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I. Introduction
A contract is a legally enforceable exchange of promises between two or more parties. In other words, a contract is an agreement
for which the law will provide a remedy when breached by either party.

A. Sources of Contract Law

The general principles of contract law are embodied in the common law, though states may make statutory modifications from
time to time. That said, contracts involving the sale of goods are governed by a specialized body of law contained in Article 2
of the Uniform Commercial Code (UCC), which has been adopted in every state except Louisiana. Article 2 incorporates many
common law principles, but the key differences will be discussed in further detail throughout the outline.

II. Formation of Contracts

A contract generally forms when one party makes an offer and receives an acceptance from another party in a manifestation of
mutual assent, provided that each party has the requisite intent and there is adequate consideration. This is a classic bilateral
contract—a mutual exchange of promises. A unilateral contract exists when an offeror makes a promise and conditions acceptance
of that promise on full performance by the offeree. The law will provide a remedy when either party breaches the contract by failing
to adhere to the agreed terms. [See Restatement (Second) of Contracts §§ 1, 17, 17 cmt. c, 21 (1981)]

A. Offer
An offer is the “manifestation of willingness to enter into a bargain” that is made by an offeror, which justifies acceptance from
an offeree. To form a contract, the offer must be valid, communicated to the offeree, and must not have terminated prior to
acceptance. [See Restatement (Second) of Contracts §§ 24, 33 (1981)]

1. Validity
A valid offer contains reasonably certain terms from which a reasonable person is able to conclude that an offer has been
made. Typically, this means that the offer must identify the parties, describe the subject of the agreement, and include
some sort of price term (which may be an objective standard from which the price can be derived, such as “fair market
value”). Note that certain additional terms may be required depending on the subject matter of the contract. For example,
generally an offer to sell land must include a price term, and an offer to buy or sell goods must include some type of
quantity term under the UCC. The most common types of invalid offers are jokes, preliminary offers, and advertisements.
[See Restatement (Second) of Contracts § 33 (1981)]

Example: Bob test-drives a red Ferrari and a black Ferrari before saying to a car salesman, “I’ll give you $200,000 for
the Ferrari.” However, Bob has not indicated which color Ferrari he is interested in purchasing. Because the
terms are not reasonably certain, Bob’s offer is invalid and cannot be accepted by the car salesman to form a
contract.

a. Joke
An offer made in jest is invalid only if the offeree knows or has reason to know that the offer is a joke. [See
Restatement (Second) of Contracts § 18 cmt. c (1981)]

Example: A pub owner played every televised game of the local sports team on the pub’s big screen television.
The team had been having the worst season in the organization’s history. The team was scheduled to
play the top-ranked team in the league for its final game. Before the game began, the pub owner jested to
a patron, “If the home team wins, I’ll sell you this bar for a dollar.” Both the pub owner and the patron
laughed, and the pub owner said, “Seriously though, if the home team wins, everybody is getting a round
on the house!” In the biggest upset of the season, the home team won by a landslide. The following day,
the patron shows up and presents the pub owner with a $1 bill. The pub owner balks. The patron will not
be successful if he brings a breach of contract lawsuit, because the circumstances surrounding the pub
owner’s offer make clear that the owner was only joking. Further, the patron had reason to know the pub
owner was joking, because he heard the pub owner’s qualification that he would seriously buy a round
on the house.
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b. Preliminary Offer
A preliminary offer is some kind of invitation to negotiate, such as an invitation to bid, a negotiation of terms, a price
quotation, or a proposal of terms. Generally, a preliminary offer is not considered a binding offer, because such an
offer lacks any manifestation of the offeror’s willingness to conclude a final bargain. [See Restatement (Second) of
Contracts § 26 (with comments) (1981)]

Examples: 1) A university asks two construction companies to submit bids for a new building on campus. The first
company submits a bid of $500,000, while the second company submits a bid of $750,000. Because the
companies were merely invited to bid, there was no valid offer. Thus, no contract has been formed with
either company. The university is not obligated to hire either company to construct the new building on
campus.

2) A dairy farmer writes to a grocery store, “I can quote the price of milk at $3 a gallon in carload lots.”
Unless the dairy farmer indicated his intent to make a valid offer, the grocery store may not accept the
price quotation to form a contract.

c. Advertisement
An advertisement is not considered a valid offer unless the language makes an express promise to adhere to specific
terms. In particular, mere puffery that could not be taken seriously by a reasonable person is not a valid offer. [See
Restatement (Second) of Contracts § 26 cmt. b (1981)] Courts have typically construed advertisements as invitations
to negotiate or solicitations of offers. [See, e.g., Craft v. Elder & Johnson Co., 38 N.E.2d 416 (1941)]

Examples: 1) A shoe store publishes the following advertisement: “All boots on sale! Visit our new location! The
first 100 customers this Saturday before noon will receive a gift card worth $10!” The shoe store is
obligated to provide gift cards to the first 100 customers on Saturday before noon. However, the shoe
store is not obligated to sell all boots for a specific price due to the lack of specific terms such as date,
percentage off, or time for the sale.

2) PepsiCo creates a promotional campaign in which consumers may acquire “Pepsi Points” from Pepsi
products to exchange for items in a catalog. A television commercial advertises that 7,000,000 Pepsi
Points (worth $700,000) may be exchanged for a Harrier Jet (worth $23,000,000). However, the offer is
not included in the catalog and could not be taken seriously by a reasonable person. Because the
television commercial is mere puffery, PepsiCo is not obligated to provide a Harrier Jet to a consumer
who has 7,000,000 Pepsi Points. [See Leonard v. Pepsico, Inc., 88 F. Supp. 2d 116 (S.D.N.Y. 1999),
aff’d, 210 F.3d 88 (2d Cir. 2000)]

Compare: The Carbolic Smoke Ball Company advertises a “smoke ball” that will cure influenza, promising to pay
£100 to any person who contracts influenza despite using the smoke ball three times per day for two
weeks. Because the terms are specific and communicated as an express promise, the advertisement is a
valid offer. [See Carlill v. Carbolic Smoke Ball Co., [1893] Q.B. 256 (C.A.)]

2. Termination
An offer may be terminated before acceptance by rejection or counteroffer, lapse of time, revocation, or death or
incapacity. A terminated offer may no longer be accepted by the offeree. [See Restatement (Second) of Contracts § 36
(1981)]

a. Rejection or Counteroffer
An offer immediately terminates when the offeree rejects the offer or makes a counteroffer that proposes a different
bargain regarding the same matter. Note that simply asking if the offeror might accept different terms is not a
counteroffer if a reasonable person would know the original offer had not been rejected.
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Example: Anne offers to buy her coworker’s motorcycle for $15,000. The coworker responds, “I’ll sell you my
motorcycle for $15,500.” The coworker’s counteroffer terminates Anne’s offer of $15,000. The
counteroffer acts as a rejection and a new offer, which Anne may accept or reject.

b. Lapse of Time
An offer terminates when a reasonable or specified amount of time has lapsed without acceptance.

Example: A billionaire says to an entrepreneur, “I’ll buy your startup company for $2,000,000, but you have to
agree to the offer by Friday.” The entrepreneur agrees to the offer on Saturday. Because the billionaire’s
offer terminated at the end of Friday, there is no contract.

c. Revocation
An offer immediately terminates when the offeror notifies the offeree that the offer has been revoked. Revocation
becomes effective when the notice is actually received by the offeree (note that this rule may become important when
the offeror attempts to revoke the offer by mail). However, option contracts and firm offers made in a signed writing
are irrevocable.

i. Option Contract
An option contract guarantees, in exchange for something of value, that an offer will not be revoked for a
specified amount of time. Essentially, the offeree provides consideration in exchange for irrevocability. [See
Restatement (Second) of Contracts §§ 25, 37, 87 (1981)]

Example: A car owner offers to sell his car to a buyer for $5,000 and says, “If you give me $10, I’ll keep this
offer open until Monday.” The buyer may give the owner $10 to have the irrevocable option of
purchasing the owner’s car for $5,000 until Monday.

ii. Firm Offer

A firm offer guarantees that a merchant will not revoke an offer to sell goods for a specified amount of time.
Unlike an option contract, the offeree is not required to provide anything of value. Only offers to buy or sell
goods contained in a signed writing will be deemed firm offers. [See U.C.C. § 2-205 (2002)]

iii. Unilateral Contracts

The offeror of a unilateral contract may not revoke the offer after the offeree has begun performance. Once the
offeree has begun performance, she is entitled to a reasonable time for completion before the offeror may revoke.
This is true despite the fact that a contract will not actually be formed until the offeree has completed
performance.

iv. Detrimental Reliance

In some cases, the facts may be such that the offeror should reasonably expect that the offeree may change
position or do something in preparation for performance in detrimental reliance on the offer remaining open. The
offeror may not revoke the offer in that case until a reasonable period of time has passed.

d. Death or Incapacity
An offer immediately terminates when either party dies or is legally incapacitated.

e. Destruction of the Subject Matter

An offer will terminate automatically when the subject matter of the offer is destroyed. For example, an offer to sell a
house will automatically terminate if the house burns down.

B. Acceptance
An acceptance is the “manifestation of assent to the terms” by an intended offeree with knowledge of the offer. [See
Restatement (Second) of Contracts §§ 23, 29 (1981)]
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Example: A mother posts a sign offering a reward of $500 for the return of her child’s lost dog. A neighbor finds and
returns the lost dog without knowledge of the reward. Later, the neighbor sees the sign and demands $500.
Because the neighbor did not know about the offer at the time of performance, the mother is not obligated to pay
the reward.

1. Method of Acceptance
An acceptance may consist of a promise or performance by the offeree, depending upon the terms of the offer. If the offer
stipulates the method of acceptance, acceptance must conform to the terms of the offer to be valid. Otherwise, any
reasonable method of acceptance, such as by phone, mail, or fax, will be valid. An acceptance by a promise communicated
to the offeree forms a bilateral contract. In contrast, if the offeror conditioned acceptance of the contract on full
performance, acceptance by performance forms a unilateral contract. [See Restatement (Second) of Contracts §§ 1 cmt. f,
30, 32, 45 cmt. a (1981)]

Example: A high school offers to purchase 500 textbooks from a bookstore without specifying a method of acceptance.
The bookstore may enter into a bilateral contract by agreeing to deliver 500 textbooks (promise).
Alternately, if the high school conditions acceptance of the offer on delivery of the books, the bookstore may
enter into a unilateral contract by delivering 500 textbooks (performance).

2. Mirror Image Rule

The traditional rule under the common law is that an acceptance must unconditionally agree to the exact terms of the
offer. In other words, an acceptance must be the “mirror image” of the offer and may not add or remove any terms. The
mirror image rule generally does not apply to the sale of goods. [See U.C.C. § 2-207 (2002); Restatement (Second) of
Contracts § 59 (1981); see also VI.A.2 (discussing acceptance under the UCC)]

Example: A law student offers to tutor a classmate for 20 hours in exchange for $300. The classmate says, “I accept,
but you have to agree to return $150 if I fail any of my exams.” Because the classmate has included an
additional term, the acceptance is merely a counteroffer. No contract has been formed.

Compare: A furniture salesman offers to sell 100 tables to a librarian at $150 per table. The librarian says, “I accept, but
I only need 50 tables.” Because the mirror image rule does not apply to the sale of goods, a contract has been
formed. The furniture salesman is obligated to sell tables to the librarian at $150 per table, and any dispute
over the number of tables may be resolved in court.

3. Mailbox Rule
An acceptance by promise is effective upon proper dispatch, meaning when the acceptance is sent, regardless of whether
the offeror receives the acceptance. An acceptance may be effective upon improper dispatch only if received by the offeror
within a reasonable amount of time. The mailbox rule generally does not apply to option contracts (effective upon receipt),
unilateral contracts (effective upon full performance), or offers that specify an alternate time of acceptance (such as that
the acceptance will only be effective upon receipt). There are two scenarios in which the mailbox rule becomes especially
important. Recall that revocation of an offer is only effective when actually received by the offeree. Thus, if an offeree
were to send acceptance at the same time that the offeror sent a rejection, a contract would be formed, because acceptance
becomes effective when mailed. Next, when an offeree accepts or rejects an offer but then changes her mind, the mailbox
rule may come into play. If the offeree first mails acceptance and then tries to reject, a contract is still formed. However, if
the offeree first mails a rejection and then attempts to accept, whichever is actually received first by the offeror will be
effective. [See Restatement (Second) of Contracts §§ 63, 66-67 (1981); Merriam-Webster’s Dictionary of Law (Kindle ed.
2011), mailbox rule]

Example: A seller sends a letter offering to sell her car to a buyer for $5,000. The buyer is in negotiations to buy a
pickup truck for $4,000, so the buyer puts a rejection in the mail. The following day, the buyer’s negotiations
to purchase the pickup truck fall through. The buyer quickly mails an acceptance to the seller via overnight
mail. Typically, acceptance becomes effective when placed in the mail, provided that the envelope is
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properly addressed or, if improperly addressed, received within a reasonable amount of time. In this case,
however, the buyer rejected first and then attempted to accept. Thus, the buyer’s acceptance will only be
effective if the seller receives it first. Because the buyer sent the acceptance by overnight mail, the seller
received it first. The rejection arrived the following day. There is a valid contract.

4. Silence
An acceptance generally may not consist of silence, unless one of four exceptions applies.

a. Benefit of Services
Silence constitutes acceptance if the offeree receives the benefit of offered services, despite the reasonable
opportunity to reject those services, and the offeree knows that compensation is expected. [See Restatement (Second)
of Contracts § 69(1)(a) (1981)]

Example: A man offers to paint a neighbor’s house for $300 and begins painting the house without waiting for a
response. The neighbor sees the man painting the house and, despite the opportunity to ask the man to
stop, does not say anything. Because the neighbor’s silence constitutes acceptance, the man is entitled to
$300 upon the completion of painting.

b. Exercise of Dominion
Silence constitutes acceptance if the offeree exercises dominion over offered property by acting inconsistently with
the offeror’s ownership of that property. [See Restatement (Second) of Contracts § 69(2) (1981)]

Example: An uncle sends a tuxedo to his nephew, saying, “If you wish to buy my tuxedo, send me $100 within one
week of receipt. Otherwise, I will pick up the tuxedo in two weeks.” Without sending $100, the nephew
wears the tuxedo to a friend’s wedding, thereby acting inconsistently with the uncle’s ownership of the
tuxedo. Because the nephew has exercised dominion over the tuxedo, the uncle is entitled to $100.

c. Prior Dealings
Silence constitutes acceptance if it is reasonable, based on prior dealings, for the offeror to understand that the offeree
has accepted by remaining silent. [See Restatement (Second) of Contracts § 69(1)(c) (1981)]

Example: A retail store has frequently ordered clothing from a manufacturer for years. Each time, the manufacturer
delivers the clothing within a week and mails a bill to the retail store without any other notification of
acceptance. Based on these prior dealings, the manufacturer’s silence constitutes acceptance whenever
the retail store places an order.

d. Implied-in-Fact Contract
Silence constitutes acceptance if the offeror has indicated that the offeree may accept by silence or inaction. The
offeree must intend to accept the offer by remaining silent or inactive. [See Restatement (Second) of Contracts §
69(1)(b) (1981)]

Example: A composer writes a letter to a pianist, saying, “You have been borrowing my grand piano for quite a
while, so I offer to sell you the grand piano for $5,000. As you are a busy man, you do not need to write
back. I will assume that your silence operates as acceptance if you do not respond.” If the pianist does
not respond to the composer’s offer, a contract forms but only if the pianist intends to accept by
remaining silent. There is no contract otherwise, even if the pianist never informs the composer that his
silence does not constitute acceptance.
C. Intent
The parties to a contract must intend to be legally bound by the terms. No manifestation of intent is required. However, the
manifestation of intent not to be legally bound may prevent the formation of a contract. [See Restatement (Second) of
Contracts § 21 (1981)]
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Example: A dentist informs an uninsured patient that a root canal procedure will cost $750. The patient says, “All right, I’ll
agree to $750 for a root canal.” A contract will form if the dentist and the patient intend to be legally bound by the
terms, regardless of whether there is a manifestation of intent. However, a manifestation of intent not to be
legally bound would prevent formation, such as the following statement from the patient: “But first, I’m going to
get a second opinion and make sure that the procedure is necessary.”

D. Consideration
The parties to a contract must bargain for and exchange something of value to have sufficient and adequate consideration to
form a contract. This requires the promisor (offeror) to make a promise to the promisee (offeree) in exchange for a return
promise or performance (an act or forbearance) that is given by the promisee (or third person) to the promisor (or third
person). [See Restatement (Second) of Contracts § 71 (1981)]

Example: An uncle promises to pay his nephew $5,000 in exchange for his nephew’s abstention from alcohol, tobacco,
swearing, and gambling until the age of 21. At the time, the minimum age for purchasing alcohol or tobacco and
gambling was 18. The nephew agrees and fulfills the terms of the agreement. Because the nephew’s forbearance
is sufficient consideration, the uncle is obligated to give $5,000 to his nephew. [Hamer v. Sidway, 27 N.E. 256
(N.Y. 1891)]

1. Adequacy
Any exchange of value is generally sufficient for adequate consideration. The values that are exchanged do not have to be
equivalent. Note, however, that a gross inadequacy that “shocks the conscience” may support a defense against
enforceability. Furthermore, certain types of exchanges are typically insufficient to form a contract. [See Restatement
(Second) Contracts § 79 (with comments) (1981)]

Example: A cash-for-gold company offers $50 for a ring valued at $300,000. Even though the values are not
equivalent, there is sufficient consideration to form a contract. However, the owner of the ring may use the
gross inadequacy to support a defense against enforceability, such as fraud.

a. Nominal Amount
A nominal amount of consideration cannot form a contract if the bargain is a mere pretense. [See Restatement
(Second) Contracts § 71 cmt. b (1981)]

Example: A mother wins the lottery and wishes to make a binding promise to give $1,000,000 to her daughter. The
mother offers to buy a pencil (worth $1) from her daughter for $1,000,000. The daughter accepts,
knowing that the bargain is a mere pretense. There is no contract due to the lack of consideration.

b. Past Consideration or Moral Obligation

Past consideration or moral obligation cannot support a contract if the promisor makes a promise in recognition of a
benefit already conferred by the promisee. [See Restatement (Second) Contracts § 86 (with comments) (1981)]

Examples: 1) A clairvoyant predicts that a man will die before 1900. Later, the man promises to pay the clairvoyant
in the event that the prediction comes true. Because the man’s promise was given in exchange for a
benefit that was already conferred (the clairvoyant’s prediction), no contract has been formed. If the
prediction comes true, the man’s estate is not obligated to pay the clairvoyant. [See Moore v. Elmer, 61
N.E. 259 (Mass. 1901)]

2) A stranger provides medical care for a sailor who has fallen ill. After the sailor dies, the sailor’s father
promises to compensate the stranger for medical expenses incurred while caring for his son. Because the
father’s promise is based solely on a moral obligation, there is no contract due to the lack of
consideration. [See Mills v. Wyman, 20 Mass. 207 (1825)]

c. Illusory Promise
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An illusory promise cannot support a contract if the promisor reserves a choice of alternative performances, unless
each of the alternative performances would be sufficient for consideration if offered alone. [See Restatement (Second)
of Contracts § 77 (1981)]

Example: A musician says, “I agree to perform at the outdoor concert on Saturday in exchange for $20,000. If it
rains on Saturday, however, I will not perform at all.” Because the musician has made an illusory
promise by reserving the choice of not performing at all, there is no contract due to the lack of
consideration.

Compare: A musician says to a charity, “I agree to perform at the outdoor concert on Saturday in exchange for
$20,000. If it rains on Saturday, however, I will instead perform an indoor concert on Sunday.” Each of
the alternative performances (an outdoor concert on Saturday or an indoor concert on Sunday) would be
sufficient for consideration if offered alone. There is a contract between the musician and the charity.

2. Preexisting Duty Rule

The performance of a legal duty that is already owed is generally insufficient for consideration. In other words, a promise
to perform an obligation that the promisor is already legally required to do cannot support a new, binding agreement.
Under the preexisting duty rule, the modification of a contract and the settlement of claims, without some additional
consideration, may be unenforceable. [See Restatement (Second) Contracts § 73 (1981)]

Example: A woman offers a reward for evidence that leads to the arrest of her husband’s murderer. A police officer
uncovers evidence that identifies the murderer in the course of performing his legal duty as a member of law
enforcement. The woman is not obligated to pay the reward.

a. Modification
A modification to an existing contract is unenforceable without some new consideration unless an exception applies,
such as the alteration of duties, and unforeseen circumstances, or the sale of goods.

Example: A sailor agrees to work on a captain’s ship for £5 per month. During a voyage, two sailors desert the
ship. To avoid mutiny, the captain promises to divide the deserters’ wages among the remaining sailors
(more than £5 per month). However, because the sailors were already legally obligated to work on the
ship for only £5 per month, the wage increase is unenforceable. [See Stilk v. Myrick, 170 Eng. Rep. 1168
(1809)]

i. Alteration of Duties
A modification to an existing contract is enforceable if the parties alter their duties to be sufficient for additional
consideration, such as by agreeing to accelerate performance.

Example: A hairstylist agrees to trim a man’s facial hair for $30. However, the hairstylist stops before
completing the trim and says, “This is taking more time than I expected. If you pay an extra $30, I’ll
cancel my next appointment and give you a haircut as well.” The modification alters the parties’
duties and is enforceable.

ii. Unforeseen Circumstances

A modification to an existing contract is enforceable if the modification is fair and equitable in light of
circumstances that were unforeseen by the parties at the time of the contract. [See Restatement (Second) of
Contracts § 89(a) (1981)]

Example: A general contractor hires a subcontractor to excavate debris from a construction site. During
excavation, the subcontractor discovers considerable debris that was not foreseen by either party.
When the subcontractor refuses to finish the excavation, the general contractor agrees to compensate
the subcontractor for the removal of the additional debris, plus an additional 10 percent. Because the
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modification is fair and equitable, the subcontractor will be obligated to complete the excavation.
[See Brian Constr. & Dev. Co. v. Brighenti, 405 A.2d 72 (Conn. 1978)]

iii. Sale of Goods

A modification to an existing contract is enforceable where the contract is for the sale of goods. Article 2 of the
UCC requires only that such modifications be made in good faith. [See U.C.C. §§ 2-209(1), 2-209 cmt. 2 (2002)]

Example: A manufacturer contracts to deliver 20 snowplows to the government at $4,500 per snowplow.
However, the manufacturer realizes that a recent increase in extreme winters has led to a shortage of
snowplows. The government agrees to pay $5,000 per snowplow instead of $4,500. Because the
contract is for the sale of goods and the modification was made in good faith, the modification is
enforceable.

b. Settlement of Claims
Generally, a party’s agreement not to bring suit to enforce a valid claim will constitute consideration for a valid
settlement agreement. An agreement to forbear or surrender an invalid claim or defense is unenforceable unless the
surrendering party believed that the claim or defense was not invalid at the time of the contract. Otherwise, the
surrendering party has merely performed a legal duty. [See Restatement (Second) of Contracts § 74(1) (1981)]

Example: A tenant asserts that he has a valid claim for discrimination based on the fact that he owns a dog. His
landlord agrees to a reduction in rent in exchange for the tenant’s forbearance of the claim. Even if the
claim is invalid, there is an enforceable contract if the tenant genuinely believes that the claim is valid or
might be valid.

3. Substitutes
A consideration substitute is generally sufficient to support a contract if there is no consideration. The most common
substitutes are promissory estoppel and statutory substitutes.

a. Promissory Estoppel
The doctrine of promissory estoppel may permit enforcement of a promise if (1) the promisor reasonably expects or
should reasonably expect the promise to induce performance, (2) the promisee relies on the promise, and (3) the
promisee suffers a substantial detriment. The court will provide a limited remedy for a breach by the promisor to
prevent injustice. [See Restatement (Second) of Contracts § 90(1) cmt. d (1981); Kirksey v. Kirksey, 8 Ala. 131
(1845)]

Example: A board of directors adopts a resolution in 1947, promising to provide a loyal employee with a
retirement plan of $200 per month. In reliance on the resolution, the employee retires in 1949 and
receives $200 per month. In 1956, however, the payments are cut in half. Even though the employee did
not provide consideration, the promise is enforceable based on the doctrine of promissory estoppel. [See
Feinberg v. Pfeiffer Co., 322 S.W.2d 163 (Mo. Ct. App. 1959)]

i. Reasonable Expectation
The promisor should reasonably expect the promise to induce an act or forbearance from the promisee.

Example: A father promises to pay for all six semesters of his daughter’s tuition if she attends law school. The
father should reasonably expect his daughter to quit her current job to attend law school. This is
unlikely to be a reasonable expectation, however, if the father only promises to pay for his
daughter’s books the first semester.

ii. Reliance
The promisee must reasonably rely on the promise by performing a definite and substantial act or forbearance in
reliance on the promise.
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Examples: 1) A father promises to pay for all six semesters of his daughter’s tuition if she attends law school.
The daughter plans to quit her current job to attend law school, but she does not turn in her two
weeks’ notice or send out law school applications. The daughter has not yet performed a definite or
substantial act or forbearance that would permit application of the doctrine of promissory estoppel.

2) Elvis Presley promises to pay for expenses incurred by the mother of his girlfriend during the
mother’s divorce proceedings, including a $40,000 mortgage debt. Presley dies on August 16, and
his estate informs the mother on August 25 that the mortgage debt will not be paid. In April of the
following year, the mother enters into a settlement agreement in which she agrees to assume the
mortgage debt. Because the mother’s reliance on Presley’s promise after August 25 is
unreasonable, she is not entitled to $40,000 from Presley’s estate. [See Alden v. Presley, 637
S.W.2d 862 (Tenn. 1982)]

iii. Substantial Detriment

The promisee must suffer a substantial detriment in reliance on the promise for promissory estoppel to apply.
Any benefit received by the promisee is irrelevant.

Example: An uncle promises to reimburse his nephew’s trip to Europe. In reliance on his uncle’s promise, the
nephew goes on the trip and incurs significant expense. Even though the nephew received the
benefit of the trip to Europe, the uncle is obligated to provide reimbursement. [See Devecmon v.
Shaw, 14 A. 464 (Md. 1888)]

iv. Limited Remedy

The remedy for promissory estoppel will be limited by the promisee’s actual loss based on the extent of reliance,
rather than by the terms of the promise.

Examples: 1) A mother promises to pay her son’s rent ($1,000 per month) for 12 months. After the son renews
his lease in reliance on his mother’s promise, she refuses to pay the rent at all. Assuming the son
owes $1,000 for the first month plus $2,000 for breaking the lease, the remedy will be $3,000
(actual loss) rather than $12,000 (as promised).

2) A bakery owner enters into negotiations to become a franchise owner of a Red Owl grocery store.
In reliance on Red Owl’s assurances, the owner sells his bakery at a loss and incurs other expenses
in preparation for becoming a franchise owner. The owner also independently purchases a small
grocery store to gain experience. After negotiations fall through, the owner is entitled to the money
spent in reliance on Red Owl’s assurances but not the money spent on the small grocery store. [See
Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267 (Wis. 1965)]

b. Statutory Substitute
In some states, a signed writing may form a contract under a statutory provision even without consideration. Statutory
substitutes typically relate to the discharge of a claim or interest. For example, Michigan and New York have statutes
that provide that a signed writing for modification or discharge of a contract in personal or real property cannot be
invalid due to the lack of consideration. [Mich. Comp. Laws § 566.1 (2014); N.Y. Gen. Oblig. Law § 5-1103 (1964)]
Similarly, New York also has a statute that provides that a signed agreement for release or discharge of a claim, debt,
demand, obligation, or property interest cannot be invalid due to the lack of consideration. [N.Y. Gen. Oblig. Law §
15-303 (1964)]

III. Enforceability
A contract is generally enforceable upon formation. In the event of a breach of contract, however, the breaching party may assert a
defense to enforceability in court. Furthermore, certain types of contracts require a signed writing to be enforceable under the
Statute of Frauds.
 10

A. Defenses
A valid defense to enforceability renders a contract unenforceable. The main defenses to enforceability are: lack of capacity,
duress, undue influence, illegality, unconscionability, and misrepresentation.

1. Lack of Capacity
A party may assert the defense of lack of capacity due to the party’s infancy, mental illness or defect, or intoxication at the
time of the contract. Only the party that lacked capacity may avoid or disaffirm the contract.

Example: A landowner enters into a sales contract and subsequently suffers brain damage in a boating accident.
Because the contract was formed before the accident, the landowner may not assert a lack of capacity to
avoid the contract.

a. Infancy
A person lacks capacity due to infancy until the beginning of the day before his or her eighteenth birthday, which is
the age of majority in most jurisdictions. Keep in mind that many jurisdictions deem a married person under the age of
majority to be an adult. A minor may generally disaffirm a contract until a reasonable time after she reaches the age of
majority or choose to ratify the contract. Note that a minor must generally return the subject matter of the agreement
(or what is left of it) if she elects to disaffirm. [See Restatement (Second) of Contracts § 14 (1981)]

Example: A 16-year-old enters into a contract to babysit her neighbor’s children at the rate of $10 per hour. The
16-year-old may avoid the contract and refuse to babysit her neighbor’s children. However, the neighbor
may not refuse to pay the 16-year-old at the rate of $10 per hour.

i. Exceptions
Over time, some very important exceptions to this rule have developed. The most important of these is that
contracts for necessities like food, shelter, and medical care are always enforceable against minors. This serves
the public policy goal of ensuring minors are able to obtain such things (as people would be reluctant to enter into
such contracts with minors if they were unenforceable). In addition, there have been a number of statutory
exceptions to this rule. For example, some statutes specifically provide that minors cannot avoid certain types of
contracts, such as student loan agreements or insurance contracts.

b. Mental Illness or Defect

A person lacks capacity due to mental illness or defect when unable to reasonably understand the nature and
consequences of the transaction. Even if a person is able to understand the nature and consequences of the transaction,
the person may also lack capacity when unable to reasonably act in relation to the transaction, but only if the other
party has reason to know of the mental illness or defect. Note that generally such contracts may be avoided by the
incapacitated party’s legal representative. Alternately, if the party regains capacity, she may elect to ratify or disaffirm
the contract. [See Restatement (Second) of Contracts § 15 (1981)]

Examples: 1) A grandmother suffering from dementia enters into a contract to purchase a timeshare vacation to
Mars, Pennsylvania, believing that she will actually be traveling to the planet Mars. Because the
grandmother does not understand the nature of the transaction, she may avoid the contract.

2) A man suffering from delusions of grandeur incorrectly believes that he is a billionaire. The man
agrees to sell 100 acres of land (worth $3,000 per acre) to his cousin at $500 per acre. The man may
avoid the contract only if his cousin has reason to know of his delusions.

c. Intoxication
A person lacks capacity due to intoxication when unable to reasonably understand the nature and consequences of the
transaction or unable to reasonably act in relation to the transaction. In either case, the other party must have reason
 11
to know of the person’s intoxication in order for intoxication to be a valid defense. [See Restatement (Second) of
Contracts § 16 (1981)]

Example: A partner in a law firm is extremely intoxicated. She emails an offer to sell her share of the firm to a
colleague. Not knowing of the partner’s intoxication, the colleague accepts the offer. The partner may
not avoid the contract.

2. Duress
A party may assert the defense of duress where assent is induced by an improper threat that leaves no reasonable
alternative. An improper threat typically involves a crime or tort and may be expressed or implied through words or
conduct. Note that a purely economic or pecuniary threat, without some wrongful act, generally will not give rise to a
defense of duress. For example, suppose that a retailer threatened to stop selling a supplier’s products, which would put the
supplier out of business. If the supplier did not agree to the contract, the supplier could not offer a defense of duress unless
the retailer had committed some other wrongful act. [See Restatement (Second) of Contracts § 175-176 (1981)]

Example: A woman wields a knife and threatens to kill her fiancé unless he signs a prenuptial agreement. Assuming
the fiancé cannot reasonably call for help or otherwise leave the situation, the prenuptial agreement is
unenforceable. The fiancé signed under a threat of death.

3. Undue Influence
A party may assert the defense of undue influence if assent is induced by unfair persuasion. The party may be under the
domination of the persuader or in a relationship that justifies a belief that the persuader will not act inconsistently with the
party’s welfare. [See Restatement (Second) of Contracts § 177 (1981)]

Example: A wealthy son informs his elderly mother that he will no longer pay for her room in a nursing home unless
she agrees to sell all of her land. Because the elderly mother is dependent upon her wealthy son for support,
the contract is unenforceable.

4. Illegality
A party may assert the defense of illegality if the contract violates public policy. An illegal contract generally involves a
serious crime or tort or endangers public welfare. In such cases, the contract is void. [See Restatement (Second) of
Contracts § 178 (1981)]

Example: A politician offers $20,000 to a journalist to publish a false and defamatory statement about the President of
the United States. The contract is unenforceable, because the offer involves libel (a serious tort).

5. Unconscionability
A party may assert the defense of unconscionability if the bargaining process and/or terms of the contract are unfair. The
court will consider whether the contract has a high degree of procedural and/or substantive unconscionability. [See U.C.C.
§ 2-302 (2002); Restatement (Second) of Contracts § 208 (with comments) (1981)]

a. Procedural
A contract is procedurally unconscionable if a significant inequality in bargaining power prevents one of the parties
from having a meaningful choice or real alternative in setting the terms of the agreement or the contract involves some
aspect of unfair surprise. Procedural unconscionability often exists in standard form contracts where one party cannot
negotiate or modify the terms, as well as contracts with buried terms that have been purposely hidden by the other
party.

Example: An impoverished buyer who lacks financial sophistication enters into multiple contracts to purchase
expensive items from a furniture store. Despite full knowledge of the buyer’s impoverishment and lack
of sophistication, the furniture store continues to extend credit to the buyer to enter into additional
contracts without explanation of the terms. Because the bargaining process raises “serious questions of
 12
sharp practice and irresponsible business dealings,” the contracts are procedurally unconscionable. [See
Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965)]

b. Substantive
A contract is substantively unconscionable where the terms are overly harsh or one-sided against a party.

Example: T-Mobile provides service agreements to customers on a take-it-or-leave-it basis. The terms contain a
class action waiver that would prevent either party from commencing a class action lawsuit. However, as
companies typically do not sue their customers in class action lawsuits, the waiver is “indisputably one-
sided” in favor of T-Mobile. The service agreements are substantively unconscionable. [See Gatton v. T-
Mobile USA, Inc., 152 Cal. App. 4th 571 (2007)]

6. Misrepresentation
A party may assert the defense of misrepresentation if assent is induced by an untrue assertion that is fraudulent or
material. The party’s reliance on the misrepresentation must also be justified. [See Restatement (Second) of Contracts §§
159-164, 169 (with comments) (1981)]

a. Untrue Assertion
An untrue assertion generally takes the form of a statement that is not in accordance with the facts, an act of
concealment that prevents a party from discovering the facts, or a nondisclosure that either fails to correct a mistake
or violates a relationship of trust and confidence (typically fiduciary).

Examples: 1) A landlord knows that an apartment has a mold problem but says to a potential tenant, “This
apartment does not have any mold.” The landlord has made an untrue assertion in the form of a
statement. The landlord also hides mold behind furniture. Thus, the landlord has also made an untrue
assertion in the form of concealment.

2) A car salesman knows that a buyer mistakenly believes that a used car is actually brand new. If the
car salesman fails to disclose to the buyer that the car is used, then the car salesman has made an untrue
assertion in the form of nondisclosure.

3) A real estate agent knows that an apartment has asbestos in the ceiling, which can cause severe health
issues for any tenants. If the real estate agent does not inform her client of the presence of asbestos, then
there is a nondisclosure due to the fiduciary relationship between the real estate agent and her client.

b. Fraudulent or Material
A misrepresentation is fraudulent if (1) it is intended to induce a party’s assent and (2) the party making the
misrepresentation knows it is false or is not certain that it is true. Even if a misrepresentation is not fraudulent, the
contract will still be voidable if the misrepresentation is material. A misrepresentation is material if it is likely to
induce a reasonable person’s assent or the party making the misrepresentation knows it will likely induce the
particular party’s assent (even if a reasonable person would not be so induced).

Examples: 1) A buyer is interested in purchasing a racehorse. Intending to induce her assent, a stable owner says,
“My thoroughbred horse can run a mile in 90 seconds.” However, the stable owner does not know how
fast the horse can actually run. The stable owner has made a fraudulent misrepresentation.

2) A restaurateur mistakenly informs a vegetarian patron that the “Green Burger” does not contain any
meat. However, the “Green Burger” actually includes beef and bacon. While the misrepresentation is not
fraudulent, the restaurateur has made a material misrepresentation known to be likely to induce the
vegetarian patron’s assent.

c. Justified Reliance
 13
A party justifiably relies on a misrepresentation if the untrue assertion is presented as a fact. An opinion or mere
puffery only justifies reliance under three situations:

i. Relationship
An opinion justifies reliance if there is a relationship of trust and confidence between the party and the maker of
the opinion (typically fiduciary), such that the party’s reliance is reasonable.

ii. Special Skill

An opinion justifies reliance where the party reasonably believes that the maker of the opinion has special skill,
judgment, or objectivity regarding the subject matter.

Example: A record producer knows that an aspiring singer does not have the ability to succeed in the music
industry. However, the record producer says, “You have a great voice and should pay me to record
your demo album. You’ll be famous!” The aspiring singer is justified in relying on the record
producer’s opinion.

iii. Susceptibility
An opinion justifies reliance if the party is particularly susceptible for a special reason, such as illiteracy, unusual
gullibility, or lack of intelligence.

Example: A homeowner asks a refrigerator repairman if her refrigerator needs to be serviced. The repairman
tells her to read the information printed on the back of the refrigerator, because it will indicate how
often the refrigerator needs to be serviced. The homeowner tells the repairman that she cannot read.
The repairman then tells the homeowner that she should go ahead and have the refrigerator serviced,
even though he knows that the manufacturer does not recommend servicing the refrigerator for
another two years. The homeowner is justified in relying on the repairman’s opinion, because of the
special circumstance of her illiteracy.

B. Statute of Frauds
Under the Statute of Frauds, certain types of contracts are unenforceable unless the terms are set forth in a writing (one or
more written documents, including electronic documents, containing the essential terms of the transaction) signed by the party
to be charged. Note that a formal contract is not required. There are six classes of contracts that fall within the Statute of
Frauds: marriage contracts, contracts that cannot be fully performed in one year, land contracts, executor-administrator
contracts, contracts for the sale of goods for $500 or more, and suretyship contracts. A popular mnemonic for remembering the
six classes is MY LEGS (marriage, year, land, executor, goods, and suretyship). As long as a contract falls within at least one
of the classes, the court will require a signed writing before enforcing the terms. [See Restatement (Second) of Contracts §§
110 (with comments), 132 (1981)]

Examples: 1) A man agrees to quit his job, move cross country, and marry a woman in three years if she will make him an
equal partner in her business. The agreement falls within the provision for marriage contracts, as well as the
provision for contracts that cannot be fully performed in one year. The agreement falls within the Statute of
Frauds both because it cannot be performed within one year and it involves a promise in consideration of
marriage. The contract is not enforceable unless evidenced by a signed writing. [See Restatement (Second) of
Contracts § 110 cmt. b, illus. 1 (1981)]

2) A sales manager enters into an agreement to be employed for two years. The terms are set forth in an unsigned
written document. Subsequently, a general manager signs a “payroll change card” that confirms the agreement.
Because the documents relate to the same transaction, there is a signed writing sufficient for the Statute of
Frauds. [See Crabtree v. Elizabeth Arden Sales Corp., 110 N.E.2d 551 (N.Y. 1953)]

1. Marriage
 14
A contract falls within the Statute of Frauds if the consideration involves marriage or a promise to marry, unless the
contract consists solely of a mutual promise to marry. Note that this rule also applies when a third party makes some
promise to the marrying parties in consideration of marriage. [See Restatement (Second) of Contracts § 124 (1981)]

Examples: 1) A boyfriend promises to move to Michigan and marry his long-distance girlfriend. In exchange, the
girlfriend promises to provide financial support to her boyfriend and execute a new will leaving him all of
her property. The promise in consideration of marriage falls within the Statute of Frauds and is
unenforceable without a signed writing. [See Dienst v. Dienst, 141 N.W. 591 (Mich. 1913)]

2) A man and woman have been dating for many years. The man’s father orally promises to give the couple a
dream honeymoon to Paris if they get married. The couple agrees and gets married, but the father reneges
and refuses to pay for the honeymoon. The promise in consideration of marriage falls within the Statute of
Frauds and is therefore unenforceable, because the father did not sign any writing.

Compare: A man and woman agree to marry in six months. Because the agreement consists solely of a mutual promise
to marry, the marriage contract is enforceable even without a signed writing.

2. One Year
A contract falls within the Statute of Frauds if the parties know that it is impossible for the terms to be fully performed
within one year of formation. If a party renders part performance, however, the court may provide a limited remedy even
without a signed writing. [See Restatement (Second) of Contracts § 130 (with comments)(1981)]

Example: A couple orally agrees to lease a house for one year from a homeowner. Because the parties know that it is
impossible for the terms to be fully performed within one year, the oral contract falls within the Statute of
Frauds and is unenforceable. [See Shaughnessy v. Eidsmo, 23 N.W.2d 362 (Minn. 1946) (holding that the
original lease is within the Statute of Frauds)]

Compare: 1) A construction manager orally agrees to oversee a housing project at a university, which involves the
construction of several buildings. Even though the housing project will probably take at least several years to
complete, it is not impossible to construct all of the buildings within one year. The oral contract does not fall
within the Statute of Frauds and is enforceable. [See C.R. Klewin, Inc. v. Flagship Props., Inc., 600 A.2d 772
(Conn. 1991)]

2) An employer orally agrees to hire an employee to work at his auto dealership for one year. The oral
contract falls within the Statute of Frauds and is unenforceable. After two months, however, the employer
fires the employee. The employee is entitled to a limited remedy for rendering part performance. [See
McIntosh v. Murphy, 469 P.2d 177 (Haw. 1970)]

3. Land
A contract falls within the Statute of Frauds if an interest in land is transferred, unless a party has reasonably relied on a
promise to his or her detriment by rendering part performance that benefits the other party. Contracts involving an interest
in land include real property sales contracts, leases for longer than a year, easements with a duration longer than a year,
security interests, profits from the land, or fixtures. Many states also provide a statutory exception for short-term leases
and mortgages of less than one year. [See Restatement (Second) of Contracts §§ 125, 129 cmt. a (1981)]

Examples: 1) A landowner orally agrees to lease his farm, including a house as well as supplies for the construction of a
barn, to a renter for one year. In exchange, the renter agrees to cultivate the landowner’s farmland. The renter
quits his job and travels to the farm, only to discover that the house is uninhabitable and the landowner has
failed to obtain supplies for a barn. However, the renter has not rendered any performance that benefits the
landowner. The oral contract falls within the Statute of Frauds and is unenforceable. [See Boone v. Coe, 154
S.W. 900 (Ky. App. 1913)]
 15
2) A businessman promises to sell twenty acres of land to an elderly couple for $60,000. After forming an
oral agreement, the elderly couple secures financing for the land in contemplation of performance but does
not otherwise act in reliance on the businessman’s promise. Because the elderly couple has not rendered any
payment or suffered any detriment, the oral contract falls within the Statute of Frauds and is unenforceable.
[See Schwedes v. Romain, 587 P.2d 388 (Mont. 1978)]

Compare: A homeowner orally promises that a couple has the option to purchase a house after a lease of one year.
When the couple exercises the option at the end of the lease, the homeowner fails to send a written contract
for the couple to sign. The couple remains in possession of the house while continuing to send payments for
the purchase of the house to the homeowner. The oral contract is enforceable because the couple reasonably
relied on the homeowner’s promise and partially performed to their detriment. [See Shaughnessy v. Eidsmo,
23 N.W.2d 362 (Minn. 1946)]

4. Executor-Administrator
A contract falls within the Statute of Frauds if the executor or administrator of an estate promises to personally answer
for a duty of a decedent (deceased person). Typically, the promise involves paying a debt owed by the decedent. [See
Restatement (Second) of Contracts § 111 (1981)]

Example: A husband dies, leaving his wife as the executor of his estate. The husband owes $5,000 to a creditor. In
exchange for the creditor’s promise to forgo $1,000 of the debt, the wife promises to personally pay the
remaining $4,000. The contract falls within the Statute of Frauds and requires a signed writing to be
enforceable.

5. Sale of Goods for $500 or More

A contract for the sale of goods falls within the Statute of Frauds where the price is $500 or more. There are three
exceptions to this rule: goods that are specially manufactured; if the party admits there was a contract; and if there has
been part performance. [See U.C.C. § 2-201 (2002)]

Example: Costco enters into a written contract to purchase 2,080 boxes of jewelry from a wholesale jeweler for
$74,880. A sales agent for Costco orally promises to buy an additional 1,248 boxes of jewelry from the
jeweler. Both the original contract and the modification involve a sale of goods for more than $500 and thus
fall within the Statute of Frauds. While the original contract fulfills the signed writing requirement under the
Statute of Frauds, the oral modification does not and is unenforceable. [See Costco Wholesale Corp. v. World
Wide Licensing Corp., 898 P.2d 347 (Wash. 1995)]

a. Specially Manufactured
A signed writing is not required if the contract is for the sale of specially manufactured goods that are not suitable for
sale to others in the ordinary course of the seller’s business. The seller must have substantially begun to manufacture
the goods or made a commitment to procure the goods.

Example: A sports manager orally agrees to purchase 100 custom jerseys and 50 custom hats from a clothing
manufacturer for $1,000. After the clothing manufacturer has already produced 25 custom jerseys and
made a commitment to procure 50 hats from another manufacturer, the sports manager backs out of the
agreement. The oral contract may be enforceable under this exception, because the manufacturer has
substantially begun to produce the custom goods and made a commitment to procure goods needed to
fill the order.

b. Admission
A signed writing is not required if the other party admits in court that a contract for sale was made. However, the
contract is only enforceable regarding the quantity of the goods, not any other contract terms.
 16
Examples: 1) A buyer orally promises to purchase a sailboat from a seller but breaches the agreement. When sued
by the seller, the buyer admits in a deposition to entering into a contract for the sailboat. The oral
contract is enforceable under this exception. [See Cohn v. Fisher, 287 A.2d 222 (N.J. 1972)]

2) While testifying in court, a factory owner admits to entering into a contract to sell 500 widgets to a
retail store for $500, with the stipulation that the retail store will exclusively purchase widgets from the
factory owner over the next five years. The terms regarding the 500 widgets may be enforceable under
this exception, but not the stipulation of exclusivity.

c. Part Performance
A signed writing is not required if goods have been received and accepted or payment has been made and accepted.

Example: A buyer orally promises to purchase a sailboat from a seller for $4,650 but only sends a check for
$2,325. Because the buyer’s payment and the seller’s acceptance of the check constitute part
performance, the oral contract is enforceable under this exception. [See Cohn v. Fisher, 287 A.2d 222
(N.J. 1972)]

6. Suretyship
A contract falls within the Statute of Frauds if a surety or guarantor promises to answer for the duty of a third person.
Typically, the promise involves paying a debt owed by the third person. Under the main purpose rule, however, a contract
does not fall within the Statute of Frauds if the surety or guarantor makes the promise for his or her own economic
advantage rather than for the benefit of the third person. [See Restatement (Second) of Contracts §§ 112, 116 (1981)]

Example: A law student commits the tort of false imprisonment against a classmate. The father of the law student meets
with the classmate and promises to pay for the damages resulting from the tort if the law student fails to do
so, in exchange for the classmate’s promise to remain quiet about the tort when speaking to professors and
other classmates. The contract falls within the Statute of Frauds and requires a signed writing to be
enforceable. [See Restatement (Second) of Contracts § 112 cmt. b, illus. 1 (1981)]

Compare: A general contractor agrees to build a house for a landowner and hires a subcontractor to furnish materials
for the house. When the general contractor fails to pay for some of the materials, the subcontractor ceases
performance. The landowner orally promises to pay for the materials if the general contractor fails to do so,
as long as the subcontractor continues to furnish materials for the house. Although the oral contract falls
within the Statute of Frauds, the landowner has made the promise for his own economic advantage rather
than any benefit to the general contractor. Under the main purpose rule, the contract is enforceable even
without a signed writing. [See Restatement (Second) of Contracts § 116 cmt. b, illus. 3 (1981)]

IV. Interpretation
When enforcing a contract, the court must interpret the terms of the agreement to determine the appropriate remedy. Ordinarily,
courts will interpret contract according to its plain meaning, unless the parties clearly intended a specialized meaning, but often
terms may be susceptible to more than one reasonable interpretation. The process of interpretation generally involves the
application of standards of preference and the clarification of terms. However, the use of extrinsic evidence during interpretation
is limited by the parol evidence rule. Note that even if there is some ambiguity in a contract, courts will generally interpret
contracts as valid and enforceable if at all possible. [See Restatement (Second) of Contracts § 202 (1981)]

A. Standards of Preference
The court will adhere to certain rules and standards of preference when choosing among reasonable interpretations of a
contract. These rules and standards are intended to assist the court in determining the meaning or legal effect of the terms. [See
Restatement (Second) of Contracts §§ 202-03, 206 (1981)]

1. The parties’ intent and purpose are given great weight.

 17

2. The parties’ words and conduct are interpreted in light of the circumstances.

3. All terms are interpreted to have reasonable, lawful, and effective meaning.

4. Specific or exact terms are given greater weight than general language.

5. Negotiated or added terms are given greater weight than standardized terms.

6. A meaning that operates against the draftsman (the party that supplied the terms of the contract) is preferred over other
reasonable meanings.

7. When a single contract involves repeated performances by either party, such as in an installment contract, the course of
performance between the parties (for example, acceptance of previous performance without objection) is strong evidence
of the contract’s meaning.

8. If the parties to a contract have engaged in similar transactions with one another in the past, the course of dealing between
the parties may aid in the proper construction of the current contract.

9. The customs, practices, and other trade usages of a particular industry may be used to clarify an agreement between
parties who regularly conduct business in the industry.

B. Clarifying Terms
The terms of a contract must be reasonably certain in order for the court to enforce the agreement. In most cases involving
uncertainty, the court must clarify the meaning of an indefinite, ambiguous, or omitted term.

1. Indefinite Term
A term is indefinite when left open or uncertain, such that the parties may not have intended to form a binding contract. If
the indefinite term is essential to the exchange, then the court will likely void the contract for indefiniteness. However, if
the parties intended to form a binding agreement, then the court will supply a customary or reasonable term and enforce
the contract. [See U.C.C. §§ 2-204, 2-310 (2002); Restatement (Second) of Contracts § 33 (with comments)(1981)]

Example: A publishing company agrees to compile and publish an anthology of short stories written by a widow’s
deceased husband. However, the agreement does not specify numerous essential terms, such as the number
of stories to be included in the anthology, the date for delivery or publication of the manuscript, the form or
content of the manuscript, the style or manner of publication, and the price at which the book will be sold.
The contract is unenforceable for indefiniteness. [See Acad. Chicago Publishers v. Cheever, 578 N.E.2d 981
(Ill. 1991)]

Compare: 1) A gasoline company and an oil company agree to become partners in a business venture. Even though
several minor terms are indefinite, the essential terms of the agreement are sufficiently definite for the court
to determine the appropriate remedy and enforce the contract. [See Texaco v. Pennzoil, 729 S.W.2d 768 (Tex.
App. 1987)]

2) A steel corporation agrees to purchase iron ore from a shipping company at a price to be determined by
certain pricing mechanisms. However, these mechanisms subsequently fail. Even though the price is
indefinite, the parties clearly intended to form a contract for the sale of iron ore. The court may supply a
price that is reasonable at the time of delivery. [See Oglebay Norton Co. v. Armco, Inc., 556 N.E.2d 515
(Ohio 1990)]

3) A toy store enters into a five-year lease with the owner of a mall. The contract provides that the toy store
has the option to renew the lease after five years at a new rental amount “renegotiated to the then prevailing
 18
rate within the mall.” Even though the new rental amount is left open, the requirement of renegotiation
provides a practicable, objective method of determining the essential term. The option contract is not too
indefinite to be enforced. [See Toys, Inc. v. F.M. Burlington Co., 582 A.2d 123 (Vt. 1990)]

2. Ambiguous Term
A term is ambiguous if multiple meanings lead to a misunderstanding between the parties. The ambiguity may be latent
(due to the circumstances) or patent (due to the language). Specifically, a latent ambiguity does not appear on the face of
the contract and arises only from a consideration of extrinsic circumstances, while a patent ambiguity is apparent on the
face of the contract and arises from inconsistent or uncertain language. If the parties understood the same meaning, then
the court will interpret the contract based on that meaning. However, if the parties understood different meanings, then the
court will interpret the term against a party with knowledge of the misunderstanding at the time of the contract. If neither
party knew of the misunderstanding, then the court will void the contract for lack of mutual assent. [See Restatement
(Second) of Contracts § 201 (1981); Merriam-Webster’s Dictionary of Law (Kindle ed. 2011), latent ambiguity, patent
ambiguity]

Examples: 1) A seller agrees to deliver cotton to a buyer in Liverpool via a ship named Peerless. Due to a latent
ambiguity, neither party realizes that two different ships named Peerless are sailing from Bombay to
Liverpool around the same time. Because the court is unable to determine whether the parties understood the
same meaning, the contract is void for lack of mutual assent. [See Raffles v. Wichelhaus, 159 Eng. Rep. 375
(Ex. 1864) (also known as “The Peerless Case”)]

2) A coin collector agrees to purchase “Swiss coins” from a seller for $50,000. Due to a patent ambiguity,
the coin collector believes that “Swiss coins” refers to all of the seller’s coins from Switzerland, while the
seller believes that “Swiss coins” refers only to her so-called “Swiss Coin Collection.” The contract is void
for lack of mutual assent. [See Oswald v. Allen, 417 F.2d 43 (2d Cir. 1969)]

Compare: A fisherman agrees to sell “fish” to a restaurant, which ambiguously refers to either salmon or tuna. Based on
their prior conversations, the restaurant understands “fish” to mean salmon. However, the fisherman only
intends to sell tuna. If the fisherman is aware of the misunderstanding at the time of the contract, then the
court will interpret “fish” to refer to salmon rather than voiding the contract for lack of mutual assent.

3. Omitted Term
A term is omitted if the parties have failed to provide for a given situation that subsequently arises. The court will fill the
gap in the contract by supplying a term that is reasonable under the circumstances. [See Restatement (Second) of Contracts
§§ 204-05, with ch. 9, topic 1, intro. note (1981)]

Example: A fashion designer grants an advertising agent the exclusive right to market and sell her clothing designs, as
well as to place her endorsement on anyone else’s clothing designs. The contract does not specify whether
the advertising agent must actually market any designs or place any endorsements. However, it is reasonable
and implied that the advertising agent must use his best efforts to promote the fashion designer by marketing
her designs and placing endorsements. The court will supply this term rather than void the contract. [See
Wood v. Lucy, Lady Duff-Gordon, 118 N.E. 214 (N.Y. 1917)]

C. Parol Evidence Rule

Under the parol evidence rule, the court generally may not consider certain types of extrinsic evidence (evidence related to a
contract that is not included in the written contract) when interpreting a binding, integrated agreement, unless an exception
applies. [See Restatement (Second) of Contracts §§ 213-14 (1981); Merriam-Webster’s Dictionary of Law (Kindle ed. 2011),
extrinsic evidence]

1. Integrated Agreement
An agreement is completely or partially integrated if adopted by the parties as a written, final statement of the terms.
Often, a contract will contain a merger clause stating that the document is a final expression of the entire transaction
 19
between the parties. Without a merger clause, any contemporaneous writings that relate to the same subject matter and are
assented to as multiple parts of a single transaction are typically considered to be within the same integrated agreement.
[See U.C.C. § 2-202 (2002); Restatement (Second) of Contracts §§ 210, 213 cmt. a (1981); Merriam-Webster’s Dictionary
of Law (Kindle ed. 2011), merger clause]

a. Completely Integrated
A completely integrated agreement is a complete statement of the terms. The parol evidence rule excludes extrinsic
evidence of prior or contemporaneous agreements that are inconsistent with or within the scope of the completely
integrated agreement. In other words, the court may not use extrinsic evidence to modify or supplement the contract.
[See Restatement (Second) of Contracts §§ 213(1)-(2), 214-15 (1981)]

Example: A farmer enters into a written contract to sell his farm to a buyer. The farmer also orally agrees to
remove a nearby icehouse. However, the written agreement is completely integrated, as the sale of the
farm does not inherently imply the removal of the icehouse. The court may not use evidence of the oral
agreement to supplement the contract. [See Mitchill v. Lath, 160 N.E. 646 (N.Y. 1928)]

b. Partially Integrated
A partially integrated agreement is a final but incomplete statement of the terms. The parol evidence rule excludes
extrinsic evidence of prior or contemporaneous agreements that are inconsistent with the partially integrated
agreement. In other words, the court may use extrinsic evidence to supplement, but not to modify, the contract. [See
Restatement (Second) of Contracts §§ 213(1), 214-15 (1981)]

Example: A buyer enters into a written contract to purchase jewelry from a seller, with the stipulation that the
buyer may return the jewelry for a refund. The contract does not specify the time limit for the return, and
the parties orally agree that the buyer has until the following Monday to return the jewelry. Because the
written agreement is only partially integrated, the court may use extrinsic evidence of the oral
agreement to supplement the contract. [See George v. Davoli, 397 N.Y.S.2d 895 (Geneva City Ct. 1977)]

2. Exceptions
There are several exceptions to the parol evidence rule that allow the court to consider extrinsic evidence that would
otherwise be excluded. The court may admit extrinsic evidence for any of the following purposes: to establish the
integration of the agreement, to clarify the meaning of an ambiguous term, to support a defense to enforceability, or to
grant or deny a remedy. In addition, extrinsic evidence may be used to show subsequent modification of the agreement
without running afoul of the parol evidence rule. Keep in mind that the parol evidence rule bars extrinsic evidence used to
show prior or contemporaneous agreements between the parties; subsequent modifications to a contract may be shown by
extrinsic evidence. [See Restatement (Second) of Contracts § 214 (1981)]

Examples: 1) A buyer enters into a written contract to purchase land upon which stands a hotel. The buyer and the
landowner disagree as to whether the sale includes the personal property inside the hotel. Because the terms
do not contain an integration clause, the court may use extrinsic evidence to determine whether the
agreement is completely or partially integrated. [See Brown v. Oliver, 256 P. 1008 (Kan. 1927)]

2) A construction company enters into a written contract to provide labor and equipment to a power
company. The contract contains an indemnity clause that may have a latent ambiguity due to the
circumstances. The court may use extrinsic evidence to clarify the meaning of the indemnity clause. [See
Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 442 P.2d 641 (Cal. 1968)]

3) A gun-store owner enters into a written contract to sell a large quantity of rifles to a buyer. Subsequently,
the gun-store owner asserts the defense of illegality when sued by the buyer for breaching the contract. The
court may consider extrinsic evidence indicating that the gun-store owner and the buyer had previously
agreed that the rifles would be used to illegally support a rebellion against the local government. [See
Restatement (Second) of Contracts § 214 cmt. c, illus. 6 (1981)]
 20

4) A millionaire enters into a written contract to sell a tract of land, Plot A, to a corporation. However, the
terms of the integrated agreement incorrectly describe the tract of land as Plot B. The millionaire argues that
the court should modify the description in the contract to refer to Plot A rather than Plot B. The court may
consider extrinsic evidence of prior agreements between the millionaire and the corporation when
determining whether the modification would be an appropriate remedy. [See Restatement (Second) of
Contracts § 214 cmt. d, illus. 7 (1981)]

V. Performance
An injured party is generally entitled to a remedy if the other party breaches the contract by failing to perform the agreed terms.
However, the court may decline to award a remedy in certain cases, particularly if the circumstances have changed, the
performance is conditional, or the contract is affected by a mistake.

A. Breach and Repudiation

A breach of contract occurs if a party fails to fully perform by the due date of the performance. If the breaching party has
rendered no performance or made an anticipatory repudiation, then the injured party is entitled to a remedy in court. If the
breaching party has already rendered part performance, however, then the injured party is entitled to a remedy only if there is a
material breach. A party may generally suspend performance and demand adequate assurances even without a breach. [See
Restatement (Second) of Contracts § 235(2) (1981)]

1. Material Breach
The materiality of a breach is generally based on a consideration of a number of significant circumstances: loss of benefit
to the injured party, adequacy and extent of compensation to the injured party, disproportionate forfeiture by the
breaching party based on that party’s preparation or performance in substantial reliance on the exchange, likelihood of
cure by the breaching party, and absence of good faith or fair dealing by the breaching party. Under the common law
doctrine of substantial performance, a breach is immaterial if the breaching party has rendered a good faith performance
that is substantially similar to what was promised in the contract. [See Restatement (Second) of Contracts § 241 cmt. d
(1981); Merriam-Webster’s Dictionary of Law (Kindle ed. 2011), substantial performance]

Examples: 1) A contracting company agrees to build a sewer system for a city. After performing and receiving
compensation for 90 percent of the work, the contracting company “throws its hands up” and refuses to
complete the project. There is a material breach, because the city has not received the benefit of a working
sewer system and the contracting company is unlikely to suffer significant forfeiture. [See Roberts
Contracting Co. v. Valentine-Wooten Rd. Pub. Facility Bd., 320 S.W.3d 1 (Ark. Ct. App. 2009)]

2) A pool company agrees to build a peanut-shaped pool at a family’s residence but excavates a kidney-
shaped pool. When the family complains, the pool company only offers to complete a circular pool. There is
a material breach, because the pool company did not offer to cure the breach by completing a peanut-shaped
pool. [See Strouth v. Pools by Murphy & Sons, Inc., 829 A.2d 102 (Conn. App. Ct. 2003)]

3) A company agrees to remove the excess soil displaced during the processing of sand and gravel by a
processing plant. However, the company willfully fails to remove the excess soil in bad faith. There is a
material breach due to the absence of good faith. [See Groves v. John Wunder Co., 286 N.W. 235 (Minn.
1939)]

Compare: A general contractor agrees to build a house with the specification that all pipes be manufactured in Reading,
Pennsylvania. However, the general contractor accidentally installs pipes manufactured in places other than
Reading. The breach is discovered after the house is completed, such that reinstalling the pipes will require
demolishing and reconstructing the house. There is no material breach, because the general contractor has
substantially performed the terms of the contract at a trivial loss to the owner of the house. [See Jacob &
Youngs v. Kent, 129 N.E. 889 (N.Y. 1921)]
 21
2. Anticipatory Repudiation
An anticipatory repudiation may take the form of a statement that clearly indicates an intent to breach (not just a mere
expression of doubt) or a voluntary, affirmative act that renders a party unable to perform. It is possible for an anticipatory
repudiation to be retracted before it becomes final. If a party makes an anticipatory repudiation, the other party may elect
to sue immediately and is under no obligation to wait until the date performance is due. [See Restatement (Second) of
Contracts §§ 250 (with comments), 256 (1981)]

Examples: 1) A courier agrees to accompany a traveler on a trip to Europe beginning on June 1. However, on May 11,
the traveler informs the courier that the trip has been canceled and the courier’s services are no longer
required. The courier is entitled to seek a remedy before June 1 due to the traveler’s statement of anticipatory
repudiation. [See Hochster v. De La Tour, 118 Eng. Rep. 922 (Q.B. 1853)]

2) A company agrees to build a gravel driveway for a property owner within 60 days. After two weeks, the
company removes its equipment from the construction site and refuses to return or meet with the property
owner, despite promising to resume work immediately on multiple occasions. The property owner is entitled
to seek a remedy due to the company’s act of anticipatory repudiation. [See Wholesale Sand & Gravel, Inc. v.
Decker, 630 A.2d 710 (Me. 1993)]

a. Retraction
An anticipatory repudiation is retracted if the injured party receives notice that full performance will be rendered or
knows that the events causing the repudiation have ceased to exist.

Example: A gas company agrees to supply gas to an apartment complex beginning on May 1. On June 1, the gas
company repudiates the contract. Before the apartment complex takes any action in response to the
repudiation, the gas company issues a notice of retraction on June 15. The apartment complex is not
entitled to a remedy. [See Restatement (Second) of Contracts § 256 cmt. a, illus. 1 (1981)]

b. Final
An anticipatory repudiation is final if the injured party has materially changed position in reliance on the repudiation
or has indicated that the repudiation is considered final. The breaching party can no longer retract the anticipatory
repudiation.

Example: A gas company agrees to supply gas to the government for a federal housing project. Before completing
full performance, the gas company sends a notice of anticipatory repudiation. The government informs
the gas company that the anticipatory repudiation will be considered final if it is not retracted within
three days. When the gas company refuses to retract the anticipatory repudiation, the government enters
into a contract with another company, thereby materially changing position. The gas company can no
longer retract the anticipatory repudiation, which has become final. [See U.S. v. Seacoast Gas Co., 204
F.2d 709 (5th Cir. 1953)]

3. Adequate Assurance
A party may suspend performance and demand adequate assurance if there are reasonable grounds to believe that the
other party will commit a breach. If adequate assurance is not provided within a reasonable amount of time, then the
suspending party may proceed as if there has been an anticipatory repudiation. [See Restatement (Second) of Contracts §
251 (1981)]

Example: A subcontractor enters into a contract with a general contractor to provide labor and materials for the
construction of a house. During the project, the subcontractor learns that the general contractor has become
insolvent. The subcontractor demands either reasonable security or payment for the remaining work in
advance. When the general contractor refuses to do either, the subcontractor ceases performance. The general
contractor is not entitled to a remedy. [See Restatement (Second) of Contracts § 252 cmt. a, illus. 1 (1981)]
 22
Compare: The owner of an opera house enters into a contract with four musicians for a concert. When a snowstorm
blocks many of the nearby roads, the owner assumes the musicians will not be able to travel to the opera
house and fails to make the necessary preparations for the concert. However, the musicians are able to arrive
by train. Because the owner failed to demand adequate assurance before proceeding as if there was an
anticipatory repudiation, the four musicians are entitled to a remedy. [See Hathaway v. Sabin, 22 A. 633 (Vt.
1891)]

B. Changed Circumstances
A breaching party may avoid performance if the circumstances change such that performance is impossible or impracticable or
the principal purpose of the contract is substantially frustrated. The changed circumstances must result from an unforeseeable
event that was not caused by the breaching party, such as an “act of God” or the act of a third party. If the breaching party is
able to avoid performance, then the injured party will not be entitled to a remedy. Keep in mind that if the impossibility or
impracticability is temporary, the obligation to perform will be suspended rather than excused. [See Restatement (Second) of
Contracts § 261 (with comments) (1981)]

Example: The owner of a grocery store hires a manager to work for two years at a salary of $50,000 per year. After one
year, the owner voluntarily shuts down the grocery store due to changed family circumstances and fires the
manager. Because the owner caused the event that changed the circumstances, the manager is entitled to a
remedy. [See Restatement (Second) of Contracts § 261 cmt. b, illus. 3 (1981)]

1. Impossibility
A performance is impossible if it cannot be performed by anyone, not just the breaching party. Generally, only three types
of events are sufficient to render performance impossible: the death or incapacity of a person necessary for the
performance, the destruction of the subject matter (including significant deterioration or failure to come into existence),
and the prevention of the performance by law (including regulations and court orders). Bear in mind, however, that
destruction of the subject matter of the contract will not give rise to a valid defense of impossibility if the risk of loss is
already on a particular party (such as when the risk of loss has passed to the purchaser of land under the doctrine of
equitable conversion). [See Restatement (Second) of Contracts §§ 262-64 (1981)]

Examples: 1) A producer agrees to produce a play starring a famous actress as the main character. However, the actress
develops a throat condition and is advised by her doctor to cancel the remaining performances and undergo a
minor operation. Because the actress is incapacitated, it is impossible for the producer to render full
performance. [See Restatement (Second) of Contracts § 262 cmt. a, illus. 5 (1981)]

2) The owner of a music hall agrees to host a series of concerts. However, the music hall is destroyed by fire
before the first concert, without any fault of the parties. It is impossible for the owner to render full
performance. [See Taylor v. Caldwell, 122 Eng. Rep. 309 (Q.B. 1863)]

3) A railroad company enters into a contract to sell annual passes to a traveler for the next decade. One year
later, however, a statute is enacted that makes it illegal for railroad companies to sell annual passes. Because
of the law, it is impossible for the railroad company to render full performance. [See Restatement (Second) of
Contracts § 264 cmt. a, illus. 2 (1981)]

2. Impracticability
A performance is impracticable if it will cause extreme and unreasonable difficulty, expense, injury, or loss to one of the
parties. The impediment to performance must be severe, and the breaching party must reasonably attempt to overcome any
obstacles to performance. [See Restatement (Second) of Contracts § 261 cmt. d (1981)]

Example: A shipping company agrees to transport wheat from an American port to an Iranian port. However, a civil
war unexpectedly breaks out in Iran, and the rebels announce their intent to attack any vessels bound for that
port. The risk of injury is severe enough that it is impracticable for the shipping company to render full
performance. [See Restatement (Second) of Contracts § 261 cmt. d, illus. 7 (1981)]
 23

Compare: A shipping company agrees to transport wheat from an American port to an Iranian port. The contract specifies
the port of delivery but not the route. During the voyage, the Suez Canal is seized and closed to traffic,
thereby making it impossible for the shipping company to travel via the usual and customary route to Iran.
However, an alternate route would not significantly increase the shipping company’s expense. It is neither
impossible nor impracticable for the shipping company to render full performance. [See Transatlantic Fin.
Corp. v. U.S., 363 F.2d 312 (D.C. Cir. 1966)]

3. Frustration of Purpose
A party’s principal purpose is substantially frustrated if the other party’s performance has become virtually worthless,
regardless of whether it is possible or practicable. [See Restatement (Second) of Contracts § 265 (1981)]

Example: A man enters into a contract with a landlord to rent a room for the sole purpose of viewing the King of
England’s upcoming coronation. However, the King of England becomes ill and cancels the coronation.
Because the room has become virtually worthless to the man at no fault of his own, the man’s principal
purpose has been substantially frustrated. [See Krell v. Henry, 2 K.B. 740 (Eng. 1903)]

C. Conditions
A breaching party may avoid performance if a required condition in the terms has not occurred and the non-occurrence is not
excused. If the breaching party is able to avoid performance, then the injured party will not be entitled to a remedy. [See
Restatement (Second) of Contracts § 225 (1981)]

1. Types of Conditions
A condition is a term that specifies an uncertain event that must occur before the due date of the performance. There are
two primary types of conditions: express (explicitly agreed upon by the parties to the contract) and constructive (supplied
by the court based on what is reasonable under the circumstances). Typically, every contract will have a constructive
condition, or implied duty, of good faith and fair dealing that requires the parties to follow standards of decency, fairness,
and reasonableness in performing and enforcing the contract. Note that conditions may be further subcategorized as
conditions precedent (conditions that must occur before a party will be obligated to perform), conditions concurrent
(conditions that must occur together before either party will be obligated to perform, and conditions subsequent
(conditions that will cut off a party’s pre-existing duty to perform). [See Restatement (Second) of Contracts §§ 204 cmt. a,
205, 224, 226 cmt. c (1981); Black’s Law Dictionary (3d pocket ed. 2006), condition]

Examples: 1) A principal says to a teacher, “If you substitute teach the algebra class on Friday, I will pay you $400 on
the condition that 30 days have passed after you have finished.” The agreement does not actually contain a
condition, as the passage of time is not uncertain. Note, however, that the principal must pay $400 to the
teacher after 30 days have passed. [See Restatement (Second) of Contracts § 224 cmt. b, illus. 2 (1981)]

2) The owner of a shopping center rents space to a businessman, promising the businessman the exclusive
right to conduct a restaurant in the shopping center. However, the owner subsequently expands the shopping
center onto adjoining land and rents space in the expansion to a competing restaurant. The businessman may
avoid performance because the owner has breached the condition of good faith. [See Restatement (Second)
of Contracts § 205 cmt. d, illus. 2 (1981)]

2. Excuses for Non-Occurrence

An excuse for the non-occurrence of a condition allows performance to become due even though the condition has not
occurred. The most common excuses for non-occurrence are waiver, election, and disproportionate forfeiture. [See
Restatement (Second) of Contracts § 225 cmt. b (1981)]

a. Waiver and Election

A condition does not have to occur if waived by either party. A breaching party may waive a condition by making a
subsequent promise to perform despite the non-occurrence. If there is no consideration for the subsequent promise,
 24
the injured party must have materially changed position in reliance on the waiver, such that estoppel applies to enforce
the promise. An injured party may waive a condition by electing to accept the breaching party’s performance despite
the non-occurrence. [See Restatement (Second) of Contracts §§ 84 cmt. b, 246(1) (1981)]

Examples: 1) Clark enters into a contract to write a series of law books. A condition provides that Clark will receive
$6 per page if he abstains from drinking liquor during the writing period. Subsequently, the publication
company promises to pay $6 per page (without any additional consideration), despite knowing that Clark
is not abstaining from drinking liquor. In reliance on the publication company’s waiver, Clark
completes the remaining law books without abstinence. The non-occurrence of the condition is excused
due to estoppel, and the publication company must pay $6 per page. [See Clark v. West, 86 N.E. 1 (N.Y.
1908)]

2) A chauffeur enters into a contract to drive an actor to an awards ceremony for $200. A condition
provides that the chauffeur must pick up the actor in a limousine between 5:00 p.m. and 5:30 p.m. When
the chauffeur arrives at 6:15 p.m., the actor gets into the limousine and is driven to the awards ceremony,
thereby accepting the chauffeur’s performance. The non-occurrence of the condition is excused by
waiver, and the actor must pay $200. [See Restatement (Second) of Contracts § 246 cmt. b, illus. 2
(1981)]

b. Disproportionate Forfeiture
A condition does not have to occur if the avoidance of performance would deny compensation to a party that has
relied substantially, through preparation or performance, on the expectation of the exchange. The condition must not
be a material part of the exchange, in that the injured party is not significantly harmed by the non-occurrence. [See
Restatement (Second) of Contracts § 229 cmt. b (1981)]

Example: An employee agreed to work for one year for his employer. The employee quit after nine and a half
months, and the employer refused to pay the employee on the ground that full performance of the
contract term was a condition precedent to his obligation to pay. The employee relied substantially
through part performance on his expectation of the the employer’s performance and would suffer a
disproportionate forfeiture if the employer were not entitled to pay. The employee is entitled to damages
in quantum meruit for the value of the work actually performed. [See Britton v. Turner, 6 N.H. 481
(1834)]

Compare: A dentist accidentally damages his office and gives unreasonably late notice to his insurance company.
Because timely notice is a condition for receiving coverage, the dentist must prove substantial reliance
on the expectation of coverage, as well as a lack of significant harm (materiality) to the insurance
company. However, there is no evidence that the condition was not a material part of the exchange. The
non-occurrence of the condition is not excused, and the insurance company is not required to provide
coverage to the dentist. [See Aetna Cas. & Sur. Co. v. Murphy, 538 A.2d 219 (Conn. 1988)]

c. Divisibility
A contract is divisible if: (1) both parties’ performance is divided into at least two parts, (2) both parties owe the same
number of performances, and (3) each party’s performance of one part, or unit, is the agreed-upon exchange for the
other party’s equivalent performance. If a contract is divisible, then a party’s performance of the entire contract will
not be a condition precedent to the other party’s obligation to perform. Rather, the party’s performance of each unit
will trigger the other party’s duty to perform the corresponding part. Note that if a contract explicitly provides that it is
indivisible, the court will likely give this provision effect.

Example: A landowner hired a contractor to build 35 houses. The contract

specified a set price to be paid upon completion of each house. After building 20 houses, the
contractor defaulted. The landowner sued for breach, and the contractor counterclaimed for the
contract price for the 20 completed houses. Even though the contractor breached the contract by
 25
failing to build the final 15 houses, the contractor may recover the money owed for the completed
units because the contract is divisible. [Carrig v. Gilbert-Varker Corp., 50 N.E.2d 59 (Mass. 1943)]

MISTAKE CASES

Donovan v. RRL

Rule of Law -In order to get out of a contract, a defendant who has made a unilateral mistake of fact must
show: (1) the mistake was a fundamental assumption of the agreement, (2) the mistake materially effects the
value of the agreement, (3) the defendant did not assume the risk of the mistake, and (4) it would be
substantively unconscionable to enforce the contract in light of the mistake.

Facts - Donovan (plaintiff) is suing RRL Corp. (RRL) (defendant) for breach of contract. RRL advertised the
sale of a used car in a local newspaper. Unfortunately, the newspaper made a typographical error, listing the
sale price well below what RRL intended. Donovan attempted to buy the car based on representations in the
advertisement but was rejected by RRL. The municipal court found for RRL, holding that a contract could not
be formed because of the mistake in the advertisement. The court of appeals reversed based on a statute of the
Vehicle Code making it illegal for a dealership to refuse to sell a car at the advertised price. Further, the court
of appeals held that a valid contract had been formed between the parties. The advertisement was an offer and
plaintiff accepted the offer when attempting to purchase the car.

Issue- Whether one party is required to fulfill a contract when he made a good faith mistake regarding a
material fact of the agreement and the contract would result in a substantial loss to that party.

Holding and Reasoning - No. Under § 153(a) of the Restatement Second of Contract, in order to get out of a
contract, a defendant who has made a unilateral mistake of fact must show: (1) the mistake was a fundamental
assumption of the agreement, (2) the mistake materially effects the value of the agreement, (3) the defendant
did not assume the risk of the mistake, and (4) it would be substantively unconscionable to enforce the contract
in light of the mistake. While a contract had been formed by the parties, it is unenforceable if it fulfills every
element of the § 153(a) unconscionability doctrine. RRL here made a mistake about the advertised price. Price
is a fundamental assumption of a contract in addition to materially impacting the value of that contract.
Further, it is unreasonable to place the risk upon RRL. The mistake was made in good faith and consumers
cannot realistically expect absolute accuracy in every price listed in advertisements. Imposing such a high
standard of accuracy upon automobile dealers would amount to strict liability for even the slightest mistake. In
the context of modern transactions, strict liability is an unreasonable standard to put upon businesses. Lastly,
due to the loss that would be suffered by RRL for its minor mistake, it would be unconscionable to enforce this
contract. RRL would lose more than $9,000 while Donovan would reap a $12,000 advantage. This amounts to
substantive unconscionability because RRL would be unduly penalized and Donovan would be rewarded
simply for taking advantage of RRL’s vulnerability. Accordingly, RRL is allowed to rescind the contract. The
judgment of the court of appeals is reversed.

Sherwood v Walker (final)

Rule of Law
When a contract is made based on the mutual mistake of the parties that relates to a material fact such as the
subject matter of the sale, the price, or some other fact which materially affects the agreement, the parties may
rescind the contract once they learn of the mistake.

Facts
Sherwood (plaintiff) requested to purchase a cow owned by Walker (defendant), a farmer. Walker told
Sherwood that most of his cows were barren and would not breed. Sherwood looked at Walker’s cattle and
decided to purchase a cow known as “Rose” who was believed by both parties to be barren. Walker sent a
letter to Sherwood agreeing to sell Rose for five and a half cents per pound, minus fifty pounds. This reflected
 26
an amount typically payable for cattle used only as beef and not breeding. At the same time, Walker sent a
letter to Graham, his employee, requesting that Graham prepare Rose to be picked up by Sherwood. Sherwood
sent a letter to Graham informing him of the date and time of pick-up. However, when Sherwood arrived,
Graham stated that Walker told him to not sell the cow to Sherwood, as Walker had discovered that Rose was
actually with calf and not barren. Thus, because she was a breeder, Rose was worth a significantly higher price.
Sherwood successfully instituted a writ of replevin and recovered Rose. He later had her weighed, and found
her to be 1,420 pounds. At the subsequent trial, Sherwood argued that title for Rose passed to him at the
moment Walker drafted a letter agreeing to sell her for a certain amount per pound. Walker argued, however,
that title to Rose never passed because Walker never weighed Rose and thus never confirmed a final price for
her. The trial court held for Sherwood, and the appellate court affirmed. Walker appealed.

Issue
Whether a contract made based on a mutual mistake of the parties involving a material fact may be rescinded
when the parties learn of the mistake.

Holding and Reasoning (Morse, J.)

Yes. The jury should be instructed that if they find that Rose was sold upon the mutually mistaken
understanding of the parties that she was barren, and if she was later found to be not barren, Walker has a
right to rescind the contract and judgment should be directed in his favor. When a contract is made based on
the mutual mistake of the parties that relates to a material fact such as the subject matter of the sale, the price,
or some other fact which materially affects the agreement, the parties may rescind the contract once they learn
of the mistake. The mistake of fact must truly relate to the substance of the contract, rather than merely the
quality of the contracted-for item. Walker agreed to sell Rose to Sherwood for an insubstantial sum based on
the belief of both parties that Rose was incapable of breeding and thus only useful for beef. The total amount
Sherwood agreed to pay under the contract was $80. If, however, Rose had been sold as a breeder, she would
have been worth at least $750. This very large discrepancy in price demonstrates the completely different value
of a beef cow versus a breeder cow. A barren cow is not merely a lower quality of cow than a breeder, but is
actually a substantially different creature for practical and contractual purposes. Thus, a mistake as to Rose’s
ability to breed materially affects the substance of the contract between Sherwood and Walker. The decision of
the lower courts should be reversed and remanded. On remand, the jury should be instructed that if they find
that Rose was sold upon the mutually mistaken understanding of the parties that she was barren, and if she
was later found to be not barren, Walker has a right to rescind the contract and judgment should be directed
in his favor.

Dissent (Sherwood, J.)

The record does not reflect that Sherwood intended to buy Rose merely for beef. Rather, it shows that he
believed she could eventually be made to breed. However, at the time of making the contract, both Sherwood
and Walker believed Rose to be barren. That Sherwood correctly speculated that Rose could be used to breed
should not operate to allow Walker to rescind the contract at his leisure. The cow contracted for by the parties
was ultimately the cow sold. The subsequent development of Rose becoming capable of breeding has no bearing
on the contract as formed and should not form a basis for rescinding the contract.

D. Mistake
A breaching party who is adversely affected by a mistake may avoid performance if at least one of the parties held an
erroneous belief that was not in accordance with the facts or the law at the time of the contract. The mistake may be mutual or
unilateral. [See Restatement (Second) of Contracts §§ 151 (with comments), 152 (1981)]

1. Mutual
A mistake is mutual if both parties enter into the contract based on the same mistake. The mutual mistake must relate to
(1) a basic assumption that has (2) a material effect on the breaching party, (3) who must not bear the risk of the mistake.
The court will generally void the contract or provide an equitable remedy by reforming the contract based on the parties’
 27
true intent. [See Restatement (Second) of Contracts § 152 (with comments)(1981)] - explained further below in slides from
class section

a. Basic Assumption
The mistake must relate to a basic assumption upon which the contract was made (also referred to as the “substance of
the agreement”). **Note however that a mistake as to the VALUE of the subject matter of the contract is
generally not a defense.

Example: A farmer agrees to purchase a cow named “Rose” from a breeder of cattle. Both parties believe that Rose
is barren. However, Rose is discovered to be with calf before performance is due. Because the agreement
was formed on the basic assumption that Rose was barren, there is a mutual mistake that allows the
breeder to avoid performance. [See Sherwood v. Walker, 33 N.W. 919 (Mich. 1887)]

Compare: A woman agrees to sell a stone to a jeweler for one dollar. Neither party knows anything about the stone
or its worth. Later, the woman learns that the stone is actually an uncut diamond worth $700. Because
the value of the item was not a basic assumption of the agreement, the woman cannot avoid
performance. [See Wood v. Boynton, 25 N.W. 42 (Wis. 1885)]
Second Restatement of Contracts 154 a party bears the risk of mistake when: a. the risk is allocated to him by
agreement of the parties, or b. he is aware at the time the contract is made that he has only limited
knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as
sufficient, or c. the risk is allocated to him by the court on the ground that it is reasonable in the
circumstances to do so - this is the one that the court analyzes mostly in the opinion in Donovan case.
The court finds that it is reasonable for the company to assume the newspaper printed the ad correctly
and also not efficient if businesses always had to go back and check everything they assign to other
companies
b. Material Effect
The mistake must have a material effect on the exchange of performances. In other words, the resulting imbalance
must be so severe that the breaching party cannot be fairly required to perform. Typically, the breaching party
will be disadvantaged by the mistake while the injured party receives a significant advantage

Example: A landowner enters into a contract to sell a tract of land to a buyer at $1,000 per acre. Both parties
mistakenly believe that the tract contains 500 acres. Whether there is a material effect depends on the
severity of the resulting imbalance. If the tract actually contains 490 acres ($490,000 instead of
$500,000), then there will not be a material effect on the exchange of performances. If, however, the
tract actually contains 800 acres ($800,000 instead of $500,000), then the buyer will likely be able to
avoid performance. [See Restatement (Second) of Contracts § 152 cmt. c, illus. 8 (1981)]

c. Bearing the Risk

A mistake will not excuse a party’s performance if that party bears the risk of the mistake. A party may bear the risk
of the mistake based on: (1) the terms of the contract expressly allocating the risk to that party, (2) court allocation of
the risk to one party that is reasonable under the circumstances, or (3) the party’s conscious ignorance of the relevant
facts, despite awareness of his or her own limited knowledge. [See Restatement (Second) of Contracts § 154 (1981)]

Examples: 1) A law student agrees to sell a box of books to a bookstore. The contract includes a term specifying
that the law student makes no representation as to the contents of the box. Both parties believe that the
box contains law books when it actually contains children’s books. However, the bookstore bears the
risk of the mistake and cannot avoid performance. [See Restatement (Second) of Contracts § 154 cmt. b,
illus. 1 (1981)]

2) A couple purchases an apartment building “as is” from the previous owner. Both parties believe that
the property is fit for human habitation. However, the apartment building is subsequently condemned
due to a defective sewage system. Even though neither party expressly assumed the risk that the building
 28
would be condemned, the court reasonably allocates the risk of the mistake to the couple based on the
“as is” purchase. Thus, the couple cannot avoid performance. [See Lenawee County Bd. of Health v.
Messerly, 331 N.W.2d 203 (Mich. 1982)]

Compare: Two homebuyers enter into separate agreements to purchase adjoining lots of property. Both parties
proceed with their contracts despite knowing that the seller is uncertain of the location of the boundary
between the lots. Eventually, one of the homebuyers learns that the boundary runs through his house.
While both parties were aware of the risk of mistake regarding the location of the boundary, neither
party was conscious of the risk that the boundary might run through the house. Due to the mutual
mistake, the aggrieved homebuyer may be entitled to a remedy such that the boundary is redrawn around
his house. [See Bailey v. Ewing, 671 P.2d 1099 (Id. 1983)]

2. Unilateral
A mistake is unilateral if only one party enters into the contract based on the mistake. Like a mutual mistake, the unilateral
mistake must relate to a basic assumption that has a material effect on the mistaken party, who must not bear the risk of the
mistake. However, the unilateral mistake must also cause unconscionability or result from the other party’s fault or
knowledge for the mistaken party to avoid the contract. In other words, a unilateral mistake, without more, is not a
defense. [See Restatement (Second) of Contracts § 153 (1981); see generally IV.D.1, supra (definitions of basic
assumption, material effect, and bearing the risk)]

- Ways to resolve unilateral mistakes:

1) reform contract = reformation
2) recision is when you allow the contract to be rescinded or canceled
— The court uses equitable remedies to these types of cases - court has discretion to decide how to appropriately find a
just remedy
- Example in Travelers case Show 1. beyond reasonable doubt that there was a mistake in the terms AND 2. the changing
of the terms will not cause prejudicial/unfair outcome for one party. These standards must be met for the court to issue a
contract reformation.

Example: A building contractor submits a construction bid of $300,000 to a school district. Due to a clerical error by
the building contractor, the construction bid does not include a $150,000 expense. The unilateral mistake has
caused unconscionability, and the building contractor may avoid performance. [See Restatement (Second) of
Contracts § 153 cmt. c, illus. 1 (1981)]

Compare: A building contractor submits a construction bid of $90,000 to a school district. Due to a clerical error by the
building contractor, the construction bid does not include the cost of plumbing ($6,500). However, the
unilateral mistake has not caused unconscionability, and the school district did not cause or have knowledge
of the building contractor’s mistake. The building contractor may not avoid performance. [See Elsinore
Union Elementary Sch. Dist. v. Kastorff, 353 P.2d 713 (Cal. 1960)]

(From slides in class) — To get out of a unilateral contract in which you made the mistake, you must show 1. basic
assumption of which he made the contract 2. has a material effect on the aged exchange of performances that
is adverse to him the contract is voidable by him 3. if he does not bear the risk of the mistake under the rule
states in 154 and also fulfills one of the following - a. the effect of the mistake is such that an enforcement of
the contract would be unconscionable, or b. the other party had reasons to know of the mistake or c. The
other party’s fault caused the mistake

VI. Sale of Goods

Article 2 of the Uniform Commercial Code (UCC) governs contracts for the sale of goods (movable things) in every state except
Louisiana. The parties to the contract are generally referred to as the seller and the buyer, who may or may not be merchants
(persons who deal in goods of the particular kind or hold themselves out as having relevant knowledge or skills). When a contract
 29
involves both the sale of goods and services, courts will determine the dominant purpose of the contract to decide which law
applies. Remember that Article 2 incorporates many common law principles, but there are some key distinctions. Of particular
importance in Article 2 are the perfect tender rule, the inclusion of warranties, and the battle of the forms. [See U.C.C. §§ 2-102,
2-105(1) (2002)]

A. Perfect Tender Rule

The perfect tender rule provides that all goods, including the delivery of those goods, must conform to the contract in every
respect. The common law substantial performance doctrine does not apply to contracts for the sale of goods, and the court will
not distinguish between a minor and a material breach. In other words, any failure to adhere to the terms of the contract,
however slight, will entitle the injured party to a remedy. Note that a buyer generally has the right to inspect the goods before
accepting or rejecting. If the seller violates the perfect tender rule, the seller breaches the contract, and the buyer may elect to
reject or accept the goods (either partially or as a whole). In some cases, the buyer may also accept and then subsequently
revoke acceptance of the goods. [See U.C.C. § 2-601; 2-513 (2002)]

Example: A seller enters into a contract to ship 15,000 cubic meters of logs to a buyer between July and August. Subsequent
market changes made the buyer’s deal under the agreement less favorable, and the seller feared the buyer would
cancel the contract. The seller failed to to ship the logs by the due date. The perfect tender rule has been violated,
regardless of whether the time of delivery is a material term of the contract. Because the seller has breached the
contract, the buyer may refuse to accept the logs. [See Alaska Pac. Trading Co. v. Eagon Forest Prods., 933 P.2d
417 (Wash. Ct. App. 1997)]

1. Rejection
A buyer may reject goods within a reasonable time after delivery by promptly notifying the seller of the rejection. The
court will consider the nature, purpose, and circumstances of the goods when determining reasonableness, such as whether
the goods are perishable or likely to rapidly decline in value. [See U.C.C. §§ 1-205, 2-602(1), 2-603(1) (2002)]

a. Buyer’s Duty to Hold

The buyer has a duty to hold rejected goods with reasonable care and without exercise of ownership over them for an
amount of time that is sufficient to permit the seller to remove the goods. [See U.C.C. § 2-602(2) (2002)]

Example: A buyer buys a new station wagon and takes it home. Afterward, the buyer discovers that the car does
not have a spare tire, which was required under the contract, and notifies the seller that he revokes his
acceptance of the car. The buyer leaves the car parked in front of his home and refuses delivery of new
license plates. Eventually, the station wagon is towed due to an expired registration. The buyer has held
the station wagon with reasonable care and has not violated his duty to hold. [See Colonial Dodge, Inc.
v. Miller, 362 N.W.2d 704 (Mich. 1984)]

b. Seller’s Cure
The seller may cure any non-conformity of the goods after rejection by promptly notifying the buyer of the sellers’
intent to cure. If the time for performance has not expired, then the seller merely needs to make a conforming delivery
by the due date of the performance (which the buyer must accept). However, if the time for performance has expired,
then the seller may have additional time to make a conforming delivery only if the seller had reasonable grounds to
believe that the non-conforming goods would be acceptable. [See U.C.C. § 2-508 (2002)]

Examples: 1) A family enters into a contract to purchase a camper. However, the camper is unusable on the date of
delivery. After the family rejects the camper, the car dealership promises to cure the non-conformity, but
fails to do so over the next several months. The family is entitled to cancel the contract and refuse the
camper. [See Ramirez v. Autosport, 440 A.2d 1345 (N.J. 1982)]

2) A man purchases an older model hearing aid from a manufacturer but receives a newer model that
allegedly causes him to suffer headaches. After submitting a complaint, the man receives a prompt offer
from the manufacturer to replace the hearing aid with the older model. Because the newer model was a
 30
modified and improved version of the older model, the manufacturer had reasonable grounds to believe
that the newer model would be acceptable. The manufacturer may have additional time to make a
conforming delivery, even though the time for performance has expired. The man is not entitled to
cancel the contract and may not refuse the hearing aid. [See Bartus v. Riccardi, 284 N.Y.S.2d 222 (Utica
City Ct. 1967)]

2. Acceptance
A buyer may accept goods by indicating acceptance or failing to reject the goods, after a reasonable opportunity for
inspection, or by acting inconsistently with the seller’s ownership at any time. Note that accepted goods may no longer be
rejected, though a buyer may revoke acceptance under the circumstances discussed below. [See U.C.C. § 2-606 (2002);
see also VI.A.3., infra)]

Example: A student purchases a laptop from an online store. The student may accept the laptop by beginning to use the
laptop at any time or, after a reasonable amount of time for inspection, failing to return the laptop.

Compare: A buyer enters into a contract for the sale of a pickup truck. However, the engine overheats during a test
drive. The buyer attempts to drive away several times but immediately returns to the car dealership each time
due to the truck overheating. Finally, the buyer notifies the car dealership that he is not taking the truck and
will be stopping payment. The buyer has not accepted the truck. [See Capitol Dodge Sales, Inc. v. N.
Concrete Pipe, Inc., 346 N.W.2d 535 (Mich. Ct. App. 1983)]

3. Revocation
A buyer may revoke acceptance of substantially impaired goods if the buyer (a) reasonably assumed that the seller would
cure the non-conformity (but the seller did not) or (b) reasonably failed to discover the non-conformity before acceptance
due to the seller’s assurances that the goods conformed or the difficulty of discovery of the non-conformity. The buyer
must notify the seller of the revocation within a reasonable time after discovering the non-conformity, or within a
reasonable time after the non-conformity should have been discovered, and before any substantial change in the condition
of the goods not caused by their own defects. As with rejection, the buyer has the duty to hold revoked goods. [See U.C.C.
§ 2-608 (2002); see generally VI.A.1.a, supra (discussion of buyer’s duty to hold)]

Example: A buyer purchases a station wagon but subsequently discovers that the station wagon is missing a spare tire.
The non-conformity could not have been easily discovered before acceptance, as the location of the spare tire
is inside a concealed panel. The buyer promptly notifies the car dealership of the non-conformity and
reasonably believes, based on the car dealership’s assurances, that a spare tire will be provided as soon as
possible. The buyer revokes acceptance within a reasonable time and promptly notifies the seller. There has
been a valid revocation of acceptance from the buyer, who has a duty to hold the station wagon for the seller.
[See Colonial Dodge, Inc. v. Miller, 362 N.W.2d 704 (Mich. 1984)]

4. Installment Contracts
An installment contract provides for the delivery of goods in separate installments to be separately accepted by the buyer.
Installment contracts vary slightly from typical contracts in terms of the buyer’s rights and duties under the perfect tender
rule. [See U.C.C. § 2-612 (2002)]

a. Rejection
A buyer may reject a non-conforming installment if the non-conformity substantially impairs the value of the
installment to the buyer and cannot be cured by the seller. Note, however, that a single non-conforming installment
does not automatically entitle the buyer to cancel the contract. [See V.A.4.c), infra (discussion of cancellation)]

b. Acceptance
A buyer must accept an installment if the seller gives adequate assurance that the non-conformity will be cured.

c. Cancellation
 31
A buyer may cancel the contract if one or more non-conforming installments substantially impairs the value of the
entire contract. However, the contract will be reinstated if the buyer demands future installments or accepts a non-
conforming installment without promptly notifying the seller of the cancellation.

Example: A trick-or-treater orders a superhero costume to be delivered in three separate installments (blue
jumpsuit, red cape, and boots). However, the trick-or-treater receives a black jumpsuit intended for a
different superhero costume. The red cape and boots are useless without the blue jumpsuit, substantially
impairing the value of the entire contract. If the seller refuses to cure the defect, the trick-or-treater is
entitled to cancel the contract by refusing to accept the black jumpsuit and promptly notifying the seller
of the cancellation.

B. Warranties
The sale of goods is often accompanied by a warranty that the goods conform to a certain condition. There are three primary
types of warranties: express warranties, implied warranties of merchantability, and implied warranties of fitness for a
particular purpose. However, a seller may limit warranties through the use of disclaimers.

1. Express Warranty
An express warranty is created when a seller promises or affirms that goods conform to a stated fact or condition,
regardless of the seller’s language or intent. This includes any description, sample, or model that forms a part of the basis
of the bargain. However, “mere puffery” in the form of the seller’s opinion or commendation of the goods does not create
an express warranty. [See U.C.C. § 2-313 (2002)] - allocation of risk to seller because he’s the one promising the product
is in good condition or properly functioning etc

Examples: 1) A jeweler describes a diamond bracelet as “VVS grade” to a customer, who purchases the diamond
bracelet based in part on the description. Even though the jeweler did not intend to create a warranty, the
description creates an express warranty that the diamond bracelet is VVS grade. However, the customer later
discovers that the diamonds are a substantially lesser grade. The jeweler has violated the express warranty.
[See Daughtrey v. Ashe, 413 S.E.2d 336 (Va. 1992)]

2) A printing center provides a sample book with white pages to a publishing company. Based in part on the
sample, the publishing company orders 5,000 books from the printing center. The sample creates an express
warranty that the delivered books will have white pages, even though the terms of the contract do not address
the color of the pages. However, the printing center delivers 5,000 books with gray pages. The printing center
has violated the express warranty. [See Printing Ctr. of Tex. v. Supermind Pub. Co., 669 S.W.2d 779 (Tex.
App. 1984)]

Compare: The owner of a horse barn offers to sell an interest in a stallion to a novice in the equine industry, opining
that the stallion is “an all-around winning stallion” that is “capable of attaining national show titles again.”
Because the owner’s mere puffery does not create an express warranty, the novice may not prevail on a claim
that an express warranty has been violated, even though the stallion is suffering from chronic lameness and
incapable of participating in future shows. [See Leal v. Holtvogt, 702 N.E.2d 1246 (Ohio Ct. App. 1998)]

2. Implied Warranty of Merchantability

An implied warranty of merchantability guarantees that goods are merchantable and is automatically created when the
seller is a merchant of goods of that kind. Generally, goods are merchantable if they are fit for the ordinary purposes for
which such goods are used. [See U.C.C. § 2-314 (2002)]

Example: A printing center enters into a contract to print 5,000 books for a publishing company. However, the
delivered books are printed with off-center cover art, crooked and wrinkled pages, and inadequate
perforation. Even though the contract does not expressly address the non-conformities, there is an implied
warranty of merchantability that requires the books to be fit for sale to the public. The printing center has
 32
violated the implied warranty of merchantability. [See Printing Ctr. of Texas v. Supermind Pub. Co., 669
S.W.2d 779 (Tex. App. 1984)]

Compare: A customer is bitten by a spider while trying on a pair of pants at a clothing store. The pair of pants has no
defects from a manufacturing standpoint and is fit to be worn. Because the spider is not part of the product,
the clothing store has not violated the implied warranty of merchantability. [See Flippo v. Mode O’Day
Frock Shops of Hollywood, 449 S.W.2d 692 (Ark. 1970)]

3. Implied Warranty of Fitness for a Particular Purpose

An implied warranty of fitness for a particular purpose guarantees that goods are fit for the buyer’s particular purpose and
is automatically created when the buyer relies on the seller’s skill or judgment to select suitable goods. Note that the seller
must know of the buyer’s particular purpose and reliance on the seller’s judgment, but that the seller need not be a
merchant for this warranty to be created. [See U.C.C. § 2-315 (2002)]

Example: A novice in the equine industry approaches the owner of a horse barn for assistance in starting a breeding
program. The owner, who is an expert trainer and breeder, offers to sell an interest in a “winning” stallion
whose foals are “selling for $6,000 to $10,000 each.” The novice relies on the owner’s expertise and invests
in the stallion. However, the novice subsequently learns that the stallion suffers from chronic lameness and
cannot be used in a breeding program. Even though the owner knew of the novice’s reliance and particular
purpose of starting a breeding program, the owner selected a stallion that is not suitable for a breeding
program. The owner has violated the implied warranty of fitness for a particular purpose. [See Leal v.
Holtvogt, 702 N.E.2d 1246 (Ohio Ct. App. 1998)]

Compare: A buyer wishes to purchase a boat for the particular purpose of traveling up to a maximum speed of 30 miles
per hour. However, the buyer does not make this purpose known to the seller at any point. The buyer
purchases a boat that is only capable of traveling up to a maximum speed of 13 miles per hour. Because the
seller did not know that the buyer required a maximum speed of 30 miles per hour, the seller has not violated
an implied warranty of fitness for a particular purpose. [See Bayliner Marine Corp. v. Crow, 509 S.E.2d 499
(Va. 1999)]

4. Disclaimers
An explicit or implicit disclaimer by a seller may limit, modify, or negate the three primary types of warranties.

a. Explicit Disclaimer
The seller may explicitly disclaim any of the following: (1) an express warranty, using clear and reasonable words or
conduct, (2) an implied warranty of merchantability, using spoken or written language that mentions merchantability,
or (3) an implied warranty of fitness, using written language. An explicit disclaimer of either type of implied
warranty must be conspicuous (not in fine print unless pointed out to the buyer). [See U.C.C. § 2-316(1)-(2) (2002)]

Example: A written contract contains the following disclaimer in bold text above the buyer’s signature: “This
agreement is expressly in lieu of and hereby disclaims all other express warranties, and is in lieu of and
hereby disclaims and excludes any implied warranties of merchantability and fitness for a particular
purpose. There are no warranties that extend beyond the description hereof.” The seller has explicitly
disclaimed all types of warranties.

Compare: A couple enters into a contract to purchase an automobile from a car dealership. The reverse side of the
contract contains fine print that includes an explicit disclaimer of all implied warranties. However, the
disclaimer is neither conspicuous nor pointed out to the couple before the purchase. The car dealership’s
explicit disclaimer is invalid. [See Henningsen v. Bloomfield Motors, Inc., 161 A.2d 69 (N.J. 1960)]

b. Implicit Disclaimer
 33
The seller may implicitly disclaim either type of implied warranty by using plain language, such as “as is” or “with
all faults,” or by permitting a buyer examination of the goods. If the buyer examines the goods as fully as desired or
refuses to examine the goods at all, then the warranty is negated for any defects that the examination should have
revealed under the circumstances. Note that an express warranty may not be implicitly disclaimed. [See U.C.C. § 2-
316(3) (2002)]

Example: A college student purchases a used car. The sign on the car says: “sold as is.” Although the used car later
breaks down, the plain language implicitly disclaims both types of implied warranties. The car salesman
has not violated the implied warranty of merchantability or the implied warranty of fitness for a
particular purpose. [See Pelc v. Simmons, 620 N.E.2d 12 (Ill. App. 1993)]

c. Other Limitations
In addition to outright disclaimers, sellers may contractually limit or modify warranties in other ways. For example, a
contract may state that the damages available for breach of warranty are limited to product replacement or repair.

C. Battle of the Forms

At common law, under the mirror image rule, an acceptance had to mirror the terms of the offer exactly in order to be
effective. If the attempted acceptance varied the terms of the offer in any way, it was construed as a counteroffer. [See Eliason
v. Henshaw, 17 U.S. 225 (1819)] The UCC has done away with the mirror image rule, instead treating an acceptance that varies
the terms of the offer as valid unless the acceptance explicitly provides that it is conditional on the offeror’s agreement to the
new terms. [U.C.C. § 2-207] Whether the additional or changed terms become part of the agreement depends on whether the
parties are merchants or not.

1. Nonmerchant Contracts
If at least one party to the contract is a nonmerchant, the new or modified terms do not automatically become part of the
agreement. Rather, the new terms are treated as proposals and are only incorporated into the contract if the offeror
expressly agrees. [U.C.C. § 2-207(2)]

2. Merchant Contracts
If all parties to the agreement are merchants, any new or modified terms automatically become part of the agreement. This
is where the term “battle of the forms” comes from; the last form sets the terms for the agreement. There are three
exceptions in which the amended terms will not become part of the agreement: (1) the offer explicitly provides that
acceptance is limited to the terms of the original offer, (2) the new terms materially alter the agreement, or (3) the offeror
objects to the new terms within a reasonable time. [Id.; see generally, Egan Mach. Co. v. Mobil Chem. Co., 660 F. Supp.
35 (D. Conn. 1986)]

VII. Rights and Duties

The parties to a contract generally cannot avoid the terms of the agreement. However, in some circumstances, their contractual
rights and duties may be transferred to third parties or even discharged entirely.

A. Third Parties
Generally, contractual rights and obligations are only imposed on the parties to the contract. Although the majority of contracts
are between two parties, a third party may become involved in the agreement as a beneficiary, assignee, or delegee.

1. Beneficiaries
A third-party beneficiary is a non-party to the contract who is intended by the parties to receive a benefit from the contract.
The court typically determines the parties’ intent based on the circumstances of the agreement, such as whether the
beneficiary would be reasonably justified in relying on the contract. An intended beneficiary has the right to sue for
enforcement, even if he or she was not involved in the formation of the contract. The promisor may assert any defenses
against the beneficiary that could be asserted against the promisee. Once the beneficiary assents, sues, or materially
changes position in reliance on the contract, he or she is considered to have vested rights that prevent the original parties
from modifying or discharging the agreement. An incidental beneficiary, who only happens to receive a benefit, though
 34
that was not necessarily the intent of the contracting parties, does not have the right to sue for enforcement and cannot
have vested rights. [See Restatement (Second) of Contracts §§ 302 cmt. d, 304, 311, 315 (1981)]

Example: A builder agrees to design and construct a shopping center for a landlord. The contract requires the builder to
adhere to a construction schedule required by one of the tenants, as well as to submit design drawings to the
tenant for approval. These terms indicate that the builder and the landlord formed the contract to benefit the
tenant. As an intended beneficiary, the tenant may sue for enforcement if the builder fails to adhere to the
construction schedule or submit design drawings for approval. [See Kmart Corp. v. Balfour Beatty, Inc., 994
F. Supp. 634 (D.V.I. 1998)]

Compare: A landscaper agrees to design and plant an elaborate garden on a homeowner’s land. One of the neighbors
learns that the value of his own land will be enhanced by the garden. However, the landscaper and the
homeowner did not form the contract to benefit the neighbor. As an incidental beneficiary, the neighbor may
not sue for enforcement if the landscaper breaches the contract. [See Restatement (Second) of Contracts §
302 cmt. e, illus. 16 (1981)]

2. Assignment
An assignor (promisee) may transfer his or her rights to a third-party assignee through assignment. The effect of the
assignment is to extinguish the privity between the assignor and obligor (promisor), such that only the assignee may sue
the obligor for enforcement. Any contractual right may generally be assigned, regardless of whether there is a writing,
except where the assignment would materially vary the contract by changing the obligor’s duty, increasing the obligor’s
burden or financial risk, impairing the obligor’s chance of obtaining return performance, or reducing the value of the return
performance to the obligor. The materiality depends on the nature of the contract and the circumstances of the assignment.
Note that an assignment may also be forbidden by law or the contract itself, though “anti-assignment clauses” that prohibit
assignment are often strictly construed. [See Restatement (Second) of Contracts § 317, cmt. d (1981)]

Example: A news corporation acquires a television station. The acquisition contract assigns all of the television
station’s contractual rights to the news corporation, including the right to employ a news anchorman.
Because the assignation does not alter the news anchorman’s duties in any material way, the right to employ
the news anchorman is assignable. [See Evening News Ass’n v. Peterson, 477 F. Supp. 77 (D.D.C. 1979)]

Compare: An aunt enters into a contract to financially support her nephew for the remainder of his life. However, the
nephew attempts to assign his rights under the contract to his child. Because the assignment would materially
change the aunt’s duties and increase her burden under the contract, the nephew’s right to receive financial
support is not assignable. [See Restatement (Second) of Contracts § 317 cmt. d, illus. 3 (1981)]

a. Revocation of Assignments
Generally, an assignment for value, such as an assignment made upon payment of valuable consideration or as
security for a debt, is irrevocable. In contrast, a donative assignment, or gratuitous assignment, meaning an
assignment given for no consideration, is typically revocable. There are some important exceptions. The assignor can
no longer revoke if: (1) the obligor has already performed; (2) the assignment is in writing; (3) there has been delivery
of a token chose, or tangible thing symbolizing the assignment, related to the rights being assigned (like stock
certificates or insurance policies); or (4) the assignee has reasonably, foreseeably, and detrimentally relied on the
assignment. Where permitted, revocation may be accomplished by the assignor: (1) notifying the assignee or the
obligor that the assignment is revoked, (2) accepting performance in the assignee’s place, (3) reassigning to someone
else, or (4) by operation of law, such as upon the death or bankruptcy on the assignor. Note that if an assignor
wrongfully revokes an irrevocable assignment, the assignment may still be effective; in that case, the assignee will be
able to seek damages.

3. Delegation
A delegor (promisor) may transfer his or her duties under a contract to a third-party delegee through delegation. The
delegor remains liable to the obligee (promisee) and may be sued by the obligee for the delegee’s breach of contract. Any
 35
contractual duty to perform may generally be assigned, except where the obligee has a substantial interest in the delegor’s
personal performance (involving personal service, skill, or discretion). Note that a delegation may also be forbidden by law
or the contract itself. [See Restatement (Second) of Contracts § 318, cmt. c (1981)]

Example: A borrower receives a loan from a lender. After the lender delegates the loan to a bank, the borrower requests
funds from the lender under the terms of the agreement. The lender refuses, arguing that any duties regarding
the loan have been delegated to the bank. However, the delegation has not discharged the lender’s duties.
Because there was no novation, the lender, as delegor, remains liable under the terms of the original contract.
Thus, the lender is still liable to the borrower regarding the provision of funds. [See First Am. Commerce Co.
v. Wash. Mut. Savs. Bank, 743 P.2d 1193 (Utah 1987)]

Compare: 1) A singer contracts to perform three songs over the radio. Because the contract is for the exercise of a
personal skill, the singer may not delegate her duties to anyone else, even another competent singer. [See
Restatement (Second) of Contracts § 318 cmt. c, illus. 6 (1981)]

2) A beauty company acquires a barber supply company. The acquisition contract delegates all of the barber
supply company’s contractual duties to the beauty company, including the duty to distribute a manufacturer’s
hair care products. However, the beauty company is owned by a major competitor of the manufacturer.
Because the manufacturer has a substantial interest in avoiding the delegation, the duty to distribute the hair
care products is not delegable. [See Sally Beauty Co. v. Nexxus Prods. Co., 801 F.2d 1001 (7th Cir. 1986)]

B. Discharge
If at least one of the parties is no longer interested in continuing a contract, the parties may mutually consent to discharge one
or both of their obligations by substituting a new agreement or ending the agreement entirely.

1. Substituting a New Agreement

The parties may substitute a new agreement for the original contract through an accord and satisfaction, substituted
contract, or novation. The court will determine whether a new agreement is an accord or substituted contract by
considering the parties’ intent. [See Restatement (Second) of Contracts § 279 cmt. c (1981)]

a. Accord and Satisfaction

An accord is created where the promisee agrees to accept a substitute performance in satisfaction of the promisor’s
existing duties. However, the promisor’s original duties are not discharged until the accord has been performed. If
there is a breach of the accord, the promisee may sue for enforcement of either the original duties or the new duties
under the accord. [See Restatement (Second) of Contracts § 281 (1981)]

Examples: 1) A homeowner contracts with a remodeling company to remodel his house, resulting in a final bill of
$6,500. Believing the amount to be excessive, the homeowner mails a check for $5,000 with a notation
stating that the check “constitutes full and final satisfaction of any and all claims.” The remodeling
company writes a letter refusing the payment but subsequently cashes the check. There has been an
accord and satisfaction of the final bill. [See Marton Remodeling v. Jensen, 706 P.2d 607 (Utah 1985)]

2) A celebrity rents a yacht for $10,000. The owner of the yacht agrees to accept an autographed picture
in satisfaction of the $10,000 obligation. If the celebrity breaches the contract, the owner may sue for
either the $10,000 or the autographed picture. [See Restatement (Second) of Contracts § 281 cmt. b,
illus. 4 (1981)]

b. Substituted Contract
A substituted contract is created where the promisee accepts a substitute agreement that immediately discharges the
promisor’s existing duties, regardless of whether the substituted contract has been performed. If there is a breach of
the substituted contract, the promisee may only sue for enforcement of the substitute agreement. [See Restatement
(Second) of Contracts § 279 (1981)]
 36

Example: A furniture store contracts to deliver an armchair to a homeowner. Subsequently, the furniture store
offers to deliver a sofa instead of the armchair. The homeowner accepts the substituted contract,
immediately discharging the furniture store’s duty to deliver the armchair. If the furniture store fails to
deliver the sofa, the homeowner may sue for the sofa but not the armchair. [See Restatement (Second) of
Contracts § 279 cmt. a, illus. 1 (1981)]

c. Novation
A novation is created where the parties enter into a substituted contract that replaces the promisor or promisee with a
substitute party. The original party is immediately discharged of any liability under the contract. [See Restatement
(Second) of Contracts §§ 279-80, cmt. c (1981); see generally VII.B.1.b, supra (definition of substituted contract)]

Example: A student agrees to purchase a neighbor’s used car for $8,000. After delivering the car, the neighbor
promises to immediately discharge the student’s debt if the student’s father agrees to pay the $8,000. The
student and father agree. There has been a novation, and the neighbor may sue the father but not the
student in the event of breach. [See Restatement (Second) of Contracts § 280 cmt. d, illus. 1 (1981)]

2. Ending the Agreement (Termination)

The parties may end the original contract through a rescission, release, or covenant not to sue.

a. Rescission
A rescission occurs where both parties agree to completely discharge all of the remaining duties owed by the other
party. Note that if the parties only agree to partially discharge the remaining duties, the contract is considered
modified rather than rescinded. [See Restatement (Second) of Contracts § 283(1), with comments (1981); see
generally I.D.2.a, supra (discussion of modification)]

Example: A homeowner hires a painter to paint his house for $500. The painter begins to paint the house but
realizes that full performance will require $600 in materials. If the homeowner accepts the painter’s offer
to rescind the contract, the painter may immediately cease performance and the homeowner may avoid
paying the $500. [See Restatement (Second) of Contracts § 283 cmt. a, illus. 1 (1981)]

Compare: A homeowner hires a painter to paint his house for $500. After completing full performance, the painter
says, “You do not have to pay me $500 for painting the house.” However, the painter has no remaining
duties under the agreement. Because the contract has not been rescinded, the homeowner remains
obligated to pay the $500. [See Restatement (Second) of Contracts § 283 cmt. a, illus. 2 (1981)]

b. Release
A release occurs where one party agrees in writing to discharge a duty owed by the other party, either immediately or
after the occurrence of a condition. Depending on the state, a release may need to be supported by consideration, a
signed writing, or the other party’s reliance. [See Restatement (Second) of Contracts § 284(1) cmt. b (1981)]

Example: A homeowner hires a painter to paint his house for $500. After completing full performance, the painter
provides a signed document stating that the homeowner does not have to pay the $500, effective
immediately. The written release discharges the homeowner’s obligation to pay the painter.

c. Covenant Not to Sue

A covenant not to sue exists if a promisee agrees never to sue the promisor to enforce a duty. A court will interpret the
covenant as having the effect of immediately discharging the duty. Generally, a covenant not to sue is considered a
contract and must meet the requirements for the formation of a contract, such as consideration. Note that a promisee
may also create a covenant not to sue for a limited time, which temporarily prevents enforcement of the contract but
does not discharge the duty. [See Restatement (Second) of Contracts § 285 (1981); see generally I), infra (discussion
of formation of contracts)]
 37

Example: A 3L law student enters into a contract to tutor a 1L law student in criminal law for $300. When the 1L
fails to pay the $300, the 3L agrees not to sue for enforcement until final grades are released on June 1.
The covenant not to sue has the effect of preventing the 3L from enforcing the contract until June 1.
Subsequently, when the 1L fails criminal law on June 1, the 3L agrees never to sue for the $300 at all.
The second covenant not to sue has the effect of immediately discharging the 1L’s duty to pay under the
contract.

VIII. Remedies
When one party breaches an enforceable contract, the other party will be entitled to a remedy based on the circumstances of the
resulting loss or injustice. The court will typically award a legal remedy (monetary) and/or order an equitable remedy (non-
monetary). [See Restatement (Second) of Contracts § 345 (with comments)(1981)]

A. Legal Remedies

A legal remedy in the form of a sum of money may be granted through damages (compensation) or restitution (prevention of
unjust enrichment).

1. Damages
Generally, an injured party is entitled to compensatory damages for his or her actual losses. The injured party may receive
full compensation in the form of expectation, reliance, or liquidated damages, subject to certain limitations. However, the
court will only aim to make the injured party “whole” and will avoid awarding a windfall, as a matter of public policy.
Note that punitive damages are not generally recoverable under contract law unless the breach is also a tort. If the breach
has not caused any provable losses, then the injured party may only receive nominal damages (a small sum of money).
[See Restatement (Second) of Contracts ch. 16, topic 2, intro. note; §§ 346(2), 355 (1981)]

Example: A shareholder agrees to sell 1,000 shares of stock to a friend at $10 per share on June 1. Although the
shareholder refuses to deliver the stock on June 1, the friend could purchase the same stock at $10 per share
from the stock market. The friend has not suffered any actual loss and is only entitled to nominal damages,
such as $1. [See Restatement (Second) of Contracts § 346 cmt. b, illus. 1 (1981)]

a. Expectation
Expectation damages are intended to place the injured party in the position that he or she would have been in had the
contract been performed. This form of damages recognizes that the injured party is entitled to the “benefit of her
bargain.” The court will generally award expectation damages if the injured party would have profited from the
contract. The amount of compensation is equal to the loss in value of the breaching party’s performance, as well as
the incidental losses suffered by the injured party as a result of the breach, less any loss avoided by the injured party
in not having to perform the contract. [See Restatement (Second) of Contracts §§ 344, 347 (1981)]

Examples: 1) A boy enters into a contract with a surgeon for the removal of scars from his hand. The surgeon
promises a “one hundred percent good hand” but grafts skin from the boy’s chest onto the scars, causing
thick hair to grow on the hand. The boy is entitled to expectation damages equal to the difference
between the value of a “one hundred percent good hand” and a hairy hand, as well as any incidental loss
resulting from the breach. [See Hawkins v. McGee, 146 A. 641 (N.H. 1929)]

2) A builder agrees to construct a hotel for $500,000 to be ready for occupancy by May 1. However, the
builder breaches the contract and does not prepare the hotel for occupancy until June 1. The hotel owner
loses $20,000 in May rent but saves $5,000 by not having to operate the hotel in May. The hotel owner
is entitled to expectation damages in the amount of $15,000 (the loss of $20,000 less the $5,000 cost
savings). [See Restatement (Second) of Contracts § 347 cmt. d, illus. 5 (1981)]
 38

Compare: A manufacturer enters into negotiations to produce and sell ice cream. However, negotiations are broken
off before the contract is finalized. The manufacturer is not entitled to expectation damages for lost
profits “because there is no way of knowing what the ultimate terms of the agreement would have been
or even if there would have been an ultimate agreement.” [See Copeland v. Baskin Robbins U.S.A., 117
Cal. Rptr. 2d 875 (2002) (holding that the manufacturer may be entitled to damages based on reliance
but not expectation)]

b. Consequential Damages
Consequential damages are special damages, over and above expectation damages, that are incurred due to the injured
party’s unique circumstances. Often, consequential damages take the form of lost profits. Note that such damages are
only available if they were reasonably foreseeable at the time the contract was made. [See Armstrong v. Bangor Mill
Supply Corp., 145 A. 741 (Me. 1929)]

c. Reliance
Reliance damages are intended to place the injured party in the position that he or she would have been in had the
contract never been made. This form of damages often serves as an alternative to expectation damages where the
injured party’s lost profits are too speculative to measure. The court will generally award reliance damages if the
injured party incurred expenses in reliance on the contract. The amount of compensation is equal to the loss incurred
by the injured party, as well as the expenditures made by the injured party in preparation or performance of the
contract, less any expected loss by the injured party that can be proven with reasonable certainty. [See Restatement
(Second) of Contracts § 349 (1981)]

Examples: 1) A corporation agrees to allow a franchisee to sell its radios but subsequently refuses to deliver any radios
to the franchisee. At the time of the breach, the franchisee has already employed salesmen and solicited
orders for the radios. Because the franchisee incurred expenses in reliance on the contract, the
franchisee is entitled to reliance damages. [See Goodman v. Dicker, 169 F.2d 684 (D.C. Cir. 1948)]

2) A producer enters into a contract with a theater to stage a musical and divide the profits. After the
producer has already spent $5,000 on set construction and costume design, the theater decides to stage an
opera instead of the musical. The producer sues for breach. At trial, the theater proves that the producer
expected to lose $1,000 from the contract. The producer is only entitled to $4,000 in reliance damages.
[See Restatement (Second) of Contracts § 349 cmt. a, illus. 2 (1981)]

d. Liquidated
Liquidated damages are set by the parties in the terms of the contract in case a breach occurs. This form of damages is
often appropriate where the injured party’s actual loss from the breach would be difficult to measure. The amount
must be reasonable in light of the anticipated or actual loss caused by the breach. Otherwise, an unreasonably large
amount will be considered to be an unenforceable penalty by the court. [See Restatement (Second) of Contracts §
356(1) (1981)]

Example: A general manager agrees to work for a hotel for three years. The employment contract provides that the
liquidated damages for early termination will be the general manager’s entire remaining salary. After a
year, the hotel terminates the general manager but cannot prove that the liquidated damages are
disproportionate to the actual loss resulting from the early termination. The provision for liquidated
damages is enforceable. [See Wassenaar v. Towne Hotel, 331 N.W.2d 357 (Wis. 1983)]

Compare: A comedian agrees to perform at a theater. The contract provides that the liquidated damages for any full
or partial breach of the agreement will be £1,000. However, the provision for liquidated damages is
unreasonable, because it applies to even minor breaches. The amount of £1,000 is an unenforceable
penalty. [See Kemble v. Farren, 130 Eng. Rep. 1234 (C.P. 1829)]
 39
e. Limitations
The amount of damages recoverable by the injured party is generally limited by the avoidability, foreseeability, and
uncertainty of loss.

i. Avoidability
The injured party may not recover damages for loss that is avoidable without undue risk, burden, or humiliation.
This is also known as the duty to mitigate loss. However, the injured party is not precluded from recovery if he or
she makes reasonable efforts to avoid loss, even if those efforts are unsuccessful. [See Restatement (Second) of
Contracts § 350 (1981)]

Example: A board of commissioners hires a company to build a bridge but subsequently refuses to honor the
contract. At the time of the breach, the company has already spent $1,900 on labor and material. The
company continues to build the bridge, incurring a total cost of $18,300. Because the company has
violated the duty to mitigate loss, the company is only entitled to lost profits and the $1,900 in
damages that was incurred before the breach. [See Rockingham County v. Luten Bridge Co., 35 F.2d
301 (4th Cir. 1929)]

Compare: An actress enters into a contract with a film corporation for the lead role in a movie. However, the
film corporation decides not to produce the movie and instead offers the actress the lead role in an
alternate movie. Although the compensation will be identical, the alternate movie is a significantly
different production and constitutes an offer of inferior employment. The actress may refuse the role
in the alternate movie without violating the duty to mitigate loss. [See Parker v. Twentieth Century-
Fox Film Corp., 474 P.2d 689 (Cal. 1970)]

ii. Foreseeability
The injured party may not recover damages for loss that the breaching party could not have reasonably foreseen
as a result of the breach. In other words, the injured party is precluded from recovery if the loss was not
foreseeable in the ordinary course of events or as a result of special circumstances that the breaching party
should have known. [See Restatement (Second) of Contracts § 351 (1981)]

Example: A miller hires a carrier to deliver a broken crankshaft from a corn mill to an engineering company
for replacement. The carrier fails to deliver the crankshaft by the due date, delaying the reopening of
a corn mill by several days. However, the carrier could not have foreseen the loss of profits in an
ordinary contract for delivery and was not aware that the miller required the crankshaft to operate
the corn mill. The miller is not entitled to the lost profits caused by the delay. [See Hadley v.
Baxendale, 9 Exch. 341 (Eng. 1854)]

Compare: A painter agrees to paint a house on June 1, knowing that the owner has a contract to sell the house
to a buyer on June 2. However, the painter does not finish painting until June 3, causing the owner
to breach the contract with the buyer and lose the profit from the sale. Because the painter knew of
the owner’s special circumstances, the owner is entitled to the loss caused by the painter’s breach.
[See Restatement (Second) of Contracts § 351 cmt. b, illus. 3 (1981)]

iii. Uncertainty
The injured party may not recover damages for loss that cannot be proven with reasonable certainty.

2. Restitution
Restitution is intended to prevent unjust enrichment. The court will generally award restitution if one party has conferred
a benefit to the other party through partial performance, but there is no enforceable contract. The amount of restitution is
measured by the reasonable value of the party’s performance or the extent of enrichment of the other party’s interests.
Note that either an injured party or a breaching party may seek restitution. [See Restatement (Second) of Contracts §§ 370,
371, 373, 374(1) (1981)]
 40

Examples: 1) A supplier contracts to deliver flour to a buyer at $7 per barrel. The buyer pays $5,000 in advance and agrees
to pay the remainder of the balance at the time of delivery. However, the supplier does not deliver the flour in
a breach of contract. The buyer is entitled to restitution for the $5,000 that was paid in advance. [See Bush v.
Canfield, 2 Conn. 485 (1818)]

2) An employee enters into a one-year employment contract for $120, to be paid at the end of the year.
However, the employee breaches the contract and leaves after nine months. Even though the employee is the
breaching party, the employee is entitled to restitution in the amount of $95 for the work that he has already
performed. [See Britton v. Turner, 6 N.H. 481 (1834)]

B. Equitable Remedies and Other Non-Monetary Relief

An equitable remedy that provides non-monetary relief may be granted in addition to or instead of a legal remedy. In some
cases, the breaching party may assert an equitable defense in court, such as unclean hands (an injured party who has committed
wrongdoing related to the breach is not entitled to a remedy), unconscionability (an unreasonably unfair or oppressive contract
cannot be enforced), or laches (an injured party who has unreasonably delayed a claim is not entitled to a remedy). [See
Restatement (Second) of Contracts § 357 cmt. c (1981); Merriam-Webster’s Dictionary of Law (Kindle ed. 2011), clean hands
doctrine, laches, unconscionability]

Example: A landlord contracts to rent an apartment to a tenant, with the provision

that the tenant will be able to inhabit the apartment on June 1. However,
the tenant burns down the apartment building on May 31, preventing the
apartment from being habitable on June 1. Because the tenant has unclean
hands, the landlord will be able to assert an equitable defense if the tenant
attempts to seek a remedy for a breach of contract.

1. Order Against a Breaching Party

The injured party may obtain an order of specific performance or an injunction against a party who has committed or is
threatening to commit a breach of contract, but only if an award of damages would be inadequate. When determining
adequacy, the court will consider circumstances such as the difficulty of proving damages, the difficulty of procuring
substitute performance, and the likelihood of collecting damages. [See Restatement (Second) of Contracts §§ 359(1), 360
(1981)]

a. Specific Performance
Specific performance requires the breaching party to perform the contractual duty. This type of order is often
appropriate if the contract involves a unique performance for which a substitute performance cannot be easily
procured, such that monetary damages are inadequate. In particular, a parcel of land is almost always considered
unique and typically requires an order of specific performance in the event of a breach by the seller in a land-sale
contract. Similarly, a seller’s breach of contract for the sale of unique goods may create a right of replevin in the
buyer, allowing the buyer to take possession of the goods rather than receiving compensation. However, courts will
avoid awarding specific performance for personal services, such as acting or singing, due to the difficulty of enforcing
the breaching party’s performance and the similarity to involuntary servitude (which is unconstitutional). [See U.C.C.
§ 2-716 (2002); Restatement (Second) of Contracts §§ 357(1), 367(1) cmt. a, b (1981)]

Example: A contract for the sale of a stereo system provides that the seller has the option of repurchasing the
stereo system, which was designed and built by the seller over a period of 15 years and cannot be
replaced. However, the buyer refuses to return the stereo system when the seller attempts to exercise the
option. Due to the unique and sentimental value of the stereo system, an award of damages would be
inadequate. The seller is entitled to specific performance for the return of the stereo system from the
buyer. [See Cumbest v. Harris, 363 So.2d 294 (Miss. 1978)]
 41
Compare: An opera singer contracts to sing exclusively at an opera house for three months. However, the opera
singer arranges to sing at a competing opera house after a month. Although damages are inadequate, the
opera house is not entitled to specific performance for a personal service such as singing. [See
Restatement (Second) of Contracts § 367 cmt. b, illus. 1 (1981)]

b. Injunction
An injunction requires the breaching party to take or refrain from taking an action that violates the contractual duty.
Typically, an injunction directly enforces a duty to forbear or indirectly enforces a duty to perform. This type of order
is often appropriate where the difficulty of supervising compliance with an injunction is less than the difficulty
associated with supervising specific performance. For instance, a court may find it easier to prevent a breach of a non-
compete clause by ordering the breaching party to cease an instance of employment in violation of the contract rather
than to never seek employment. [See Restatement (Second) of Contracts § 357(2) cmt. b (1981)]

Examples: 1) Three veterinarians form a partnership to practice veterinary medicine in a town. The contract
provides that any partner who leaves the partnership may not practice in the same town for three years.
Eventually, one of the veterinarians leaves the partnership and immediately begins to practice in the
same town. The remaining two partners are entitled to an injunction that directly enforces the
veterinarian’s duty to forbear by requiring the veterinarian to refrain from practicing in the same town.
[See Restatement (Second) of Contracts § 357 cmt. b, illus. 2 (1981)]

2) A retail store contracts to exclusively sell a designer’s dress patterns for a year. After a few months,
however, the retail store begins to sell a competing designer’s dress patterns. The designer is entitled to
an injunction that indirectly enforces the retail store’s duty to perform by requiring the retail store to
refrain from selling the competing designer’s dress patterns. [See Restatement (Second) of Contracts §
357 cmt. b, illus. 4 (1981)]

2. Declaratory Judgment
The court has the discretion to render a declaratory judgment that declares the legal relations between the parties.
Generally, the authority to render a declaratory judgment arises from state statutory law, such that a declaratory judgment
is technically considered a “statutory remedy.” The court may render a declaratory judgment in conjunction with or instead
of other relief, or even where there is no breach of contract. [See Restatement (Second) of Contracts § 345 cmt. d (1981)]

Example: A farmer enters into a five-year lease with the option to renew at a renegotiated rate based on the fair market
value of the land. At the end of the lease, however, the current landowner refuses to accept a renegotiated
rate at fair market value. The court renders a declaratory judgment stating that the renewal and option
clauses are valid and enforceable and that the fair rental value is $400 per month. [See Moolenaar v. Co-
Build Cos., Inc., 354 F. Supp. 980 (V.I. 1973)]

3. Reformation
The court may reform the terms of a contract to accurately express the agreement between the parties. This typically
occurs where there has been a misrepresentation or mistake.
Show 1. beyond reasonable doubt that there was a mistake in the terms AND 2. the changing of the terms will not cause
prejudicial outcome for one party. These standards must be met for the court to issue a contract reformation. [See
Restatement (Second) of Contracts §§ 155, 166, 345 cmt. a, 359 cmt. c (1981); see generally II.A.6), supra (discussion of
misrepresentation); IV.D), supra (discussion of mistake)]

4. Implied-in-Law Contract/Quasi-Contract
In some cases, courts will imply the existence of a contract, even though none was ever formed between the parties, in
order to avoid injustice. An implied-in-law contract, or quasi-contract, is a legal fiction designed to permit courts to give a
remedy to a plaintiff for a benefit conferred on the defendant where it would be unfair to let the defendant retain the
benefit without paying for it. In such cases, which often involve some special relationship between the parties, the
 42
defendant must pay restitution damages to the plaintiff. [See generally, Callano v. Oakwood Park Homes Corp., 219 A.2d
332 (N.J. Super. Ct. App. Div. 1966)]

5. Rescission
The court may rescind the contract between the parties entirely. This terminates the rights and duties of both parties under
the contract. [See Restatement (Second) of Contracts § 359 cmt. c (1981); Merriam-Webster’s Dictionary of Law (Kindle
ed. 2011), rescission]