentions
Solicitations of bids (auctions with reserve)
Rest 24 Offer Defined

An offer is the manifestation of willingness to enter into a


bargain, that is made in a way that justifies another person in
understanding that his assent is invited and will conclude it
The offer itself is a promise, revocable until acceptance
Proposal of a gift is not an offer, it lacks the elements of
exchange
Rest 26 Preliminary Negotiations
A manifestation of willingness to enter into a bargain isnt an
offer if the offeree knows or should know that the deal isnt to
be closed until the offeror has made a further manifestation of
assent
Reason to know depends on words and conduct, previous
communications, and the trade usages involved
Advertisements arent offers without sufficient language of
commitment
A price quote is usually intended to invite an offer but relevant
factors such as previous inquiry, completeness of terms, and
number of parties to which the communication is addressed
could render a quote an offer
Rest 27 Existence of a K where a Written Memorial is
Contemplated
Manifestations of assent that are sufficient to create a K are not
prevented from becoming so because the parties manifest an
intention to prepare a written document
The circumstances may show that the prior agreements were
preliminary negotiations
Lonergan v. Scolnick
Facts: Skolnick puts ad up to sell property, Lonergan inquires.
Skolnick writes back directions & rock bottom price (form
letter). Lonergan rights back should I desire to purchase, this
bank ok? Skolnick says Yeah but hurry Im going to sell it
soon. He sells it not to third party.
There is no valid offer if party accepting knows that some
further expression of assent is needed
Advertisements are requests for offers unless specific
conditions are added
DETERMINATIVE FACTS
1. First letter form letter
2. Second hopes for a buyer soon
o Reserved the right to sell to the first buyer
Nebraska Seed v. Harsh
Facts: Harsh sent letter to NSC naming price of millet. NSC
accepted as offer.
Law: Mere statement of price cannot be understood as an offer
to sell. Request for bids is not an offer, but really preliminary
negotiations.
Such inquiries may lead to bargains, but dont make them.
a. NEBRASKA DISTINGUISHED FROM LONERGAN
i. LONERGAN: one property, letter directed at
Skolnik
ii. NEBRASKA: unidentified # of units, directed at
public
Leonard v. PepsiCo

Facts: Pepsi advertised junk for points, including Harrier Jet for
7M points as a joke.
Law: Advertisement is generally not offer, but solicitation of
one. Objective person must construe an ad as an offer, which excludes
acts in jest. No real offer made by Pepsi.
Lefkowitz v. Great Minneapolis Surplus
Facts: D published in newspaper Sat 9am, 3 new coats, worth
$100, first come first serve $1. P arrived with $1 but D said
offer only to women. Court ruled for P.
P fulfilled terms of the ad, ad was specific- nothing open for
negotiation
An ad can be an offer if:
o Clear
o Definite
o Explicit
o Leaves nothing open for negotiation
If ad meets above criteria, offeror is bound
Note Case IMPLIED IN FACT K
Facts: Mongo LVS law school raising fee after saying the increase
wouldnt apply to his class
The University acted in a way that was reasonable for Mongo to
believe that the fee would remain at the same level
Rule: Implied in Fact K Offeror can bind themselves to terms by their
conduct even if they dont necessarily write it down and say here, sign
here
C. Destroying the Offer
Offers create the power of acceptance in the offeree. When an offer is
made in face to face conversation, the default rule is that it expires
when the parties part company.
Rest 35 Power of Acceptance
An offer gives the offeree a continuing power of acceptance
Offeree cannot accept until the offer is complete
Rest 36 Methods of Terminating the Power of Acceptance
Termination may occur by
1. Rejection or counter offer by the offeree
2. Lapse of time
3. Revocation by the offeror
4. Death of the offeror or offeree
1. Indirect Revocation
Dickinson v. Dodds (Indirect Revocation/NO
Consideration)
Facts: Wed Dodds offered to sell house to Dickinson.
Thurs Dodds sold to Allan (then Dodds found out). Fri
Dickinson tried to accept offer and was refused.
Reasonable expectation that all is required is acceptance
on the part of the offeree
Without consideration it is not mandatory for an offer to
be held open for a promised amount of time
Notification must be made to offeree to revoke offer but
court is flexible as to how the notification takes place
No consideration=No option

Rule: Before acceptance, parties free to change if offer


revoked, then there is no meeting of minds at time of
supposed acceptance. Dickinson knew offer was
revoked because Dodds sold to Allen. No contract. See
Restmt. 43
2. Lapse
Minnesota Linseed Oil Co. v. Collier White Lead Co.
Acceptance is affected once dispatched unless the K is
an option
Revocation when received
Offers are valid only for a reasonable amount of time (90
days)
Reasonable time depends upon the circumstances and
character of the subject matter of the K
Items that fluctuate greatly in price over short periods of
time require immediate acceptance
Offers for unstated periods of time lapse after a
reasonable time
A reasonable time contemplates how rational parties
would have understood each other
3. Death or Incapacity of Offeror
Rest. 41
o
A 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
o What is a reasonable time is a question of fact depending on
all the circumstances that existed at the time of offer and
attempted acceptance
o
When not otherwise stated, an offer is effective if
mailed at any time before midnight on the day in which the
offer is received
o
An offer is irrevocable once an acceptance has
been mailed; this imposes a risk of commitment on the
offeror

Rest. 48
o An offerees power of acceptance is terminated upon the
offerors death
o In absence of legislation the rule remains in effect
o
When an offeree dies or becomes incapacitated,
the offer dies unless the terms of the offer allow a
representative to accept
o This rule does not affect option Ks
Subjective theory holdover
o Party cannot perform terms of K if dead. However, if K would
have been able to accept just prior to death, K would have
been valid and offeror would still be unable to perform. This
technicality shows that perhaps this rule is outdated.
D. Preserving the Offer
Beall v. Beall
Facts: Carlton bought farm, had option to buy Cecelia/Calvins
parcel for 28k. Carlton put $100 down to keep the option open,
then in 71, Calvin puts down another $100 to keep it open for 5
more years. In 75, Calvin/Cecelia amend 71 doc to extend for 3

more years (until 79), but no consideration paid by Carlton. In


78, Carlton tries to invoke option & Cecilia says no. Offer was
open bc no consideration, but issue is whether Cecilia revoked
during that time
Consideration given to hold offer open creates a binding option
to contract
Option sells the power to revoke
Death doesnt terminate an option
An option without consideration is simply an offer (doesnt need
to be held open as promised w/o consideration)
Offers accepted within the time limit of an option without
consideration will create a K unless the offer is withdrawn prior
to acceptance
The time limit will generally represent a reasonable amount of
time
Board of EMU v. Burgess
Facts: Burgess signed doc granting EMU 60 day option to buy
her home. Doc acknowledged receipt by Burgess of $1 and
other valuable consideration. EMU admits they never paid the
consideration. EMU sends Burgess notice of intent to exercise
option. Burgess rejects EMUs price.
Trial: Burgess acknowledging receipt of consideration is good
enough it doesnt matter if she didnt actually get it
(formalities matter)
Appeals: Written acknowledgment of receipt of consideration
creates rebuttal presumption that consideration has passed
nothing bars the presentation of evidence to contradict such
acknowledgment she hadnt gotten anything she bargained for
yet
But, even if there was no consideration, the offer was still open
unless she effectively revoked before acceptance
Burgess said after signing, called EMUs agent and said option
off
If she did this, she effectively revoked before EMUs acceptance
and no K was created EMU said this didnt happen
Case remanded to find more facts on whether she actually
revoked
Take away: CL Rule: The courts will never presume that a
consideration is fraudulent. Its the act of the exchange that
validates it
Consideration must actually be paid or option is not valid
Substance over form
Minority position
Under UCC: Firm offers between merchants are irrevocable
regardless of consideration
All offers are revocable unless they are supported by
consideration or made enforceable by statute
Rest. 87o An offer is binding as an option K if it is in writing, signed
by the offeror, purports consideration, and contains
terms

An offer that is reasonably expected to cause action or


forebearance on the part of the other party and does so,
creates a binding option
UCC 2-205 (FIRM OFFERS): If a merchant makes an offer, in
writing, signed, and which contains an assurance that it will be
held open, then it will be regarded as irrevocable in spite of the
absence of consideration for the time stated or a reasonable
time, but no longer than 3 months.
Creates exception to Beall rule
E. Modes and Methods of Acceptance
Acceptance of an offer is a manifestation of assent to the terms made
by the offeror in a manner invited or required by the offer. An
acceptance is a statement or act that indicates the offerees
immediate intent to enter into the deal proposed by the offer. As long
as the acceptance takes place while the offer is outstanding, a K is
formed as soon as the acceptance occurs. An offer can only be
accepted by the person whom it invites to furnish the consideration.
Termination of an offer:
Rejection
Counteroffer
Revocation
Lapse
Rest 54 Acceptance by Performance; Necessity of Notification
When an offer invites acceptance by performance, no
notification is necessary to make acceptance effective unless
requested by the offer
If the offeree knows the offeror would have difficulty learning of
his performance, the offerors duty is discharged unless
1. The offeree exercises reasonable diligence to notify the
offeror
2. The offeror learns of acceptance within a reasonable time, or
3. Notification isnt required
Rest 56 Acceptance by Promise; Necessity of Notification
Acceptance by promise, unless otherwise specified, requires the
offeree to exercise reasonable diligence or the offeror to receive
acceptance seasonably
1. Control Over the Manner of Acceptance
La Salle National Bank v. Vega
Facts: P made K with D for sale of real estate, D
breached. Borg says he had a K for the same real estate
(cc), naming P and D as counter defendants. Borg says K
between P and D not enforceable because it wasnt
signed by trust (but by Ps agent), which was required
for acceptance in K.
Default rules for Ks unless otherwise specified therein
Rule: The terms of execution made explicit in an offer
must be followed by both parties or no K exists
Ever-Tite Roofing Corp. v. Green
Facts: D executed doc stating P to re-roof house. Doc had
details of work to be done and pay plan. Doc signed by P
agent (wasnt authorized). Agreement stated it would
become binding with written acceptance by authorized
agent of plaintiff or upon the start of the work. Right
o

after bank approved Ds credit, P went to start reroofing


but someone else did it. When did performance begin?
Offeror must notify offeree in order to effectively revoke
an offer
Preparatory acts dont represent assent until they
communicate that the acts are for a specific job
When did the acts of P in this case represent assent?
1. Loading of the truck?
2. Arrival at the house?
Assent typically must be communicated to create
binding option through a unilateral K
Case different in that courts typically rule in favor of the
consumer
EVERTITE DISTINGUISHED FROM LASALLE:
o SIMILARITIES: both Evertite and LaSalle drafted
the documents to protect themselves, both had
an issue with the signature
o DIFFERENCES: Worked in Evertites benefit
(optioned out of CL), hurt LaSalle (too specific)
Rest. 45
o When an offer invites acceptance by
performance, and performance has begun, a
binding option K is formed
o The offerors duty of performance is conditioned
upon the completion or tender of the invited
performance
o Promise may not be effective as acceptance
Rest. 90
o A promise that is expected to reasonably induce
action or forbearance on the part of the promise
or 3rd person and does so may cause for
enforcement or remedy based on limited breach
2. Effectiveness of Promissory Acceptance
Hendricks v. Behee
Facts: On 3/2 Behee made written offer to Smith to buy
the real estate. On 3/3 their agent mailed offer to the
Smiths. On 3/4 Smiths signed the proposed offer.
Before Behee was notified of the acceptance, notified
Smiths agent that he was withdrawing. The notice to
Smiths agent (reliable) was indirect revocation before
acceptance.
Notice to the agent is notice to the principal
Notice of acceptance must occur before revocation
Acceptance of an offer doesnt occur until communicated
Notice to your own agent isnt effective
HENDRICKS DISTINGUISHED FROM EVERITE:
o EVERTITE: K said immediately after signing, this
becomes binding wrote themselves out of
having to make notice (Contracted out of CL)
o HENDRICKS: Notification was required bc of
default judgment. If included By Smiths signing,
binding then notification requirement from
offeree would have been waived

Adams v. Lindsell WE DIDNT DO THIS CASE


Mailbox rule
Acceptance is effective upon dispatch even if the letter
is lost
All other communications are effective upon receipt,
meaning once the writing comes into the persons
possession
Along with death terminating an offer, this represents
the most glaring holdovers from subjective theory
Resistant to change due to its universal nature
Doesnt apply to option Ks under Rest, but does under
common law
If you dont want to be subject to rule, use a different
medium or specifically include different terms in the K
A delivery method equal to or better than the method
used by the offeror must be used or acceptance is
effective upon receipt
o Rest 67 make effective improper mediums as
long as seasonably accepted
o Ex: A offers B through telegram and requests
acceptance by the same by Thursday noon. B
mails acceptance that arrives Thursday morning.
A cannot revoke by phone on Tuesday morning if
the acceptance is already mailed.
3. Effectiveness of Acceptance by Performance
Unless otherwise stated an offer is treated as inviting
acceptance in any manner or medium reasonable in the
circumstances.
Carlill v. Carbolic Smoke Ball Co.
Facts: D offered $100 in an ad to anyone who got the flu
through inhaling the Ds smoke ball 3 xs a day for 2
weeks. Ad noted D deposited $1k with a bank to show its
sincerity. P saw the ad, bought the ball, used it for 2
months and got the flu.
Ads can be considered in line with rewards when they
convey a reasonable intention to give reward
Rest 46 Revocation of a general offer must occur by
notice of termination given publicly in a way equal to
that of the offer when no better means is reasonably
available
Performance of the conditions is acceptance
Must know of the offer when appearing to perform; eg To
collect a reward for a lost dog you must know of the
reward before giving the dog back. Can learn of the
reward at any point before delivery. (lost puppy hypo)
Completed performance completed before the offer
comes to the offerees knowledge does not reference or
satisfy the offer
Area carved out of traditional K law
CARLILL DISTINGUISHED FROM PEPSICO
o Here, money reward existed. Harrier jet wasnt. If
it was, Leonard wouldnt have been unreasonable
Marchiondo v. Scheck

Facts: D offered to sell real estate to buyer (offeree) and


agreed to pay commission to broker (P). Offer had 6-day
limit for acceptance. D revoked the offer, P received
revocation on the 6th day. Later that day, broker got
offerees acceptance.
Beginning of performance upon a unilateral K creates a
binding option
Full performance within terms of the offer are required
Offeror must let performance be done
Performance must be completed in a reasonable time
Rest. 45 (Above)
4. Imperfect Acceptances

CL MIRROR IMAGE RULE: Any divergence in the fine


print of forms prevents formation of a contract on the
documents unconditional assent to terms of the offer
A response other than unconditional assent? Rejection
or Counter Offer
R2K 59-61: Truly conditional acceptance (counter
offer), acceptances with suggestions or inquiries
(imperfect acceptances) still sufficient to form K
LAST SHOT ADVANTAGE: If rejection of offer creates a
counter offer, offeree becomes offeror meaning offeree is
now master of the offer this is the offerees last shot to get
terms in
UCC 2-204 (reasonableness): If parties of a K have not
agreed to a term, a term which is reasonable in the
circumstances is supplied by the court
UCC 2-206 (reasonableness): Reasonable meaning of term
is usually term that operates against the party that supplies it
Dorton v. Collins & Aikman Corp.
Facts: (Carpet man/offeror) wants damages from
D(offeree) selling carpets of cheaper quality than what P
paid for. D said P was bound to arbitration agreement on
back of Ds sales acknowledgment form (said subject
to). P said their oral agreements were different, but
they took delivery of & paid for carpets without objecting
to the terms.
o District court: Under 2-207 (3) UCC does not
impose an arbitration term on the parties where
their K is silent on the matter. Conflict between
arbitration and no arbitration clause would result
in no arbitration clause becoming effective. Arb
agreement was not among the agreed upon
things. Assumed oral agreement over the phone
& arb terms were different
o Appeals court: Ds arbitration agreement was
NOT within 2-207(1) proviso (subject to
language not enough): acceptance was not made
expressly conditional on assent to additional
terms (formation under 1 (K recognized), go to
#2, additional terms are added to K unless they
materially alter the K, case was remanded to find
out if it did materially alter oral K or not)

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THOUGHT QUESTION: What if they were within proviso


(1)? Since P didnt assent to it, which would be required,
Ds arb terms would be out. But, you would go to (3) and
terms of the K would be what the parties agreed on (this
is NOT Ds arb terms)

UCC 2-207 (SEE BELOW) once material terms are


agreed upon, a K exists and any trade of additional
terms does not void K
Battle of forms
Additional terms that dont materially alter the terms of
the K are treated as proposals in addition to the K and
become effective after 10 days unless objected to by
one of the parties. (Between merchants)
Klocek v. Gateway
Facts: P brings suit against D alleging D induced him to
purchase computer & special support packing with false
promises of tech support. P claims breach of K &
warranty. D says P must arbitrate under Ds standard
terms included in the box power cable/instructions came
in. Gave 5 days for P to return the computer Ruled for P
UCC 2-207 does apply
Additional terms dont apply under 2-207 unless
explicitly agreed to (When consumer is involved)
Buyer is offeror, Gateway accepted as offeree and
proposed additional terms
Comparisons between this case, Dorton, and Hill
encompass major issues of the course

Terms that Accompany Product


ProCD v. Zeidenberg
Facts: ProCD has license inside box. Zeidenberg bought
product and violated license.
Law: Notice on outside, license on inside, right to return
for refund is an acceptable way of doing business. Since
only one form, 2-207 not relevant, although contract still
cannot be unconscionable (which it isnt in this case).
Hill v. Gateway, Klocek v. Gateway
Facts: Plaintiff bought Gateway with contract inside the
box, had problem, and did not want to submit to arbitration.
Hill: (Judge was an asshole) 2-207 does NOT apply
because there was only one form and refund allowed.
Klocek: 2-207 DOES apply because terms in box are
additional terms to which purchaser did NOT consent. No
evidence Klocek given notice.
UCC 2-207 Explained
(1)Start with an acceptance or written confirmation having varying terms.
Is it expressly made conditional on assent to the varying terms?
YES: If it is an acceptance it operates as a counteroffer, which
may in general be accepted via partial or complete
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performance. Go to 3.
If it is a written confirmation, it operates as an offer to modify
a pre-existing contract. Go to 2.
NO: Go to 2.
(2)Additional terms serve as proposals for an addition to the contract and
between merchants become part of the contract unless:
the offer expressly limits acceptance to its terms;
they materially alter the contract; or
notification of objection has already been given or is given
within a reasonable time after receipt of notice of the
additional terms.
(3)If the writings of the parties do not establish a contract, the conduct of
the parties may establish a contract consisting of the terms on which their
writings agree and any supplementary terms provided by other provisions
of the Act.
F. Defeating Agreements Based on Misunderstanding of the Terms
There is no mutual assent if the parties have assented to different
things.
Raffles v. Wichelhaus (2 Ships named Peerless- Class Hypo)
Any mistaken term can void the agreement
Very subjective view
Classic case of mutual mistake
G. Consideration
A BARGAINED FOR EXCHANGE
Purpose of consideration is to distinguish between gratuitous and nongratuitous promises
a. MUTUAL INDUCEMENT: bilateral promise, with the promisor trying to
renege
NOMINAL CONSIDERATION PEPPERCORN: An exchange where
mutual inducement is lacking and its really a gift (other than
value reasons) the consideration was a sham the court
suspects dressing up a gift to look like a BFE
Nominal consideration sits in between bargain & gift
A way to determine if there was mutual inducement is if there is
a real benefit to the promisor
Promises that are not part of an economic exchange are NOT
enforceable so GIFTS are NOT enforceable
Rest 71 Requirement and Types of Exchange
To constitute consideration, a performance or promise must be
bargained for
A performance or return promise may consist of
1. An act other than a promise
2. A forebearance
3. The creation, modification, or destruction of a legal relation
Rest 73 Performance of a Legal Duty
Performing a duty already legally required does not constitute
consideration
Ex: A offers reward for anyone coming forward with evidence
about a crime. B produces evidence in the performance of his

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duty as a police officer. Bs performance is not consideration. If


B was on vacation in another state, however, his performance
would be valid consideration.
1. Changing Your Mind About Agreeing to Give (Promissory
Gift)
Kirksey v. Kirksey (Gift vs. BFE)
Facts: Widowed womens brother-in-law tells her to sell
her land and that he has a place for her to raise her
family. He says he has more land than he needs and
wants to see her/her kids do well. She moves, and after
two years, he reneges on his promise, required her to
leave.
Mere gratuitous promises arent enforceable
Gift promises may have conditions that dont represent
consideration
Context and surrounding circumstances
What about reliance?
Compare to Hamer
Gift v BFE: Use facts to determine whether mindset of
promisor is a selfish or gratuitous
Hamer v. Sidway
Facts: Uncle promised nephew that if he didnt
drink/smoke/gamble until he turned 21, he would give
him $5K. Nephew turns 21 and hasnt done any of the
forbidden things. Uncle says he has the money waiting
for him until hes older/knows he will take care of it.
Uncle dies and now his executor refuses to pay the
promised money. Nephew files suit.
The giving up of legal rights represents valid
consideration
Consideration is a right, interest, profit, or benefit
accruing to one party or a forebearance, detriment, loss,
or responsibility suffered by the other
Doesnt matter if consideration benefits the other party
Familial promises are rarely brought into the judicial
realm:
1. They often involve an indefinite nature of
performance
2. Unwillingness of parties to sue until the relationship
is beyond repair
Legal detriment vs. actual detriment
No inquiry into the adequacy of consideration once some
form of consideration is found
Promise as consideration
Bargained for requirement
WILLISTONS TRAMP HYPO: Benevolent man tells tramp that
if he walks around the block, he will give him his card to go in
and buy fur coat from store
GIFT VS BFE use facts to determine whether intent is
selfish/gratuitous
If there is no selfish intent, walking to the store is
condition of the gift
BFE CONSIDERATION 3 PRONG TEST:

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Promisee suffered legal detriment? (Tramp wasnt legally


obligated to walk around the block)
Detriment induced the promise? FAILS HERE walking
around the block did not induce promise of fur coat, it
was the man being altruistic, he did it to be a good
person NO BFE Consideration
Promise induces detriment? Promise of fur coat induces
walk around the block
Reed v. University of North Dakota & NDAD
Facts: Reed is on scholarship at UND, gets disabled after
running on the same course as a race sponsored by
NDAD. P sues for NDAD for negligence. NDAD says race
registration forms signed by Reed (waiver) was a K
releasing NDAD from liability.
Release forms are supported by consideration as one
party gives up the right to sue and the other allows
participation
The forbearance of a legal right is a legal detriment
which constitutes good consideration
Rest. 75- a promise for a promise is valid
consideration if the promised performance would be
consideration; The promise is enforced by fact of bargain
BFE CONSIDERATION 3 PRONG TEST:
o Promisee must suffer legal detriment (NDAD is
not legally obligated to let Reed run the race)
o The detriment must induce the promise (NDAD
allowing Reed to run induces Reeds promise not
to sue Mutual Inducement)
o The promise must induce the detriment (Reeds
promise not to sue induces NDAD allowing Reed
to run the race Mutual Inducement)
3. Changing Your Mind About Agreeing to Change the Deal
Alaska Packers Association v. Domenico In Syllabus
Didnt Read
A party cannot demand more compensation for
something that they are already obligated to do by
taking advantage of the necessities of the adversary
A party shall not profit by their own wrong
Good faith requirement for estoppel
Past consideration is no consideration
Cannot promise to withhold doing an illegal act
Similar to economic duress
Angel v. Murray In Syllabus but Didnt Read
A promise to modify a contract is enforceable if:
1. The promise hasnt been fully performed by either
side
2. The situation was unanticipated
3. The modification is fair and equitable
In line with modern view of the UCC
Good faith required
Not a bad idea to tear up the old contract
Cases in between are the difficult ones
UCC 2-209

14

Rest. 89- a promise modifying a duty under a K not


fully performed on either side is binding if
o The modification is fair and the circumstances
unanticipated at the time of formation
o Not prevented by statute
o Reliance has occurred
Old rule- preexisting duty doesnt represent
consideration because it deters coercion and duress
2. Promissory Estoppel Rest. 90
4 PRONG TEST OF PE (& Detrimental Reliance):
A Promise? (Promissory assurance?)
Forseeability of reliance (action/forbearance on part of
promise)?
Reliance in fact?
Injustice absent enforcement?
EQUITABLE ESTOPPEL: conduct by one party, which leads to
another party, in reliance thereon, to adopt a course of action
resulting in detriment or damage if the first party is permitted
to repudiate his conduct (RICKETTS)
Involves factual misrepresentations that induce reliance
Ricketts v. Scothorn (PE as a Shield)
Facts: Grandfather gives note saying hes going to give
granddaughter enough $ so she wont have to work. Gift
was not conditioned on her quitting her job. Note given
w/o consideration, it was just a promise to make a gift in
the future. Grandfather died and estate didnt want to
pay the granddaughter. GFathers conduct implied he
wants her to quit
When a donee prior to revocation acts upon a promise to
his detriment, the donor is estopped from pleading want
of consideration
Argument used in the past by charities
Did promise induce reliance and do we now feel that we
should enforce the promise?
Finding of reliance rather than consideration
3 critical aspects of early cases
1. Familial relationship
2. Promise sincerely offered
3. Reliance on promise to detriment
Old rule required full enforcement of the promise

Compare to Hamer
Beginning of doctrine- promise the most important factor
Midwest Energy, Inc. v. Orion Food Systems, Inc. (PE as
Sword)
Facts: P was a builder contracting to franchise a store
with D. D made P change the design of the building to
accommodate their store. After P was told to go ahead
by D, P changed their building and didnt get the
franchise.
P/E: D made a promise (go ahead), it was foreseeable P
would rely on it (to get the franchise), P relied in fact
(modified building), and there was injustice absent

15

enforcement (court said more info needed here


perhaps lost opportunity costs).
Most important aspect is justifiable reliance
Rest. 139
Baird v. Gimbel (Formalism)
Facts: Sub sends in wrong bid to Gen, who then uses to
send in bid to client. Sub withdraws, client accepts, Sub
confirms withdrawal, Gen formally accepts clients offer.
Gen sues Sub for breach.
Law (Hand): Offer not promise until consideration
received refuses to apply doctrine of promissory
estoppel and finds for subcontractor. (Above: 1, 2a, 2b
NO; 4 YES)
Note: Gen could have insisted on contract before it used
the figures.
Drennan v. Star Paving (Implied Promise of
Irrevocability)
Facts: Sub submits bid to Gen, Gen submits to client,
client accepts Gens bid, Sub withdraws bid. Gen sues
Sub for breach.
Law (Traynor): Purpose of promissory estoppel ( 90) is
to make contract binding in lieu of consideration - finds
reliance and enforceable contract. Gen wins. (1, 2a, NO;
2b, 4 YES)
Note: Sub could have expressly stated that offer
revocable any time before acceptance.
Hoffman v. Red Owl Stores
Facts: Red Owl strung Hoffman along, promising to
grant franchise as long as subsequent conditions
continued to be met. He never received the franchise
and sued to recover for his expenses. The court ruled for
plaintiff on the basis of promissory estoppel. Damages
were only as necessary to avoid injustice and could not
exceed actual loss.
Law: Adopts promissory estoppel action based on 90
and finds that it did exist in case. Court bases damages
on reliance, and notes that this is NOT a breach of
contract action.
Pavel Enterprises, Inc. v. A.S. Johnson Companies, Inc.
Facts: General contractor (PEI) relies on subcontractors
estimate (Johnson) to make a bid. PEI sent a fax to all
the subcontractors they received sub-bids from, implying
offer was still open. Few days later, PEI emails Johnson
saying were going to get the K soon. Then Johnson says
we withdraw, price too low. Three weeks later, PEI finally
gets the NIH K. They got a new subcontractor but they
had to pay more.
Construction bidding cases require then general
contractor prove that the subcontractor:
1. Made a clear and definite offer
2. Sub reasonably expected bid to be relied upon
3. General must provide prompt notice of acceptance
and reasonably rely on the bid
4. General must have clean hands

16

5. Sub is bound only to prevent injustice


Evidence of bid shopping by the general will revoke any
later reliance argument and free the sub from his bid
Justice Hand view: Renegotiation is part of the process
and it is not the job of the courts to get involved.
Promissory Estoppel shouldnt be used in a commercial
setting.
Justice Traynor view: Apply Rest. 90 as consideration
for an implied promise to keep the bid open for a
reasonable amount of time
Protects Reliance Interests!!!
UCC Art. 2- written offer requires no consideration
F. Statute of Frauds - Defenses
Rest 110 Classes of Ks Covered
These Ks wont be enforced without a written memorandum or
applicable exception:
1. A K of an executor or administrator to answer for the duty of a
decedent
2. A K to answer for the duty of another
3. A K made upon consideration of marriage
4. A K for the sale of an interest in land
5. A K that is not to be performed within 1 year from its making
Ks for over $500 were traditionally governed by the S of F but are now
regulated by the S of F provisions of the UCC 2-201.
The primary purpose of the S of F is evidentiary, providing
relevant evidence of the existence and terms of a K. Ks that are
covered are so because of their complexity or importance.
R2K 130: The one year provision (K made at moment of formation)
If cant be completed in 1 year (within SOF), need writing
If it can be completed in a year without breach of K (not within
SOF), do NOT need writing
Radke v. Brenon
Facts: D offered to sell P property for $262, P accepted. P tried
to complete the sale but D refuses. D offered to sell lots to
neighbors for $212 with a letter, a few didnt want to buy so
price increased to $262. The requirements for the memo by the
courts were satisfied, but elements required for statute were
not so obvious.
SOF issue 1: Consideration paid wasnt exactly $212 (defense:
$262 was using same formula as letter)
SOF issue 2: Ds signature was typed wife never signed
(defense: D testified typed signature held same weight, wife not
signing defense brought at appeal)
Strongest fact: D admitted to oral K with P
The Statute of Frauds requires writing to express consideration
and authorization by the selling party
Written memoranda
Items that must be included
1. Parties to the K
2. Items to be sold
3. General terms
4. Consideration
Courts loosely interpret the signature requirement

17

1. Letterheads
2. Typed communications; must be clear it is from the
person specified
The writing creates an evidentiary platform
Statute of Frauds is a gatekeeper to the oral K
Policy of preventing the enforcement of by means of fraud or
perjury
Technical requirements overlooked due to admission
An admission that a K was made, while not making the K
enforceable, provides evidence that a K was made
Policy of the statute is to prevent fraud and not to make
admitted Ks unenforceable due to technicalities
McIntosh v. Murphy
Courts generally look to get around 1 year requirement of the S
of F
Facts: Oral employment K that allegedly violates SOF one-year
provision. P (employee) seeks to recover damages from D
(employer) for breach of one-year employment K. P was given
offer on 5/25, but didnt start work until 5/27. (Acceptance could
have been on either day, so formation date is ambiguous). P
gets fired after 2.5 months for not being able to close deals &
was bad at training.
Date of formation was important if formation happened on
Saturday, then would have been within SOF, and needed writing
to be enforceable (D says this is true, but Trial court Judge said
this was ridiculous)
D says hired P on a trial basis so it cant be completed in 1
year, writing is needed to make K enforceable & there wasnt
P says he had a one-year contract, so not within SOF, dont
need writing to be enforceable
Appellate: Ruled for P based on equitable estoppel said SOF
limited by (1) equitable estoppel (2) judicial circumvention
No reason to resort to legal rubrics/formulas
Uses R2K 139 covers situations were there has been reliance
on an oral K that falls within SOF
Ps claim also satisfied 4 prongs of P/E
Dissent: Court says just because P relied on D, the oral K is
enforceable
SOF made to prevent the consequences court is putting on D
someone is lying and dissent thinks its P
Justification for retention of the S of F:
1. Evidentiary function
2. Cautionary effect
3. Distinguish enforceable and unenforceable Ks
Rest. 139- S of F wont prevent enforcement if a party has
justifiably relied on the promise to his detriment
II. Is it a deal that the law will enforce?
A. Preview
Questions surrounding enforceability:
1. What do courts do to enforce contracts?
Injunctions

18

Damages
Specific performance
2. Why arent all agreements legally enforceable?
The way the deal was made
Parties involved
Terms of the deal
3. Which agreements arent legally enforceable?
B. Mistaken, Unstated Factual Assumptions
Three core problems
1. Proof- How do you prove what your client was thinking but
didnt say when he entered the agreement?
2. Policy- Why should the courts excuse someone from a contract?
3. Rules- Once the courts decide the policy, what rule should the
court decide advances this policy?
Rest 151 Mistake Defined
A mistake is a belief not in accord with the facts
An erroneous belief at the time of formation
Need not be articulated and may be an assumption
Erroneous predictions of the future are not mistakes
Legal consequences determined by contractual liability
Rest 152
o When a mistake regarding a basic assumption which the
parties had a formation causes a material effect on the
agreement, the K is voidable by the adversely affected
party unless he bears the risk of mistake
o In determining materiality, account is taken of relief by
reformation, restitution, or otherwise
o PER doesnt bar evidence that establishes the mistakes
o Parties must be mistaken as to the same assumption or
it is a unilateral mistake, making the K voidable only if
the voiding party does not bear the risk
o Must affect the basic assumption on which the K was
made
Rest. 154
o A party bears the risk of mistake when it is allocated to
him in the agreement, he is aware of the mistake at the
time of formation that he only possesses limited
knowledge, or the risk is allocated to him by the court
Unconscionability
Rest 152, 154
Rest. 153
o A mistake at the time of formation by one party may
make the K voidable if he doesnt bear the risk and the
effect of enforcement would be unconscionable or the
other party had superior knowledge
First Restatement only allows rescission for mistake due to the
fault of another or where one party has reason to know that the
mistake exists
Rest 155
Where a writing embodying an agreement fails to express the
correct terms due to a mistake in the writing, the court may

19

reform the writing to express the agreement to the extent that


it does not affect 3rd party good faith purchasers
Rest 157
Only a mistake that involves a failure to act in good faith will
bar avoidance or reformation
C. Fraud, Fraudulent or Material Misrepresentation, and
Nondisclosure
Part law, Part common sense
Halpert v. Rosenthal (Fraudulent Misrepresentation)
Facts: D (buyer) says court shouldnt enforce K to buy P
(sellers) house because Ps misrepresentation as to termites. D
said P and Ps agent had intentionally misrepresented the house
as being termite-free. P affirmatively stated there was no
termite problem. P says, for fraud. misrep, there has to be
evidence that P knew they were lying. D said they cant provide
that evidence, but innocent misrepresentation is grounds for
rescission.
If one is induced into a contract by material
misrepresentation, the contract may be rescinded even if
the misrepresentation was innocent when the other party relies
on it to his detriment
Knowing representations are easy cases
Speaker of the misrepresentation bears the loss
Different categories of misrepresentation:
1. Deceit (tort)- requires some degree of culpability on the part
of the misrepresenter. has burden of proving that made
statements that were false and likely to deceive
2. Material misrepresentation- a suit to rescind a contract
based on misrepresentation whether it was innocent or not
3. Innocent misrepresentation- the speaker actually believes
what he is saying. Unqualified statements
A misrepresentation is material when it is likely to affect the
conduct of a reasonable person
Rest 159
o A misrepresentation is an assertion not in accord with
the facts
o Must relate to something in the past or present but not
the future
Rest 160
o An action is equivalent to an assertion when it is known
that its is likely to prevent another from discovering the
fact
o Hiding of defects
o Reading a written offer and intentionally omitting a part
o Frustration of investigation
Rest 162
o A misrepresentation is fraudulent if it is known not to be
true
o A misrepresentation is material if it would likely induce a
reasonable person to assent
Rest 164
o If assent is induced by fraudulent or material
misrepresentation the other party may void the K

20

1)Materiality 2) Was there reliance? 3)Reasonable


Reliance?
A. CICERO EXAMPLE (NONDISCLOSURE): Grain merchant was the first
to visit town suffering from famine. Should merchant tell town other
merchants were coming even though this would lower price people
would pay for his grain.
Burden shifted on seller to disclose
Law will go to moral obligation when situation is
critical/imperative
Substantive not procedure so law must step in
B. LAIDLAW V ORGAN: Organ bought a ton of tobacco from Laidlaw for
super cheap because he knew peace treaty had been signed and the
price of tobacco was going to skyrocket. Did Organ have duty to
disclose this he did not.
This is like Swinton info is equally available to both parties
Between 2 merchants, not a time the law should step in
Buyer beware theory means seller shouldnt have to reveal
anything unless asked if there is an active market and no
monopolist, the burden is on you to figure out the market price
Swinton v. Whitinsville Savings Bank (Innocent NonDisclosure)
Facts: D sold P house and at time of sale, house was infested
with termites (internally destroying house). P couldnt observe
this upon inspection. D fraudulently & falsely concealed
houses true condition from P. 2 years later, P learned of termite
problem because of the damage/dangerous condition created. P
wants damages. Ruled for D D being silent here was fine
When information is equally accessible to both parties, there is
no duty to disclose
Law cannot require a seller to list every known defect
It would place too great a burden on courts to enforce such
deals
Moral duty, not legal duty
No defense to enforcement of an agreement based on
nondisclosure
More up front transaction costs for parties due to investigations
that must be made
Weintraub v. Krobatsch (Fraudulent Nondisclosure(Latent
Concealment))
P entered a K with D to sell her house. Prior to closing the deal,
D entered and saw roaches everywhere. Ds lawyer said home
was unfit for human life, so K is rescinded. D was claiming
fraudulent concealment or nondisclosure by P. P sues D for the
deposit $ she lost from rescission
o D alleges P knew of the infestation
o P said had no duty to speak and no claim by D can be
based on her silence (used Swinton) court reject this
though said too outdated
o Court ruled for D Entitled to rescind because P was
aware, P deliberately concealed/failed to disclose the
condition because of likelihood it would defeat the
transaction.
o OBDE V SHLEYMEYER: Seller has duty to inform based on
Dean Keeton (duty to speak whenever justice/equity/fair

21

dealing demand it refusal to speak constitutes unfair


conduct)
o P intended to mislead it was the silence that showed
she had info that they wouldnt see for themselves
(latent concealment) and would need to know
Intentional hiding or nondisclosure that was significant
to the contract justifies rescission
Fair justice and dealing require both parties to disclose material
facts that greatly affect value
Minor conditions not included
Silence is fraudulent if a material fact is concealed or
suppressed when good faith requires disclosure
What constitutes a material fact or condition?
Compare to Swinton and examine the arguments and
ambiguities in between these two positions
Less up front transaction costs
Rest 161
These types of cases now allocate risk through standard
contracts
D. Unconscionability
Looks at both bargaining process and terms of the bargain while
combining elements of misrepresentation, undue influence, duress,
and nondisclosure
UCC 2-302
Williams v. Walker-Thomas Furniture Company
Enactment of UCC by Congress has allowed for contracts that
are unconscionable at the time of their formation to be voidable
The contract must have an absence of meaningful choice by
one of the parties as well as unreasonable terms
Does moral obligation become a legal obligation?
Meaningfulness of the choice may be negated by a gross
inequality of bargaining power
Considerations to observe in contract:
1. Manner in which the contract was entered
2. Reasonable opportunity to understand the terms of the
contract with respect to the partys education of lack thereof
3. Bargaining power
Whether the terms are so unfair the enforcement should be
withheld
Primary concern is the terms of the contract in the light of the
commercial background and the commercial needs of the
particular trade or case
What about freedom to contract?
Triggering mechanisms are if there are apparent or obvious
inequalities of bargaining power and it appears that the party
took advantage
Should stores have to protect customers from themselves?
Success depends on the facts
When the concept of unconscionability developed it appeared
that it would be huge force in K law; The opposite has been true
Many oppose its application in commercial bargaining
Morrison v. Circuit City

22

Substantive: A contract is unconscionable when its terms are


unfair and unreasonable
Procedural: The relative bargaining power
Adhesion contract- a standardized contract offered on a take it
or leave it basis
Adhesion contracts dont exist where meaningful choices exist
Standardization of contracts allows for the use of cheaper
personnel, greater efficiency, and more operational fluidity

III. What are the Terms of the Deal?


What are the terms of the contract?
What do the contract terms mean?
A. Interpreting The Agreement: Beyond the Written Word
Threadgill v. Peabody Coal Co.
Facts: (Agreement contains terms parties didnt
discuss/express GAP IN K): P hired by D to probe holes. Ps
equipment gets stuck. No discussion/expression as to who
would pay for damaged equipment. (Extrinsic Evidence case
outside of writing, no problem, brought it in)
Trade Custom places risk of probe loss on driller (D) when no
other agreement said otherwise
o To be binding, must be sufficiently general so
parties could be said to have contracted w/
reference to it
To bind a party by means of a trade usage, the party must have
had actual or constructive knowledge of that usage
For constructive knowledge, the usage must be sufficiently
general so that the parties could have contracted in reference
to it
A usage isnt required to be of universal and notorious use in
most instances
The custom isnt binding if it is against public policy or
unreasonable
A K isnt just the what the parties agree to, but other things that
for differing reasons become part of the deal
Parties are supposed to become informed members of the trade
B. Express Terms, Parol Evidence, and the Argument of Completeness
of the Written Contract
1. The Common Law
Rest. 213
Parol evidence rule isnt a rule of evidence but one of
substantive law
Prior written and oral agreements are rendered inoperable when
there is a writing pertaining to the same subject in an
agreement
CL PAROLE EVIDENCE RULE 4 STEP TEST
1. Is there an actual PE problem? (HINT: LOOK FOR
AGREEMENT PRIOR OR CONTEMPORANEOUS TO IN
HYPO)
2. Is the writing/term an integration (final expression)
a. Traditional 4 corners jurisdiction: look only at
the writing (Signature? Enough info?)

23

b. R2K jurisdiction: admit any relevant evidence


to determine finality, ORAL too (R2K 209, 214)
3. Is the integration complete? If so, PER does away
with any/all prior agreements, cant be supplemented
a. If partial Extrinsic Evidence admissible
b. Merger Clauses: indicates writing final &
complete (presumption parties intended it to
mean what it says) usually means PE not
admissible because they are meant to show K is
complete problematic if the merger clause too
boilerplate (affects sincerity)
c. Does the K look complete on its face? Does it
look like the parties, through the writing,
intended to exclude PE? (Courts intent Q on
interpretation)
d. Wouldnt have been included (Natural to exclude)
partially integrated (ice house hypo dissent)
e. Would have been included- Completely
integrated (ice house hypo majority)
4. If not are the additional terms consistent?
(ROGERS) (If partially integrated, additional terms can
be added if they are consistent if theyre not
consistent, theyre out)
a. To be contradictory, term must contradict an
express term of the integration
Exceptions to PER:
Collateral Contract Concept: The separate independent
agreement is supported by separate consideration, is separate
and distinct in subject matter, and does not contradict the
written agreement (doesnt implicate PER)
Later/Subsequent Agreements: treated as modifications to the
agreement so PER never excludes evidence of subsequent
agreements
Interpreting ambiguities: exception to PER, EE admitted
Determining Illegality/Fraud/Duress/Mistake: exception to PER,
EE admitted
Nelson v. Elway
Facts: P owned car dealerships, made buy-sell agreement
(merger) & RE K to buy Metro auto. P would sell both to D for
enough $ - made service agreement, made in writing but never
signed (P would give D Metro Auto, D would pay P back by
paying $50/car sold at both dealerships for 7 years & in
exchange, D would buy metro toyota for less). Buy-sell
agreement & RE K were written & signed but didnt have service
agreement terms
Minority position will not step into integrated agreements
between sophisticated parties to rewrite the K
Merger clauses will be effective if included
Extrinsic evidence that is contrary to that of the 4 corners of the
written agreement may not be admitted
Majority position will allow in evidence to ascertain the intention
of the parties
Parol evidence rule shouldnt be used aggressively to keep
evidence out

24

Rest. 210- A completely integrated agreement is adopted by


the parties as a complete and exclusive statement of the terms
Merger clauses that frustrate the intentions of the parties
should not be enforced
When parties disagree as to whether a document represent the
full agreement of the parties and conflicting evidence exists, a
factual determination is necessary
Rogers v. Jackson (R2K Juris. Look to Extrinsic Evidence)
Facts: D signed promissory note promising to pay $3k+interest
in one year & remaining principle and interest in 2 years. (This
was the writing) D never paid said writing was part of a larger
oral agreement that included he would pay if and when he was
able. Ct granted SJ for D, then reversed
R2K 217: Where the parties to an written K agree orally that
performance is subject to occurrence of a stated condition, K
not integrated with respect to the oral condition
R2K 215,216: PE of additional terms is admissible to
supplement a partially integrated written agreement if the
additional terms are consistent with the writing
a. Oral condition didnt contradict K terms- just added to it
b. Apart from oral condition, Prom note was partially
integrated bc it was the only writing couldnt have
been the entire agreement bc it imposed no obligation
on P
Held: The oral condition does not contradict express language
of the written promissory note so proof of the condition is not
excluded by PE rule
Dissent: promissory note shouldve been examined in
accordance to basic principles of K law writing reflective of
partys intent
Esbensen v. Userware International, Inc. DONT CITE
If no integration clause exists, relevant terms that arent
discussed in the written agreement require extrinsic evidence
Sophistication of the parties is an important factor as they tend
to leave out important provisions
Trade customs can always be brought in from oral testimony
PER doesnt bar information regarding conditions precedent
An agreement is fully integrated when the writing is intended as
a complete and exclusive statement of the terms
An agreement is partially integrated regarding the terms
specifically laid out in writing
PER bars the admission of oral evidence regarding prior or
contemporaneous statements contradicting the terms in writing
Evidence of oral understandings is allowed in partially
integrated agreements regarding terms not inconsistent with
the express language of the writing
Oral evidence is always allowed to interpret the written
agreement
C. Ambiguous Express Terms: Using Parol Evidence and Other
Extrinsic Evidence to Discover the Meaning of the Terms Used
Rest. 214 Prior & Contemporaneous Negotiations

25

Agreement before or simultaneous with the adoption of a


writing are admissible to establish
1. Whether the writing is an integrated agreement
2. That the agreement is only partially integrated
3. The meaning of the writing
4. Illegality, fraud, duress, mistake, lack of consideration, or
other invalidating cause
5. Grounds for granting or denying rescission, reformation,
specific performance, or other remedy
Parol evidence may be allowed to interpret the meaning of the writing
Frigaliment Importing Co. v. BNS International Sales Corp.
(Friendly)
Facts: (AMBIGUITY of Term meaning) P sued D for sending the
wrong kind of chicken, sent foul stewing chicken when wanted
young broiler chicken.
Legal issue P has burden of proving broilers and fryers are the
ONLY objective meaning of the word in the trade. (R2K 206
Interpretation against the draftsman here, thats P)
Looked at trade usage to explain term chicken, dictionary
meaning, expert testimony on the meaning, Ps conduct
(accepted it and then complained) and that P shouldve known
by the price what kind of chicken he was getting (realities of the
market - D wouldnt sell at profit loss)
Parties are expected to be informed in the businesses they
entered into and acquiring this knowledge is part of the start-up
costs
Witnesses that testify to the effect of a trade usage must in fact
use the usage themselves
Relevant sources for determining meanings of terms
1. Trade usages
2. Regulatory agencies
3. Dictionary
P has the burden of showing a term is used in a broader rather
than narrower sense
Trade usage: a practice or method of dealing having such
regularity of observance in a trade that the parties will be expected
to K in reference to it
Course of dealing: an established sequence of conduct between
parties that forms the understood basis for interpreting their
expressions
Express terms control over both trade usages and courses of
dealing.
Course of performance: when repeated occasions for
performance between parties are called for in a K, any course
accepted without objection shall be relevant to determining the
meaning of the agreement
Random House v. Rosetta Books LLC
Facts: P sues D for copyright infringement - says D cant sell
digital format of 8 books bc author of the books granted P (not
D) the right to print, publish, and sell the works in book form
(NY 4 corners jurisdiction that looked to EE [UOT]
because the EE was relevant to the proposed meaning)
The determination of whether ambiguity exists in a K is a
matter of law for the court to decide

26

No ambiguity exists in most jurisdictions when a definite and


precise meaning can be attained
Once the K is found to contain an ambiguity, the
interpretation is a matter of fact for the jury to decide
New use problems develop when new technology makes terms
in a K ambiguous
Broad language in a K will be read to include future uses
Narrow language will likely confine the scope of the K to the
uses contemplated at the time
The neutral approach places the burden of proof upon the party
asking for the less reasonable interpretation of the K
Trident Center v. Connecticut General Life Ins. Co.
Facts: (AMBIGUITY OF INTENTION): P constructed bldg &
financed by D provides loan for 15-year term. Promissory note
says P cant pay for first 12 years. During first 12 years, interest
rate drops and P wants to pay off loan while market is good. D
said no P sues D D removes to fed ct bc doc
clearly&unambiguously precluded payment for first 12 years
Fed Court has to follow CA state law (which follows Pacific Gas,
even though Kozinski didnt think it was ambiguous, pissed
because he thinks its clear on its face): no matter how clear and
unambiguous the K is, if there is any party saying they agreed
to one thing and the K says something else, EE is allowed to
come in (CA = R2K Juris)
What is the level of sophistication of the parties and what is
their bargaining power?
Normal rule of K construction requires the reading of the K to be
interpreted as to avoid internal conflict, if possible
Minority rule allows for parol evidence under any circumstance
to interpret the meaning of the K
Pacific Gas & Electric Co.
(4 Corners Jurisdiction, allows EE) If clause is reasonably
susceptible of meaning something else, EE admissible. Words
dont show intention, need to put yourself in the
circumstances/situation & you do this through EE
Doesnt matter if K language looks unambiguous if it can
mean something else, EE can come in
3. Rules, Maxims, and Extrinsic Evidence to Interpret Contract
Language
Posner
Dictionaries, treatises, articles, and other published materials
should be used as long as it is apparent that a discrepancy
exists and one party isnt trying to slip out of their obligations
Rest 203 Standards of Interpretation
Interpretation which gives a reasonable, lawful, and effective
interpretation is preferred
Express terms are given greater weight than trade usages
Specific over general
Separately negotiated terms are given greater weight
Rest 206- interpretation is generally against the draftsman
Patterson
1. Meaning of words is affected by the others in the same series

27

2. A general term joined with a specific one will include only things
that are like the specific one
3. If one or more specific terms are listed, without general terms,
other items although similar are excluded
4. An interpretation that makes the K valid is preferred over one
that makes it invalid
5. Read Ks to favor the party that didnt draft the K or the party
with the least bargaining power
6. Interpret the K as a whole
7. Examine the purpose of the parties
8. A specific provision is an exception to a general one
9. Handwritten provisions control over printed provision on the
same K
10. Public interest is preferred
4. Special Interpretive Rules for Ks of Adhesion
Meyer v. State Farm
Adhesion Ks arent evil, they are efficient ways of doing
business and reducing costs
ADR is favored by the courts when it provides a fair method of
relief for both parties
Arbitration clauses that are more friendly to the party with less
bargaining power are more likely to be enforced
What are the established practices in the industry?
Public policy, plain language, no unconscionability, no fine print,
and a fair process make adhesion Ks and arbitration clauses
stronger
Not reading a K is no defense
If the insertion of an arbitration clause is induced by fraud, it
will not be enforced
Lauvetz v. Alaska Sales & Service dba National Car Rental
Rest. 211- where one party has reason to believe the other
would not accept the agreement if he knew the writing
contained due to a particular term, that term is not effective
In Ks of adhesion, which people most often dont read, the
agreement will be construed according to principles of
reasonable expectations
IV. When is Someone Who Made an Enforceable Deal Excused from Doing
What He Agreed to Do?
Reasons that justify non-performance in contract law are termed excuses.
A. Satisfaction of Mature Obligations to Perform: The Concept of
Discharge
Rest 235
Full performance discharges a K
Any non-performance is a breach
Full performance only will discharge a K.
Excuses for less than full performance
1. Conditions: something must happen first before a party is
obligated to perform
2. Amendment
3. Modification
4. Waiver
5. Estoppel
6. Impossibility

28

7. Impracticability
8. Frustration of purpose
9. Repudiation
10. Failure of Adequate Assurance of Future Performance
11. Material Breach
B. Conditions
Conditions may be used to allocate risk.
Types of Conditions
Express
Can be stated expressly (and unambiguously)
Can be stated ambiguously (and so implied-in-fact)
Constructive - Order performance
Implied by law to do justice
Ex: services usually paid after service rendered (i.e., auto
body work; employment)
When we talk about express conditions, we cannot say breach. If a condition
isnt met, there is not breach but the duty to abide by the agreement is
excused.
All non-performances are not breaches
Strict Compliance
Difference between promise and condition
Express conditions modify promissory obligations
Function of express conditions (question of fact)
Allocate risk of the non-occurrence of critical event to one party or
the other
Reflects parties intent so thats how it is found
When something is a question of fact, it means that the parties can contract
around it.
Condition precedent the obligation never arises if the condition isnt met
Condition subsequent the obligation happened, but later the condition
failed
Promissory obligations are under the control of the party
Conditions are not under the control of the party
Express conditions are different from promises
Differences between promise & condition
Triggering of obligation
o Promise - Agreement between the parties (Formation).
Promises are absolute. Once formation has happened,
they are not changing/going away.
o Condition uncertain event (conditional)
Obligation requires what level of performance/occurrence?
o Promise absolute but can be performed partially
o Condition Strict compliance
Effect of not meeting the obligation?
o Promise breach (partial or material)
Partial breach stuck
Material breach full - done
o Condition discharge/excused from K duty

29

Rest. 224- A condition is an event which must occur before


performance under a K is due
Conditions are about when, if ever, a party must perform
West v. USPS
Conditions precedent must be closely followed when expressly
laid out in an agreement
Rest. 225 Effects of Non-Occurrence of a Condition
o Performance of a duty subject to a condition cannot
become due unless the condition occurs or is excused
o Non-occurrence of the condition discharges the duty
under the K once performance of the condition can no
longer occur
o Non-occurrence is not a breach unless a duty exists for
that condition
Pullman CB&R v. Tuck-it-away, Bridgeport, Inc.
Facts: (CONSTRUCTIVE CONDITIONS OF EXCHANGE IN
CURRENT PRACTICE): D (seller) and Vestpro (buyer) signed a K
for sale of property. V deposits 100K in escrow with Ds lawyers.
Extended closing period many times, 4th time D told V to pay
fee, V refused. V wanted out of the K Vs lawyer found loophole
(incorrect description of land sold), sent letter cancelling the K
on 3 defects, no closing took place. Trial court found for D
Unless otherwise specified in a K, simultaneous performance
will be implied
If one party is to go first, it becomes a condition precedent
Rest. 234- performances are due simultaneously unless the
language indicates the contrary; However, when one partys
performance requires a period of time, his performance is due
first without language to the contrary
A condition precedent is a fact or event that the parties intend
must exist or take place before there is a right to performance
Law doesnt require futile acts in order to bring a breach action
A party seeking the benefit of a condition precedent may waive
strict compliance by conduct indicating strict compliance isnt
required
Luttiger v. Rosen
Facts: Buyer (P) contracted to buy home from seller (D) K had
subject to financing clause. Parties agreed that if P couldnt
get the financing in K & timely notified seller, all sums paid on K
refunded & K terminated. Ps attorney got mortgage
commitment from a bank but didnt meet Ks interest
requirement told D & asked for down payment to be returned.
D made new offer to P stating they would pay the difference P
rejected new offer.
Agreement was conditional on obtaining financing at specified
terms. Good faith effort was put forth,
Rule: A condition precedent to performance must be met
before performance is required on a contract.
A condition requires strict compliance to the terms of the
condition in order to be fulfilled
Contract is not binding if condition precedent is not met
Peacock Const. Co. v. Modern Air Conditioning, Inc.

30

Facts: (FINAL PAYMENT PROVISION- PAY-WHEN-PAY): Gen


contractor had two Ks with two subs for building project. Both
Ks said gen would make final payment to subs w/in 30 days
after completion, written acceptance by architect, and full
payment by owner (Final payment provision). Subs finished,
demanded pay, gen refused arguing payment by owner was a
condition precedent had to be fulfilled before gen had to
perform under the K (& owner didnt pay gen yet).
Ambiguous terms may be interpreted to mean reasonable
Risk must be shifted in clear and unambiguous terms
Rest. 227- interpretation of conditions is preferred that
reduces the risk of forfeiture
Moore Bros. Co. v. Brown & Root, Inc.
Facts: (PREVENTION): TRIP awarded D gen construction K. D
(gen contractor) had pay-when-pay clause in K with subs (P)
stating payment by TRIP to D was condition precedent to D
paying P. Lenders (people financing) wanted certainty in
assessing costs. D assured lenders no substantial changes but
instead they put the change in scope work in a separate
police and procedures letter and didnt tell P (they did this
because they knew P would do the work anyway, but TRIP
wouldnt pay, so they wouldnt have to pay P
Prevention doctrine
A condition may be excused if the promisor prevents or hinders
the fulfillment of the condition
Requires proof that s conduct materially contributed to the
non-occurrence of the condition
But for causation may be required in some jurisdictions
The action must be wrongful and in excess of the partys legal
rights
Under conditions, it is all or nothing; no part payment is given
for partial satisfaction
Acme Markets, Inc. v. Federal Armored Express, Inc.
Facts: P (acme) says parties entered K for armored car service
& to provide for timely reimbursement of service-related losses.
D was robbed after accepting Ps cash didnt reimburse P. D
referred to K term responsibility of D shall begin when cash
bags have been accepted & receipted for by D- D said bag
wasnt receipted prior to its loss. D says it was a condition
precedent not met so D excused. P says it was a promise
If a condition isnt a material term of the K, a party may be
excused from the condition to avoid disproportionate forfeiture
Rest. 229- a court may excuse the non-occurrence of a
condition if it would cause a disproportionate forfeiture and is
not a material part of the agreement
Cant contract out of forfeiture protection
Evidence is necessary to show purpose and materiality
C. WAIVER & MODIFICATION Is Performance Still Due?: PostFormation Conduct that Changes the Deal and the Nature of the
Performance Required
Amendment to a K may occur at any time. Under the modern view
such modifications dont require consideration. Both parties must consent
to the proposed modification.

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Waiver
1. intentional relinquishment of a known right; or
2. Excuse of the nonoccurrence of or a delay in the occurrence of a
condition or duty
Waiver may be effectuated by one party (unilateral)
Waiver is retractable in absence of reliance
Waiver only applies to conditions doesnt apply to promises
Modification
the changing of the terms of the agreement which may diminish or
increase the duty of either party
The result of the bilateral action of both parties to the sales
transaction
Modification cannot be retracted unilaterally
Applies more to promises
Estoppel
if abandon/stop insisting upon a condition precedent, and other
party, entitled to rely on such conduct, does in fact rely, then one
benefitted by condition is estopped from arguing it
waiver like conduct that induces reasonable and actual reliance,
depends on both parties
precludes "a person from denying or asserting anything to the
contrary of that which has, in contemplation of law, been
established as the truth, either by the acts of judicial or legislative
officers, or by his own deed, acts, or representations, either express
or implied.
usually does not require examination of a partys intent. Instead,
the equitable doctrine of estoppel looks to whether the party
asserting estoppel would otherwise suffer an inequitable detriment
based upon the conduct of the other party
Dynamic v. Machine & Electric Co.
Facts: P (buyer) agreed to buy lathe from D. Payment in segments in
meantime, P rented a lathe from D. P told D rental lathe had problems
and if these problems werent fixed in new lathe, P would reject it
(condition precedent). P & D made oral agreement to extend deadline
for install/commissioning to 9/19. 10/9 D delivered and installed. 12/9
Ps letter to D granted final deadline for D to deliver a working lathe by
12/19. Next day P got info that led him to conclude lathe wouldnt be
able to meet required specifications. P notified D it intended to retract
deadline extension. D didnt materially rely on deadline extension from
12/9 prior to P revoking on 12/11. P sues D
Issue: was this a modification or a waiver? (Question of fact)
turns on whether P and D mutually agreed to extend deadline
P says waiver if its a waiver, signing doesnt matter because
waiver doesnt require SOF formalities can be express/implied
D says modification (so that way P couldnt retract) the
12/19 extension being signed makes it look like an agreement,
shows they were channeling their behavior)
Court: If modification, P cant retract unilaterally bc both parties
need to agree and needs new consideration under CL. If waiver,
can retract unilaterally if youre the one that benefits court
remands to find out
Held: absence of consideration under UCC doesnt preclude a
finding for modification, doesnt have to be in writing for a

32

waiver, waiver can be inferred from circumstances and parties


conduct
May Centers, Inc. v. Paris Croissant
Facts: 10 year lease agreement b/t landlord and lessee, lease
began April 15, 1986, guarantee signed that if D defaults, must
pay penalties, if in default after two years individual guarantors
liable, lease says to be paid on first of the month, lessee had 10
day grace period, although payments late, landlord accepted
payments in mid-month each month, and final time even later
Waivers are the unilateral giving up of rights that can only be
reclaimed prospectively
Modification is permanent
A course of conduct may indicate the intent of the parties
Rest. 278- if a different performance from the one promised
is accepted, the duty is discharged
Rest 279- a substituted K is accepted in satisfaction of the
existing duty and discharges the original duty
A non-waiver provision does not allow a party to return to prior
violations of the K, but only future ones
Clark v. West
Facts: (ESTOPPEL CASE): K for P to write books for money.
Condition: P doesnt drink while he writes the book. P gets
$6/pg if he doesnt drink, but only $2/pg if P doesnt observe
this condition and drinks. P argues despite his breach of this
condition he should get paid $6 because D knew of Ps nonobservance & this waived it and now he cant insist on strict
performance. D argues abstinence is consideration for $4
payment difference therefore cant be waived unless made a
new K with new consideration. P argues stipulation was a
condition precedent intended to work a forfeiture of the
additional compensation in the case of breach & therefore could
be waive w/o formal agreement
A condition is waived when the acts of a party cause the other
party to reasonably justify a belief that it has been waived
No consideration required for waiver
Modification is a new agreement
A waiver cannot be reinstated once revoked
D. Unanticipated Post-Formation Events That May Excuse
Performance
Rest 261 Discharge of Supervening Impracticability
A performance is discharged when an event that the nonoccurrence of which was a basic assumption of the K occurs
Rest 262
The death of a party necessary for performance is an event that
the non-occurrence of which was assumed in the K
Taylor v. Caldwell
Facts: (IMPOSSIBILITY/IMPLIED CONDITION): P and D entered K
D agreed to let P have use of Music Hall, so they can use them
day and night for concerts. After K was made and before
concert, hall destroyed by fire. Not fault of either party. P sues D
for damages.

33

The occurrence of unforeseen accidents that destroy the reason


for the K may discharge the duties of the parties
This stipulation is implied
Implied condition the continued existence of the hall being
up at the time of concert (the continued existence of the hall is
necessary for the fulfillment of the K) & because the hall was
destroyed, Ds performance was excused & Both sides are
excused (the losses stay where they are)
Underlying notion is a lack of foreseeability
What would the K have said if it was foreseeable?
As time passes, relief for unforeseen occurrences becomes less
and less as parties are expected to prepare for known
possibilities
Risk may be shifted by implication
Wisconsin Electric v. Union Pacific Railroad
Facts: K b/t parties for D to deliver coal to P in Wisconsin, after
D delivers coal, D has contract w/ Geneva to deliver coal, so
after D delivers to WEPCO, D picks up iron ore for Geneva, the
second K affects the pricing of the 1st contract, Geneva steel
enters bankruptcy but still operational, FM clause in K triggers
when no return trip w/ full cars (not declared until 2004)
Force Majeur Clause: specifying the failures that will
excuse performance must always be interpreted in
accordance with its language and context
Issue: whether D can increase rates for P. P claims D
had waived its right to charge a higher rate. Does D
have to refund P the surcharge (lack of discount)?
P says bc D waited so long to invoke, D waived FM
clause. No waiver clause shouldnt apply here bc no
waiver
D didnt find another resource to ship court says he
didnt need to do this
Good Faith performance court says there was good
faith requirement but doesnt need to be 100% - good
faith doesnt require putting one party over another
Krell v. Henry
Facts: P rented apartment for two days (not nights though) to
D, D paid down payment for apartment b/c wanted to see King,
King sick so doesnt appear, and D didnt want to pay
Frustration of purpose
What is the foundation of the K?
Parol evidence is used to determine the foundation
Implicit understanding
Questions for consideration:
1. What was the foundation of the K?
2. Was the performance of the K prevented?
3. Was the event which was prevented such that it could be
said to have been in the contemplation of the parties at
the time of formation?
Things are typically allowed to be unforeseen only once
The level of sophistication of the parties plays a large part in
what is expected to be foreseen
Mel Frank Tool & Supply v. Di-Chem Co.

34

Facts: D chemical manufacturer renting warehouse from P,


some chemicals are hazardous but P not expressly aware when
signing lease, city ordinance later passed that states you
cannot have hazardous materials, fire code said cant house
hazardous materials b/c not up to code, P and D tried to work it
out, but couldnt so D moved out breached lease, P suing for
balance of rent and damages to warehouse
Supervening frustration: ordinance put into place after signing
lease
Where a partys principle purpose is substantially frustrated
without his fault by an unexpected occurrence his duties are
discharged unless the language of the circumstances indicates
the contrary
A problem must arise that makes one partys performance
virtually worthless
Communication of purpose must be explicit at the time of
formation
Both parties must know of purpose
What are the backgrounds of the parties?
New human experience adds to the list of foreseeability
Rest. 265- unless the language indicates the contrary, the
frustration of the principal purpose of a K by an event assumed
not to happen in the K will discharge the parties duties
Rule for discharge of obligations due to frustration
1. A partys principal purpose was substantially frustrated
2. Occurrence of unanticipated event (ordinance here)
3. Non-occurrence of which was basic assumption upon
which K was made
a. Must be shared by both parties, Object of K both
parties understood (#1-3 Di-Chem was excused,
until #4)
4. Unless language or circumstances indicate the contrary
(Di-chem no longer excused in these circumstances,
court held express language of K doesnt shift burden on
one party. Bc of the circumstances, the inventory
(hazardous and not) shows risk falls on Di-Chem. Burden
is back on Di-chem to show that frustration was
substantial)
7200 SCOTTSDALE ROAD: (TERRORISM HOTEL CASE): Conference booked
but Desert Storm occurs so fear of traveling so company that was supposed to
stay in hotel tried to back out and say frustration
Held: Not sufficient proof of frustration, maybe some money lost
but some money loss is not enough.
Risk was w/in the K from the start. Terrorism is an assumption
(always foreseeable) but wasnt talked about so court said this
was a normal background risk of K like market price changing,
for example)
Distinguished from Di-Chem: may or may not be a
substantial frustration (there may or may not be significant
amount of non-hazardous inventory), here there were some
people who could still attend, just a drop in attendance
The risk on Di-Chem was not a normal background risk of the K
this is not a market-price risk case this was not a risk that
the parties would have assumed from the start

35

MUST LOOK AT THE CIRCUMSTANCES FACTS!!!


For frustration of purpose, impracticability, and impossibility CENTRAL
ISSUE: ALLOCATION OF RISK
E. Excuse Through Actions Of a Party Before Performance is
Otherwise Due
Truman L. Flatt & Sons Co., Inc. v. Schupf
Repudiation must be very clearly communicated
Anticipatory repudiation must be clear and unequivocal
Rest. 250- a repudiation is a statement indicating that a
party will commit a breach that would give the other a claim for
damages or a voluntary affirmative act which makes
performance impossible
Whether an anticipatory repudiation occurred is a question for
the jury
Retraction may occur if the other party has not substantially
altered their position and does not immediately refuse the
retraction
Rest. 251- a failure to provide adequate assurance may
represent a breach when a party reasonably demands them
Rest 256- a party may retract its repudiation
Modern doctrine requires to mitigate damages
Norcon Power v. Niagra Mohawk Power
Demands for adequate assurance of future performance are
allowed in long and complex deals
Demands for assurance may come
1. Communication from one party making the other unsure
2. Questions about solvency
Law is moving toward allowing parties to seek assurances
If a demanding party overreacts, they may become the
breaching party
These demands allow parties to reach an equilibrium in terms of
uniformity and reliability in resolving problems without judicial
intervention
If the demanding partys assurance isnt met, they may take
reasonable action to act as if repudiation occurred
Rest. 243
F. Excuse Provided by a Material Breach by the Other Party
Possible responses to breach:
1. Waiver
2. Amendment
3. Partial breach
4. Adequate assurance
5. Total breach
Rest 237- performance can only be suspended due to the other
partys material breach; the duty to tender performance is conditioned
on the other partys not being in material breach
Gibson v. City of Cranston
A contracting party may cease performance and seek damages
if a material breach that goes to the essence of the K occurs
Questions of materiality are to be determined by the jury unless
no reasonable person could find otherwise
Rest. 241 Factor in Determining if a Breach is Material

36

Extent of deprivation of benefit


Extent to which the injured party would be compensated
for the part of the benefit it is being denied
o Extent to which the party failing to perform will suffer
due to forfeiture
o Likelihood that the failure will be cured including any
reasonable assurances made
o Extent to which the failing partys behavior comports
with good faith and fair dealing
It must be objectively determined that the breach frustrates the
K to the point that performance is virtually worthless
Jacobs & Young, Inc. v. Kent (Cardozo)
Facts: P built a house for D. K stated all iron pipe must be well
galvanized, lap welded pipe of the grade known as standard
pipe of Reading brand. D found out some of the pipe was not
Reading. P was directed to redo it. This meant demolition (super
expensive) of substantial parts of the completed structure. P left
the work untouched and asked for a certificate that the final
payment was due. D refused. P sues.
A condition of a K wont cause forfeiture when it is insignificant
to the overall deal
Substantial performance
Collateral damages may be awarded
An unintentional mistake that doesnt frustrate the purpose of
the K, is grounds for replacement or the difference in value
Law will not impute perfect performance requirement
Some jurisdictions limit this rule to construction Ks
Ks that require perfection will be strictly enforced
What is the purpose of the item?
OW Grun Roofing v. Cope
Facts: The K required D to install new roof on Ps home for
$648. D acknowledges that it was his duty to install a roof of
uniform color. After D installed P noticed streaks due to
difference in shade/color of shingles. D removed the
nonconforming shingles and replaced them (replacements
didnt match either) D only replaced non matching shingles on
northern and eastern sides leaving south side with yellow
streaks still apparent.
Deficient work will not constitute substantial performance
Under substantial performance, the K must be completed close
to the extent and value requested
Must be a good faith unintentional mistake
Purpose, general plan, and object
Avoidance of forfeiture when imperfection is insignificant
What is the purpose?
Divisible Contracts
Divisible K the whole performance is divided into two sets of partial
performances, each part of each set of being the agreed exchange for
a corresponding part of the set of performances to be rendered by the
other promisor
Two or more separate partial performances on each side are agreed to
be exchanged for partial performances on the other side
o
o

37

The failure to perform one part does not bar recovery for
performance of another
The performance of each division of the service will be impliedly
a condition precedent to the recovery of a corresponding
portion of the price
The party who has performed one of these partys has the right to its
agreed equivalent just as if the parties had made a separate contract
with regard to that pair of corresponding parties (R2K 240)

V. How Does the Law Enforce the Deal?


A. Specific Performance
The granting of specific performance is a matter of judicial
discretion and wont be granted unless the terms of the K are
clear enough to enable a court to grant an appropriate order
Specific performance will not be granted where there is an
adequate remedy at law
Party seeking SP has the burden of proving that it is warranted
Ks for the sale of realty may be specifically enforced
Rest 360
o In situations where no suitable substitute is reasonably
ascertainable and
o Where goods are unique in kind, quality, or personal
association, and purchase elsewhere may be impractical
o And the buyer is unable to cover specific performance
may be granted
Other factors (Corbin)
o Difficulty and uncertainty in determining the amount of
damages
o Insufficiency of money damages to obtain the duplicate
or the substantial equivalent of the promised
performance
UCC allows SP for unique goods or where proper in other
circumstances; Meant to broaden the rule
Courts do not like to supervise performance; Sales of goods are
easier to enforce than projects and relationships that would
continue over time
Sequence of activities vs. One time performance
The preference for money damages in our system is likely
traced back to the courts of equitys deference to the courts of
law
Rest 367- no specific performance for personal service Ks
Although a court wont grant an injunction requiring personal
services, certain situations exist in which a court will enjoin a
party from rendering such services to another during the term
of the K
For enjoinment there must be
1. A negative covenant precluding from providing the
services to anyone else
2. The services are unique or extraordinary, either because of
special skill or special knowledge that has acquired of his
employers business

38

3. The injunction wont prevent the employee from possessing


reasonable mean of making a living (preventing the
equivalent of requiring to perform the K)
4. The party seeking the injunction is not in default or unable
to perform its obligations (Clean hands)
Policy justifications for not enforcing employment agreements
o Personal freedom of the employee
o Quality of work may be affected in a negative manner
o Too much supervision for the court
UCC focuses on the commercial feasibility of replacement
The test of uniqueness is the total situation which characterizes
the K
In contrast to the past, where SP was granted typically for
heirlooms or priceless works of art, SP is now commonly
granted for output and requirements Ks involving a peculiarly
available source or market
A party may not get SP even if agreed to in the K, if the
breaching partys sole remaining obligation is to pay money
B. Damages and the Concept of Efficient Breach
Holmes- there is no moral component to the law of contracts. A party
must pay damages for breach but nothing else.
This attitude is supported by the lack of punitive damages in contact
law.
Efficient breach- if can make more money by breaching a K than
would have to pay in expectation damages to , than everyone is
better off by breaching and repairing while uses its resources
more efficiently
This theory fails to take into account transaction costs and attorneys
fees.
1. Penalties, Liquidated Damages, and Efficient Breach
Judge Posner represents one of the many proponents of
enforcing
liquidated damages clauses. Especially when a
substantial
corporation is involved, the promise to pay a penalty
clause is a way of reducing credit risk and may be essential to some
value- maximizing Ks. The penalty clause could also represent a
valuable negotiating tool when one party wishes to take advantage of
an
efficient breach.
2. Dissenting View on Efficient Breach
Certainty of performance is the essential value of many Ks and
to
allow parties to breach at will undermines the public confidence
in
contractual relations. As traditional contract damages offer no
motivation not to take advantage of an efficient breach,
recognition
of a cause of action under tort may be necessary to
compel
commercial responsibility.
D. Money Damages
Expectancy damages put the aggrieved party in the same position he
would have been in had there been performance. In short, money
substitutes for performance.
Rest 345
Rest 347
Loss in value
+ any other loss (including incidentals/consequentials)
- loss avoided by breach
Rest 348

39

Hawkins v. McGee
Hairy Hand Case
General rule gives expectancy damages
Puts in as good of position as he would have been in had
performed
Difference in value
Expectancy may be difficult to compute in some contexts
Damages are compensation for a breach measured in the terms
of the K
Panorama Village Homeowners Assn v. Golden Rule Roofing
Facts: D contracted to install roofs and issue manufacturers
warranties. Construction was defective and warranties not
issued
Rule: Injured party must establish cost to remedy breach;
contractor then bears the burden to challenge the evidence to
reduce the award.
Leingang v. Mandan Weed Board
Facts: Weed control company - City mistakenly assigned large
lots to other company
For a breach of K, is entitled to compensation for the loss
suffered, but can recover only the amount that would have
been gained by full performance
In a K for services, the value of the K when breached is
1. s reasonable expenditures that would have been spent in
performance subtracted from
2. the anticipated revenues
may recover lost profits if they are reasonable and not
speculative
Overhead costs are not deducted as they must be paid anyway
and thus factoring them in causes to pay them twice
K price is reduced by reduced by expenses actually saved
Groves v. John Wunder Co.
Facts: contract to remove sand and gravel from Ps premises
and leave the property at a uniform grade, substantially the
same as the grade now existing at the roadway. D paid P
$105,000 but willfully failed to leave the property at a uniform
grade.
is ineligible for relief under substantial performance if it has
acted in bad faith
If there is a windfall, it must go to the innocent party
Cost of completion vs. Diminution in value
Correct doctrine is the cost of remedying the defect
is liable for the reasonable costs of doing what they promised
to do and have willfully declined to do
has bargained for the performance, not the increase in the
value of the land
If the court finds substantial performance, an effort to avoid
economic waste will be undertaken and damages will be
calculated by diminution in value
Without substantial performance, which requires good faith, the
damages will be calculated as cost of completion
Peevyhouse v. Garland Coal & Mining Co.

40

Facts: D contracted for the right to strip mine coal on Ps


property for five years. Contract provided D would perform
restoration work on the property at the end of the lease period.
P sued for $25,000 when D refused to perform the restoration
To construct an argument that has bargained for performance
of the activity which will yield little gain in value to the land,
ignores the unlikelihood that anyone would bargain for the
performance at such a price when so little value is added
(Reference to Groves)
Diminution in value is the proper calculation if economic waste
is involved
The value rule should be followed when the cost of performance
is disproportionate to the end to be attained
Relative economic benefit is thus the proper consideration
Cost of performance is the typical calculation of damages,
unless the breach is incidental to the main purpose of the K and
the economic benefit to from performance of the K is grossly
disproportionate to the cost
Dissent: has gained the benefits without incurring the
obligations of the K. is the more sophisticated party and
knew going in the cost of repairing s land and thus specific
performance should be ordered
Willful and malicious conduct should not be rewarded
Signal to the legislature that sanctions are needed
This case shows how important framing your arguments is;
needed to show the need for the reparation of the land and put
the cost of completion in context with how much profit made
Incidental damages include
1. Costs incurred in the process of replacement
2. Expenses or commissions involved in covering
3. Interest costs
4. Reliance costs
E. Limitation on Money Damages
Limitations on damages
1. Foreseeability (R2K 351/UCC 2-715)
2. Certainty (R2K 352)
3. Minimization or mitigation (R2K 350/UCC 2-712)
Consequential damages- the dislocation of ones business by the
failure of another party to perform.
Rest 350(1) Avoidability as a Limitation on Damages

(1) Except as stated in Subsection (2), damages are not r


ecoverable for
lossthat the injured party could have avoided without undue ris
k, burden or humiliation.

(2) The injured party is not precluded from recovery by t


he rule stated
Subsection (1) to the extent that he has made reasonable but
unsuccessful efforts to avoid loss.
Parker v. 20th Century-Fox Film Corp.
Facts: Actress contracted for lead in film, D did not produce
film and offered alternative lead which P denied seeks
payment of contract

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Different and inferior employment will not be considered a


substitute requiring mitigation
Just because employment is different, doesnt mean may
reject it
Geographical concerns depend on the career path
Measure of recovery for a wrongfully dismissed employee is the
salary for the period of service agreed upon, less the amount
the employer proves the employee has earned or reasonably
could have earned from other employment
The employment must be comparable or substantially similar
Policy party who has been injured cannot sit idly by and allow
damages to accumulate
Ultimate question is whether the employee acted reasonably
Rest 351 Unforeseeability & Related Limitations on Damages
(1) Damages are not recoverable for loss that the party in
breach did not have reason to foresee as a probable result of
the breach when the contract was made.
(2) Loss may be foreseeable as a probable result of a breach
because it follows from the breach:
a. in the ordinary course of events, or
b. as a result of special circumstances, or beyond the
ordinary course of events, that the party in breach had
reason to know.
Hadley v. Baxendale
Facts: P sends component of steam engine for replacement D
delays shipping component causing Ps mills shutdown to be
extended
may only recover damages that were contemplated at the
time of formation (the direct damages the cost of shipping)
Flow of damages go only as far as foreseeable
If a K is made under special circumstances, they must be known
to both parties in order for lost profits to be awarded
must know of the damages to be contemplated
Without this knowledge on both sides, may only be held liable
for the amount of injuries that would generally arise
Consequential damages are typically not foreseeable
may be held liable for the regular business profits if they are
foreseeable and communicated, but not extraordinarily
lucrative profits unless they are communicated as well
Modern delivery companies contract out of these risks
Cheapest cost avoider is owner because the owner knows of the
resulting damages
Manouchehri v. Heim
Facts: P orders 100/100 x-ray machine. D delivers 100/60
machine court awards direct damages & consequential for
loss of profits
Foreseeability and knowledge of profits may be found in
businesses in which certain s commonly deal
For breach of warranty, may recover direct, incidental, and
consequential damages
Difference of value between goods accepted and received may
be determined by the cost of repair

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Consequential damages arent awarded if they could be


prevented by cover or otherwise
isnt precluded from damages by unsuccessful attempts to
cover
It is reasonable for to rely on s promises that the breach will
be remedied
isnt required to tell how much income relies on the K, as
long as the lost income was reasonably foreseeable
must produce evidence of the loss in proportion to the context
of the claim (The bigger the claim, the more evidence required)
Mass produced items to anonymous buyers dont allow for
consequential damages

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