Barry Adler Contracts Fall 2010

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

Agreements in Principle......................................................................................................................................................5 Revocation and Acceptance.................................................................................................................................................7 MIRROR-IMAGE RULE....................................................................................................................................................................7 ACCEPTANCE BY ACTION...............................................................................................................................................................8 ACCEPTANCE BY INACTION...........................................................................................................................................................11 BATTLE OF THE FORMS................................................................................................................................................................11 E-COMMERCE & MUTUAL ASSENT...............................................................................................................................................14 CONSIDERATION DOCTRINE............................................................................................................................................15 PAST OR MORAL CONSIDERATION.................................................................................................................................................16 EXCEPTION: MODIFICATION AND PREEXISTING DUTY.......................................................................................................................17 EXCEPTION: PROMISSORY ESTOPPEL..............................................................................................................................................19 STATUTE OF FRAUDS...................................................................................................................................................................21 NATURE AND LIMITS OF KS..............................................................................................................................................22 UNENFORCEABLE PF VALID K’S....................................................................................................................................................22 WRT Public Policy/Legislation.........................................................................................................................................22 WRT Capacity, Duress, and Undue Influence...................................................................................................................22
Incapacity ......................................................................................................................................................................................23 Duress and Improper Threat...........................................................................................................................................................23 Undue Influence.............................................................................................................................................................................23

WRT Unconscionability.....................................................................................................................................................24
Definitions.....................................................................................................................................................................................24

INTERPRETING THE AGREEMENT..................................................................................................................................26 HIERARCHY OF INTERPRETATION....................................................................................................................................................26 GAP FILLING..............................................................................................................................................................................28 Illusory Promises...............................................................................................................................................................29 Gap Filling and Good Faith..............................................................................................................................................31 EXTRINSIC EVIDENCE...................................................................................................................................................................31 BREACH....................................................................................................................................................................................34 EFFICIENT BREACH HYPOTHESIS....................................................................................................................................................34 PHILOSOPHY OF PROMISE..............................................................................................................................................................35 BREACH AND CONSTRUCTIVE CONDITION.......................................................................................................................................35 FAILURE OF A BASIC ASSUMPTION................................................................................................................................38 DAMAGES.................................................................................................................................................................................41 Farnsworth’s Three Damage Interests:............................................................................................................................41 Damage calculation...........................................................................................................................................................41 LIMITATIONS ON DAMAGES............................................................................................................................................................43 Remoteness of Harm (Foreseeability)...............................................................................................................................43 Uncertainty of Harm..........................................................................................................................................................45
Speculative Damages.....................................................................................................................................................................45 Wasted Expenditures......................................................................................................................................................................46

Avoidability of Harm (Mitigation Obligation)..................................................................................................................46
Mitigation and Efficient Breach.....................................................................................................................................................47 Mitigation and “Burdensome” Cover [R.2d §350(1)].....................................................................................................................48 Mitigation and Buyer Breach/Seller’s Remedy..............................................................................................................................49

SPECIFIED DAMAGES...................................................................................................................................................................50 SPECIFIC PERFORMANCE................................................................................................................................................................52 RESTITUTION..............................................................................................................................................................................54
Restitution for Breaching Promisor................................................................................................................................................56 Restitution & Quasi-K....................................................................................................................................................................57

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Barry Adler Contracts Fall 2010

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

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

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

Existence of an Offer
• • • R.2d §22: observes that “the manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties” R.2d §24: says that an “offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it” R.2d §33: provides that even if a communication takes the form of an offer, it can’t be accepted (and serve as the basis of a K), unless the terms to be accepted are sufficient to form a K, that is “provide a basis for determining the existence of breach and for giving an appropriate remedy” (also in §1) UCC o UCC hypo  e.g. BA says to me “I offer you some books” and I say “I accept” • What books? At what price? How many books?, etc. • Books=UCC o BUT a crt may fill many gaps and thus enforce a lightly specified offer (see R.2d §204) 3

Barry Adler Contracts Fall 2010 o UCC §2-204: provides that a sales K “may be made in any manner sufficient to show agreement”—i.e. w/o identification of an offer or acceptance—and does not “fail for indefiniteness” despite open terms if there is merely a “reasonably certain basis for giving an appropriate remedy”  The UCC is expressly permissive also in that a sales K can be formed despite, e.g., • The absence of a specified price (§2-305) • The absence of a specified place for delivery (§2-308) • The absence of a specified time for delivery or duration of the agreement (§2309) • The absence of a specified time for payment (§2-310)  Cf. w/ R.2d §33, which treats the omission of terms as a possible manifestation that no offer is intended • Despite the ∆ in tone b/t the R.2d and UCC §, don’t be misled into thinking that there is necessarily a ∆ b/t a case under the CL and one under the UCC. o The question is ultimately the same, whether there was a manifestation of intent to be bound, if so, whether there is a basis for remedy in the event of breach Preliminary Negotiations o Nebraska Seed v. Harsh (305) [D issued a letter to P informing them that he was willing to sell a certain seed at a particular price, but was indefinite as to quality • P responds and “accepts”]  Note that UCC §2-206 provides that “unless otherwise or unambiguously indicated by the language or circumstance, an offer to make a K shall be construed as inviting acceptance in any many and by any medium reasonable in the circumstance” • It was customary for farmers to receive flyers in the mail that were not offers  Why no K, given law’s general flexibility? • Missing terms can be supplied if there is manifestation of an intended offer, but the absence of terms may still be evidence that no offer was intended (See R.2d §33)  Holding: that D’s communication was an advertisement, not an offer, noting the lack of quantity—which a crt will not try to supply absent direction of the parties—and the missing term for time of delivery • There is little reason to think that the case would come out differently today (at least w/ a like-minded crt) • How might you re-characterize the ad as a valid offer (capable of acceptance)? o (1) An implicit offer that could be accepted of approx. quantity, “while supplies last,” perhaps reasonable b/c communication was individualized (not like in Leonard) o (2) An implicit offer for reasonable delivery terms that are unspecified (like time) • On ads in general, R.2d §26 provides that “a manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent” o R.2d §29: makes clear that it is up to the offeror—through her manifestations—to determine the “person or persons in whom is created the pwr of acceptance” or, implicitly, whether there are any such persons.  E.g. communication that is best understood as an invitation to consider offers from the recipient is an ad, not an offer, despite its 4

Barry Adler Contracts Fall 2010 form. o o Leonard v. Pepsico (308) [re: TV ad, which announces that various items were available to ind. of amassed Pepsi pts • Pepsi pts via buying Pepsi products or buying the points themselves (10 cents/pt) • one item that was mentioned was a Harrier jet for 7MM pts]  Holding: crt finds that in a widespread communication (like TV commercial) there is a presumption against an offer, to ob overcome only by clear, definite and explicit terms • An application R.2d §33trying to fill in K gaps when the gaps imply that there is no offer • Also, the commercial refers to a catalog and the catalog does not include a Harrier jet, while the commercial additionally states (in fine print) that the offer is not available everywhere • Further, the fact that an offer for a WMD in a soft drink commercial (for less than 1/20th of its value) is obviously a joke, and that the P should have known this (see Lucy)

Agreements in Principle
• • We have to interpret “agreements in principle,” sometimes written in “letters of intent,” and sometimes referred to as “agreements to agree” In connection w/ whether a communication is an offer or an ad, we looked at R.2d §26 (see above) o Now consider R.2d §27, which provides that “manifestations of assent that are in themselves sufficient to conclude a K will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.”  The task is to distinguish b/t an agreement w/ open terms and a preliminary negotiation (that does not affect an agreement at all) 4-ways to approach “agreements in principle” o 1) Do not enforce as binding K [Empro] o 2) treat the areas of apparent agreement b/t the parties as binding even though the negotiations continue as to supplemental terms [Texaco]  Either added by parties later on, or supplied by crt if parties fail to do so o 3) Treat the open terms as options granted by each party to the other, whereby if the parties do not agree each party has an option to enforce the K on the reasonable terms most favorable to the other  R.2d §34(1): which provides that the terms of the K may be reasonably certain even though it empowers one or both parties to make a selection of terms in the course of performance. o 4) Treat the parties as having agreed to negotiate in good faith  unlikely (ultimately) top bind either party in a meaningful way Empro Manufacturing v. Ball-Co (319) [re: “letter of intent” b/t P (Empro) and D to purchase D’s assets • letter provided that P’s purchase shall be subject to certain conditions (inc. approval by P’s board) • negotiation breaks down over collateral • P sues D to enjoin from selling assets to anyone else] o Holding: crt affirmed dismissal for lack of K b/c the agreement was “subject to” a later definite agreement (Asset Purchase Agreement) and board approval  Based on what the crt sees as an objective interpretation of the letter’s terms (regardless of parties’ subjective intent)  P was free to walk at any time, so there was no bilateral agreement  Crt also dismisses P’s claim for reliance expenditures, b/c there was no promise on 5

b/c open terms can be filled by a crt if not later on by the parties • See R.e. an “agreement in principle” can mean a binding agreement that the parties expect to supplement later • (2) whether there was any partial performance by the party disclaiming the K o P argues that the lack of partial performance by either party suggests that neither treated the agreement as binding  Crt: P’s alleged interference w/ the K relationship occurred so soon after the release that lack of partial performance is not dispositive • (3) whether there was agreement on all essential terms o P argues that there were too many open terms for such a complex merger  Crt: the jury had a right to decide that the open terms did not preclude an effective manifestation of intent to be bound (implicitly at least). why isn’t the reasoning of Anglia of benefit to Empro here? o B/c.Barry Adler Contracts Fall 2010 which P could rely • On reliance.2d §204 • (4) whether the complexity/magnitude of the transaction suggests that formal writing is req. Pennzoil (323) [re: Memorandum of Agreement for merger b/t Getty and Pennzoil (D). but as a matter of law “this factor is [not] determinative of the question of the parties’ [manifest] intent” 6 • . which was ratified by Getty’s board of directors • Getty/Pennzoil had a press release and announced an “agreement in principle” • Texaco (P) was accused of tortiously interfering w/ a sales K b/t Getty and Pennzoil • Texaco argued no K] o Holding: there was a binding agreement (and thus interference)  Crt used 4-part test to determine whether parties manifested an intent to be bound by informal agreement • (1) whether a party expressly reserved the right to be bound only when a written agreement is signed o P argued that Getty had reserved the right to be bound only by subsequent agreement b/c the press release said so  Crt: the press release as a whole is written in indicative terms (i. for assent o P argues that the deal is too complex to be w/o formal writing of assent  Crt: concedes this point. according to the crt there was never an agreement (whereas in Anglia there eventually was one) o If letter of intent is not binding the why use it?  B/c it does no more than sets the stage for negotiations on details • Allows for the parties to approach in stages w/o fear that they have bargained away their privilege to disagree on the specifics o The parties only disagreed only abt the collateral for the purchase loan. “shareholders of Getty Oil will receive”). How could P use this fact?  P could argue that the crt should fill in the collateral term • crt might have no basis to do this  Still. P might have argued that it had an option to purchase if it granted the disputed collateral Texaco v.

a revocation—a rule stated in R. “gives the offeree a continuing pwr to complete the manifestation of mutual assent by acceptance” until that pwr is terminated (R. which is “the manifestation of willingness to enter into a bargain. o Absent an exception (enforceable option K above). revocation terminates the right of acceptance  But acceptance forms K.Barry Adler Contracts Fall 2010 • • Is Texaco reconcilable w/ Empro? o Arguably so in that no two cases are identical. D left the offer open until a certain date • P attempted to accept an offer after he learned of D’s intent to revoke before the deadline] o Holding: P’s knowledge deprived him of the right to accept—that knowledge was. it must be an unequivocal assent to all of the offer’s terms o As above.2d §25)  Keep in mind that there are two potential Ks to consider. so that parties get the benefits of their bargain despite formal lapses o Perhaps disfavor. a counter-offer even if in the form of an acceptance is the equivalent of a rejection and so following a counter-offer the offeree loses the pwr to accept unless the initial offer is renewed (or unless the offeree has a binding option) 7 . b/c offeror is “master. or a “counteroffer” that is not also an unequivocal acceptance.2d §24). (R.2d §36) o Exception—options Ks: “a promise which meets the requirements for the formation of a K and ltds the promisor’s pwr to revoke an offer” (R. so that parties do not find themselves accidentally bond o Maybe it doesn’t matter. thus making any attempt at revocation ineffective  There may be a race b/t revocation and acceptance Dickinson v. Timing issues can arise. fax. not upon receipt o However. Revocation and Acceptance • An offer. at least to a well represent party. Dodds (328) [re: race b/t revocation and acceptance • over the sale of property. this rule doesn’t do much work b/c of the abundance of instantaneous communication (e-mail. should the law favor or disfavor enforcement in close cases? o Perhaps favor. or death or incapacity of the offeror or offeree. or revocation by the offeror. in essence.2d §35) o The pwr of acceptance is terminated by the offeree’s “rejection” of the offer. so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. but it is hard to find facts in Texaco that would have led Judge Easterbrook in Empro to reach a different decision here o The ∆ may simply be one of whether a judge/jury gets to decide how to interpret the parties words and conduct As a ∏ matter. etc. or the non-occurrence of any condition of acceptance under the terms of the offer” (R. 43  When communication is not instantaneous—mailbox rule (aka deposited acceptance rule) applies (339)—see R. or “the lapse of time.) • • MIRROR-IMAGE RULE • CL rule: to be effective on acceptance.” he can K around this (default) rule and insist that acceptance is valid only upon receipt • In a modern context.2d §§ 42.2d §66 • Rule: an acceptance is effective upon dispatch.

Barry Adler Contracts Fall 2010 o Via R. either because the offer expressly invites or requires such means of acceptance or. or a tender of either. each party (still) owed the other some performance 8 • • • . or the start of performance.2d §61 [counter-rule to UCC §2-207] an unequivocal acceptance that also proposes a modification to a K formed by the acceptance. the acceptance cannot be conditioned on the offeror’s assent to the offeree’s proposal for different/addtl terms • Ardente v. Horan (336) [P wanted specific performance of an agreement to sell real property • D had agreed to accept bid. can be effective (and thus would not. 15”  Baker begins work on Nov.2d §62 provides that “where an offer invites an offeree to choose b/t acceptance by promise and acceptance by performance. ACCEPTANCE BY ACTION • R. 12  Abel again. including by requiring a verbal promise.2d §36. 13 • R. or that proposes additional terms.2d §30 provides that while an offeror can condition acceptance in any way she like. 12 (unbeknownst to Abel)  Abel cannot revoke on Nov. it may be possible to accept by performance. not likely to be an unequivocal acceptance with a proposal for addtl terms (furniture) b/c Ps offered no more $ for addition of furniture into deal. 13 • Via R. b/c the circumstance otherwise make it reasonable for an offeree to accept by performance or the start of performance Partial-performance illustrations o (1) Abel says to Baker: “if you want $10k to fix my roof you have to begin work on my roof by Nov.2d §62: “let me know” invited acceptance by either promise or performance o Baker performed o An offer accepted by partial perf. terminate the offeree’s pwr of acceptance)  BUT to be effective. it operated as a rejection of the D’s offer and no K obligation was created  Based on facts. Price should have adjusted accordingly. “unless otherwise indicated by language or circumstances. the tender or beginning of the invited performance or a tender or a beginning of it is an acceptance by performance that operates as a promise to render complete performance Thus. cannot revoke on Nov. acceptance remains valid if the offeror learns in reasonable timeframe o (2) Abel says to Baker: “if you want $10k to fix my roof let me know or complete the work by November 15”  Baker begins work on Nov.2d §54 provides that notice by promisee who begins performance is not necessary unless the offeree “has reason to know that the offeror has no adequate means of learning of the performance w/ reasonable promptness and certainty” o even in this case where offeror has no adequate means. in the absence of such express invitation or req. creates a bilateral K b/c at the moment of formation.2d §32 follows this theme by providing that “in case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering performance” R. under R. an offer invites acceptance in any manner and by any medium reasonable in the circumstances” o R. but the P sent down payment w/ letter “confirming” whether furniture was included • D refused to sign agreement and returned deposit $] o Holding: P’s letter of acceptance was conditional.

• He purchased materials. and traveling to deliver it is (arguably) unlike the carpenter’s generic treatment of wood in White Warranty-not unilateral K o How would you characterize “$100 reward to anyone who returns my lost dog?  Offer for unilateral K o How would you characterize “£100 to anyone who uses my product as directed and contracts the flu?”  Promise. being the first to discover oil and notify Abel) White v. he is not bound. Carbolic Smoke Ball Co. the offeree has fully performed leaving only the offeror’s performance outstanding o R. presumably P’s gathering of more that $4k would be the “beginning of the invited performance” that would earn P an option to complete tender  Gathering a specific. or before” a specified date • P shows up by date w/ cash hand before date • D had already sold mortgage] o D’s arg: characterization of events  D’s offerP’s statement of intent of acceptD’s manifestation of revocationP’s (too-late) attempt to accept  This is the majority’s characterization o P’s arg: characterization of events  D’s offerP’ acceptance by tender or attempted tenderD’s (too late) attempt at revocation  This is the dissent’s characterization o Under R. under which after the promisee begins to tender performance. Corlies & Tifft (358) [P sends D estimate for office construction • D: “Upon agreement… you can begin at once • P purchased lumber and began work when D revoked] o Holding: acceptance of an offer must be “manifested by some appropriate act…though the manifestation need not be brought to his knowledge before (the offeror) becomes bound.2d §45. not necessarily this job  This offer was one for bilateral K • “upon agreement” language • unlikely to let an offeree turn offices into work zone. large sum of money. the promisor cannot revoke the offer (either specified in the offer or reasonable) • Complete-performance illustration “Oil finding hypo” o Abel sends letters offering “$100k to you or to anyone who first locates oil under my land and tells me where to find it before the New Year”  Acceptance by promise (express or implicit) is not invited  Acceptance only by complete performance is invited (i. perhaps warranty. at the moment of formation.Barry Adler Contracts Fall 2010 • A unilateral K is one where.2d §45—imputes an option K. but materials that could be used for any job. Pattberg (362) [D offers P a reduction in debt “providing said mortgage is paid on. if that manifestation is not put in a proper way to be in the usual course of events”  The offeree did no act that indicated an acceptance of the offer to the offeror. not an offer Carlil v.e. (343) [P sues D when she gets sick to recover money like ad announced] o Holding: D should pay as per ad 9 • • • • . and then be able to walk away w/o impunity Petterson v.

Barry Adler Contracts Fall 2010  This is not a reward case. not a unilateral K case. not a case that includes an offer at all • “Prove me wrong” cases are not offers 10 .

keeping goods offered for sale. or the benefit of service when they might be easily rejected. the words or past conduct of an offeree can manifest assent to an arrangement through which the offeror can treat the offeree’s inaction and silence as acceptance o Also. based on prior experience. and if the term is material so would §2-207(2)(b)  So the arb.(2) o What to do with the conflicting dispute-resolution terms?  The arb. but what will be the disputeresolution mechanism? • Knock-out rule—treating the express K as silent on this term. of whom ignored the other’s form. §2-207(2)(c) would keep the term out in any case.: Record-of-the-month clubs. the buyer assented since he didn’t return the eels in a reasonable time  Past practice b/t the parties manifested a buyer’s assent to accepting skins unless the buyer returned them to the seller in a reasonable time • Ex. seller)? • In this hypo. alters the CL • ∏: why should luck (which form comes 1st vs. there is a “definite and seasonable expression of acceptance” [via UCC §2-207(1)] o Sometimes a disagreement b/t forms can be so great (e. (368) [P sent D eel skins and D retained them. crt”  Seller: “any dispute over quality of goods will be resolved via arbitration” o Neither party notices this ∆.” so arguably §2-207(2) does not apply even if the parties are merchants • Given the conflict. the second form is a counter-offer and the shipment of/payments for goods serves as acceptance of counter-offer terms • The “last shot” doctrine  The UCC. if using “knock out rule” it will be up to UCC filler rules]  Under CL. if depending on “drop-out” rule. Massasoit Whip Co. ea.g.e.2d §69 normally. should get its preferred terms (i. and as result goods are exchanged for $ o Is there a K here? [yes] If so. can also constitute acceptance (though beware statutory provisions to the contrary) Hobbs v. o Holding: crt held that. 2nd) determine which of the parties. will dispute go arbitration? [it will go to st. different goods are described) that there will not be a “definite and seasonable expression of acceptance”  This would not imply that there is no K. clause will not come in under §2-207(2).Barry Adler Contracts Fall 2010 ACCEPTANCE BY INACTION • R. and using background rules supplied by the UCC/crts 11 . clause is “different. price and delivery terms o The ∆ is over how disputes will be handled  Buyer: “any dispute over quality of goods will be resolved in st. only that the K isn’t formed by the forms under UCC §2-207(1). where a buyer expressly agrees to accept by inaction future transactions • BATTLE OF THE FORMS UCC’s way of handling mismatch b/t offer and acceptance • UCC §2-207 Hypo: Buyer (1st) and Seller (2nd) exchange forms that agree on quantity. however. crt. an offeror cannot impose an obligation on an offeree. but never formally accepted them • D never used them and eventually destroyed them • Hobbs sued for value of skins.” not “additional.

o A K formed under §2-207(3) consists of those terms that agree. when it opened the box • The crt disagrees with this reasoning in footnote 51  P’s counter arg: the box-top was no more than an ignored confirmation (going for contents of box does not manifest assent) • Also. o What if acceptance is conditional.” a K is formed by reference to the forms themselves.Barry Adler Contracts Fall 2010 o Maj. one.” either of which can operate “as an acceptance”  INTERNAL CONTRADICTION. in neither case referring to disclaimers of warranties • software package had “box-top license. the “different” terms drop o What if the term was not “different. P actually accepted the terms of the counteroffer. that there is a “definite and seasonable expression of acceptance. the addtl terms would be added if not material • What is material? o Would a ltd time on offeror’s (Buyer) complaints be material?  Union Carbide suggests that it would if time is shorter than the background rule b/c consent could not then be presumed  But UCC §2-207 [Comment 5] suggests that the test is whether the term represents an unreasonable surprise o Turn to the distinction UCC §2-207 makes b/t “acceptance” and “confirmation.” but instead “additional”?  If the parties are merchants. ignoring different terms • The “knock-out” rule should apply to conflicting confirmations. including the warranty disclaimer. and parties exchange goods for $?  The forms do not create a K • But a reading of the UCC suugest that the parties’ transaction in the goods invokes UCC §2-207(3). a confirmation cannot act as an acceptance! • A confirmation is intended to be of a pre-existing K—formed orally perhaps  Most sensible way to deal with confirmations is to run them through §2-207(2). with everything else filled in w/ UCC background rules  **This is a rejection of the Last Shot Doctrine (the ∏ purpose to begin with) and a sensible result • BA-everything else is not necessary • Step-Saver v. Rule • Drop-out rule—the offeror’s term stays.” disclaiming a warranty • box top also stipulated that “opening this package indicates acceptance…” • software malfunction and dispute over warranty] o Is the box top disclaimer a part of the K? o P’s arg: the telephone convo formed the K and the box-top license was a confirmation w/ additional terms  Effect: Addt’l terms would not become a part of the K b/c they are material • A disclaimer of a standard UCC warranty is listed under UCC §2-207 (Comment 4) as an example of a material alt. Wyse (457) [Step-saver (P) ordered software from TSL (D) • both agree over phone followed by exchange of purchase order/invoice • forms match the telephone order. to which the box-top was a counter offer  Effect: there is no BotF. but not to a conflict b/t a confirmation and an agreement o Once it is est. which allows for a K by conduct although the writings do not est. o D’s arg: the phone convo and P’s purchase order constituted merely an offer. D had told P that the box-top did not apply to it (not the typical 12 .

which do not attach automatically b/c exchange is not between merchants §2207(2). insurance industry) and should not be set aside by operation of a provision directed at the entirely different problem of inconsistent forms Hill v.  Written offer is not express pre-requisite to application of UCC 2-207(1). Gateway (483) [**Vratil** P sues claiming D induced him to purchase computers and special support packages by making false promises of technical support • D wants to enforce arbitration clause. if you treated invoice as a confirmation following shipment ProCD v.] o Issue: How should box terms be treated? o Holding: customer’s oral order is the offer under UCC §2-207(1). seller’s promise to deliver (or delivery) is acceptance (non-conditional) or a confirmation.] o Issue: Are the box terms effective as the K or is the K term-free b/c the order-taker did not read any terms over the phone & elicit the customer’s assent? o Holding: crt treats purchaser as an offeree (contrary to customary interpretation) charged w/ knowledge that computer will come w/terms. it is rejected. no writings exchanged o ∏: “deal now. and P’s invoice the acceptance. Terms in box are proposals for addtl terms. Placed on constructive notice that additional terms will follow.g. Oscar Meyer (470) [P sold plastic casings to D per a standing purchase order • P filed a action against D for beach of K to recover sales tax it had paid on products it had sold to defendant. It was a confirmation and b/c material. who b/t Easterbrook and Vratil has the better argument as far as ∏ 13 • • • • . terms later” transactions are common (e. including arbitration clause • If computer not returned w/n 30 days. making the terms irrelevant in any case o Holding: box-top was not an expressly conditional acceptance b/c there was no indication that TSL (D) would walk away absent assent.  Crt gets confused on Comment 2 • Plausible/cleaner reading: a confirmation runs additional terms through §2207(2) and a notice that absent a pre-existing K. Gateway (479) [**Easterbrook** • P bought a computer over the phone • Box computer was shipping in included a number of terms. Doctrine aside. an expressly conditional acceptance takes the case out of §2-207(1) & (2) altogether • Union Carbide v. P claimed that Oscar Mayer had agreed to indemnify it for all sales ] o Both parties agree that D’s purchase order is the offer. terms deemed assented to.  Same line of reasoning that D played in Step Saver Klocek v.Barry Adler Contracts Fall 2010 customer). Zeidenberg (473) [**Easterbrook** P offered software directory w/K terms contained inside the box and notice given on outside of box • option to return for refund if terms not accepted • dispute over clause forbidding commercial use of the directory • D used for non-commercial uses] o Holding: the prohibition on commercial use/refund opportunity were incorporated by reference in P’s offer and thus accepted upon purchase  The terms were not unconscionable and were not otherwise unenforceable under UCC  Crt reasoned that UCC §2-207 was not applicablesimple offer and acceptance by conduct (the latter not proposing any addtl or different terms).  Dispute is over tax indemnity clause and if part of K o Holding: the sales tax indemnification clause is not effective  Indemnification would be a material alteration under UCC §2-207(2) and D never actually assented to clause  Same result. Purchaser’s order is treated as acceptance of these implicit terms.

Netscape Communications (370) [D offers “SmartDownload” software for free • D’s want to enforce arbitration clause included in browse-wrap agreement. when 1) one may not have even seen the terms and 2) even if so.2d §211 support Easterbrook? o Does concern about “unfair surprise” embodied in UCC §2-302 favor Vratil? o Is UCC §2-207 the right provision to deal with this issue? E-COMMERCE & MUTUAL ASSENT • Specht v. which does not appear until after each query? o D arg: did not receive notice of the conditions that P seeks to enforce until after each download of data. which user could only see if scroll down and needn’t read or agree to prior to downloading • P’s are suing for violation of federal privacy and fraud statutes] o Issue: Under what circumstances does the act of downloading create a K. UCITA: Uniform Computer Information Transactions Act o §112 provides that a person manifests assent if she intentionally engages in conduct or makes statements w/ reason to know that the other party may infer from the conduct or statement that the person assents.] o Issue: is D bound by the limiting language. Verio Inc. no knowledge that he’d be bound by them? o Holding: 1) Mere act of downloading does not indicate assent (thus.  Not very “new age” o §14 an electronic agent is an agent and can bind its master. o Holding: D’s argument fails due to the multiple.  Second point is inconsistent with Hill. These cases illustrate the need for careful counsel to clients who want to be sure that their proposed terms are accepted o ABA Working Group on Electronic Contracting Practices—provides techniques like requiring the user to click an acceptance of terms before having access to the product  To offer a “click-wrap” agreement rather than a “browse-wrap” • • • 14 . 2) Mild “please review” language is insufficient to put a user on notice that acceptance of the terms is a condition of the offer nor that he will be bound. which suggests that individuals can be placed on constructive notice of additional terms. repeated queries. Think of apple stand and free apples  R.com v.2d §69 provides that an offeree who takes an offered benefit w/knowledge of the offer’s terms accepts those terms. Register. no K). (379) [D obtains “WHOIS” info about domain name registrants from P’s database using robot and solicits thru direct mail and telephone • P seeks to enjoin D based on limitation which appears w/the info produced after each WHOIS query.Barry Adler Contracts Fall 2010 o Does the “utility of standardization” principle embodied in R.

Otterbein Univ. or simply a signed writing o The importance of exchange to economic development—Smith essays  But bargains often go beyond business • Via UCC §2-205. can be revoked at any time prior to delivery of the gift. consideration) (R. it is an exception to the consideration req. evidence that abstinence was actually in response (no inherent teetotaler) to uncle’s offer. motivating factors) were such that the law wished to enforce the promise—Simpson Essay o Over time. Sidway (622) [Uncle promises nephew $5k to stop drinking and gambling • Enforced] o D-estate arg: the K was without consideration because the nephew was not harmed.2d §79: consideration requires no advantage to the promisor or detriment to the promisee. as it freq. or equivalence in the values exchanged. • R. it doesn’t need consideration to be binding o Via UCC §2-209no consideration is needed for a modification to a K Johnson v.Barry Adler Contracts Fall 2010 Consideration Doctrine • Historically. • ∏ justification: uncertain o Solemnity and indication of intent to be bound to a promise?  But there are good substitues: the seal.2d §§ 1.e. But court points to nephew’s previous engagement in the bad behavior as evidence that this isn’t a “sham consideration. does. the term “consideration” has taken on a more narrow. but benefited.  P was not induced to act b/c they have to pay their debts anyway! Making it a “condition” ≠ bargained for exchange • But this test is misleading: Johnson might argue intrinsic value to U paying its debt (something he could not have done unilaterally) and that it resisted o These facts are unlikely Hamer v. not every promise was enforced o Question of whether a promise is “supported by consideration” was simply a matter of whether the circumstances surrounding the promise (i. 18…71: “performance or return promise…sought by the promisor in exchange for his promise and…given by the promisee in exchange for the promise” o If the law enforces a promise w/o a bargain. specific meaning  Now “consideration” = “a bargained-for-exchange” aka quid pro quo • See R.] o Holding: No consideration.e. 3. no consideration  Otterbein test [apparently] rejected. and insists that unless the promisor was benefited. an executory K to give is w/o consideration.2d §81) o The fact that the uncle might have made a gift in the absence of a bargain is irrelevant • • 15 . 17. only an actual bargain is necessary • Motive for making a bargain is irrelevant to whether there was a bargain (i. In general. and a promise to make a gift.” Also. in the context where a merchant makes a firm offer. that is the nominal promise to give $ for compliance. (620) [P signs instrument promising to pay $100 w/ interest to satisfy indebtedness of the D • D accepts.

such to the Good Samaritan. “It is enough that something is promised.e. the promise reinforces a claim for a quasi-contractual obligation. although there was no original duty or liability. lacks support of a past bargain or quasi contract and is either unenforceable (as in Mills) or enforceable under a broader doctrine of “moral consideration.] • Holding: A moral obligation is sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit o Well settled that a moral obligation is a sufficient consideration to support subsequent promise to pay where the promisor has received a material benefit. o Quasi-K obligation 16 . Not enforced. • R. Enforced.Barry Adler Contracts Fall 2010 o Holding: the nephew had a legal right to engage in the contractually prohibited behavior and that his abstention from doing so amount to a bargained for exchange. McGowin (649) [Worker injures himself to protect coworker. debtor promises to repay creditor. McGowin. but not an adult son. McGowin o This is an exception to the requirement of past bargain-for-exchange consideration  Mills v.  Webb v. Wyman (640) [D’s adult son falls ill in foreign city. done.” Material benefit may be a factor but not necessarily.] • Does D have moral obligation to pay for adult son’s medical expenses? • Holding: there is no consideration. o Rule is tightened to include only cases where at some time or other a good or valuable consideration has existed (i.) o Father may have general moral obligation to pay for infant’s debt. Webb v. coworker promises to compensate him for the injuries. or forbearance of a right will be sufficient to sustain a promise’” PAST OR MORAL CONSIDERATION  3 Scenarios o Moral Obligation for Previous Legal Obligation: SoL runs on debt. and where there is no opportunity to bargain. to Mills]  A promise made after the receipt of a gift. [BUT cf. some prior legal or equitable obligation that has become unenforceable for some reason.2d §86 (2)(a): A promise made in recognition of a benefit previously received…is not binding if the promisee conferred a benefit as a gift or…the promisor has not been unjustly enriched” • Quasi-Contractual Obligation: When a promisee has conferred a benefit not gratuitously.  Court says. Webb v. o Naked Past Moral Consideration: Worker injures himself to protect a coworker. P wants to enforce D’s verbal promise to pay for son’s medical expenses. or suspension. forborne or suffered by the party to whom the promise is made as consideration for the promise made to him’” and “‘In general a waiver of any legal right at the request of another party is a sufficient consideration for a promise’” and “‘Any damage.  Renewal of an obligation discharged by time waives the discharge and enforcement looks back to the origin of the transaction.

If the modification is wrong. Trouble with Stilk/Alaska analysis: Promisors gave up their legal right to breach and to be answerable only in damages when they voluntarily performed.when it makes sense to enforce and not to enforce contract modification?  Taken from view of protecting Captain (extortion victim). Alaska Packers’ Assn. the modification would not have been in bad faith or extortion  Interesting case is the middle ground. demand for increased pay for certainly have been in bad faithextortion  OTOH. Fisherman hypo o Fishermen claim request for higher pay is not extortion but a reasonable reaction to the unanticipated quality of the nets (R2d §89)  Had condition of nets been known to fishermen at the time of K.e. you can make the Captain better off w/o hurting yourself by negotiating (i. This seems like a consideration— employer has bargained for relinquishment of this right and performance on the K. but don’t enforce if otherwise would not have performed. Captain can compensate you and still be made better off with π)    17 . when and under what circumstances would she want her promise of a pay increase to be enforceable and when would she not want it to be enforceable? • **If captain will be awarded fully compensatory damages and fishermen are solvent. So why doesn’t the court think so? (seemingly Holmes would agree) o Answer: Better characterization might be “bad faith” negotiations. Domenico (658) [Fisherman demand higher pay due to what they believe are inferior nets provided by Alaska Packers. it’s because it is extortion.Fishermen encounter an unexpected difficulty in performance of K but are responsible to perform nonetheless (no excuse) o Policy standard.] o Holding: agreement void for want of consideration. This saves Captain from being extorted but also allows him to offer raises or changes if he so fits. b/c sailors agreed to do no more in exchange for the increased pay than the promisor was obligated to do under the original K. had nets been so defective as to provide Fisherman an excuse from performance. (arguably) not due to a lack of consideration o Preferred Rule: Enforce modification if fisherman would have performed anyway.Barry Adler Contracts Fall 2010 EXCEPTION: MODIFICATION AND PREEXISTING DUTY  Stilk v. fishermen might (inefficiently) choose to breach rather than expend the effort (cost) of performance—when there is room for negotiation b/t the captain and the fishermen. has taken an unjustifiable advantage of the necessities of the other party. If no option for a negotiated modification.] o Holding: No valid consideration. v. Myrick (656) [Sailors offered wages of deserters while on roundtrip voyage from London to Baltic. A party who refuses to perform and thereby coerces a promise from the other part to pay increased compensation for that which he is legally bound to do. Captain does not care what the legal rule is because she has no incentive to induce performance of fishermenwill get $ from either fishing or damages (when breach) o Fishermen will not even ask for a raise because they know Captain will not grant • If fishermen are insolvent (most likely in Alaska Packers) and that both parties know the legal rule.

and the 18 .  Fisherman: “I’m being hurt.enforcement when otherwise (w/o modification) fishermen would breach.she makes nothing! • Captain also hurt by rule that says always enforce o Fishermen will always try to get higher pay.could the law instead simply enforce all modifications. so when enforce? • Captain hurt by rule that says never enforcefishermen won’t agree to any modifcation o Will get no damages (insolvent). and induce a concession. All coercive modifications would then be unenforceable. Stump Home Specialties Manufacturing (671)Posner: the sensible course would be to enforce contract modifications (at least if written) regardless of consideration and rely on the defense of duress to prevent abuse.  UCC §2-209: An agreement modifying a contract within this article needs no consideration to be binding.Barry Adler Contracts Fall 2010 o Captain will want the option to make an enforceable promise of a pay increase because she could lose more from breach than pay increase  Factors that will induce fishermen to breach absent a renegotiation option • Initial contract price • Realized cost of performance • Assets subject to liability/damages  So. modification can be good (efficient).2d §89: A promise modifying a duty under a contract not fully performed on either side is binding: o (a) if modification is fair & equitable in view of circumstances not anticipated by parties when K was made. but no enforcement when fishermen would have done work without the price increase • No extortion when fishermen are in distress and it in not in their interest to perform • Caveat to this rule. if defense successful o Consideration is an inadequate safeguard against duress because slight consideration might be enough to enforce a contract but would be consistent with coercion → this must be avoided  R. even when they would be willing to perform w/o an increaseextortion  RULE. no fish are caught. counting on the promisee (Captain) not to make a concession where one isn’t in her interest? o Maybe. but one might worry that a promisor (fisherman) could convince the promisee (captain) that it will not perform despite its incentive to do so. [But the effective use of bad faith to escape performance on the original K is barred. but you are really getting hurt”  Our rule protects promisee from a threat of the promisorThe promisor has no incentive to issue a threat if it knows that any concession by the promisee would be unenforceable  US v.

I’ll do it for nothing” o B declines C’s offer o A’s promise to B will be enforceable b/c he had reason to expect that you would rely on his promise and not hire C  If A refuses or fails to paint B’s house.2d §90-reliance on promise) o A knows that B is debating to hire a contractor (C) who has offered to paint your house for $10k o A tells B: “don’t bother. B accepts anyway o A will not be able to defend a lawsuit brought by B for lack of consideration (to keep the offer open)  A will be estopped from using the defense b/c he had reason to expect A’s commitment to keep the offer open would induce B to decline C’s offer • Will be responsible for at least reliance o NOTE: that if C’s offer was for 10k at T0 and after B (in reliance on A’s promise) declines.) under “equitable estoppel” (although promissory estoppel works well too) 19      . (although not universal) remedy would be reliance damages • NOTE: that C’s offer was for 10k at T0 and after B (in reliance on A’s promise) declines.” EXCEPTION: PROMISSORY ESTOPPEL  R.2d §87 (or UCC §2-205)-reliance on “firm offer”) o If A offers (not promises) to paint B’s house for $7k and says “you have until next week to accept my offer” o In reliance on offer B declines to hire the initial contractor (C) o A then attempts to revoke before B’s acceptance. Scothorn (723) [**Classic estoppel case**P quit job in reliance on her grandfather’s granting of a note payable to her (gratuitous promise) and sued his estate (D) for payment after death] o No consideration b/c quitting work was not a condition of the promise (in fact she later returned to work)—Cf. Otterbein wrt R. if at T1 C’s offer is 12k. w/ Hamer o Gratuitous promise is fully enforced (expectation dam. if at T1 C’s offer is 12k. then B would pay $2k in reliance damages [if it was 10k at T1 $0 in reliance] Promissory Estoppel Hypo II (R. o Good Faith Test among merchants is “observance of reasonable standards of fair dealing in the trade.Barry Adler Contracts Fall 2010 extortion of a “modification” w/o legitimate commercial reason is ineffective as bad faith. then B would pay $2k in reliance damages [if it was 10k at T1 $0 in reliance] See Johnson v.2d §90(2): a charitable subscription is binding under promissory estoppel even w/o demonstrable reliance Rickets v.2d §87(2): “an offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option K to the extent necessary to avoid justice o See also UCC §2-205: “firm offers” do not need consideration to be binding Promissory Estoppel Hypo I (R.2d §90: “a promise which the promisor should reasonably expect to induce action or forbearance on part of the promisee or a third person and which does induce such an action or forbearance is binding if injustice can be avoided by enforcement of the promise” R. B can sue based on promissory estoppel  Std.

one sided)  **∆ b/t (1) and (2) is consideration [(1)-no. a Sub submits a bid to a Contractor.2d §87. before actual acceptance—reliance enforced thru promissory estoppel • Hand (Baird) rejects this idea b/c reasons that D didn’t mean to subject himself to a one-sided obligation • Traynor (Drennan) “embraces” this idea b/c Sub was bound to realize the substantial possibility that Contractor would accept w/in timeframe o *** but the Crt states that Sub “wanted him to” rely on the bid BUT rejects the idea of a Uni-K (confusion!)  If Sub didn’t “get anything” from Contractor’s reliance— promissory estoppel  If Sub does (more likely) get something from Contractor’s reliance—bargain (at least Uni-K). if there interactions were too indefinite to support a K? • Characterization of facts o (1) a K for the franchise w/ terms to be filled in (see Texaco) o (2) D implicitly agreed (K) to cover expenses in case of breakdown in negotiations for a promise of a store 20  . but before Contractor communicates acceptance of Sub’s bid. (2) sold a bakery. in reliance on promise (see R. (2)-yes (at the time of incorporation)] and remedy [(1)-reliance. but PEst provided ground for recovery (reliance)  BUT what did the D promise. yet remedy is under expectation (see below. a store for P for $18k. Promise not enforced o Holding (Drennan) Traynor binds the Sub to its offer. a K (but see Texaco!). (742) and Drennan v.2d §87)  Baird v.Barry Adler Contracts Fall 2010  P changed her position to her disadvantage. K dissolved. but otherwise bound) by Contractor’s use of its bid—Bilateral K • This is a two-way binding K • This makes the most business sense-why would Sub just give Contractor a free option that could be shopped?  Both crts reject the characterization of the Sub’s bid as an accepted offer of any kind Hoffman v. (4) moved and (4) paid rent for another move • P eventually terminated the relationship and sued for reliance] o Holding: Agreement never reached on essential factors necessary to est. (2)-expectation]  (3) The Sub’s bid was an offer to be conditionally accepted (if Contractor didn’t get project. In reliance on the promise. Sub attempts to withdraw its bid. P (1) leased a grocery store. Red Owl (752) [D promised to est. (3) put a down payment on a lot. Gimbel Bros. Promise is enforced under promissory estoppel. No gifts!  (2) The Sub’s bid included an offer of irrevocability in exchange for the Contractor’s use of its bid (tender under §45)—Unilateral Option K • Contractor was free to walk away (still. ultimately incorrect approach—BA) o Characterizations of the facts?  (1) The Sub’s bid was a firm offer (implied timeframe) on which the Contractor relied—see R. Star Paving (745) o In both cases. o Holding: (Baird) Hand the Sub’s bid (an offer) was withdrawn before acceptance (and cannot be accepted). who incorporates Subs bid into Contractor’s own bid for a construction project  Contractor wins job.

Barry Adler Contracts Fall 2010 o (3) No promise (of store!). Dicker (751) [D (dist only and not franchisor) thru conduct induced P (potential franchisee) to incur expenses in preparing to do business under the franchise • D promised that franchise would be granted] o Holding: No K for the franchise.broader than equitable estoppel)  Alt reading: an implicit promise by the dist. No K (to reimburse)NO REMEDY Goodman v.g.’s representations justified a reliance remedy via (equitable estoppel. Drennan and Hoffman. Goodman show that PROMISSORY (& EQUITABLE) ESTOPPEL OUTSIDE OF THE GRATUITOUS PROMISE CONTEXT CONFUSES MORE THAN CLARIFIES SITUATIONS o Maybe there should be a stricter adherence to the consideration doctrine   STATUTE OF FRAUDS • Statute of Fraud—provides that certain agreements are enforceable only if memorialzed in a signed writing o See R. had potential π to gain Baird. but the dist. to cover the would-be franchisee’s expenses—a bargain • Consideration: Dist.2d §110 and UCC §2-201 o Agreements covered under SoF are important ones. E.:  Ks for sale of land  Ks that cannot be performed w/in 1 yr  Ks for the sale of goods above a specified price (UCC §2-201) 21 .

[R. and Undue Influence • • • Void: as if the contract never happened – no party can enforce it Voidable: at least one party has the option to treat the contract as if it never happened. but the D refuses to give her to the P • Trial court enforces K w/ specific performance] o Holding: that surrogate parenting agreements are invalid because they conflict with (1) existing statutes (i. public policy concerns (though this arg. recklessly or negligently • Term exempting from consequences of misrepresentation Shaheen v. if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.  D expressly guaranteed results  Re: damagesto allow the award that P wants would be vs.Barry Adler Contracts Fall 2010 NATURE AND LIMITS OF Ks UNENFORCEABLE PF VALID K’S WRT Public Policy/Legislation • • A promise/term of an agreement is unenforceable on grounds of public policy. custody)  Interference with other protected interests. such as • Commission of a tort • Violation of fiduciary duty • Interfering with contract with another • Term exempting from liability for harm caused intentionally. which if not performed.2d §§ 178-9] • • WRT Capacity. isn’t necc) [R. Matter of Baby M (22) [D. PP (dehumanizing to child) • P should get Benefit of Bargain. and his patient can bargain/K for a particular result. PP] Holding: A Dr.2d §346(1)-injured party has right to damages for any breach unless the claim for damages has been suspended or discharged. can be basis for an action for breach of K. Duress.e. like  Restraint of trade  Impairment of family relations (marriage. forced relinquishment of parental rights absent showing of unfitness) and (2) vs. divorce.2d §178(1)] Reasons for unenforceability based on public policy [R.) to perform vasectomy • P’s wife became pregnant after operation • P sues for the future expenses of raising child • D argues. tried to maintain physical custody of her child after having agreed to give the baby to the bio father and his wife (P) • Baby M is born. party must have the capacity to incur at least a voidable obligation [R. not a valid K b/c vs.2d § 12(1)] 22 . but the contract is valid IF the party doesn’t exercise that option [R. Knight (11) [P K’s with D (Dr. a surrogate mother.2d §179]: o Legislation relevant to such a policy (see Baby M) o The need to protect some aspect of the public welfare. but awarding expenses may overcompensate b/c P gets joy from raising child o R. against paid adoption.2d §7] To be bound.

without knowledge or reason to know of the threat. then the person with the mental illness or defect cannot avoid the contract if this would be unjust (such as where performance has begun) o Infancy [R. o Does NOT matter that the terms of the bargain is fair. which causes him to consent to a transaction through fear. o Mental Illness or Defect (but in the absence of guardianship) [R. [R.2d §13]-NO CAPACITY to incur contractual duties if under guardianship for reason of mental illness or defect  Rationale: adjudication is a public event (assumption that everyone is aware).2d §177] • VOIDABLE by victim if the persuader is a party to the contract.2d §14]-Minors (<18) incur ONLY VOIDABLE duties (unless statute provides otherwise)  No excuse for lack of knowledge • Rationale: probably because being young is something that should be easily observable  Some states opt out w/ statute (e.2d §12: categories of potential incapacities to K fully: o Guardianship [R. or relatives.2d §175] o An improper threat includes a threat [R. or property.2d §174].g. and provides value under the contract or materially relies on the victim’s promise [R. if a K is made on fair terms and the other party is unaware of the person’s mental difficulty.Barry Adler Contracts Fall 2010 Incapacity • R.2d §177(2)(3)] 23 . [R.e. OR  (b) he is unable to act reasonably in relation to the transaction  Secret intoxication offers no shield Duress and Improper Threat • Duress: “unlawful confinement of another’s person. the guardian maintains control.2d §15]-A mentally ill person who’s unable to understand the nature and consequences of a transaction can incur ONLY VOIDABLE duties  HOWEVER.2d §16]-A person incurs ONLY VOIDABLE contractual by entering into a transaction if the other party has reason to know that by reason of intoxication:  (a) he is unable to understand in a reasonable manner the nature and consequences of the transaction. for performers) o Intoxication [R.2d §176]:  To commit a crime to tort. o Does NOT matter that the counterparty is aware of the duress (study guide) • Improper threat: Duress by improper threat renders a contract VOIDABLE by the victim unless the other party acts in good faith. or to otherwise act in bad faith  Of criminal prosecution (even if for a crime that was actually committed)  To achieve an unfair exchange where the threatened act would harm the victim but would not benefit the party making the threat (i. but NOT if the persuader is a third party and the contracting party acts in good faith.” o If physically compelled (duress). no contract formed—VOID [R. blackmail) Undue Influence Unfair persuasion of a party over who is under the dominion of the persuader. OR believes that the persuader has a fiduciary resp.

hard to decide where persuasion has “overblown normal banks/become oppressive waters”  “Excessive strength” factors • Unusual place/inappropriate time • Insistence on immediate decision • Emphasis on consequence of delay • Use of multiple persuaders vs. and (2) an “application of excessive strength against a subservient object” (i. The hospital accepts and the tanker delivers. The water tanker sues. (1025) [D. we don’t want to live in a society where individuals exploit dire situations of others • Cf dragnet clause in Williams WRT Unconscionability Definitions • Unconscionability is a hybrid between unenforceability because of (1) substance (Shaheen. agrees in a form k to a dragnet clause (cross-collateral clause) for furniture purchased on credit • clause difficult to understand and educational dynamics of D at play • after a payment default. a guardian). Baby M) and (2) process (duress. is valid because the emp took advantage of his “weakness of mind”  Two elements of undue influence: (1) “lessened capacity of the object to make free contract” (i. or it may enforce the remainder of the K w/o the unconscionable clause. the term is not part of the agreement” [R. undue influence. one • Absent counsel and no time to consult • Undue influence: New Orleans water hypo o A hospital in New Orleans is cut off from water post-Katrina. Walker-Thomas Furniture Co. a poor customer. still on table] o Holding: undue infl. undue infl. teacher. but later the hospital refuses to pay the $100/gallon and instead offers to pay market price. stupid” o See Carnival and Caspi • BA: unconscionability is a fall-back for courts when duress and undue influence don’t apply but the contract just “smells wrong” • Williams v. duress or undue influence)  Incentive effects for tanker. however. Bloomfield School District (1012) [P. A water tanker comes by and offers water for $100/gallon. position of pwr) • when no direct duty owed (employer vs.  Best analyzed as a case of diminished capacity to choose (rather than econ.2d § 208 Comment B. P. sought to 24 . arrested for homosexual activity • principal/super got him to resign from position • P sought to recind his resignation on basis that is was procured as a result of duress.e.2d §208] o “It is possible for a contract to be oppressive… even though there is no weakness in the bargaining process. Odorizzi) of promise formation o ∏: prevention of oppression and unfair surprise [R. fraud.e. UCC §2-302 Comment 1] • “the court may refuse to enforce the K. retailer. or may ltd the unconscionable term” [UCC §2-302] o Same sentiment in [R. undue influence and mistake • Crt finds no duress or menace.2d §211(3)] o Form Ks are an efficient means of doing business with a large group of people o BA: reflected in $-“it’s the price.Barry Adler Contracts Fall 2010 • Odorizzi v.” [R. weakness of mind).2d §208 Comment C] • Form Ks: “where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term.

L. protection in the form of these clauses • Cf. sought to file suit in WA for a injury sustained on D’s cruise • D had a forum-selection clause contained in ticket] o Holding: A non-negotiated forum-selection clause contained in a standard contract (Form K) is enforceable where the court determines it meets the requirements of fairness. Microsoft Network. (453) [P claimed that the forum-selection clause in the online subscriber agreement with D.  Term was reasonable/presumably reflected in the price of ticket (presuming a mkt) • Pro-seller term might be good for buyer because it lowers the price • Caspi v.C. choice o Consequences of stricking down a pro-seller term?  Increased prices (if you assume a functioning mkt) • Seller is taking risk by selling to this market. with New Orlean’s hypo • Seller may disappear from mkt • Carnival Cruise Lines v. Shute (445) [P.” • Unfair surprise-lack of edu may have played role in lack of understanding  Worries about paternalism : Crt making value judgment on how D can spend money/what she needs or doesn’t need • This issue also goes to buyer’s ltd.L. online provider. was ineffective b/c it lacked adequate clarity and notice] o Holding: a contracting party may be bound by the terms of a form K even if he or she has never read it  Only if the clause was a result of fraud or overweening bargaining pwr would the clause be invalidated in NJ  Caspi was free to scroll thru to read before agreeing 25 . purchased by D] o Holding: The defense of unconscionability to action on a K is judicially recognized  “Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.Barry Adler Contracts Fall 2010 replevy all goods prev.

but more often on Thursdays  On each Thursday delivery. the restaurant expresses a desire for deliveries no later than Wednesday. the restaurant tells the farmer that the K is over.2d §201(3)--“failure of mutual assent” • Likely not to be the case in a situation where there is an objective meaning to the term.Barry Adler Contracts Fall 2010 Interpreting the Agreement • • • We now turn to the question of how we interpret the words that form the basis of an agreement R. Person A believes that “$10k” actually means “$20k” and Person B believes that it means “$5k”  No “failure of mutual assent” in this case b/c “$10k” is objective HIERARCHY OF INTERPRETATION • • Situation: each party attaches different meanings to an (objectively) ambiguous term.2d §201 addresses the question of whose meaning prevails when a term is subject to multiple meanings  R. while mkt value for Buick is $8k  Contract? If so. for which car? • Adler’s love for the Replicar suggests that he meant to sell the Buick. it is interpreted in accordance w/ that meaning” but adds. Unbeknownst to each other.. that “technical terms and words of art are given their technical meaning when used in a transaction w/in their technical field”  Does “mid-week” have a generally accepted meaning. and neither party had info that would make the other’s subjective meaning relevant Hierarchy Illustration: Dairy Farmer Delivery Hypo o A dairy farmer agrees to make a weekly delivery of butter to a restaurant  Each delivery to occur “no later than mid-week” o The K is supposed to run for 1 yr o During the 1st 6mos of the K. and I know that: • He owns a Buick and a Replicar • He loves his Replcar • He is financially distressed  At lunch. o The farmer and restaurant sue one another for breach and dispute the meaning of “mid-week” o R.2d §202 provides “where language has a generally prevailing meaning. but his financial distress suggest that he means the Replicar  Likely no K via R.g.2d §201(2)The meaning attached by a party w/ no knowledge or reason to know of another’s meaning cntrls over the meaning attached by a party with knowledge or reason to know another’s meaning • Subjective meaning does not matter otherwise o Adler Car Sale Hypo  Adler and I are buddies.2d §200 provides that “interpretation of a promise or agreement or a term thereof is the ascertainment of its meaning” The role of subjectivity o R. or is it a technical meaning 26 . but accepts each Thurs. o E. the farmer delivers the butter sometimes on Wednesdays. delivery after farmer apologizes o After a Thurs delivery on the 7th month. he offers “I’ll sell you my ‘car’ for $10k” • I accept on the spot  The mkt value of the Replicar is $12k. among other things.

weeks missed deliver. Argued that selection of ship represents a gamble on arrival time that would be reflected in the price (speculation) o The seller here (P) had a “winning” K (the price of cotton had dropped). were the rule in Bush different? • Seller could have stipulated that he did breach K in October [as D argued] and sued for the negative damages as a result of the falling prices b/t Oct and Dec (and thus savings to D). delivery as a breach by farmer. which provide that acceptance of performance “w/o objection” is given interpretive weight o (3) Course of dealings o (4) Usage of trade • Raffles v. but seller (P) tenders no cotton • Peerless (Dec) arrives later w/ cotton that seller tenders to buyer (D) • buyer refuses cotton. claiming K was for earlier ship] o Holding: crt finds no basis to resolve the dispute and concludes that there is no K  Industry analysis at timeguidance on what parties should be deemed to have meant • Gilmore: concludes that it is not relevant to the K whether the cotton was on Peerles (Oct) or Peerless (Dec) o The term “to arrive ex Peerless” was a term provided by seller in case ship was lost in voyage. o Cf. but the restaurant should have made it clear after every deliver/waiver that it reserved the right to treat the nxt Thurs. but—depending on how the restaurant stated its “preference” for earlier deliveries after each Thurs. delivery—not necessarily as to interpretation or modification o The restaurant will arg: that it did waive ea. UCC §2-208(1) and R. shipment (via the 27 . the farmer delivered butter on Thurs and the restaurant accepted delivery • UCC §2-208(3) provides that “course of performance shall be be relevant to show a waiver or modification of any term inconsistent with such course of performance” o Does this help the dairy farmer?  Yes as to waiver of “mid-week” term. o Seller should have been able to benefit (at least) from what turned out to be the shipment most favorable to Buyer [Peerless (Dec)]  How might Seller (P) have benefited here. would give incentives to D to take Dec.2d §202(4). but that it didn’t constitute a modification. Wichelhaus (396) [K for cotton to be delivered on the ship “Peerless” • 2 ships named “Peerless” • Peerless (Oct) arrives. and thus voided the K (ltd damages paid by seller) • Simpson: disagrees w/ Gilmore. there is a relevant course of performance: for 6mos.Barry Adler Contracts Fall 2010 w/in the relevant industry? • UCC §§ 1-205 and 2-208 put the following interpretive factors in an order of importance o (1) Express terms o (2) Course of performance  In this hypo. o If permitted.

o OTOH: language barrier may have made this expectation unreasonable GAP FILLING • Some crts try harder than those of Raffles and Oswald to find a K o Frigailment Importing v. • An express term that can’t be interpreted reliably.  Default rule: a gap is filled with a term that “is reasonable in the circumstances” 28 • .Barry Adler Contracts Fall 2010 K)  If price had risen b/t Oct and Dec: • Buyer would have accepted cotton on Peerless (Dec) [winning K]. both an implied-in-fact and an implied-in-law determination will typically turn on an inquiry into what reasonable parties would have wanted under the conditions the parties encountered. actual Raffles w/ a version of the case where no ship (or date of sail) is mentioned (pure interpretation issue. damages based on Oct breach (in Dec) and accepting delivery on loosing K in Dec. may justify negation of a K even where a K w/ a gap would be enforced o Cf. one might have expected a convo re: those coins. no breach b/c Seller was ready to tender in Dec  If price had fallen b/t Oct and Dec: • In Dec: if Buyer claims Oct. breach by Seller. which was suitable for stewing only]  Holding: where extrinsic evidence revealed no clear basis for interpretation. where the parties are free to choose the contractual term. albeit implicitly. BNS Corp (unassigned) [P ordered large quantity of chicken from D • P intended to buy ‘young’ chicken used for broiling. have agree to o (2) “implied-in-law” terms: are thought to be imposed on parties w/o their consent  As a practical matter. etc. and will take in Dec (after speculating on rising price) • But no NEGATIVE DAMAGES via Bush! • Oswald v. he would have to pay negative damages o Would be indifferent b/t paying neg. filling a gap) Traditionally two forms of judicial gap filling: o (1) “implied-in-fact” terms: those that the parties actually. but D assumed older chicken. vs. if the collection was really to include all coins including the “Rarity” coins. raise the question of gap filling and whether “interpretation” and “gap filling” can be distinguished meaningfully  A term that needs interpretation may signal greater importance to the parties than does gap filling. the P had “the burden of showing the ‘chicken’ was used in the narrower rather than broader context” • But no basis is offered for the choice of “broader sense” as the default o Firgailment. Allen (407) [Sale $50k of “Swiss Coins” agreed to in back of car • Seller (D) (says she) meant a subset of rare coins shown that were from Switzerland • Buyer (P) (says he) understood deal for all coins including those from “Rarity Coin Collection”] o Holding: Applies Raffles rule”no sensible basis for choosing b/t conflicting understandings”  BA—necessarily the case? • On the seller’s purported understanding.

that the agreement was lacking as far as essential terms o The crt held that a jury was free to decide the gaps to be filled o Can Texaco and Sun be reconciled?  Arguably. good faith requirement in UCC §2-306 and output Ks • Sun Printing v. Remington (422) [Sun Printing (P) agrees to buy paper (1k tons/mo for 1st 4 months and 16k in all) from Remington (D) • payment to be made on 20th of each mo • for balance (after 4 mos) the price of paper and length of term when price applied “shall be agreed upon” capped by a Canadian index for large consumers • after 4 mos. you still need to know how long it would apply (and is not specified o Holding: that b/c the parties gave the crt no guidance on the term for which the price was to apply. the crt should have found a way to fill the gap on the term of P’s option—a year. determining payment process. • Even if you determine a price. o Can you define for P the terms of an option that might have persuaded the crt to rule in its favor?  BA—P might have claimed an option to buy paper at the Canadian index price at successive terms set by D • In Texaco v. Pennzoil P arg.2d §34. industry stds can be used to determine certain terms (e. or as too indefinite to enforce.2d §204) • You can K around default rules! • Does having a default rule encourage parties to be more explicit? Thus. etc). a ∆ b/t implied in law and fact?  Mandatory (immutable) rule: may not be varied by consent and will override any express clause to the contrary • e. or penalties. but not quantity (of shares) as applied to a stated price • There is a reference point thru industry standards Illusory Promises • Sometimes agreements are attacked as illusory or as lacking mutuality.Barry Adler Contracts Fall 2010 (R.  The crt might have provided for a term on Sun’s option—particularly given the quantity total in agreement—as P contended • BUT the crt held that there was no agreement to grant such an option  The crt accepts that P might have prevailed had it provided evidence that the Canadian index price was fixed for a year at a time (rendering irrelevant the interval for the option!) o Dissent: the parties expressed a clear intent to be bound. which provides that the “terms of a K may be reasonably certain even though it empowers one or both parties to make a selection of terms in the course of performance”  P’s option would be part of a barained-for-exchange b/c P is bound for the 1st 4 mos of the K o D’s arg: the seller and buyer left the price to be paid and the length of time during which the price would apply open  Agreement to one would be insufficient for K w/o the other.g. the crt had no basis on which to calculate remedy for breachno K beyond the 4 mos. mo-to-mo. despite the 16k total quantity bargained for. or a match to the term of the Canadian index  The “rule of reason” permits the crt to enforce a K here. 29 .g. D repudiates] o P’s arg: supported by R.

o Both parties are bound to carry the K out in good faith  i. (429) [US Radiator (D) agreed to provide (at a specified price) NY Central Iron Works (P) with its “entire radiator needs for the yr” • P agreed to purchase exclusively from D • D refused to fill excess demand]  D’s arg: an implicit term of the agreement ltd the quantity “to an amt such as had been called for in previous yrs of similar dealings b/t the parties”  Holding: The crt denied this arg b/c P’s needs could be “indefinitely enlarged” when mkt conditions allowed it to undercut competitors • It did not mean to imply that P had the right under the K to order goods at any amt. are permitted even when the variation may be such as to result in discontinuance. do). o Wood v. lacking in mutuality. impermissibly indefinite.e.  Would P—not a speculator—have prevailed under UCC §2-306? • Even if P’s demand were in “good faith” it likely would be disqualified as a “quantity unreasonably disproportionate to any stated estimate or in the absence of such estimate to any normal or otherwise comparable prior… requirements” o There would be a K. invoking a mandatory duty of good faith or a statutory requirement o New York Central Iron Works v. US Radiator Co. etc. was a promise you use reasonable efforts to bring π and revenue into existence • “Best efforts” default rule under UCC §2-306(2) • This imputed obligation of reasonable efforts saves K from lack of mutuality. K. sues for performance]  Holding: P’s promise to pay Lucy ½ π resulting from sale. Lucy (434) [**Cardozo** P given exclusive agency on placement of D’s design • when P learns that D was placing products outside of their agmt. but parties might prefer to bet on mkts and inherent constraints rather than a later determination of what is “in good faith” or “unreasonably disproportionate” o UCC §2-306 (Comment 2): “…good faith variations from prior req. K w/ a speculator is one sided in a way that such a K is not with an inherently constrained operating business • A speculator’s req. and to render accounts monthly. and D is bound o This is arguably the case b/c the obligation is only to expend 30 .”  Imagine that you are req. etc. A shutdown by a requirement buyer for lack of orders might be permissible when a shutdown merely to curtail losses would not.Barry Adler Contracts Fall 2010 o A requirements or output K represents such an agreement. but the quantity would be ltd • The UCC drafters may have provided the best default rule for an output or req. could not use K to speculate • A req. obligation is truly illusory. buyer w/ competitors who buy supplies at costs below yours  If you shut down b/c you have no demand for your product. is this b/c you “lack orders” at a price that allows you to cover your costs or b/c you choose a price to “curtail losses” (max π in the circumstances)? • Hard to say. which can be recharacterized as one with a gap—regarding one party’s obligation—that crts can fill if they choose (and freq.

maybe not.2d §214: “agreements and negotiations prior to or contemporaneous with the adoption of the writing are admissible in evidence to establish (a) that a writing is not an integrated agreement”. in Wood. (2) a partially integrated agreement is one “other than a completely integrated agreement”  UCC §2-202—uses “final expression of agreement” instead of “integrated agreement” and “complete and exclusive statement of the terms of the agreement” instead of “completely integrated agreement”  How to determine if “completely integrated”? • Merger clause—bars use of EE by explicitly stating that agreement is final & conclusive expression of all agreements b/t the parties and discharges all others.2d §205 and UCC §1-203 o But “good faith” and “reasonableness” are not necessarily synonymous  Perhaps good faith should=no more than doing what one has promised to do NY Central Iron and Wood are cases where the crts should perhaps not be so sure parties intended to impose a binding obligation of reasonable conduct o Thought . or (b) “that the integrated agreement. absent an imputed duty. courts will sometimes hear EE to determine whether agreement was final & conclusive. If no merger clause.2d §216(2): An agreement is not completely integrated if the writing omits a consistent additional agreed term which is (a) agreed to for separate consideration. is it a “completely” or “partially” integrated agreement?  R. as the parties may have wanted to rely on P’s incentives rather than on an enforceable obligation Gap Filling and Good Faith • An obligation of good faith is a mandatory rule o See R.Barry Adler Contracts Fall 2010 reasonable efforts  However. (b) such a term as in the circumstances might naturally be omitted from the writing  Implication: an agreement is completely integrated WRT an additional outside term if that term would not under the circumstances naturally be omitted from the writing  If agreement is completely/partially integrated? • Parol evidence rule (R.2d §213/UCC §2-202): a writing that is a final expression of an agreement discharges any prior (or contemporaneous oral) agreements that conflicts w/ the writing or that adds a term within the scope of a comprehensive portion of the writing o Underlying principle (∏): a final writing is the best evidence of an agreement’s terms 31 . • R. is completely or partially integrated”IMPLICATION of §216 o R. if any. one might worry abt the satisfaction of the consideration doctrine.2d §210 (1) a completely integrated agreement is one adopted by parties “as a complete and exclusive statement of the terms of the agreement. • EXTRINSIC EVIDENCE Extrinsic evidence=reference to circumstances beyond the “four corners” of an agreement TEST-When to admit EE? • 1st question: Is the agreement an “integrated agreement”? [R.2d §209 (1): writing constituting a final expression of one or more terms of an agreement] o If yes.

The dispute over the furniture did not contradict anything in the writing. must look examine context • Test: In order to determine whether a writing is “reasonably susceptible” to alternative meanings. a court can hear evidence. Quoting Wigmore.  R.W. especially if included w/in price set out in the agreement [§216(2)(a)] o BUT there is also the fact that the seller seemed to wait a long time to claim the furniture o Applying the PER (or any restriction on EE) can have its costs as well as benefits o Holding: It was unclear from the agreement whether it was meant to cover one subject or the entire range of their agreements.  Court takes opposite approach than Thompson. a claim likely enough to be a lie is irrefutably presumed to be a lie. including the object.  To admit evidence on a purported oral warranty as proof that a written sales K was not intended to be comprehensive would be to work in a circle and permit the very evil the rule was designed to prevent. Oliver (489) [Replevin for hotel furniture • P purchased land from D on which stood a hotel • dispute arose as to whether the land sale included the hotel furniture. writing deemed susceptible. if actual.2d §214(c) “agreements and negotiations prior to or contemporaneous with the adoption of the writing are admissible in evidence to establish the meaning of the writing. Thomas (494) [**Traynor**D agreed in writing to remove & replace cover of P’s turbine • P attempts to recover for damage caused by falling cover based on “indemnity clause” in agreement]  D’s arg: the provision applied only to third-party injuries not P’s own property  Holding: EE allowed. G. Libbey (488) [P sold logs to D • terms memorialized in writing • D later claims that the two had agreed orally for warranty of the quality of the logs • D now claims breach of warranty and that he is not required to pay the balance. nature. court must consider evidence including “testimony as to the circumstances surrounding the making of the agreement.2d §216(2): An agreement is not completely integrated if the writing omits a consistent additional agreed term which is (a) agreed to for separate consideration. [see R.] o General Test for whether a writing should exclude a prior or contemporaneous oral agreement is whether such agreement. whether integrated or not” o Yet crts differ on the use of EE even where permitted by rule o Pacific Gas & Electric v. EE as to meaning is admissible. • Nothing in the PER excludes EE in aid of interpretation of a writing o R. then ignore it if the judge concludes that on the balance of the evidence the writing was intended to be comprehensive w/r/t subject matter of such additional terms. complete with regard to the land only.] o Holding: EE is not allowed to determine if an oral warranty was reached. • Brown v. there is no reason for a crt even to admit evidence of a prior conflicting agreement o If no. would naturally have been included in the writing. the writing was therefore only a partial integration.” Then. Rejects “four corners” approach—no matter how plain words look. 32 . if. (b) such a term as in the circumstances might naturally be omitted from the writing • Sale of furniture presumably would have been mentioned. and subject matter of the writing.2d §216(2)(b)]  ∏: to conserve resources and promote certainty. EE was properly allowed (which jury interpreted in favor of P). you can admit the EE for consideration • Thompson v.Barry Adler Contracts Fall 2010  Where a writing is indisputably final.

Barry Adler Contracts Fall 2010 o Trident Center v. even if loan docs had merger clause. justify EE  There are definitely ∆ in degree b/t Traynor and Kozinsky • Who’s right as a matter of ∏? o Traynor’s approach may be more likely to give the parties the K for which they actually bargained—at least if crts are willing to discard ambiguous/suspect EE and revert to the writing—but at the cost of litigation expense and uncertainty that Kozinski’s approach would avoid. and thus blocked by PER??  Given the flexibility of the PER. but likely would have dismissed the case absent proffer of evidence that something truly extraordinary occurred  An Kozinski likely would have found the indemnification clause in Pacific Gas ambiguous. o Traynor (Pacific Gas) v. or more generally the tolerance for EE among some judges. o Illustration  Imagine that in Trident Center the loan agreement recited  CT General’s right to collect 10% prepayment fee if it accelerated the loan on P’s default. Kozinsky (Trident Center)  It seems that Treynor would have invited evidence in Trident Center. T wants out of the agmt • attempts to interpret default clause option for prepayment as permitting prepayment]  Holding: crt prefered not to allow the evidence given the plain and apparent meaning of the clauses. which does not.  Merger clause • Would P be permitted to prove this option via EE? o In this case. citing Pacific Gas. but was silent on whether P had a prepayment option. than Barnhizer suggests • ∆ based on judicial approaches rather the BLL stated. but. Traynor would presumably permit P to present evidence supporting an “interpretation” of the prepayment fee as one that includes an option for P to prepay o Kozinksi would likely see the matter differently —would he see it as an omitted prior agreement that should have been included. which adopts the PER and CISG. 33 . CT General Life (497) [**Kozinsky ** P borrowed $56mm from D in a highly complex loan agmt • agmt provides that P cannot repay loan for 12 yrs • when interest rates plummet. there may be less ∆ b/t the UCC. words have no meaning in CA and thus EE must be allowed (stare decisis).

as efficiency requires • • 34 . V = value to Baker. performance is efficient – society would gain $5  Abel earns P – C = $10 if she performs  Because V – P = . A is better off by $30.$100 (K price) $20 o What will A do?  A will BREACH because it will cost $30 more to perform than to breach.$5. as efficiency requires o Case 2: C = $5.  C = Abel’s cost.  This is efficient (Pareto improvement): B is compensated either way. Efficient Breach Scenarios o Abel agrees to paint Baker’s house. because will lose $50 either way Efficient breach: House Painter Hypo o A agrees to paint B’s house for $100 o A later discovers that it would cost A $150 to do the work o The value of the painted house to B (or the cover price) is $120. o What are B’s damages if A breaches?  Damages (§2-713): $150 (mkt price) -$100 (K price) $50 o What will A do?  A is indifferent to breaching or not.Barry Adler Contracts Fall 2010 Breach EFFICIENT BREACH HYPOTHESIS • Indifference to breach: Bookseller Hypo o A agrees to sell B a rare book for $100 o Later discovers could sell the book for $150 on eBay. P = $15  Because V > C. C = $10. performance is efficient – society would gain $10  Abel earns P – C = $5 if she performs  Abel pays V – P = $5 if she breaches  Abel performs. performance is efficient – society would gain $5  Abel earns P – C = .  These variables could be ordered 6 ways: o Case 1: P = $5. o What are B’s damages if A repudiates?  Damages (§2-712): $120 (cover price) . V = $15  Because V > C. V = $15  Because V > C. P = contract price. Abel pays nothing if she breaches  Abel performs. that is she loses $5 from performance  Abel pays V – P = $10 if she breaches  Abel performs.$5 if she performs. V = $10. P = $10. as efficiency requires o Case 3: C = $5.

that is she loses $5 from performance  Because V – P = . C = $15  Because C > V. P = $15  Because C > V.$10 if she performs. o If A partially breaches.$5 if she performs.” 35 • • • . that is she loses $10 from performance  Abel pays V – P = $5 if she breaches  Abel breaches. Material breach: A breach of a contract’s terms by one party that is so substantial as to relieve the other party form its obligations pursuant thereto. Abel pays nothing if she breaches  Abel would perform. as efficiency requires o Case 6: V = $5. V = $10. • However if no cure. often fill in cost of substitute performance for V PHILOSOPHY OF PROMISE • Charles Fried: a promisor is morally bound to perform because by promising she has intentionally invoked a social convention with a purpose to induce others to expect performance.2d §237: Provides that it is generally “a condition of each party’s remaining duties to render performance to be exchanged under and exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time. nothing else • BREACH AND CONSTRUCTIVE CONDITION • Principle: A determination of the appropriate remedy for a partial breach depends on whether a breach is material or if there is substantial performance. breach is efficient – society would gain $5  Abel earns P – C = $5 if she performs  Because V – P = . don’t always know V. breach is efficient – society would gain $5  Abel earns P – C = . B are not obligated to pay for work under the contract unless A cures (although.$5. Substantial performance: A performance of all the essential obligations pursuant to an agreement. This would seem to be a breakdown of efficient breach theory. if time is important. To approximate.Barry Adler Contracts Fall 2010 o Case 4: P = $5. A’s delay in offering a cure may entirely discharge B of having to pay). C = $10. In other words. B would have to pay restitution (net of any damages that A owes from the breach  If A has substantially performed (the breach is not material) and doesn’t cure. but the efficient outcome will still be achieved because Baker would breach • The reason Case 6 doesn’t come out right is the prohibition on negative damages • • In real life. Abel pays nothing if she breaches  Abel breaches. as efficiency requires o Case 5: V = $5. B is obligated to pay A the contract or market price but B has a claim against A for damages from my breach. o Breach erodes the institution of promising. R.$10. since she gains $5 from performance. contracts operate under imperfect information. P = $10. breach is efficient – society would gain $10  Abel earns P – C = . C = $15  Because C > V. there are 2 possible consequences:  If A’s failure to comply with a contract is a material breach. o Liquidated damages clauses are inconsistent with this value Holmes: a promisor commits either to perform or to pay damages for failure.

return the land to “uniform grade. since breach was not material.000 for the plant and upon removal of gravel. but do not cure the breach?  B still owes $10k on the K.” B is not obligated to pay for the work under the K unless A cures  If A delays in cure—esp if time is of the essence—it may discharge B’s duty to perform under the K  B would have a claim for damages for total breach (see R.” Wunder breaches and Groves sues • At trial Court.  B owes A net $9k • A crt arguably should not lightly determine that a breach is material unless the promisee is at risk of losing the benefit of his bargain. • A promisee w/in reason to believe that the promisor will commit a total breach of the K can demand adequate assurance and treat the promisor as having repudiated the K if such assurance is not forthcoming w/in a reasonable time (R. and B doesn’t claim any idiosyncratic value to the work. while the job as A performed has a mkt value of $7k. in return. John Wunder Co. only after A has completed the job o A paints B’s house. the contractually specified paint job has a mkt value of $8k. but dissent says that their gross negligence was equivalent to willfulness and one might say that their refusal to replace the pipe was willful. since the pipes were the same price.] 36 . • Also.2d §§242. 243) • Assume that at all relevant times. assume that A and B agree to these facts. 250) o UCC §§2-609—2-611: covers the right to adequate assurance of performance and anticipatory repudiation • Jacob & Youngs v.  Also. but B owes $1k (the ∆ b/t the value of the work promised and the value of the work delivered [R.2d §348(2)]. he gets $15.  Court holds that D’s breach was not willful.000. • R.damages are negligible. (929) [Groves sells a plant and leases land to John Wunder who. agrees to pay $105. o What result if A is deemed to be in an uncured material breach that=a total breach?  B owes A nothing on the K (b/c B hasn’t paid A yet)  A owes B nothing on the K b/c B has not been injured by the breach  B owes A $7k in restitution o What result if A substantially performed (no material breach).000 (more than market value of land) but appeals for cost of completion damages— over $60. but uses a lower quality pain than specified in the K o If A’s failure to comply is a “material breach.Barry Adler Contracts Fall 2010 • R2nd §238: Treats obligations to perform simultaneously as conditions for one another. Kent (883)[P refused to make the final payment on a construction contract because Reading pipe was not used throughout the house as contracted for • D refused to rebuild and sued for the rest of the amount owed] o Holding: Court holds that breach was “trivial and innocent” so D substantially performed so P is obligated to pay under the contract. P should recover damages which were the difference between the market and contract price but.2d §241: rough guidelines on materiality including consideration of “the extent to which the injured party will be deprived [by the failure of performance] of the benefit which he reasonably expected” and “the extent to which the injured party can be adequately compensated for the part of the benefit of which he will be deprived. • Breach and Constructive Condition (and Damages) Hypo: o A has agreed to paint B’s house in exchange for $10k  B has agreed to pay.2d §§ 251. • Groves v.

Garland Coal Mining Co. cost of completion is likely incorporated into the contract price. reflecting idiosyncratic value. o Dissent: Unless circumstances have changed since the time of the contract or it has been revealed that there was a mistake in estimation. Garland decides not to restore land and Peevyhouses sue for cost of completion damages of $25. it is reasonable to assume that the parties incorporated the cost of completion into the contract price.Barry Adler Contracts Fall 2010 o Holding: Court holds that because breach was willful and in bad faith. this would give promisee’s a windfall or promisor’s a penalty  inefficient investment 37 .  Distinguishes cases like Jacob and R. if there is no idiosyncratic value. • Peevyhouse v. one way to find appropriate measure of damages as 1) an interpretation of the parties’ implicit bargain and as 2) an accurate measure of true expectation damages: o Cost of completion damages: if no changed circumstances since time of contract. o Market-based damages: if changed circumstances and/or mistake is revealed. groves is entitled to higher cost of completion damages. • So. Peevyhouses leased farm to Garland who agreed to pay for the right to extract coal and would restore the land. Court holds that it is highly unlikely that the ordinary property owner would pay the $29k for repairs to increase value of land by only $300.  Because the Peevyhouses likely attached no idiosyncratic value to the restoration. the promisee would only pay it if there were idiosyncratic value.  So if cost of completion is greater than market value. but this doesn’t seem to be true: why spend 15k to increase land by 10k  Dissent believes that market-based measure for damages would give Groves benefit of his bargain especially since the property was not unique or personal and he was trying to get it in shape for sale. market-based damages of $300 are awarded.2d §348 and says that lower market-based damages would be appropriate only if they reflected economic waste  Court reasons that economic waste occurs when one tears down a good building but not when one restores land to original state. (934) [Similar to Groves. more likely to fulfill the parties’ true bargain • Don’t want to always award cost of completion because. and no mistake in estimation. (Market-based damages would have been $300)] o Holding: Opposite of Groves.000.

Michigan Land and Iron Co. Unilateral Mistake: R2nd §153 Provides that where one party to a contract is mistaken as to “a basic assumption” and the mistake has for him a “material. they refused to deliver the cow because she is worth more and Sherwood brings action of replevin for Rose] o Holding: The seller had the right to refuse because the mistake was not mere quality of the animal but went to the very nature of the thing as a barren cow is substantially a different creature than a breeding one. When they find out that it is really with calf. than mutual mistake. Neither knew what it 38 • • • • • . even though the mistake may have been the actuating motive to the purchaser or seller. Finding oil under land.Barry Adler Contracts Fall 2010 Failure of a Basic Assumption • Two default rules for interpreting a contract: o Treat the silence as the absence of a condition (easier for courts) or o Guess at what the parties likely intended. Boynton [The seller unknowingly sold a diamond to jewelers for $1. or both of them. Nester cut and took away all of the pine but was dissatisfied with the quality and quantity of the timber and demanded that Michigan accept ½ of the contract price. • Exp.” adverse effect on the exchange. o R2nd § 154: A party bears the risk of mistake when the risk “is allocated to him by agreement. [Michigan Land & Iron (D) contracted to sell timber to Nester (P) for $27.” o More like Doctrine of Unconscionability. or in terms of R2nd § 154.000. then there is no contract  But if it be only a differenced in some quality or accident.” when he is unsure of the underlying fact about which he later claims to be mistaken 1) “but treats his limited knowledge as sufficient. the contract is voidable by that party if he does not “bear the risk” under §154 and enforcement would be “unconscionable” or “the other party had reason to know of the mistake or the other party’s fault caused the mistake. o Dissent: What is the distinction between fertile cow (no contract) and a lame horse (contract enforced)? Nester v. Walker [Walker agrees to sell cow to Sherwood for $850.  If the thing actually delivered or received is different in substance from the thing bargained for and intended to be sold. o When a court is trying to decide whether it is “reasonable under the circumstances” to force a party to bear the risk of unilateral mistake. Michigan refused • Nester sued trying to force Michigan to accept ½ of the price claiming that they both overestimated the quality and quantity of the pine. the court may be confronted with a conflict between:  It’s moral judgment of what fairness requires and its  Desire to have contracts law foster productive economic activity. Wood. o A conscious gamble implies that there was no mistake. assuming she’s barren.  Look at the least-cost-avoider (from Torts) Mutual Mistake: R2nd § 152: “Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract is voidable by the adversely affected party unless he bears the risk of the mistake. Sherwood v.” or 2) when the court just plain thinks “it is reasonable in the circumstances” to have him bear the risk.] o Holding: Court thought that parties gambled over quality of pine and held that the original contract should be enforced Wood v.” See Nester. the seller would be denied excuse from performance because he would have “treated his limited knowledge as sufficient. Excused from the contract.the contract is binding.

which ended the War of 1812 and opened the British Market to American Tobacco. • Paradine v. • Hurricane Concert Hypo II o Same facts and A has built shelter o B seeks to avoid the K on the grounds that the storm has destroyed the instruments of the musicians  Making it difficult to put on the concert and make $ o Who is the LCA?  LCA would be lest likely to be able to avoid the K. just frustrating. that B will use for an upcoming concert o The K price=$10k o Prior to concert. • Intervening impracticability (or impossibility): Issue that arises where a subsequent event makes performance difficult (or impossible). Laidlaw’s agent specifically asks if there is any news that will raise the price and Organ is silent. He knew that this would increase the market price so he tried to make a deal with Laidlaw before he found out. his silence (even if strategic) does not necessarily amount to fraud. o Not necessarily harder. o We can look to concept of least-cost avoider  Because A is in the better position to avoid loss from a storm. just mutual mistake. Original contract enforced. See R2nd §161(D). Organ was an arms-length transactor. just pointless to performer.] o Holding: Court holds that they are bound to the original contract. Defendant tried to be excused because he had been ousted from the possession of the premises. making it more expensive for A to construct the shelter as promised o A seeks to avoid the K based on “supervening impracticability” o The storm is not A’s fault. but they refused and she sued] o Holding: Court held that there was no fraud. Organ [Organ had been negotiating with Laidlaw to buy his tobacco. Conscious gamble (both parties) implies no mistake.Barry Adler Contracts Fall 2010 was but once seller found out. Organ was not required to communicate his extra knowledge and since he was not an agent of Laidlaw’s. It was not impossible for him to pay. o Usually when something is more expensive. (Wasn’t there to enjoy land)  Frustration Case] o Holding: Court holds that they are bound to the original contract. then it is less likely that the implicit bargain includes. a hurricane blows through. Jane (England) [Landlord sues for 3 years rent. he may be the leastcost avoider  If A is the LCA. or should include an escuse for the storm (whether or not A’s failure to prevent the costincrease counts as “fault”) • Frustration of purpose: Issue that arises where a subsequent event makes performance less valuable. she wanted to buy it back for $1 + interest. Facts are revealed and Laidlaw seeks to rescind contract. • Laidlaw v. 39 . but was the non-occurrence of its effect was a basic assumption. or harder to execute • Hurricane Concert Hypo I o A agrees to build a band shelter for B. Just because lessee was ousted doesn’t mean that the landlord should have to bear the entire risk of the loss. when Organ learned of the treaty of Ghent.  Court assumed that the seller had better access to information about the stone (although hard to believe since buyer was a jeweler).

Caldwell (England) [Owners of music hall (D) agreed to lease the hall to lessees (P) for a series of concerts. 40 . Krell is suing for balance. Henry [Henry (D) failed to pay the balance of the money owed to Krell (P) pursuant to an agreement to rent his flat in order to view the coronation of Edward VII. lessor would be liable because he was in best position to avoid destruction-by-fire of the music hall. but the hall burned down.  Frustration Case] Holding: Court held that both sides were excused from the contract. due to the cancellation of the ceremony.Barry Adler Contracts Fall 2010 • Taylor v.cost avoider approach.  Impracticability ] o Holding: Court holds that both sides are excused from the contract   This holding might not be right or wrong. • Krell v. but it could also be evaluated under the least. The lessees sued to recover their expenditures for advertising and other preparations for the concert on a breach of contract theory. • Under least-cost avoider.

Reliance damages o Incurred expenses from performing or preparing to perform o Objective: to put the PROMISEE in the position had the promise never been made 3. Baker agrees to paint Abel’s house for $100. Abel finds another painter who charges him $120. $5 sunk cost) MINUS $10 deposit (sunk deposit) • Expectation damages: -$105 MINUS -$140 = $35  R.) o Objective: to put the PROMISOR back in the position had the promise not been made o Used as a remedy for capacity defenses in claims for breach of K Damage calculation • Damage Calculation: House Painting Hypo (Common law) 1. 2. it would have been -$130 instead) o Reliance interest: $5  $5 spent on prepping house before breach • But the $10 deposit might also be considered reliance o Restitution: $10  The $10 spent as deposit • Would likely be returned even if the contract was voided.. profit.2d §347: includes the above calc. etc.Barry Adler Contracts Fall 2010 Damages Remedies are at the heart of what K law is Farnsworth’s Three Damage Interests: Where there is a breach by the PROMISOR: 1. but “wealth w/ breached promise” includes (+) any loss or cost avoided by breech • Ex: in the above hypo. such as if Baker lacked capacity to form K. o Expectation calculation: $35  Formula: WEALTH W/ PERFORMED PROMISE – WEALTH W/ BREACHED PROMISE • Wealth w/ performed promise: o Painted house MINUS $100 contract price MINUS $5 cleaning expense • Wealth w/ breached promise o Painted house (cover) MINUS $120 cover price MINUS $10 cleaning expense (inc.g. Expectation damages o “Benefit of the bargain” o Objective: to put the PROMISEE in the position had the promise been performed 2. When Baker breaches. property improvement. Abel gave him a $10 deposit and spent $5 prepping the house. Restitution damages o Benefit conferred by promisee in performing to promisor (e. if Abel would have avoided $10 in loss with the breach. that would offset the “Wealth w/ Breached Promise” by $10 (i. 3. 41 .e.

and seller didn’t breach in bad faith. UCC §2-713 • Crt holds that §2-713 is the proper method to use o Award ∆ b/t mkt price and K price= $10 per hwt • “the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages… but less expenses saved in consequence of the seller’s breach.”  When SPECIFIC rule (§2-713) vs. Thomas (86) [Tongish agrees to sell seeds to Co-op for $10 per hwt • Co-op agrees to sell seeds to Bambino for $10. (i.55 per hwt  §1-106 vs. Failure to cover does not bar buyer from other remedies • UCC §2-715-Provides for incidental/consequential (and that the seller had reason to know) damages [Retailer can claim $10 in promotions as consequential dam. it discourages breach of Ks • Discouraging breach may not be desirable (see Efficient Breach Hypothesis)  Rational #2: Buyer should get benefit of potential bargain. but nevertheless sues for breach? • UCC §2-713-the measure of damages in this case is the ∆ b/t the mkt price @ the time of breach PLUS incidentals (UCC §2-715) MINUS savings due to breach 6.55 per hwt • Tongish repudiates w/ Co-op and sells seeds to Thomas for $20 per hwt.] 5. Tongish could have resold for mkt price. 3. Victor-seller unable to deliver on raisins to middleman b/c of shortage • CA crt held that if seller knew the buyer had a resale K for the goods.Barry Adler Contracts Fall 2010 • Damage Calculation: Bicycle Hypo (UCC) 1.500 ($10 per wheel)] 1.e. Wholesaler agrees to sell 250 bicycle wheels to Retailer for $100 per wheel. As a result. except that Wholesaler delivers 200/250 wheels before repudiation. Buyer may recover the ∆ b/t cost to cover and K price PLUS incidental/consequential exps (see §2-715) MINUS expenses saved due to breach 3.] o Holding:  Under UCC §1-106: remedies to be liberally administered so that aggrieved party can be made whole as if promised performed • The trial court uses this methodawarded lost profits of $0. 2.allows deduction of damages from price still due (by withholding payment) under K on installment sales w/ partial breach] • Tongish v. rendering worthless $10 of promotional materials. Wholesaler repudiates. then buyer ltd to actual loss under 42 . what would happen to similar relationships in the future?--increased price for those Ks ??  Cf Allied Canners v. Retailer cancels a custom bike sale it had planned. Just before the delivery date under the contract. and assume that Wholesaler sues Retailer for payment on the wheels delivered? • UCC §2-717. What if the facts are the same. Retailer then buys from alt source @ $110 per wheel • UCC §2-712 –“Cover” [Retailer can claim damages $2. What if Retailer declines to purchase substitute wheels. but chose not to)  How can we presume that Bambino had no K right to sue Co-op? (study guide)—no consequential damages awarded in instant case??  If Tongish won. Buyer may make good faith cover for loss from breach (by seller)—see Mitigation 2. GENERAL rule (§1-106)specific wins!  Rational #1: Even though doesn’t reflect actual loss. 4.

OR (2) supposed to have been in the contemplation of both parties.” Limited liability rule: Shipper’s hypo o Players:  Letter carrier (UPS) in competitive mkt (π=$0) w/ clerks who are too unskilled to inspect every package and determine an individual price  Two types of shippers: 1. [see R.2d §351 2(a)-(b)]  This is the DEFAULT rule o ∏: the goal of compensation “is to discriminate between that portion of the loss which must be borne by the offending party and that which must be borne by the sufferer. LIMITATIONS ON DAMAGES Remoteness of Harm (Foreseeability) • • • Almost any damages are literally foreseeable.Barry Adler Contracts Fall 2010 §1-106. insurance) between BB and letters “blended price” (weighted avg. “remoteness” is a better term for the limitation Why not award unforeseeable damages? o Was not a part of bargin. and the special circumstances were here never communicated by P to D. Letter (worth $10)90% of shippers 2. Bearer bonds (BB) (worth $1k)10% of shippers o What if instead of Hadley rule we had an Unlimited Liability Default rule?  Pooling equilibrium – because of the price differential (inc. Give the parties what they bargained for and nothing else R. (3) UCC §2-715—consequential damages (see above) to a buyer that a seller who has reason to know will be the result of her breach Hadley v.] o Holding: P could not recover for lost π b/c the mill’s idleness was not foreseeable. o Hadley rule: the damages from a breached K should be such as may be considered either (1) arising naturally from breach. Baxendale (93) [P’s mill was idled by a broken crankshaft • P hired D’s firm to deliver for a replacement • the shipment was delayed beyond a reasonable time through D’s negligence • P sued D for the lost mill π during the delay.) • Free ride for rare BB shippers • More $$ to pay for more abundant letter shippers  Separating equilibrium – letter shippers would have to differentiate themselves to better inform carriers of the value of their products • • • 43 . by allowing recovery only for loss incurred in reliance in order to avoid disproportionate comp.2d §351: refers to a loss that is “foreseeable as a probable result of a breach” b/c it arises from ordinary course of events (2a) or special circumstances that the breaching party “had reason to know” (2b) o Unforeseeable damages are not recoverable (1) o A crt may ltd damages for foreseeable loss by excluding recovery for loss π. The law in fact aims not at the satisfaction but at a division of the loss. as the probable result of the breach of it. at the time they made the K.

transporter. Com. –wouldn’t it not award b/c the agreement/ins policy wasn’t in writing? Period? 44 . leave the default rule • Hector Martinez v. • Does not take into account depreciation (in the case of a physical asset— maybe not intellectual property) • Morrow v. • D didn’t agree to effectively issue a burglary insurance policy – the promise to notify him of the availability of the boxes ≠ tacit agreement to be liable for as much as $32k o UCC rejects tacit agreement doctrine (§2-715.  Rental rate is an appropriate remedy  BA: the court misses the point of why rental rate is an appropriate remedy• Whether he was going to use. no “insurance” of 32k for box that cost a few hundreds) 1. Foreseeable?—P must prove D’s knowledge that a breach of K will entail special damages to P. the one-month rental value of the machine) • D argued that lost rental value (i. employs Hadley forseeability test • Tacit agreement jx (minority rule)—“has promisior tacitly agreed to liability • Express agreement jx (majority rule BA likes)—“what did the parties actually agree to in the case of breach  Would a crt that rejects tacit agreement test award damages? • Prob. • Sues D.Barry Adler Contracts Fall 2010 o Instead. coin collector.e. just sold) was unforeseeablenot recoverable under the Hadley rule] o Holding: the Hadley rule allowed for recovery of foreseeable damages – not that the damages be the most foreseeable. that it would be rented vs. 2) o Tacit agreement jx vs. and eliminates free-riding shippers of BB • Hadley takeaway: If there are special circumstancesnegotiate. and 2.e. if not. which applies to virtually any use. Southern Pacific Transportation (104) [P’ machinery was delayed in transit. for not informing him of the availability of a safety deposit box. for delay damages (i. Hadley rule)  Pooling equilibrium—letter carrier’s charge $10 (based on most common package)  Separating equilibrium--puts responsibility of declaration of value on the BB shippers to differentiate themselves • More efficient because fewer actual negotiations take place. as it had agreed to do • D knew abt valuable coins • P claims theft was foreseeable] o Holding: Tacit Agreement Test: foreseeable damages not recoverable unless promisor at least tacitly agrees to extended liability (i. robbed. under Limited Liability Default rule (i. Not—amt of insurance policy would have been way higher than just mkt price of box. he sued D. Must appear that D at least tacitly agreed to assume responsibility. rent.e. First National Bank of Hot Spring (109) [P. bank. Express agreement jx  Every jx. or sell the dragline: rental rate is roughly the cost of cover.e.

2d §349).2d §352: Damages are not recoverable for loss beyond amt that can be est. damages.2d §349: As an alt. post-K/pre-breach recoverable o Classic reliance interest • 45 . o P has right to damages for breach [but can be left with only nominal damages if uncertainR. Reed 3. The lost π were not proven w/ suff.2d §352)  But Baker’s $10k wasted promotional expenditure (included in his $60. for a fight • D repudiated.Barry Adler Contracts Fall 2010 Uncertainty of Harm Speculative Damages • R. lawyers) AFTER breach were not recoverable o Incurs exp as his peril—consistent with mitigation doctrine 4. o Would supplement restitution • Abel and Baker Concert Hypo Uncertainty o Abel agrees to sing at Baker’s concert hall for $100k  In reliance: Baker spends $10k in promoting the concert  Before the concert.000 [(200k-150k) +(10k)] o Probable outcome: crt might conclude that the ∆ in revenues b/t the Charley and the Abel concert were too speculative (see R. Abel repudiates o Baker hires Charley instead. fight is then cancelled • P brought suit for damages] o Holding(s): 1. arena.2d §346(2)] • R. to exp. Baker takes in $150k net revenue o Baker sues Abel for breach  Baker believes that the Abel concert $200k in net revenue  Loss from Abel’s breach should be (according to Baker) $60. w/ reasonable certainty.e.000 [$10k + $50k] failed expectation claim) would be awarded here as reliance damages (see R. fighter K’d with the P. Dempsey (112) [D. Exp. incurred (i. and $0 wasn’t w/in range o “What is so special about zero?”—BA o Outlier—modern crts would apply fig w/in range 2. etc. injured party has a right to reliance damages LESS any loss that the breaching party can prove w/ reasonable certainty. certaintyspeculative and NOT awardable o BA: Crt got it wrongthere was a range of π. PRIOR to K not awardable b/c didn’t “flow from”/”result of” breach o Contra Anglia v. for the same $100k  Baker reasonably promotes Charley’s concert with an additional $10k expenditure o At Charley’s concert. Exp. • This is a provable part of exp. Other necessary exp. damages Chicago Coliseum Club v. but after promotional expenditure. to promote fight.

2d §349  Also works as a reliance case. in prep.2d §350: Damages are not recoverable for loss that the injured party could have avoided without undue risk. Mistletoe] o NOT RELIANCE DAMAGEEXPECTATION DAMAGE • Mistletoe Express v. (Cf.e. like cars. burden or humiliation  If you are able to cover but choose not to. Locke (128) [D K’d w/ Locke (P) to perform pickup/delivery services • D terminates K • P sues for recovery • P incurred exp. for movie based on him would be wasted  BA reinterpretation: Crt could look at pre-K exps.--125) [D agreed to perform in movie produced by P • D repudiates K • production is cancelled and P sues D] o Holding: Crt awards claim for pre. he shouldn’t cover o He would gain more by accepting the expectation damages 46 .Barry Adler Contracts Fall 2010 Wasted Expenditures • Anglia Television Ltd. but will only get the $20 • Had a “mitigation opportunity” and lost it • The fact that he values it at $200 (or above $120) is irrelevant o His lost $80 is his own fault • If he valued the house at less than $120. may be recovered (i. v.)  BA reinterpretation: look at as EXPECTATION remedy w/ E(π)=0 • To break even. etc. those that cannot be resold.] o Holding: only unrecoverable reliance exp.and post-K exps. as E(π) =at least $0 (so. Anglia) • D couldn’t prove lost π to get deduction via R. b/c there was a K when expenditures made. Reed (Mr.e. B does not try to “cover” • There is a substitute painter willing to do the same job for $120  By the time that B sues A. (Contra Dempsey)  Crt believed that Reed must have known that exps. damages are what they would have been if promisee did cover (using price of substitute) o ∏: (1) The mitigation doctrine helps prevent waste by giving you an incentive to “cover” with a substitute + (2) w/o it. customers might have to pay more in preemptive charges that sellers would impose“It’s the price. Brady) (Eng. o R. broken even) [Cf. no longer values at $200 (no more wedding)  B demands $100 • Personal π of ($200-$100)  B will not get the $100. E(π)=0) • No evidence of what π would beassumes $0 π (i. awarded pre-K exp. Avoidability of Harm (Mitigation Obligation) • Mitigation: A P’s implied obligation [“mitigation obligation”] to reduce the damages incurred by taking reasonable steps to prevent additional injury [“mitigation opportunity”]. stupid” o Mitigation Illustration  A agrees to paint B’s house for $100 • B values a painted house at $200 (due to wedding)  After A breaches. machines.

the promisee would have a mitigation obligation to cover (with the painter w/ costs =$120) • Expectation damages w/mitigation=$20  Promisor would SAVE $50. Luten Bridge (1929) [The county. may be able to negotiate on a release price somewhere b/t $20 and $50. D. o Mitigation obligation ensures this efficient result  If promisor breaches. $75  Baker builds first section ($75)Abel repudiates  Baker continues to build entire wall and sues Abel for $200  Crt: Baker gets the $75 from 1st section and $50 π ($200-150)=$125 Mitigation and Efficient Breach • Mitigation & Efficient Breach Hypo o Assume that:  K price=$100  Promisor (painter) costs=$150  Competition costs=$120 o It would be efficient for orig. muni. BUT  Transaction costs  Promisee may be overcompensated  Mitigation obligation allows unilateral termination ending in efficient nonperformance 47 . promisor to breach (where there is someone who could do the job for less)  If the promisor didn’t breach. board repudiated project in the middle of construction • P cont’d to build until complete] o Holding: After repudiation of performance by one party to a K. K’d w/ P for construction of a bridge • After political struggle. the other party can’t continue to perform and the collect damages based on full performance  Stopping work in this case is not burdensome (via R. there would be a $30 loss to society (Promisor. and only have to PAY $20incentives against inefficient performance o W/o mitigation obligation. could have saved 50 and lost only 20) • This is especially so if the competition’s “costs” include “economic rent” and the true costs are even less.2d §350) • Contra Parker  P could have claimed the work done up until time of breach in restitution o Luten Bridge Hypo  Abel agrees to K w/ Baker to build wall for $200  Wall to be built in 2 sections.Barry Adler Contracts Fall 2010 • Rockingham County v. ea.

just loss of leisure) • Net personal π = $500k  D’s π from Movie B w/ P in it would have been $750k  P declines Movie B • Efficient? o NO. genres. location. she would have created $750k in wealth (for D) at a cost of $250k to her. Big Man (Western) instead • D’s clause: “[D’s] sole obligation…being to pay you the guaranteed compensation herein provided for” • P rejects movie and sues for full compensation] o Crt decides this case on mitigation and not on the guaranteed compensation clause  Clause: Seems to protect D from consequential damages (e. • Not all inferiority NEED be an excuse for not taking substitute opportunity o Parker Hypo  P was to receive $750k for Movie A.$250k damages) • What should her damages be? o $250k (not $750k)  Would induce her to accept (in which case she would get the $250k + 750k salary) o Practical impediment: via holding in case.2d §350(1)] • Parker v. to the orig. injury to MacLaine’s career) • “Paid to play” clause  **is it important that the breaching party in this case “covered”?** o D’s arg: Movies are fairly identical31/34 K provisions are the same for the movie. Taking on the movie would be “burdensome” o Holding: crt held that D.  Dissent: questions whether different/inferior necessarily means that differences are considered unduly risky. w/ a $250k net cost (no joy. P gets $750k whether or not she accepts Movie B (P might have feared that accepting Movie B would be a settlement for only $750k)  Would induce to reject Movie B • Workaround: if she could conditionally accept on basis of damages/negotiationmovie could get made  This analysis falls apart if the net cost to P is > $750k—the π to D when movie is made (i. $500k personal π) o D would then make $500K ($750k π . burden or humiliation”) o P’s arg: The movies are in no way substitutable: diff. burdensome. • P could be made whole by an increase in salary to $1MM (leads to orig. or humiliating. Twentieth Century Fox (142) [P (actress) sued D (studio) for damages resulting from D. If P had made movie.e. and compensation is the same (goes to “undue risk.g.Barry Adler Contracts Fall 2010 Mitigation and “Burdensome” Cover [R. it really would be “unduly burdensome” and D would not be able to compensate if movie is made  You could also negotiate and P would end up somewhere b/t $1MM (w/ $250k and 48 . Lost opportunity to bargain. failed to show that other movie was comparable. etc. or substantially similar. The substitute movie was “diff. then repudiated and offered her a role in Big Country. movie. reputational harm is astronomical) • In this case. and inferior” to the orig.s breach of an employment K w/ her • D offered P a role in Bloomer Girl (feminist musical). w/ a $0 net cost (joy=loss of leisure) • Net personal π =$750k  P would receive $750k for Movie B.

and can recover the ∆ b/t the resale price and the K price PLUS incidental damages (§2-710) MINUS cost savings due to breach  Incidental damages (§2-710)=any commercially reasonable charges… • Omission of “consequential damages”**is this that asymmetry?** o Rare Coin Shipper Hypo (UCC §§ 2-706. 2-710)  Jan. box)-$50 (shipping savings)  $875 o **key question: was the seller going to pay the shipping costs. allows a seller to resale goods in good faith to another.499MM (where D’s π would be barley positive. 1: buyer agrees to buy rare coin for $10k • Seller obliged to ship coins in 4 weeks • Seller pays $100 shipping deposit on D1  Jan 8: buyer repudiates. but positive) Mitigation and Buyer Breach/Seller’s Remedy • Goods w/o mkt price @ resale: o UCC §2-706: in case of buyer breach. which measures mkt price at time of repudiation o BA: @ time of performance approach is more sensible o Mkt price at repudiation leads to systematic overcompensation of seller when buyer breaches  Math: • K price=$75 • T0 (repudiation)-§2-713 mkt price=$100 • T1 (performance)-§2-708 E(mkt price)=$100 [.5(150-75) + .50 o . if there had been no breach? If yes.5 (50)] • Damages w/ §2-713 (mkt price @ rep. seller begins search for replacement buyer  Jan 22 (2 wks later): Seller finds alt buyer willing to pay $9k • Alt buyer lives closeno shipping costs • Retrieves from safety deposit box (which cost $75/wk) o Seller saves $75 from that last week  Hypo is silent on who has to pay shipment costs • Buyer to pay: o Damages= [$10k-$9k (from alt buyer)]+$100 (deposit)-$75 (1-wk savings from box)  $1025 • Seller to pay: o Assume total shipping costs = $150 (including $100 deposit) o Damages=[$10k-9k]-$75k (safety dep.)=$25 • Damages w/ §2-708 (mkt price @ perf)=$37.5(50-75) No negative 49 .Barry Adler Contracts Fall 2010 $1.5(150) + . no refund** • Goods w/ mkt price @ resale: o UCC 2-708(1): provides that “the measure of damages for…repudiation by the buyer is the ∆ b/t the mkt price at the time and place of tender and the unpaid K price PLUS incidental damages (§2-710) MINUS cost savings due to breach  (Same as common law expectations damages Seller gets benefit of bargain) SEE SLIDE 194  Mkt price is measured at time of performance rather than time of repudiation • Inconsistent with the seller breach/buyer remedy (§2-713).

but b/c there is not bright line test for either. • Comments suggest seem to suggest that the latitude of either prong diminishes the less well satisfied is the other o Both prongs must be satisfied.Barry Adler Contracts Fall 2010 damages!  Another example of UCC stepping on its own toes o UCC 2-708(2): But if 2-708(1) is inadequate to put seller in as good a place as if performance had been done.” • Ex-ante calculation and BOTH prongs must be satisfied • If damages are easy to determine (at the time of K) OR the estimate (at the time of K) greatly exceeds a reasonable upper estimate of what damages arelikely a penalty R. therefore. AND the need for estimation at that time must be shown by reference to the likely difficult of measuring the actual damages from a breach of contract after the breach occurs. BUT §2-718(3) permits greater refund if authorized by another provision§2-708(2) applies when ∆(mkt-K) “is inadequate to put the seller in as a good a position as perf. it looks as if D must return all but $500 under UCC § 2-718(2)(b) (w/o specified damage clause limits restitution of deposit to min{$500. the measure of damages is the expected π. Retail Marine (154) [P (buyer) Ks w/ D (seller) for purchase of boat • P left unspecified deposit with D • P became ill and repudiates K • D sold boat for K price to a 3rd party • P sues for deposit] • At first glance.2d §356 (1) allows liquidated damages. 20% value of perf}). would have done” • Holding: according to §2-708(2). Had P not repudiated. but ONLY in an amt that is reasonable in the light of the anticipated (ex-ante view like Lake River) OR actual loss (ex-post view retrospective) caused by the breach AND the difficulties of proof of loss (also in Lake River) • It seems that a stipulated amt that’s unreasonable wrt the anticipated loss may be enforceable if reasonable wrt the actual loss (and vice versa). and that the law should encourage promise-keeping Purposes of Specified damages: • Avoid uncertainty • Avoid litigation exps • Substitute for anticipated inadequate judicial award • Provide incentive for economic efficiency • Judicial economy and freedom to K (added by Wassenaar) ∏ against enforcement: specified damages may substantially exceed the injury and may justify an inference of unfairness in bargaining or objectionable in terrorem agreement • Tension b/t efficiency and potential penalty Specified damages that are ex post significantly higher than actual damagessubject to attack as penalty • LINE DRAWING PROBLEM: the distinction between allowable liquidated damages and an unenforceable penalty Rule from Lake River v. then measure of damages is lost π PLUS incidental damages Neri v. D only owed P the ∆[deposit-lost π(s)] o D is a “lost volume” seller [fungible goods lined up to go] o No mitigation opportunity in this case (a substitute buyer is insufficient) • SPECIFIED DAMAGES • • • “Specified damages” = “liquidated damages” = “stipulated damages” Inconsistent with Charles Fried’s notion that promises should be kept. Carborundum (173): liquidated damages “must be a reasonable estimate at the time of contracting of the likely damages from breach. there is 50 • • • • . D would have TWO π.

which if lost (due to incomplete rollercoaster) can be recouped in expectation damages. The theory of the stipulated clause could lead to a payment of a large amount for the non-payment of a small some o Clause was open to any breach large or small • R. • Contractor would then be incentivized to overinvest in construction to get rollercoaster builit and to avoid high expectation damages from breech • The costs from the extra construction will get passed on to Fairgrounds in the form a higher K price.2d §355: punitive damages are not recoverable for a breach of K o Extra high stipulated damages suggest penalty merely by amt. o How could this be fixed? • Through a (reasonable) stipulated damage amt.Barry Adler Contracts Fall 2010 interaction (same with Lake River standard) • Comments also suggest possible disqualification of liquidated damages on an ex-post view alone • What work is being done by test: to combat the likelihood of a penalty • R. o The K price would adjust accordingly • Specified damages has potential to align parties’ investment incentives • Makes Fairgrounds and Contractor behave as though they are a sole owner of both operations. Farren (163) [D agreed to perform in P’s theater • K provided that if either party breached. o It internalizes all costs and benefits of the joint project Kemble v. o Easily provable damages—such as in a thick mkt—suggest a penalty rather than a need to stipulate damages to avoid litigation expense • UCC §2-718 (1): provides that “damages for breach by either party may be liquidated in the agreement” b/t the parties. liquidated damages are not rejected on the grounds that they are undercompensatory • Fairgrounds Hypo: Economic Efficiency of Specified Damages • Overinvestment (incentive) problem o Fairgrounds enters into K with a Contractor to build a flagship rollercoaster o Fairgounds would be incentivized to overinvest in advertising. and §2-719(1)(a) provides that “the agreement may provide for remedies that are in addition to or in substitution for” those otherwise provided under the UCC. which restricts a seller’s right to ltd a consumer’s personal injury claim]. • With rare exceptions [like UCC §2-719(3). he would pay $1000 damages • was not to be considered a penalty] • Holding: no enforcement b/c “a very large sum should become immediately payable.2d §356 does not follow Kemble (via its comments FIND THIS)—suggests enforcement of stipulated damages even if the amount would be disproportionately large compared to a breach that might have occurred WHY?? • • 51 . in consequence for the nonpayment of a small sum” • Tainted the stipulation even though in the actual breach was not minor. clause in the K • Fairground looses incentive to overinvest in advertising (b/c they would not be able to collect more than specified amt in breech) • Contractor will loose its incentive to overinvest in construction b/c the stipulated amt sets the liability.

stipulated damages preclude a mitigation obligation • Remember the point abt the value of a certain remedy even where the remedy would be easy to calc.2d § 360) • damages may be difficult to collect (maybe due to insolvency) • Other reasons (beyond the inadequacy of money damages) to support specific performance: o It may be less likely that the cost of performance would exceed the benefit (i.Barry Adler Contracts Fall 2010 • Wassenaar v. Towne Hotel (165) [Hotel. efficient breach may be unlikely) o Cf.2d § 364 favoring specific enforcement absent “hardship” • There is a presumption that real estate is unique. D fired P prior to their employment K’s expiration date • sued for damages under liquidated damages clause in K • P obtained alt. intangibles are hard to calculate (like good will) • Holding: crt sides with P and rejects a reduction in stipulated damages for mitigation (i. employment yet sued D for stipulated amt] • D’s arg: Full salary to a fired employee seems necessarily overcompensatory o Damages are also easily calculable • P’s arg: Intangible injury to personal assets like reputation means that full salary is not necessarily overcompensatory o Also. but beware of crts that reject high damages measure from hindsight alone. o Wassenaar case is similar to Parker wrt guaranteed compensation clause (or would have been had the Parker crt interpreted the clause the way Parker wanted it) SPECIFIC PERFORMANCE • • Where a promisor would be simply required to perform (if it remained possible) R. finding another job) o Logically. and thus.2d § 357-provides for specific performance and for a negative injunction in order to avoid a promisor’s “breach of duty” o Negative injunctions can directly enforce a promise of forbearance or indirectly enforce a positive obligation o § 359 (1) specific performance or injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party • expectation remedy may be inadequate for multiple reasons: • damages may be difficult to prove (including b/c there is no ready substituteno mkt value for the contractual performance) o Ks for the sale of unique objects or services (see R.e. real estate Ks are presumptively specifically enforceable o See R. R.” an implicit reference—at least in part—to more general CL principles) 52 .e.2d § 360 Comment e o Do you argree that ALL land should be treated as unique for purposes of specific performance • UCC §2-716(1)—provides that specific performance “may be ordered where goods are unique” (as well as in other “proper circumstances.

when in Scholl there was a specific vehicle. but agreed to sell to third party for $22k (even though the improvements increased the value more • D’s tried to repudiate and take back land • P’s sued for specific performance] o D’s arg: • In old terms: there is equity in avoiding overcompensation • In modern terms: because the P’s expectation interest can be easily measured (as ∆ b/t resale price and the option price)—there is no difficulty in proof and money damages are thus adequate o P’s arg: • In old terms: Crts of equity grant specific performance as a matter of course where no hardship is imposed • In modern terms: (beyond the presumption re: RE Ks) true expectation is not the K-resale ∆. Charlie’s Chevrolet (208) [In Scholl. or gave it away was of no concern to the sellers” • Tongish analysis • ∏: to refuse specific relief would est. an unsound precedent. Harris (203) [P sought an order specific performance to recover stereo equipment (w/ irreplaceable parts) that he tendered pursuant to an option K entered into w/ D] • Holding: error in not finding the goods “unique” for purposes of specific performance o LINE DRAWING PROBLEM: how many parts that are difficult/impossible to replace. true expectation damages) o Holding: the crt sides with P’s dismissing the idea that resale price should determine damages • “P’s had a perfect right to resale the land if they wanted to. Whether they kept it. which would be inadequate (esp.Barry Adler Contracts Fall 2010 • Loveless v. or other circumstances justifying specific performance. with the improvements) • Recall Tonish—promisee should get full value of bargain (i.e. depend on whether essentially similar goods are available for reasonably easy cover • These factors also go to whether money damages would be easy to determine adequately (thin vs. sold it. or what level of sentimental value sufficiently makes the good unique? Scholl v. Diehl (198) [D’s leased a farm to the P’s w/ option to purchase at end of rental period for $21k • P’s made improvements to farm • couldn’t but at end of term. esp wrt a mkt for reg.000? • What was different abt the car in Scholl did not go to the essence of its value (unlike the parts in Cumbest). not specific performance Cumbest v. a 1962 Corvette was not unique/special enough to justify specific performance. while in Sedmak it was one of 6. used Corvettes o Principle: uniqueness. diminishing the transferability of property b/c future buyers will be reluctant to bind themselves to a purchase K for fear that it’d be unenforceable • **You could still argue that this land—in commercial use—should not be counted as unique and that the real debate was over the amt of money damages. thick mkt wrt pricing) • Uniqueness = a proxy for difficulty to cover • Can’t be determined in a vacuum 53 • • . Hartzell (206) versus Sedmak v. while the “pace car” characterization of the car in Sedmak did • The mkt for “pace car” Corvettes is very thin. while in Sedmak a 1978 Corvette was unique/ special enough] o How can you reconcile these cases esp.

any enforcement of a promise. If the goal is to just strong-arm promisee into performing (by cutting off access to all national mkts) and not to minimize damage (there is no damage—presumably—from the Russian mkt). The goal is to minimize the harm to the promisee.e. but in addition to paying expectations damagaes may be prevented from performing for a competing NY (or NJ or CT) opera house at the time she agreed to perform for the promisee • She will not likely be enjoined from performing for a Russian company even if she expressly agreed not to perform • The key to enforcing a negative injunction where specific performance would not be granted is that the effect is to prevent unquantifiable injury to the promisee rather than compel performance o See R. perhaps acceptably RESTITUTION • The restitution remedy can be best thought of as independent from a K remedy b/c it is not necessary (or at least typical) to compensate a promisee for the promisor’s breach (i. A NJ or CT mkt may have some overlap with the NY mkt. by damages or negative injunction. PP o Today.e. all work)  Geographical reach (NY vs.Barry Adler Contracts Fall 2010 • Some personal services on one side of the uniqueness (remember: ease of cover!) spectrum—a soprano who will sing at the opera—while others are at the other extreme—janitor o Similar to goods. forever) o In the end. tends to encourage performance. Russia)  Length of time (the contractual time pd vs. benefit of the bargain). forced apprenticeships for children are also unlawful • Negative injunctions-Soprano opera singer hypo • Agrees to perform for a NY opera company. the provision won’t be enforced o Narrower covenants are more likely to be enforced:  Scope of activity (opera singing vs. but there may be other considerations—the constitutional and public policy considerations re: indentured servitude • Mary Clark (212) [19th century Indiana • Mary Clark. is the goal  R. indentured servitude violates the 13th Amendment. you have expectation and reliance damage) o Crts. do. therefore we would want to prevent the competition from benefiting. not compensation (i.2d § 373(1): provides that a victim of breach “is entitled to restitution for any benefit that he has conferred on the other party” by way of performance o BUT the avoidance of unjust enrichment. however sometimes invoke restitution in the context of K breach  R.2d §371—measures the restitution interest by reference to the value of the 54 . but in the absence of specific performance. indentured herself as a house maid for 20 yrs] • Holding: this K was not specifically enforceable (and would not be despite any inadequacy of the expectation remedy) b/c a promisee’s “continual right of command” over a promisor would be degrading and vs. then repudiates o She will not be forced to perform. blk woman.2d §367 • The Russia mkt is distinctly different than the NY mkt.

π=$20  In the case of asymmetric information (only Painter knows) • NO neg damages: Painter will not breach. she will be liable for the entire $40π** • This is NOT to say the negative damages should be allowed o There are fairness objections 55 . • Job will pay $80 and it will cost Painter $60. job onlybreach) o EFFICIENT RESULT: Two houses painted (inc. of flour for $14k • P pays $5k in advance (deposit) • at time of performance. b/c she will fire him. and she’d have to pay the full $40π breach/no breach. a specified quant. and P purchase. a $3k loss ($14k-11k)  P’s counter-arg: NO NEGATIVE DAMAGES!!! o Holding: promisor was unjustly enriched and should return the $5k to the promisee. Promisor can not award negative damages. D fails to deliver the flour.  Under some philosophical principles.e. the information symmetry becomes moot. a wash. an efficient result. b/c Owner will not be able to save $40 and pay $20. the latter measure independent of the former only if there is no mkt substitute for the property or services) • Bush v. He could collect $40 in negative damages from Owner and do 2nd job and collect $20 in π ($60π>$40π from orig. He will not be able to collect the $40 from the breach and would then only make a $20π from 2nd job. • Neg. the majority is correct b/c a breacher (promisor) should not benefit from his breach  Efficient breach theory and the disallowance of negative damages • Under Bush. so that Painter’s π=$40 • Painter also knows about 2nd potential paint job that only Painter can do. only a payment of $2k b/c that would yield P the benefit of his bargain. save $40. Canfield (250) [D agrees to deliver. there may be circumstances where the promisee does not know to do so o Bush No Negative Damages Illustration  @ T0 K price for Painter to paint Owner’s house=$100 (π=$0 for painter)  @ T1 Labor prices shoot down (to $60). BUT unlikely b/c information is not fully symmetrical  **w/o Mitigation obligation/opportunity. either the mkt value of the property transferred or services performed. then worth $11k] o P’s arg: sues on restitution after (implicit) election to “disaffirm” K o D’s arg: the expectation remedy req. damages: RACE TO BREACH by both Painter and Owner o Also. and pay $20 in expectation damages o w/o that knowledge. the one that only Painter can do) are better for society than one  In the case of full (symmetrical) information • No neg damages: Owner (only) will breach and pay the $20 in expectation damages. or the increase in the recipient’s wealth as a result of the benefit conferred. Owner will assume there’s no mitigation opportunity ≠ $60. $40π>$20πno breach o He also does not have incentive to tell Owner abt the job. and will save $40 from the breach • Neg. damages: Painter will be incentivized to breach. the promisor will not breach and even though a fully informed promisee will.Barry Adler Contracts Fall 2010 benefit conferred (i.

2d §374 (1)—permits a breaching promisor to collect restitution despite her breach (but only “in excess of the loss that he has caused by his own breach”)  Goes to unjust enrichment and not benefit of bargain o Britton v.g. 2-711 • Restitution amt is to be offset by any “damage which the promisee has sustained by the promisor’s nonfulfillment of the K  Britton illustration • Laborer agrees to work for a year ($30/ quarter) • Immediately after K is signed.”  Mkt price of $50/quarter. but in quantum meruit (for restitution)]  P arg: To allow the employer to keep the $95 would allow emp. w/ Bush where the crt treats the breach party as a bad actor whom the law need not rescue from the consequences of breach • The employer (at least implicitly) accepted the benefits of performance as the employee provided them. the price of labor increases to $50/quarter • After working—and without receiving payment for 3 quarters—laborer quits w/o cause and seeks restitution • What award if one looked at R. R. • providing labor worth $95. not on the K.2d § 374(2).2d § 371 in isolation? o The amt “it would have” cost Employer to obtain “what he received” from “a person in claimant’s position. • $90-20=$70 o §374(1) permits a promisor to collect restitution despite her breach.Barry Adler Contracts Fall 2010 Restitution for Breaching Promisor • Can a breaching promisor collect in restitution? o R. to retain more than his expectation interest • Cf. but only “in excess of the loss that he has caused by his own breach” o $70 is also what the laborer would be awarded were she permitted to sue for negative damages on the K despite her breach (blocked by rule in Bush)  Negative damages: (30x4)=120 (full K 56 . UCC §§ 2-718. then quits w/o reason (breach) • laborer sues. or $150  The presence of a mkt price logically precludes an award for increased property value ??? • What will be the award in fact? o Begin w/ the K rate of $30/quarter$90 o MINUS the employer’s expectation damages from breach  The $20 ∆ b/t mkt rate of $50 and $30 for the 4th quarter. on an object to be created)  Holding: defines restitution as the default rule and that parties could expressly agree to no-recovery-on-breach but should not presumed to have so agreed • Although a crt may find that an agreement of forfeiture would be an unenforceable penalty o See Vines. Turner (256) [a laborer works under a 1-yr emp K for more than 9mos. and thus should be bound to pay for them o This distinguishes the case where a victim of breach might (w/in his rights) reject and thus not benefit from part performance (e.

an aggressive version of the penalty doctrine Restitution & Quasi-K • Cotnam v. Wisdom (265) [P (Dr. A quasi-k has no (exchange of) promises  Quasi-K a/k/a “constructive K” or “implied-in-law K” • An agreement that the parties would have reached had they the opportunity to negotiate o BUT not quite re: negotiating: the P’s wealth was not deemed a relevant factor (i. his life) • Fairness may require the beneficiary of another’s efforts in exigent circumstances to compensate the benefactor for her effort. will perform.e.e. who died anyway • P sought repayment for services • ex.2d § 374(2). would have an affect on the K price)  The law will estimate the value of services rendered w/o reference to the patient • The mkt value of services (of the effort) is the measure of compensation (rather than benefit realizedb/c had the patient lived he would not owe the Dr.e. in Cotnam. not award restitution) if a liquidated damages clause is valid (same with UCC §2-718)  If actual damages are zero. one might be unsure whether the average rate the P charged should matter—as an indication of skill level and thus the value of the services (surgeon v.Barry Adler Contracts Fall 2010 • price for full yr)-50$70 Vines v. or might not be provided at all in the future (If E(B)>C. it doesn’t matter that patient died in Cotnam) • Economic justification for quasi-K is that efficiency may req.g. resident)—or whether this should be irrelevant to how society values the services 57 . this alone might justify return of the deposit. which permits retention of a deposit (i. the beneficiary of another’s efforts in exigent circumstances to compensate the benefactor for services. Orchard Hills (260) [P k’d to purchase a condo • down payment was stipulated as liquidated damages • P (moved to another state) reneged on the K • D kept down payment] o Holding: the crt allows the buyer the chance to challenge the liquidated damages clause (as a penalty) and would award restitution if challenge succeeded (i. but w/o quasi-K. of quasi-K] o Again. restitution is sometimes awarded completely outside of a K o Here: there is no K!!! A K involves (exchange of) promises.e. o Benefit is measured ex ante (i. E(B) is dubious and therefore may not be >C) • Application of quasi-K may be problematic o e. the seller was unjustly enriched by the deposit and clause is a penalty)  Consistent w/ R.) operated on an unconscious patient.

What result? • LIKELY recovery if the landscaper had good reason to presume that the landowner would have agreed to pay for the services were negotiation possible o A reasonable was to think of quasi-K is as inverted tort law  Tort law allows a victim to demand payment from a malefactor. but later. after the patient recovers and is ungrateful. What result? • NO recovery. b/c the services were a gift the value of which it would not be unjust to permit the patient to retain o BUT. What result? • NO recovery b/c there was an opportunity for negotiation. while quasi-K requires beneficiaries to pay a benefactor 58 .Barry Adler Contracts Fall 2010 o Cotnam Hypos  (1) Imagine a Dr that treats an unconscious patient not intending to charge a fee. sues for restitution. how can you prove this subjective intent is reality??  (2) Imagine a house painter who arrives at night and paints a house. then hands the owners a bill in the morning. and thus no moral/economic reason for the law to impose an obligation on the occupant  (3) A landscaper reinforces a retaining wall undermined by a sudden flood while the landowner is out of the country. the Dr.

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