Table of Contents

TABLE OF CONTENTS.............................................................................................................................................1
ISSUE SPOTTER CHECKLIST.................................................................................................................................8
QUESTION 2 CHECKLIST......................................................................................................................................13
THEMES.....................................................................................................................................................................15
Legal Formalism v. Legal Realism..............................................................................................................................15

INTRODUCTION: GENERAL CONTRACT OVERVIEW.................................................................................16

Ways Contracts Arise.....................................................................................................................................................16
Why do people make promises?.....................................................................................................................................16
Kinds of Contracts.......................................................................................................................................................... 16
Elements of a Contract...................................................................................................................................................17
Elements of a Contract Case...........................................................................................................................................17
Affirmative Defenses..................................................................................................................................................... 17
Why Enforce Contracts..................................................................................................................................................18
Ex Ante vs. Ex Post........................................................................................................................................................18

UCC VS. COMMON LAW........................................................................................................................................19

UCC OVERVIEW.......................................................................................................................................................19
Goods:.................................................................................................................................................................19
Sale:....................................................................................................................................................................19
STATUTE OF FRAUDS................................................................................................................................................19
Note on Court’s Interpretation of Statute of Frauds........................................................................................................20
Note on The Restatement of Contracts...........................................................................................................................20

DOCTRINES...............................................................................................................................................................22
CONSIDERATION.......................................................................................................................................................22
Consideration......................................................................................................................................................22
Promise...............................................................................................................................................................22
Donative Promises..............................................................................................................................................22
Consideration Cases....................................................................................................................................................... 22
Consideration and Form, Lon Fuller...............................................................................................................................23

THE ELEMENT OF BARGAIN...............................................................................................................................24

Classical Consideration:....................................................................................................................................24
Restatement Bargain & Exchange Sections....................................................................................................................24
Bargain Cases................................................................................................................................................................. 25

MUTUALITY..............................................................................................................................................................25
Mutuality Rule.....................................................................................................................................................25

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 Illusory Promise..................................................................................................................................................25
Conditional Promises..........................................................................................................................................25
Impossible Conditions.........................................................................................................................................26
Mutuality Cases..............................................................................................................................................................26

MODIFICATION..........................................................................................................................................................27
Modification:.......................................................................................................................................................27
Pre-existing duty rule (Restatement §73)...........................................................................................................27
Modification Statutes and Rules.....................................................................................................................................28
Modification Cases......................................................................................................................................................... 29

WAIVER....................................................................................................................................................................30
Waiver:................................................................................................................................................................30
Waiver Restatement....................................................................................................................................................... 30
Waiver Cases.................................................................................................................................................................. 31

THE ELEMENT OF RELIANCE............................................................................................................................32

Promissory Estoppel Restatement..................................................................................................................................32
Distinct Elements to Make Case for Liability.................................................................................................................32

Equitable Estoppel:.............................................................................................................................................32
Reliance Cases: Pre-1932...............................................................................................................................................33
Modern Reliance............................................................................................................................................................ 33

THE ELEMENT OF BENEFIT................................................................................................................................34

Restitution...........................................................................................................................................................34
McMansion Restitution Example...................................................................................................................................34

Unjust Enrichment..............................................................................................................................................34
Past and Moral Consideration.........................................................................................................................................34
Restitution Cases (Past and Moral Consideration)..........................................................................................................35

THE ELEMENT OF FORM.....................................................................................................................................37

Nominal Consideration.......................................................................................................................................37
Sufficiency vs. Adequacy...............................................................................................................................................37
Element of Form Cases..................................................................................................................................................37
Note on Form and the History of the Seal......................................................................................................................37
Form Advantages & Disadvantages...............................................................................................................................38

DEFENSES..................................................................................................................................................................39
DURESS.....................................................................................................................................................................39
Duress Cases..................................................................................................................................................................39

UNCONSCIONABILITY...............................................................................................................................................39
UCC Unconscionability.................................................................................................................................................40

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 How to Argue Unconscionability...................................................................................................................................40
A Note of Warning re: Unconscionability Arguments....................................................................................................40
How to avoid unconscionability?...................................................................................................................................41
Unconscionability Cases................................................................................................................................................41

MISTAKE...................................................................................................................................................................41
Mutual Mistake...................................................................................................................................................42
Mutual Mistake Cases....................................................................................................................................................42

Unilateral Mistake..............................................................................................................................................42
Unilateral Mistake Cases................................................................................................................................................42

Transcription Errors...........................................................................................................................................43
Mistake Restatements.....................................................................................................................................................43
Notes on Restatement 154..............................................................................................................................................43
Mistake vs. Change in Circumstances............................................................................................................................44

Failure to Disclose..............................................................................................................................................44
UNDUE INFLUENCE...................................................................................................................................................45
INCAPACITY..............................................................................................................................................................45
FRAUD......................................................................................................................................................................45
IMPOSSIBILITY..........................................................................................................................................................45
Impracticability...................................................................................................................................................46
FRUSTRATION...........................................................................................................................................................46
DAMAGES..................................................................................................................................................................47
General Approach to Damage Assessment.....................................................................................................................48

EXPECTATION DAMAGES....................................................................................................................................49
Expectation Formula = Full Performance - Present Condition........................................................................49
Common Law Performer Breach Formula:........................................................................................................49
Common Law Recipient Breach Formula:.........................................................................................................49
Sales Cases Under UCC.................................................................................................................................................49

Lost Volume Seller..............................................................................................................................................49

Middleman Seller................................................................................................................................................50
Consequential Damages.....................................................................................................................................50
Incidental Damages............................................................................................................................................50
Punitive Damages...............................................................................................................................................50
Limitations of The Expectation Measure........................................................................................................................50
Expectation Cases.......................................................................................................................................................... 50

RELIANCE DAMAGES............................................................................................................................................52
Reliance Damages..............................................................................................................................................52

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 Opportunity Cost.................................................................................................................................................52
Reliance Cases............................................................................................................................................................... 52

RESTITUTION DAMAGES.....................................................................................................................................53
How Courts Decide Between Different Measures..........................................................................................................53

RESTITUTION DAMAGES................................................................................................................................53
Unjust Enrichment..............................................................................................................................................53
Restitution Cases............................................................................................................................................................54

DISGORGEMENT........................................................................................................................................................54
UCC Seller/Buyer Breach Statutes.................................................................................................................................55
UCC Damages Cases......................................................................................................................................................55

OTHER REMEDIES..................................................................................................................................................56
LIQUIDATED DAMAGES............................................................................................................................................56
Liquidated Damage Statutes...........................................................................................................................................56
Liquidated Damage Cases..............................................................................................................................................57

THE DUTY TO MITIGATE..........................................................................................................................................58

Reasonable Efforts:........................................................................................................................................................ 58
Restatement Duty to Mitigate.........................................................................................................................................58
Note on Duty to Mitigate................................................................................................................................................59
Duty to Mitigate Cases...................................................................................................................................................59

SPECIFIC PERFORMANCE..........................................................................................................................................61
Specific Performance Cases...........................................................................................................................................61
Specific Performance and Covenant Not to Compete.....................................................................................................62
Covenant Not to Compete..............................................................................................................................................62

INTERPRETATION..................................................................................................................................................63
STANDARDS OF INTERPRETATION.............................................................................................................................63
WHAT HAPPENS WHEN THERE IS AMBIGUITY?.......................................................................................................63
Note on Capacity to Consent..........................................................................................................................................63

Classic v. Modern Interpretation........................................................................................................................64

Interpreting Purpose of Contract From Language...........................................................................................................64
Interpretation Cases........................................................................................................................................................ 64

OTHER CONSTRUCTION PRINCIPLES.........................................................................................................................66

Plain Meaning.....................................................................................................................................................66
Absurdity Doctrine..............................................................................................................................................66
Construction Against the Drafter........................................................................................................................66
Negotiated or Added Terms................................................................................................................................66
Terms of Art and Technical Terms......................................................................................................................66

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 Principal Purpose:..............................................................................................................................................66
ROLE OF WRITING..................................................................................................................................................67
PAROL EVIDENCE RULE...........................................................................................................................................67
Parole Evidence Rule Example......................................................................................................................................67
Exceptions to Parol Evidence Rule.................................................................................................................................68

Integration...........................................................................................................................................................68
Partial Integration..............................................................................................................................................68
Merger Clauses...................................................................................................................................................68
Two Ways to Determine if a Writing is Integrated.........................................................................................................68
Actual Approach: It’s Always a Factual Question.......................................................................................................69

Collateral Agreement Rule.................................................................................................................................69

Collateral Agreements vs. Parol Evidence Rule.............................................................................................................69
Compare to Statute of Frauds and Oral Modifications....................................................................................................69

PAROLE EVIDENCE UNDER THE UCC......................................................................................................................70

UCC §2-202: Parol Evidence.............................................................................................................................70
Notes on Restatement § 2-202........................................................................................................................................70

UCC § 1-303 Course of Performance, Course of Dealing, Usage of Trade Definitions...................................71

Explaining Express Terms vs. Contradicting Them........................................................................................................71
Application from cases...................................................................................................................................................71
Parol Evidence Cases.....................................................................................................................................................72
Trade and Course of Dealing Cases................................................................................................................................72

THE BASIC PRINCIPLES OF OFFER AND ACCEPTANCE............................................................................73

MUTUAL ASSENT......................................................................................................................................................73
OFFER.......................................................................................................................................................................73
Offer Restatement and UCC Statutes..................................................................................................................74
Offer Determination....................................................................................................................................................... 74

Firm Offers..........................................................................................................................................................74
Common Law Firm Offers..................................................................................................................................74
Factors to Consider......................................................................................................................................................... 74

Restatement Option Contracts............................................................................................................................75

Offer Cases.....................................................................................................................................................................75

PRELIMINARY NEGOTIATIONS..................................................................................................................................77
Preliminary Agreements.....................................................................................................................................77
Factor’s Court Will Use to Determine Party’s Intention.................................................................................................77
UCC Open Price Term (Firm Offer)...............................................................................................................................77

REVOCABILITY..........................................................................................................................................................78

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 Expiration...........................................................................................................................................................78
Communicated Revocation.................................................................................................................................78
Indirectly Communicated Revocation.................................................................................................................78
UCC §2-204........................................................................................................................................................78
Preliminary Negotiations and Revocability Cases..........................................................................................................78
3 Questions When Applying Promissory Estoppel:........................................................................................................79

ACCEPTANCE............................................................................................................................................................80
Silence As Acceptance...................................................................................................................................................80

Mirror Image Rule..............................................................................................................................................80

CONTRACTING AROUND DEFAULT FORMATION RULES...........................................................................................80
STANDARDIZED FORMS............................................................................................................................................81
Interpreting Standard Forms...........................................................................................................................................81

Restatement §211: Blanket Assent......................................................................................................................82

Enforceability of Standardized Forms............................................................................................................................82

Interpretation vs. Unconscionability..................................................................................................................83

Conspicuousness Factors................................................................................................................................................83
Standardized Form Cases...............................................................................................................................................83

DISCLAIMERS............................................................................................................................................................84
Disclaimer Case............................................................................................................................................................. 84

SHRINKWRAP/CLICKWRAP........................................................................................................................................84
Shrinkwrap..........................................................................................................................................................84
Shrinkwrap Cases...........................................................................................................................................................85

Clickwrap............................................................................................................................................................85
Clickwrap Case...................................................................................................................................................85
ROLLING CONTRACTS...............................................................................................................................................86
“Rolling Contracts” and “Contract First, Terms Later”..................................................................................86
Adhesion Contracts........................................................................................................................................................86
Four Approaches of Courts............................................................................................................................................86

DISCLOSURE.............................................................................................................................................................88
Casually Acquired Information, Kronman......................................................................................................................88
Discovery v. Foreknowlege............................................................................................................................................88
Disclosure Cases............................................................................................................................................................ 88
Hypotheticals................................................................................................................................................................. 88

SUBSTANTIAL PERFORMANCE AND MATERIAL BREACH.......................................................................89

SUBSTANTIAL PERFORMANCE..................................................................................................................................89
BASIC CONCEPTS......................................................................................................................................................89

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 UCC CONTRACTS.....................................................................................................................................................90
UCC § 2-508. Cure by Seller of Improper Tender or Delivery; Replacement................................................................90

GETTING AROUND SUBSTANTIAL PERFORMANCE....................................................................................................90

Express Conditions.........................................................................................................................................................90

GOOD FAITH AND BEST EFFORTS....................................................................................................................91

COMMON LAW GOOD FAITH....................................................................................................................................91
UCC GOOD FAITH....................................................................................................................................................92
BEST EFFORTS..........................................................................................................................................................92

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o

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Themes
LEGAL FORMALISM V. LEGAL REALISM
 Legal formalism sees judicial decisions as resulting from the application of a relatively
predictable framework of doctrinal rules.
 Legal realism sees those outcomes as better explained by the complexity of factual
circumstances in the individual case.

LEGAL FORMALISM LEGAL REALISM

Law as a framework of
UNDERLYING MODEL Law as a set of practices
rules

REPRESENTATIVE FIGURE C.C. Langdell Karl Llewellyn

REPRESENTATIVE CONCEPT “Law as a science” Situation sense

RELATION BETWEEN DOCTRINE AND CASE Doctrine summarizes

Cases illustrate doctrine
LAW cases

To put it in a nutshell, formalism contends that the rules are fundamental and the cases illustrate the rules,
while realism contends that it's the cases that are fundamental and the rules just summarize the cases.

WHY DO PEOPLE MAKE PROMISES?

 Coordination action through advance notice

 Give a gift you cannot afford right now
 To initiate an exchange
 To create trust
 To facilitate the promisee ‘s advance action
 To create stability and predict the future so that people can safely put themselves at risk?
 Beneficence
 Self-motivation and commitment
 Impulse
 Exchange: a trade in property, services (means recriprocal relationship)
World without enforceable promises…
 No employment
 Uncertainties in commerce > decreased in assurances necessary for business

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Introduction: General Contract Overview
 The law of contracts is the law of voluntary obligations
o Problems with voluntary lawmaking:
 How do we know when the law was made? How do we know what law was
made?
 How do we resolve ambiguities when not everything was settled when the law
was made?
 What are the limits? What should people be allowed to contract around?
 How do we make the law well – prevent the weak from being overpowered by
the strong
 3 functions of contract law
o Determine what’s enforceable
o Gap-fill incomplete contracts
o Gap-fill for ambiguous contracts

WAYS CONTRACTS ARISE

 Express contract
o Parties agree with each other via words to form a contract
 Implied-in-fact contract
o Conduct of parties implies agreement
 Implied-in-law contract/quasi contract
o 1 party has valid reason for action that confers benefit onto other party that the other
party accepts and retains
o Based off unjust enrichment – element of benefit

KINDS OF CONTRACTS

 Unilateral contracts
o Promise for performance
o Traditionally enforceable only after performance completed, now enforceable after
performance has begun
 Bilateral contracts
o Promise for promise
o Enforceable as soon as promises are made

ELEMENTS OF A CONTRACT

 Contract requires promise that parties mutually assent to backed by consideration

ELEMENTS OF A CONTRACT CASE

For contracts cases, the standard elements of a claim include…

1. Mutual assent: the parties must have agreed on a contract
2. Consideration: the contract must be of the type the law will enforce

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 3. Breach: the defendant has failed to perform on its contractual promise
4. Damages: the plaintiff must show that the defendants failure to perform has resulted in harm

Once the plaintiff makes out all the elements of the claim, we say that he or she has established a prima
facie case.  This means that the plaintiff has gotten the ball over the line and is entitled to win unless the δ
raises some reason to say otherwise.

AFFIRMATIVE DEFENSES

 A defendant can defeat the plaintiff’s prima facie case by disproving one or more of the
plaintiff’s required elements.
 But the defendant can also try to establish an affirmative defense.
o It is up to the defendant to raise such defenses, and usually to prove them too.
INCAPACITY the promisor lacked power to enter into the bargain.  E.g., the promisor was
a child, or was intoxicated or insane, or was exceeding their legal authority
(e.g., to act as an agent).
FRAUD the promisor was deceived into making the promise. Mistake: one or both
parties were mistaken about some fundamental aspect of the contract (we’ll
have substantially more to say about this one later in the course).
UNDUE INFLUENCE the parties have some special relationship that creates a risk that one party
won’t look out for their own interests, and thus there’s an obligation for
other party to take the weak party’s interests into account.  E.g., the
relationship between a doctor and a patient, or an infirm person and their
caregiver.
DURESS under improper threat from other party, leaving victim no reasonable
alternative; or by 3rd party unless other party is in good faith, without
reason to know, relies or gives value to transaction
UNCONSCIONABILITY when things just look so unfair the court can’t uphold it (Note: a contract
may be unconscionable either because of an extreme lack of fairness in the
bargaining process, or because of the substance of the contract itself

WHY ENFORCE CONTRACTS

Three overlapping kinds of reasons why we would want to enforce contracts or why we would want to
put limits on the enforcement of contracts.
 Social utility: we enforce contracts to facilitate transactions and activities that promote wealth,
social welfare, and the pursuit of happiness.  
 Individual liberty: we enforce contracts in order to promote the freedom of the parties, their
autonomy, their power to pursue the ends that they individually choose for themselves. 
 Human development or Virtue: we enforce contracts in order to encourage the development of
virtuous and flourishing persons and communities.

EX ANTE VS. EX POST

When we decide which contracts should be entered into, we are taking an ex ante approach; when we
decide whether an already existing contract should be enforced, we are taking an ex post approach.
When deciding a conflict…

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 A forward-looking perspective is often called the ex ante perspective
 A backward looking perspective is often called the ex post perspective

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UCC vs. Common Law
 UCC governs sale of goods (and some mixed qs)
o Predominant factor test: are the goods incidentally involved in the contract or are the
services incidentally involved?
o UCC governs all sales of goods, not just those with merchants, but has additional rules
for merchants depending on text
 Merchant: person who deals in goods or otherwise by his occupation hold
himself out as having knowledge or skills peculiar to the practices or goods
involved in the transaction
 Tends to be more liberal, interventionist than common law
 If UCC silent, common law governs (UCC 1-103)
 Parties can contract out of the UCC’s provisions so long as standards are not “manifestly
unreasonable”

UCC OVERVIEW
 UCC is a statute in contrast to the Restatement, which is just an influential treatise that is not
binding on courts
o (except to the extent that they have incorporated its rules into the common law of their
jurisdiction)
 The UCC been adopted by legislatures of the several states  courts must follow it in cases to
which applies.
 Article 1 provides some general principles of interpretation, as well as definitions of important
concepts
 Article 2 relates to the sale of goods.
o Many of the provisions of Article 2 depend on flexible standards, many of which differ to
social practice and custom.
 The duty of good faith is a good example of this.

GOODS:
Things that are movable, other than money.
 So Article 2 does not apply to contracts involving services, real estate, insurance,
construction, intellectual property, or employment, except in so far as they include the sale of
movable goods. All those other kinds of items are covered by the common law and the
restatement.

SALE:
Passage of ownership in exchange for a price.
 So sale does not include borrowing goods, leasing them, or pledging them as collateral for a
loan. 

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STATUTE OF FRAUDS
Refers to the framework of rules that determine whether a contract must be in writing in order to be
legally enforceable.
 This is a formal, not substantive requirement.
 Purpose is to:
o (1) provide evidence of existence and purport of contract in the case of controversy and 
o (2) prevent inconsiderate engagements.
 Focused on fairly important agreements that are often rather complex in their terms.
 Intended to restrain juries from finding contracts everywhere
 Exceptions to writing requirement: Specially manufactured, Payment has been made, Admit there
was a contract
 The following agreements that must be in writing:
1. Sales of land or permanent interest in land
2. Contracts that can’t be finished in less than a year
3. Contracts in consideration of marriage
4. Third party guarantees (debts) (Must be signed by guarantor)
5. Sales of goods of $500 or more – 2-201

NOTE ON COURT’S INTERPRETATION OF STATUTE OF FRAUDS

 Courts over the years have interpreted the Statute of Frauds strictly, so as to allow oral contracts
to be enforceable unless it is very clear that they come within one of the six categories.
 For example, courts have interpreted the one-year provision of the Statute of Frauds to apply only
in cases where the contract, by its terms, must last more than one year.
o If a contract could be completed under some circumstances in less than a year, then it
doesn't have to be in writing. 
 But you can generally orally rescind SoF contract (unless its about land) but must modify it in
writing
“Notwithstanding the Statute of Frauds, all unperformed duties under an
enforceable contract may be discharged by an oral agreement of rescission.
RESTATEMENT §148 The Statute may, however, apply to a contract to rescind a transfer of
property.”

NOTE ON THE RESTATEMENT OF CONTRACTS

 First Restatement of Contracts was published by American Law Institute in 1932

 Reporter was Samuel Williston of HLS
 Among axioms of first restatement were that bargain and only bargain constituted
consideration 
o Bargain were formed by offer and acceptance
o Remedy for breach of an enforceable promise was expectation damages

14
15
Doctrines
CONSIDERATION
 Generally how the law determines what promises should and should not be enforced
 Contract law states that consideration for a promise must exist
 two ideas of consideration:
o The idea that a promise must be bargained for (mostly speak about it in this sense)
o The set of things that make a contract enforceable
 Bargain
 Reliance
 Form
 Benefit
 Legal realist would say we take all the cases where a contract has been enforced and that is what
consideration is.

CONSIDERATION
Something bargained for and received by a promisor from a promisee (reason to enforce a contract)

PROMISE
An expression of an intention to act or refrain from acting in a specified way in some future time, so made
as to justify the person to whom the expression is addressed in understanding that a commitment has been
made to that person
 A person making promise is promisor
 A person to whom its made is promisee

DONATIVE PROMISES
A promise to give a gift without expecting anything in return (without consideration);
 these are NOT cast in a form to which modern contract law gives special significance
 under classical contract law, consideration ran the basic fault line between bargain promises and
donative promises 
 Under bargain theory of consideration (classical contract law) every promise that was not a
bargain promise was viewed as a gratuitous promise
o If gratuitous  not enforceable

CONSIDERATION CASES

 Dougherty v. Salt, NY (1919).

o Facts: P received note from his aunt for $3,000 with the words “value received.”  Not
included in her will. No witnesses other than guardian.
o Held: Promissory note not enforceable.

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 o Rule: Mere donative promises are not legally enforceable. Contracts must have
consideration to be enforceable. FORM VS. SUBSTANCE: merely reciting “value
received” will not be enough to prove 

CONSIDERATION AND FORM, LON FULLER

 Various substantive and formal ground (process grounds) for enforcing promises
o Evidentiary safeguards
o Cautionary safeguards
 Donative promises fall short because they raise serious problems of proof
o May sound like a credible by a jury despite absence of corroborating evidence
o Raise problems of deliberativeness - emotional involvement 
 The substantive and process bases for enforcing or not enforcing any kind of process are
interrelated
o The stronger the substantive interest in enforcing a given kind of promise, the more the
law can tolerate process concerns

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The Element of Bargain
 Dominant theory of contractual liability
 Must have either a performance or a return promise (Restatement §71)
 Sections §71 §72 §79 of Restatement leave it up to the parties and no one else to determine what
contracts are worth entering
o Two standard issues:
 sufficiency of consideration: whether the parties understand that both are giving
something of value
 adequacy of consideration: whether the bargain was fair/between things of equal
value

CLASSICAL CONSIDERATION:
 Something must be exchanged (sufficiency)
 Courts don’t generally inquire into whether the things exchanged are equal (adequacy)
 Waiver of any legal right at the request of another party generally counts as consideration
o See Hamer v. Sidway where court says nephew’s promise not to smoke, drink, etc. was
sufficient to establish consideration

RESTATEMENT BARGAIN & EXCHANGE SECTIONS

§ 71 REQUIREMENT OF 1) To constitute consideration, a performance or a return promise must be

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

§ 72 EXCHANGE OF PROMISE FOR Except as stated in §§ 73 and 74, any performance which is bargained for
PERFORMANCE is consideration.

§ 79 ADEQUACY OF If the requirement of consideration is met, there is no additional

CONSIDERATION; MUTUALITY OF requirement of
OBLIGATION (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage,
or detriment to the promisee; or
(b) equivalence in the values exchanged; or

18
 (c) “mutuality of obligation.”

BARGAIN CASES

Hamer v. Sidway, (1891)

 Facts: Uncle promised nephew to pay him $5,000 if he gave up drinking, using tobacco,
swearing, and playing cards or billiards for money until he became 21. Uncle died without paying
nephew the $5,000 plus interest. Was there a bargain?
 Held: For P, because nephew narrowed his field of choice.
 Rule: In general, a waiver of any legal right (or choice) at the request of another party is sufficient
consideration (considered a bargain) for a promise. But this only goes so far
Batsakis v. Demotsis (1949
 Facts: Parties in war torn Greece sign a document that says that P lent D $2,000 in U.S. currency,
whereas in reality P had lent D 500,000 drachmae (worth $25 USD). Was D liable to pay back
$2,000 under the contract?
 Held: For D
 Rule: Even if the contract is distasteful, it can still be a bargain. Court declined to evaluate the
adequacy of consideration.

MUTUALITY
MUTUALITY RULE
Both parties must be bound or neither is bound.
 Issue with promise that arises in promise contracts (bilateral)
o Doesn’t apply to unilateral K
 Arrangements that are clearly bargains but give one of the parties substantially more discretion
than the other
 Formally an extension of the doctrine of consideration

ILLUSORY PROMISE
When a promise is not real/meaningful
 Promisee has suffered no real detriment
 Optional contract  no condieration

CONDITIONAL PROMISES
 Enforceable if the condition is a possible future event that is not completely controlled by the
promisor
o Example: if it rains tomorrow, I will sell you my umbrella
o See Scott v. Moragues – D told P that if he bought a boat, he would charter it to P; D
bought the boat but didn’t charter it to P; Court said he had to because there was a
bargain and it become binding once D bought the boat

19
  Not enforceable if conditioned based on party’s will and not on outside events (i.e. illusory
promise because party does not have to do anything if he doesn’t want to)
o See Office Pavilion v. ASAL – P didn’t have to actually buy any chairs, so K not
enforceable
 An optional contract does not furnish consideration
 Some courts have read in implied promise of best efforts into relational contracts
o See Wood v. Lucy Lady Duff Gordon

IMPOSSIBLE CONDITIONS
 A promise conditioned on something that cannot occur
o Example: if it rains

MUTUALITY CASES

Office Pavilion v. Asal Products (2003)

 Facts: Pavilion (seller) and Asal (buyer) modified their contract to state that Pavilion agreed to
sell Asal as many chairs as it ordered. The modified contract does not require Asal to purchase
any chairs at all.
 Held: K unenforceable because Asal's did not make a promise (one party was not bound).
o Original K included minimum supply language: “ASAL agrees to order a minimum of
1,000 unites per year.”
o Modified K applied T&C of original K EXCEPT delivery time and quantity provisions.
 “P agrees to supply ASAP with Aeron chairs ordered by ASAL within its
established manufacturing lead times.”
 No minimum quantity term for the chairs
 Rule: An optional promise does not furnish consideration.
Wood v. Lucy, Lady Duff-Gordon (1917)
 Facts: Lucy agreed to an exclusivity deal where only Wood could market her brand, and she
would get 50% of the profits he received for marketing her brand. Wood also agreed to take out
patents/copyrights/trademarks necessary to protect Lucy's designs.
o Lucy contends not enforceable because of lack of consideration – Wood does not bind
himself to anything
 Held: K is enforceable because there is an implied promise on Wood's part.
o Implication that P’s business organization will be used for the purpose for which it is
adapted
 “his promise to pay the defendant one-half of the profits and revenues resulting
from the exclusive agency and to render accounts monthly was a promise to use
reasonable efforts to bring profits and revenues into existence.” (pg. 123)
 Rule: A promise may be implied by the terms of the contract (e.g. to use reasonable efforts); an
implied promise may constitute consideration.
 What was the court's reasoning for finding an implied promise?
o Compensation structure (50%)
o Providing a monthly accounting of his activities

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 o Exclusivity in dealing
 If the court had not found an implied promise, would the contract be enforceable?
o 50% of the profits? IP protections? Exclusivity in dealing?
o Ex. Give me your umbrella, and I will give you $10 tomorrow if I have cash.

MODIFICATION
 Common approach parties take to deal with uncertainty
o Parties enter into tentative agreement that contains the terms that appear best at the outset
of the relationship
 expectation that the agreement will be updated over time as the parties receive
new information. 

TRADITIONAL Relatively reluctant to lend their authority to enforce the kind of flexible adjustments that
APPROACH arise in the context of relational contracts, and tended to apply relatively rigid and
formalistic doctrines, such as the pre-existing duty rule or the illusory promise doctrine,
that avoided their having to do so.

MODERN More willing to step in. But doing so requires them to employ doctrinal tools that are less
APPROACH like rules, and more like standards: such as the duty of good faith. These doctrines are
arguably more equitable and better suited to the details of the individual relationship.  But
their application is more uncertain. 

MODIFICATION: Amends an existing contract (can be by adding, subtracting, or changing the terms).
 Courts now often apply Restatement §89:
o modification is binding if
 (a) fair and equitable in view of unforeseen circumstances or
 (b) provided by statute or
 (c) justice requires in view of material change of position in reliance on promise
 Novation served as a formalism to get around the pre-existing duty rule
o Parties would tear up the old contract, affix signatures to a new contract with modified
terms
o See Schwartzreigh v. Baman-Basch where PED rule didn’t apply because old contract
was rescinded and new contract formed
 UCC §2-209: no need for fresh consideration in order to modify a contract, just need good faith
negotiation and fair and equitable in light of the circumstances
o Good faith:
 In general: “Honesty in fact in the conduct or transaction concerned.” 
 For merchants: “Honesty in fact and the observance of reasonable commercial
standards of fair dealing in the trade.”

PRE-EXISTING DUTY RULE (RESTATEMENT §73)

 If a person is already obliged to perform an action under an existing contract, that action cannot
serve as consideration for another contract (or for a modified contract in which the other party
offers something new).

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  The logic of this rule is that the promisor cannot sell the same performance twice, anymore
than a car dealer can sell the same car twice.  
 Pinnel’s Case (ancient English) which suggested you could get around the PED rule if you
adjusted the obligations so that a fresh consideration exists
o but it has to differ in more than a nominal way
o See Lingenfelder v. Wainwright Brewery (P stopped work until D agreed to pay him
more; Courts said this was extortion, no consideration)
o Compare Angel v. Murray where court upheld pay increase because demands on
collection had increased

MODIFICATION STATUTES AND RULES

COMMON LAW modification of a contract requires additional consideration.

§ 73 PERFORMANCE OF LEGAL Performance of a legal duty owed to a promisor which is [1]neither

DUTY doubtful [2] nor the subject of honest dispute is not consideration; but a
similar performance is consideration IF IT DIFFERS FROM WHAT WAS
REQUIRED BY THE DUTY in a way which reflects more than a pretense of
bargain.

§ 89 MODIFICATION OF
EXECUTORY CONTRACT
(APPLIES TO EXECUTORY
CONTRACTS: TERMS ARE SET
OUT TO BE FILLED AT A LATER
DATE)
A promise modifying a duty under a contract not fully performed on either
side is binding
(a) if the modification is fair and equitable in view of circumstances
not anticipated by the parties when the contract was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in view of material
change of position in reliance on the promise.

§ 2-209. MODIFICATION,
RESCISSION AND WAIVER.
(1) An agreement modifying a contract within this Article needs no
consideration to be binding.
(2) A signed agreement which excludes modification or rescission except by
a signed writing cannot be otherwise modified or rescinded, but except as
between merchants such a requirement on a form supplied by the merchant
must be separately signed by the other party.
(3) The requirements of the statute of frauds section of this Article (Section
2-201) must be satisfied if the contract as modified is within its provisions.
(4) Although an attempt at modification or rescission does not satisfy the
requirements of subsection (2) or (3) it can operate as a waiver.
(5) A party who has made a waiver affecting an executory portion of the
contract may retract the waiver by reasonable notification received by the
other party that strict performance will be required of any term waived,
unless the retraction would be unjust in view of a material change of position
in reliance on the waiver.

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23
MODIFICATION CASES

Gray v. Martino, Sup. Ct. of NJ (1918).

 Facts: Plaintiff was a police officer who provided information about a theft of diamonds in
agreement for a reward she was offering for the recovery of the property. P sued to collect the
$500 reward for the information. Jury awarded it but was appealed.
 Held: Reversed. P could not collect $500 for helping solve a case while also police officer.
 Legal Duty Rule It is not consideration to promise to perform an act which a promisor is already
obligated to perform.
Lingenfelder v. Wainwright Brewery Co., Sup. Ct. Missouri (1891).
 Facts: Plaintiff's predecessor refused to finish a construction job for Defendant, so D offered P
5% of different sale to complete the job. P sued D for the 5%.
 Held: D did not have to pay the additional 5% because the K lacked consideration.
 Rule: When a party has an existing contractual duty, he cannot demand additional compensation
to complete performance (without additional consideration).
Angel v. Murray, Sup. Ct. RI (1974).
 Facts: D completed the first 3 years of his garbage collection contract, then asked to increase
payment for the fourth year due to unanticipated increases in city dwellings. The city agreed. He
then asked for an increase for his fifth year as well, to which the city agreed.
 Held: Modifications were valid due to unanticipated circumstances.
 Rule: As long a contract has not been fully performed on either side, it can be modified after
partial performance.
o A modification for reason of unanticipated circumstances does not always require
consideration
Schwartzreich v Bauman-Basch (Squib Case, Novation)
 Facts: Parties called off their old contract which provided for payment of $90 a week, and then
immediately entered into a new contract that provided for payment of $100 week. They signaled
the destruction of the old contract by physically tearing off the paper that contained their
signatures.
 Held: new K binding, even though it unilaterally increased the burdens of only one of the parties.
o PED did not apply because rather than just modifying the old contract, the parties
rescinded it, and then created an entirely new one.  
o When they rescinded the old contract, they mutually released each other from their duties
under it. Because the parties took two steps in establishing their new arrangement, rather
than one, and because they formalized it with the ritual of tearing off their signatures, the
court said it was okay.

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WAIVER
WAIVER: a voluntary election not to enforce one’s rights
 Beneficiary of the term elects not to insist upon compliance after the time for occurrence has
passed
 A relinquishment of a right or condition in a contract
o you can waive a condition in a contract without consideration if that contract is not a
material part of the agreed exchange (Restatement §84)
 No consideration requirement for waiver
 See Nassau Trust Co. v. Montrose Concrete) if K is still executory such waiver
can also be withdrawn unilaterally if other party has not relied on waiver and
there is still reasonable time to fulfill condition
 Only non-material terms can be waived – you cannot waive the actual consideration of a contract
o A change in a material (essential) contractual term will be seen as a modification, and
would require consideration.
 Retraction: A waiver can be retracted by giving notice before the other party acts in reliance
of the waiver and there is still reasonable time for the condition to be fulfilled
 Doesn’t need to be an express waiver – can be implied via conduct
o See Clark v. West – P was supposed to stay sober while writing book, he didn’t but court
allowed the waiver since D had acted as though condition was waived and substance of K
was about writing the book not able keeping P sober

WAIVER RESTATEMENT

§ 84 PROMISE TO (1) Except as stated in Subsection (2), a promise to perform all or part of a conditional
PERFORM A DUTY duty under an antecedent contract in spite of the non-occurrence of the condition is
IN SPITE OF NON- binding, whether the promise is made before or after the time for the condition to occur,
OCCURRENCE OF A unless
CONDITION (a) occurrence of the condition was a material part of the agreed exchange for
the performance of the duty and the promisee was under no duty that it occur; or
(b) uncertainty of the occurrence of the condition was an element of the risk
assumed by the promisor.
(2) If such a promise is made before the time for the occurrence of the condition has
expired and the condition is within the control of the promisee or a beneficiary, the
promisor can make his duty again subject to the condition by notifying the promisee or
beneficiary of his intention to do so if
(a) the notification is received while there is still a reasonable time to cause the
condition to occur under the antecedent terms or an extension given by the
promisor; and
(b) reinstatement of the requirement of the condition is not unjust because of a
material change of position by the promisee or beneficiary; and
(c) the promise is not binding apart from the rule stated in Subsection (1).

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WAIVER CASES

Clark v. West (1908)

 Facts: West and Clark had a contract whereby Clark would write law books for West for $2 per
page. If Clark abstained from drinking, however, West would pay him $6 per page. Clark did not
abstain from alcohol, but argued that the alcohol did not interfere with his work, and that West
waived the provision by continuing to accept work from Clark despite knowing that Clark had
drank.
 Holding: Clark is allowed to argue that a waiver occurred. 
 Note: Court does not rule that there was a waiver, only that a waiver is possible (allowed) in this
case.
 Rule: If some condition in the contract constitutes the actual consideration for the contract
(material term), that condition cannot be waived. However, if the condition is merely a condition
precedent (non-material term), it may be waived. A waiver does not need to be express. It can
be implied.

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The Element of Reliance
The element of reliance allows courts to find a way to enforce a claim where a donative promise had been
relied upon. The element of reliance makes an agreement enforceable on the basis that it is unfair when
someone incurs a loss as a result of reliance on a promise.

PROMISSORY ESTOPPEL RESTATEMENT

§ 90 PROMISE 1) A promise, 2) which the promisor should reasonably expect to induce

REASONABLY INDUCING action or forbearance on the part of the promisee or a third person 3) and
ACTION OR which does induce action or forbearance 4) is binding only if injustice can
FORBEARANCE be avoided only by enforcement of the promise. 5) The remedy granted for
breach may be limited as justice requires.

 According to §90 of Restatement, reliance isn’t enough by itself to make a promise legally
binding. Doctrine can apply even if there is no consideration (and often does)
o Eliminates the need to have “bargained for” consideration
 Courts once refused to enforce this because of lack of consideration (Kirksey v. Kirksey)
 But this has changed since the adoption of §90
o See Feinberg v. Pfeiffer: corporation made donative promise to pay secretary money,
reneged certain amount that secretary relief on
 There must be actual reliance on the promise for the court to enforce it
o See Hayes v. Plantations Steel Co.: P had already planned to retire before promise, thus
no reliance

DISTINCT ELEMENTS TO MAKE CASE FOR LIABILITY

1. There needs to be a promise

2. There needs to be an action or forbearance
3. The action or forbearance must be induced by the promise
4. The reliance must be of a sort that the promisor reasonably should have expected (and this
probably requires that the reliance be reasonable
5. Failure to enforce must result in injustice. In this regard, various factors are relevant, including
whether reliance was reasonable given all the circumstances. Reliance isn’t enough to make a 
In order for there to be legal reliance, there needs to be a change of behavior:
 either an act or an omission.
 the person who undertakes the act (or the omission) is worse off in material terms than they
would have been otherwise.

EQUITABLE ESTOPPEL:
 A says B x is true; B acts based on x being true; B sues A where x being true matters – A cannot
now claim that x is not true

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  A is estopped from using this defense

RELIANCE CASES: PRE-1932

Kirksey v. Kirksey, (1845) NOT GOOD LAW

 Facts: D wrote letter to brother’s widow P promising her that he would provide a place for her to
live if she came to live with them. P moved with her kids to D’s land. After two years, they were
moved to the woods. In the fourth year they were required to leave. 
 Held: For D (without analysis)
 Rule: Only bargain fulfills the requirement of consideration.
 Note: This was the classical view

MODERN RELIANCE

Feinberg v. Pfeifer, (1959)

 Facts: P promised $200/month for life upon retirement. Brought action when the payments were
discontinued
 Held: For P
 Rule: Reliance makes a donative promise enforceable, even in the absence of classical
consideration.
 Reminder: classical consideration is a promise given in order to induce the consideration and vice
versa.

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The Element of Benefit
Like reliance, the element of benefit is not only a part of contract law. The separate body of law that
governs when people acquire obligations as a result of receiving a benefit is restitution.
 If you receive a benefit from someone else, even if you never offered something in return, you
can still be made to pay for it

RESTITUTION
The idea that liability can be derived from benefit received; depends on the presence of unjust
enrichment:
 If you have been enriched in a manner that would make it unjust to retain what you’ve received;
someone shouldn’t be able to freely retain a benefit they have no right to if the result would be
injustice
o Example) Person A mistakenly sends one million dollars via wire transfer to Person B.
Person B does not get to keep the money.
 Restitution is equitable in nature, so the outcome of restitution cases can depend sensitively on
the factual circumstances.

MCMANSION RESTITUTION EXAMPLE

Contractor accidentally paves your driveway. Received an objective benefit but not obvious that it’s
There is no way to give the driveway back, a benefit to you.
but you might not spend money this way...

Contractor did on purpose assuming you will Weak case for restitution. Contractor has overridden
pay for it  autonomy. The law will not make you pay him.

Contractor is a landscaper and sees a dead Benefit is clearer. You would have been obliged to
tree. He removes it because he knows it is a pay at some point. If he goes uncompensated, you
liability.  would have gained at his expense. Case not clear

Contractor mistakenly goes to the wrong Case for restitution is strong. Contractor made an error
home. You are home and notice but do not but you could have prevented and you didn’t.
stop him

UNJUST ENRICHMENT
 You have been enriched in a manner that would make it unjust for you to retain what you’ve
received
o You can’t inherit money from your father if you murdered him to get ti
 Based on the principle that no one should profit from his or her own wrong
 Equitable remedy, highly fact-sensitive
 Implied contract in-law

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PAST AND MORAL CONSIDERATION

 Courts used to be hesitant of enforcing promises based off past consideration (because they
thought “moral consideration” was not actual consideration)
 Past benefit and moral obligation alone are insufficient to make a promise binding
o See Mills v. Wyman – P took care of D’s son, D promised to pay P for it but then reneged.
Court held that only a moral obligation existed so the promise was not binding.
 See Restatement §86:
o (1) a promise made in recognition of a benefit previously received by the promisor from
the promisee is binding to the extent necessary to prevent injustice
o (2) a promise is not binding under subsection (1) if
 (a) the promisee conferred the benefit as a gift or for other reasons the promisor
has not been unjustly enriched or
 (b) to the extent that its value is disproportionate to the benefit
 But if one receives a material benefit and makes a promise in consideration of that benefit such a
promise may be binding
o See Webb v. McGowin – P saved D’s life, D promised to pay him money for the rest of
his life. Court said that since a material benefit had been conferred onto D the promise
was binding
 But even where material benefit conferred directly to D, some courts have
refused to enforce based off of restitution

RESTITUTION CASES (PAST AND MORAL CONSIDERATION)

Mills v. Wyman, (1825)

 Facts: “Good samaritan” case. D’s son became ill while  returning from a voyage at sea. P took
Son in and cared for him until he died. After hearing what P had done, D offered to pay for the
expenses P incurred while caring for Son. Later went back on the promise.
 Held: For D. Promise not enforceable.
 Takeaway: Past benefit and moral obligation alone are insufficient consideration to make a
promise enforceable.
Webb v. McGowin (1935)
 Facts: P had to fall to divert block away from D (his boss). P was crippled for life, so boss
promised pension for rest of his life. Boss paid the pension for several years but they were
discontinued after the boss died.
 Held: For P, because there was a material benefit to D.
 Takeaway: A moral obligation may be sufficient consideration to support a subsequent
promise to pay where the promisor has received a material benefit. 
In re Crisan, (1961)
 Facts: P was unconscious and taken to public hospital/given medical care before she died. Issue
was whether her estate had to pay hospital for medical care given to her while unconscious. 
 Held: for hospital, on restitution (benefit given and received) basis.

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  Takeaway: If a benefit is given that one can assume the other would want (given the opportunity
to bargain for it), subsequent compensation may be required.
Nursing Care Services v. Dobos, (1980)
 Facts: D got nursing care at 3 different stages of recovery. D refused to pay for Nursing Care’s
services, arguing that she never signed a written contract or orally agreed to do so.
 Held: For P
 Takeaway: If someone knowingly and voluntarily accepts a particular service, they may be liable
to compensate the other party for the benefit they received. 

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The Element of Form
 People use and have used many types of forms when entering into contracts.
o Examples include: a legal seal, a writing, nominal consideration, recital of consideration,
deploying special terms of art like “value received”. 
 Courts used to rely more on formalistic/symbolic measures: seal, shaking hands
 The tension between form and substances always exists: is the substance really there?
 Four concerns:
o Evidentiary: how do we have proof that a contract occurred?
o Cautionary: how do we ensure adequate deliberation before parties contract?
o Channeling: how do we make this exchange clear and definite?
o Deterrent: getting rid of problematic contracts
 Language of exchange doesn’t change lack of consideration if nothing more than that language
exists (Doughtery v. Salt)

NOMINAL CONSIDERATION
 an exchange that has the form of a bargain but not the substance of a bargain because it is clear
that the promisor does not view what she gives up as the price of what she gets
 present when obtaining the item is not an apparent motive of the promisor in making the promise.
 A promise supported by nominal consideration is not binding, even if it includes all other forms
of a contract

SUFFICIENCY VS. ADEQUACY

 Courts are hesitant to make determinations of adequacy (whether consideration was fair). 
 Modern exception: nominal consideration is sufficient to make options and surety promises
binding

ELEMENT OF FORM CASES

 Schnell v Nell, Sup. Ct. Indiana (1861).

o Facts: Schnell agreed to honor his wife’s will (which she did not have the assets to fulfill)
by promising each heir $200, in return for being paid one cent. Schnell subsequently
refused to honor the agreement.
o Held: Schnell did not have to pay.
o Rule: Promise made in return for nominal consideration (consideration in name only) is
unenforceable, even if it contains the formalities of consideration.

NOTE ON FORM AND THE HISTORY OF THE SEAL

 Prior to statutory reform, a promise under seal occupied special status in contract law:
enforceable even though it was donative
 Writing, ritual of hot wax, and physical object, ring personifying owner

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 Ensure deliberation and proof
 ⅔ of states have adopted statutory provisions depriving the seal of binding effect

33
Defenses
 Plaintiff must first establish a prima facie case in a breach of contract action (must show mutual
assent, consideration, breach, and damages)
 Once that’s done, defendant can respond with affirmative defense or disprove one of the
elements:
o Instant retraction is generally not a defense (Lucy v. Zehmer)

DURESS
 Improper threat made by one party leaves other party with no reasonable alternative but to accept
bargain
o Hard bargaining does not equal duress (Batsakis v. Demotsis)
 3rd party can also cause duress if they make an improper threat that the other party is aware of and
takes advantage of
o But courts are leery of enforcing this – would have to not act in good faith
 Courts generally distinguish between duress and distress

DURESS CASES

 Totem Marine Tug & Barge, Alyeska (1978)

o Facts: Totem had an agreement to transport pipeline to Houston by certain date but
circumstances made it impossible. Totem submitted termination invoices (300,000)  after
Alyeska terminated the contract. Totem needed cash and without cash they would go
bankrupt. Totem received a settlement offer of 97,000. They agreed. Filed suit on the
ground of economic duress. 
o Held: Facts were sufficient to allege duress, so enough dispute to go to trial. Summary
judgement is reversed. 
o Rule: Duress exists where…
 (1) one party involuntarily accepted the terms of another
 (2) circumstances permitted no other alternative and
 (3) such circumstances were the result of coercive acts of the other party

UNCONSCIONABILITY
 Terms of a contract are so unfair so as to be void as a matter of public policy
 in the context of the commercial background, a clause is unconscionable when it is so one-sided
that a court should as a matter of judicial policy refuse to enforce it
 can be substantive or procedural
 Substantive: something wrong with the bargain itself; When terms are harsh, unfair, or unduly
favorable to one of the parties. Refers to situations in which the outcome of the bargaining
process is excessively one-sided.
o Examples: Exorbitant interest rates, harsh penalties for default, waiver of legal protection
or proper forum (in light of the general commercial context).

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 o No Desire to Contract: Unfairness could lie in the fact that the weaker party did not
desire the transaction but was unfairly persuaded to enter it (E.g. door-to-door sales
representative convinces woman to buy two high-priced vacuums).
 Procedural: something wrong with the bargaining process; When one party uses its position of
dominance to impose the contract or particular contract terms on the weaker party. Refers to
situations where something is wrong w/ bargaining process.
o Factors: Factors that can lead to procedural unconscionability are disparity in bargaining
power, sophistication, and knowledgeability.
o Abuse: It is not enough that the factors are present, but they must be abused (pressure,
deception, or unfair persuasion) in a way to impose will on the other party.
o Lack of Meaningful Choice: Walker Thomas Furniture defines unconscionability as the
absence of meaningful choice by one party resulting in contact terms that are
unreasonably favorable.

UNCONSCIONABILITY If a contract or term thereof is unconscionable at the time the contract is made a
(RST §208) court may refuse to enforce the contract, or may enforce the remainder of the
contract without the unconscionable term, or may so limit the application of any
unconscionable term as to avoid any unconscionable result.

UNCONSCIONABILITY (1) If the court as a matter of law finds the contract or any term of the contract to
(UCC §2-302) have been unconscionable at the time it was made, the court may refuse to enforce
the contract, or it may enforce the remainder of the contract without the
unconscionable term, or it may so limit the application of any unconscionable term
as to avoid any unconscionable result.
(2) If it is claimed or appears to the court that the contract or any term thereof may
be unconscionable, the parties shall be afforded a reasonable opportunity to present
evidence as to its commercial setting, purpose, and effect to aid the court in making
the determination.

UCC UNCONSCIONABILITY

 UCC §2-302, comment 1 suggests that this provision is generally invoked when there had been a
determination that a contract or a part of a contract is “contrary to public policy or to the
dominant purpose of the contract”
o Terms may be “so one-sided”
o Determination is made in light of the context in which the contract was made
 UCC §2-302 entitles courts to strike down the entire contract or to sever the unconscionable
provision

HOW TO ARGUE UNCONSCIONABILITY

 Lack of meaningful choice

 Gross inequality of bargaining power

A NOTE OF WARNING RE: UNCONSCIONABILITY ARGUMENTS

 Courts grant relief based on unconscionability very rarely.

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  It is not a scape goat for contracts that feel “unfair” (See Batsakis v. Demotsis)
 And remember, the court in Walker-Thomas Furniture did not even say that the contract was
unconscionable per se.
o The case was remanded for a determination of unconscionability.

 To determine reasonableness or fairness, the terms of the contract must be considered “in the
light of the general commercial background and the commercial needs of the particular trade or
case . . ." (Walker Thomas Furniture)

HOW TO AVOID UNCONSCIONABILITY?

 Avoid legalese
 Avoid pressure (door-to-door sales)
 Have them write out separately the clause that matters and sign it
 Don’t use home furnishings, other essential items to securitize

UNCONSCIONABILITY CASES

 Williams v. Walker-Thomas, (1965)

o Facts: Furniture store sells to low-income customers. Pro rata clause in furniture contract
so that nothing is paid off until everything is paid off. Also a cross-collateral clause so
that a default on the payment of one item means store can repossess all items. P did
default on a small amount, and they took all her furniture.
o Held: For P. Case was remanded.
o Rule: An unconscionable contract (one that offends the sensibilities of justice) is not
enforceable.

MISTAKE
 one or both parties mistaken about some fundamental aspect of the contract
 R2K §151 defines mistake as a belief that is not in accord with the facts.
 Contracts are often formed with incomplete information.
 Sometimes, the circumstances make the cost of performance too high to perform.
 Central question is whether risk was allocated to a party implicitly in the formation of a contract
 Restatement §154 tells us when a party bears the risk of mistake
 If other party knows that the other party is mistaken about basic assumption, he has duty to
disclose if he remains silent (Restatement §154)
 Basic Analysis:
o Is there an error of fact?
o Does that error go to a basic assumption of K?
o Does it materially effect K?
o Did the parties not allocate the risk?
 For unilateral mistake: do equities favor relief?
o Remedies:

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  Avoidance and restitution
 Reformation
 “as equities dictate”

MUTUAL MISTAKE
 If K explicitly based on shared mistaken factual assumption, parties can normally rescind if the
mistake has a material effect on agreed exchange (Restatement 152)
o See Sherwood v. Walker – parties thought cow was barren, it wasn’t. D can rescind.
 But most courts have adopted a stricter rule than Sherwood, requiring a mistake of kind rather
than mistake of degree
 Courts sometimes held that even if a mutual mistake did exist, the contract implied that one of the
parties assumed the risk of that mistake happening, so the contract is enforceable anyway
o See Lenawee County Board v. Messerly

MUTUAL MISTAKE CASES

 Lenawee County Board of Health v. Messerly

o Facts: Lenawaee County Board of Health condemned property that M were trying to sell
for income. No fraud or misrepresentation found.
o Issue: whether the parties’ mistake relates only to the quality or value of the real estate
transferred or to the very nature of the character of the consideration.
o Held: equity does not justify the remedy sought by the purchasers, because they bore the
risk of mistake (Restatement §154(a)).
o Reasoning: both parties mistakenly believed that the property would generate income as
rental property. It was inhabitable, so it could not generate income.
 The mistake directly affected the property’s value but also the essence of the
consideration because the “thing cold and bought [income generating property]
had in fact no existence.” (pg. 830)
 However, rescission is not available to relieve a party who has assumed the rick
of loss in connection with the mistake
 Court can make this decision because remedy is equitable in nature

UNILATERAL MISTAKE
 One party messes up – can occasionally rescind if effect of mistake would be unconscionable or
other party had reason to know that the mistaken assumption existed or caused the mistaken
assumption (goes to failure to disclose, below)
o See RLL v. Donovan: unilateral mistake caused unconscionability because price change is
nearly 30% lower than it should be

UNILATERAL MISTAKE CASES

DePrince v. Starboard Cruise Services, Inc.

 Facts: DePrince bought diamond on a cruise, Dealer mistakenly quoted him the price per carat of
the diamond rather than the total price. Difference was 250k v. 4M. Starboard notifies him of
their mistake and issues a refund. DePrince brings suit for breach of contract, specific
performance, and conversion.

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  Issue: Does a defense of unilateral mistake to a breach-of-contract claim require evidence that the
breaching party did not act negligently or with undue care?
 Held: Reversed and remanded for further proceedings.
 Four prong test: “party seeking to avoid contract must show…(1) mistake was induced by the
party seeking to benefit from the mistake (2) there is no negligence or want of due care on the
part of the party seeking a return to the status quo (3) denial of release from the agreement would
be inequitable and (4) the position of the opposing pary has not so changed that granting relief
would be unjust
 Two prong test: “court may rescind if (1) mistke did not result from an inexcusable lack of due
care and (2) defendant’s position did not so change in reliance that it would be unconscionable to
set aside the agreement”

TRANSCRIPTION ERRORS
 Parties had agreement, but they wrote it down wrong
 Can be remedied by reformation: parties show evidence of “true agreement,” write that down
o High burden of proof: clear and convincing evidence

MISTAKE RESTATEMENTS

RESTATEMENT §152: (1) Where a mistake of both parties at the time a contract was made as to a basic
WHEN A MISTAKE OF assumption on which the contract was made has a material effect on the agreed
BOTH PARTIES MAKES exchange of performances, the contract is voidable by the adversely affected party
A CONTRACT UNLESS he bears the risk of the mistake under the rule stated in § 154.
VOIDABLE (2) In determining whether the mistake has a material effect on the agreed exchange
of performances, account is taken of any relief by way of reformation, restitution, or
otherwise.

RESTATEMENT §153: Where a mistake of one party at the time a contract was made as to a basic
WHEN MISTAKE OF assumption on which he made the contract has a material effect on the agreed
ONE PARTY MAKES A exchange of performances that is adverse to him, the contract is voidable by him if he
CONTRACT VOIDABLE does not bear the risk of the mistake under the rule stated in § 154, and
(a) the effect of the mistake is such that enforcement of the contract would be
unconscionable, or
(b) the other party had reason to know of the mistake or his fault caused the
mistake.

RESTATEMENT §154 A party bears the risk of a mistake when…

(a) the risk is allocated to him by agreement of the parties, or
(b) he is aware, at the time the contract is made, that he has only limited knowledge
with respect to the facts to which the mistake relates but treats his limited knowledge
as sufficient, or
(c) the risk is allocated to him by the court on the ground that it is reasonable in the
circumstances to do so.

NOTES ON RESTATEMENT 154

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R2K §154 tells us there are three ways parties can bear the risk of mistake and therefore should bear the
costs
1. Allocated risk by agreement, explicitly as when goods are sold “as is”
2. No agreement, but one of the parties is aware of the risk and goes forward anyway
3. Common sense – what the court considers reasonable (may be informed by trade usage or
equitable considerations)

MISTAKE VS. CHANGE IN CIRCUMSTANCES

 Both involve failure to take something into account when contracting

 Time element is different
o If assumption had already failed at time contract was formed – mistake (Sherwood v.
Walker, Wood v. Boynton)
o If assumption had not yet failed at time of formation but instead failed after the
contract was underway – change of circumstance (Transatlantic Financing v. United
States)
 Compare coronation cases:
o Griffin v. Brymer (p. 821) – contract not finalized until an hour after the coronation was
cancelled. Coronation hadn’t been canceled yet so parties didn’t know about the mistake
when they signed the contract…dispute analyzed under the doctrine of mistake.
o Krell v. Henry (p. 883) – coronation cancelled after the agreement was finalized, so
dispute was analyzed under the theory of change of circumstance…specifically doctrine
of frustration of purpose.
 Formal rationale for different treatment:
o Mistake: With mistake, there was never a proper agreement – no meeting of the minds.
Would not be proper to hold parties to something they never assented to
o CoC: Both sides agree that there was a contract, person who wants out looking for excuse
– in cases of doubt they should not get it
 Substantive rationale for different treatment:
o Once a transaction has started, it is likely to be difficult and costly to unwind it, reliance
might have been undertaken

DISCLOSURE
FAILURE TO DISCLOSE
 Concealment can operate similar to fraud if promisee takes affirmative steps to prevent
promisor from discovering material fact.
 Nondisclosure can void contract if promisee fails to disabuse promisor of a mistaken belief
regarding a latent fact about a basic assumption
o at times have duty to disclose; can intertwine w broader duty of good faith
 no obligation to reveal extrinsic or exogenous facts:
o mistake regarding extrinsic or exogenous facts do not pertain to basic assumptions
(Restatement 152)
o parties do not have to reveal information regarding valuation, but do have to reveal
information regarding pricing

39
 o Laidlaw v. Oregan unilateral misunderstanding regarding the value of tobacco did not
implicate the duty to disclose
 Courts are reluctant to impose duty to disloce when facts are discovered by party;
would reduce the incentive to do fact-finding, due diligence in deal-making and
risk taking
 Have to disclose when:
o It’s necessary to correct a previous material representation
o It’s necessary to correct the counterparty’s unilateral mistake relating to contents of a
written agreement
o There’s a relationship of trust and confidence or
o It’s necessary to correct the counter party’s unilateral mistake relating to a basic
assumption, and: nondisclosure would be breach of good faith or reasonable standards
of fair dealing

DISCLOSURE CASES
Laidlaw v. Organ (1817)
 Facts: three Americans got news that the war had been ended. Price of tobacco would
immediately rise when news got out. Organ purchased tobacco from Laidlaw. Price increased by
30-50%. Laidlaw refused to deliver or seized back tobacco.
 Held: Organ was not under a duty to dislose the news.
 Rule: Where the means of intelligence are equally accessible to both parties, there is not a duty to
disclosure, but at the same time, each party cannot say or do anything tending to impose upon the
other.

UNDUE INFLUENCE
 Special relationship between parties creates risk that one of the parties won’t look out for their
own interest, so other party must instead take those interests into account
o Doctor-patient, lawyer-client, caregiver, etc.

INCAPACITY
 Promisor lacked power to enter into bargain (exceeded legal authority, child, mentally
incapacitated, intoxicated)
o Doesn’t always apply if the party incapacitated gives the appearance of being
incapacitated

FRAUD
 Promisor deceived into making promise
 Restatement §162-4: Has to be…
o 1) intentional or reckless
o 2) misrepresentation
o 3) of material fact upon which
o 4) a reasonable party
o 5) actually relied

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  Parties can opt out of the fraud defense by including no-reliance clauses or merger
o Clauses themselves can be vitiated by fraud, but otherwise removes fraud analysis re
other clauses or facts from consideration
o Theoretically reduces transaction costs
o Stands for the proposition that parties should read and understand the clauses they accede
to

IMPOSSIBILITY
 Contract could not actually occur due to change of circumstances/mistake
 Example: Taylor v. Caldwell (place where P was to have concert burnt down, so D can get out of
K without paying P
 Basic analysis:
o After K, event occurs, the non-occurrence of which was a basic assumption of contract
o Effect of occurrence is to render performance impracticable, impossible, or pointless
o Party seeking relief is not at fault
o Party seeking relief did not bear risk of event occurring

IMPRACTICABILITY
 Also a defense: contingency occurs, parties didn’t allocate risk for it, and contingency renders
performance so expensive as to be impracticable
 Courts reluctant to enforce this though unless large disparity
o See Transatlantic Financing v. US – US (D) chartered shipment from US to Iran. Charter
did not indicate route. Canal closed for political reasons. P sailed around Cape of Good
Hope to arrive at Iran and wanted to recover for additional compensation for the longer
voyage.
o “It is now recognized that ‘A thing is impossible in legal contemplation when it is not
practicable and a thing is impracticable when it can only be done at an excessive and
unreasonable cost.’’ (pg. 862)
o Rule from Transatlantic:
 Three conditions must occur for doctrine of impossibly to apply
 Something unexpected
 Risk of unexpected occurrence must not have been allocated either by
agreement or by custom
 Occurrence of the contingency must have render performance
commercially impracticable
RESTATEMENT §261 Where, after a contract is made, a party's performance is made impracticable without
his fault by the occurrence of an event the non- occurrence of which was a basic
assumption on which the contract was made, his duty to render that performance is
discharged, unless the language or the circumstances indicate the contrary.

FRUSTRATION
 Contract’s purpose can no longer be accomplished, so D can renege without penalty
o Krell v. Henry – D wanted to watch king’s procession, king cancelled, so D can renege
from paying P for his room without penalty

41
RESTATEMENT §265 Where, after a contract is made, a party's principal purpose is substantially frustrated
without his fault by the occurrence of an event the non-occurrence of which was a
basic assumption on which the contract was made, his remaining duties to render
performance are discharged, unless the language or the circumstances indicate the
contrary.

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Damages
 Damages are the default remedy under American law.
 Money damages for breach of contract are determined using concepts of expectation, reliance,
restitution, and disgorgement.
 Expectation is the dominant theory.

§ 344 PURPOSES OF Judicial remedies under the rules stated in this Restatement serve to protect one or
REMEDIES more of the following interests of a promisee:
(a) his “expectation interest,” which is his interest in having the benefit of his
bargain by being put in as good a position as he would have been in had the
contract been performed,
(b) his “reliance interest,” which is his interest in being reimbursed for loss
caused by reliance on the contract by being put in as good a position as he
would have been in had the contract not been made, or
(c) his “restitution interest,” which is his interest in having restored to him
any benefit that he has conferred on the other party.

§ 345 JUDICIAL The judicial remedies available for the protection of the interests stated in § 344
REMEDIES include a judgment or order
AVAILABLE (a) awarding a sum of money due under the contract or as damages,
(b) requiring specific performance of a contract or enjoining its non-
performance,
(c) requiring restoration of a specific thing to prevent unjust enrichment,
(d) awarding a sum of money to prevent unjust enrichment,
(e) declaring the rights of the parties, and
(f) enforcing an arbitration award.

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

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STATUS QUO ANTE: the situation that would have prevailed if the promise had never been made
STATUS QUO POST: the situation that would prevail if the promise were performed rather than
breached

STATUS QUO POSITION OF PERFORMANCE

RETURN PROMISEE TO: Reliance Expectation

Cost of completion/
RETURN PROMISOR TO: Restitution
disgorgement

GENERAL APPROACH TO DAMAGE ASSESSMENT

 Courts generally apply the expectation theory of damages because it seeks to make the non-
breaching party "whole."
 But sometimes there is no economic loss, or the economic loss is too difficult to measure.
o In those cases, other theories (reliance, restitution, or disgorgement) may be more
suitable to make the non-breaching party whole.
 Expectation, reliance, restitution and disgorgement should be understood as idealizations of what
courts are aiming for when they award damages.
o The amounts that are actually awarded in real cases may not measure up. This could be
true for very practical reasons…
 difficulties of proof: it may be very difficult to establish profits that could have
been earned from foregone opportunities for example
 some aspects of what the parties have lost or gained, such as physical injury or
the subjective enjoyment or pride taken in performing a task, are not easily
measurable in money
 institutional limitations: such as the American rule for financing litigation
under which prevailing parties are ordinarily expected to cover their own
attorneys’ fees.
 Overhead costs usually refer to expenditures that have to be incurred no matter the level of
business activity (for example, rent, insurance, license fees.)
o These kinds of expenditures need to be included when setting prices and when assessing
overall firm performance, because a business that does not take in enough revenue to
cover all of its costs, including overhead costs, will not be able to stay in business in the
long run.
o But if these expenditures are not affected when a customer breaches, they should
not be deducted when calculating expectation.
 Efficient breach is the concept that it’s not a good idea - in some cases it’s wasteful - to make
contractual parties enforce their contracts no matter what.

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Expectation Damages
 Put nonbreacher in position of performance
o Measured by the difference between nonbreacher position if fully performed –
nonbreacher position currently
 Paradigm case: Hawkins v. McGee (hairy hand)

EXPECTATION FORMULA = FULL PERFORMANCE - PRESENT CONDITION

COMMON LAW PERFORMER BREACH FORMULA:

Damages = cost of completion – amounts not paid + incidental + consequential

COMMON LAW RECIPIENT BREACH FORMULA:

Damages = expected profit + expenditures – resalable materials + incidental + consequential

SALES CASES UNDER UCC

 This is where cover and hypothetical cover come into play

 Seller breach
o Buyer can cancel, get “cover,” damages for non-delivery and specific performance
o §2-712 governs cover:
 Difference between cover and contract price + incidential and consequential =
damages
 cover must be in good faith
o §2-713 governs non-delivery damages:
 Market price (price at time buyer learned of breach, based on either place of
tender or place of arrival, depending on when rejected) – contract price +
incidental/consequential
o Idea is to put buyer in as good a position as he’d be in without breach, not better. Courts
will refuse to award §2-713 damages if it would result in a windfall to the plaintiff
 Buyer breach
o Multiple options: resell and recover difference (basically “cover”: §2-706) or get
difference between market price and contract price (“hypothetical cover” §2-708) or
recover lost profits or recover on the price
 If cover, damage = contract price – resale price – amount saved from breach (+
incidental + consequential)
 Must give buyer notice of resale (if private, just intent; if public, time
and place)
 If hypothetical cover, damages = contract price – market value – amount saved
from breach (+ incidental + consequential)
 Recover on price: if buyer accepted/rejected wrongfully, seller can recover for
price of goods.

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LOST VOLUME SELLER
 If lost volume seller, 2-708 governs: profit + reasonable overhead + incidental damages
o See Neri v. Retail Marine Corp: D could have sold 2 boats – instead only sold 1 because
of P’s breach, so D gets lost profit on the second boat as damages

MIDDLEMAN SELLER
 If the seller is a middle man, and the buyer repudiates before the seller has acquired any goods,
the seller may recover lost profits (because the seller has nothing to resell and recover)

CONSEQUENTIAL DAMAGES
 Breaches unrelated to direct breach of contract but nevertheless caused by breach
o You could have sold two boats but now can only sell one
 Lost profit for lost-volume sellers
 Foreseeability limitation: generally cannot recover for unforeseeable consequential damages
UNLESS those damages are directly communicated between parties – and even then courts are
leery
o See Hadley v. Baxendale: if you didn’t foresee the damages at the time of the contract,
you’re not liable for them unless you should have known or did know about them
 Additionally even if you did know about them you can maybe only be held liable
for a reasonable amount of damages per Victoria Laundry

INCIDENTAL DAMAGES
 Damages caused by your attempt to mitigate
o E.g. you paid for an ad to sell the boat

PUNITIVE DAMAGES
 Usually not available under contract unless tort action also involved
o Can bring tort action for bad faith breach

LIMITATIONS OF THE EXPECTATION MEASURE

 Economic waste: courts will not apply the expectation measure if they think it’d lead to
substantial economic waste; instead may just apply reliance measure
o See Peevyhouse
 Theory of efficient breach in action
 Rule: When the contract provision breached is merely incidental to the main
purpose of the contract and where the economic benefit of full performance is
grossly disproportionate to the cost of performance, damages should be
limited to the diminution in value due to non-performance

EXPECTATION CASES

Hawkins v. McGee (1929; Expectation Theory)

46
  Facts: McGee performed a experimental surgical procedure on Hawkins with the promise that he
would restore his burned hand to "one hundred percent good." McGee grafted skin from Hawkins'
chest to his hand. His hand ended up burned and hairy.
 Held: Hawkins is entitled to damages as if the contract had been fully performed.
 Rule: Expectation damages are measured by the difference between the value of the contract as
fully performed and the value of the non-breaching party's present condition, plus any reasonably
foreseeable incidental damages.
Louise Caroline Nursing Home v. Dix Construction (1972)
 Facts: Nursing Home sought damages because Dix did not complete a construction project on
time.
 Held: It is contrary to public policy to award damages that would put a PL in a better position
than if the DF had carried out the contract. No compensable damages have occurred.
 Rule: Breach by Performer of Services: Damage for an incomplete project = reasonable cost for
completion - any amount that has not been paid.
Peevyhouse v. Garland Coal & Mining (1962)
 Facts: The Peevyhouses leased their farm to Garland to allow them to strip mine coal deposits
under the land. As part of their lease (not the main part), Garland agreed to restore the farm
property at the end of their lease. The cost of restoring the property was $29,000. The court
determined the diminution in value of the property to be $300.
 Held: The cost of the restoration to Garland would grossly outweigh the benefit of the restoration
to the Peevyhouses. Peevyhouses got the $300.
 Rule: When the contract provision breached is merely incidental to the main purpose of the
contract, and where the economic benefit of full performance is grossly disproportionate to the
cost of performance, damages may be limited to the diminution in value due to non-performance

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Reliance Damages
RELIANCE DAMAGES
= OUT-OF-POCKET EXPENSES + OPPORTUNITY COSTS
 Put nonbreacher in position before contract existed
o The P must be prejudiced in that something of value has been wasted or lost, and cannot
be salvaged.
o If something is not wasted, lost, or could be salvaged, it may not be recovered
 When reliance damages are used to remedy promissory estoppel, the duty to
mitigate enters in through the elements of causation and justice (as opposed to
applying as a separate doctrine)
 Court will generally apply this and other measures of damages if its too difficult to apply
expectation damages
 Nonbreacher receives costs incurred from reliance on breacher + opportunity costs
 Can be given even if expectation measure would result in zero damages
o See Security Stove & MFG Co. v. American Rye Express: Company wasn’t guaranteed
profits off of exhibition, but contract’s purpose was frustrated so court awards reliance
damages
 Shows the difference between measure and motive of damages: even though by
expectation measure P lost nothing, motive is to compensate them for waste
 Pre-contract expenditures generally not given as reliance
o However, if other party knows those expenditures have been incurred and will be wasted
if he breaches, he can be held liable for them
 See Anglia Television Ltd. v. Reed: actor knew that breaching would cause movie
to fall apart, so he has to pay for expenses

OPPORTUNITY COST
Foregone opportunities can also be factored into reliance if they can be reliably proven

RELIANCE CASES

Security Stove v. American Railway Express (1932)

 Facts: PL needed a furnace shipped by Oct. 8th for a convention. PL informed DF of these special
circumstances. PL made large expenditures to prepare for the convention. DF’s shipment was
late, and PL was unable to put on its display for the convention.
 Holding: DF is liable for the PL’s preparation costs.
 Takeaway: When expected profits are difficult to measure, reliance may be a more appropriate
measure of damages.

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Restitution Damages
 Restore breacher to position before contract existed – give back benefit conferred to breaching
party
o In other words: restitution seeks to return to the plaintiff the value of any benefit
conferred on the defendant by the plaintiff
 Nonbreacher can rescind contract and sue for value of performance he rendered less benefits he
received from breacher
 Remedy depends on extent of non-performance by breacher
o Can’t get restitution unless material breach
 See Osteen v. Johnson
 There are multiple measures
o Market value (quantum meruit): the total market value of a goods or service
o Net economic gain: objective and subjective gain in value to the defendant
 Objective net gain: market value measure of gain
 Subjective net gain: value to the individual
 Example: A hires B to build a patio for $100. The patio increases the value of A’s property by
$150. On top of that, A’s subjective value of the patio (the value of her using the patio between
the time when it’s built and when she sells the house) is another $125.
o B builds the patio. A refuses to pay.
 Quantum meruit: $100
 Net economic gain: $275

HOW COURTS DECIDE BETWEEN DIFFERENT MEASURES

 This is a matter of equity, so courts would likely look to traditional equity principles in
determining which measurements/benchmarks to use
o Good faith/bad faith
o Fault/willfulness
o Disproportionality
 However, different jurisdictions have different precedents, so we don’t go into this too much

RESTITUTION DAMAGES
= UNJUST ENRICHMENT
or
= AMOUNT GAINED BY BREACHING PARTY - REASONABLE VALUE OF SERVICES
ALREADY PERFORMED

UNJUST ENRICHMENT
 How to value benefit conferred?
o Quantum meruit: market value of benefit
o Economic gain
 Objective net gain

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  Subjective net gain
 See US Naval Institution v. Charter Communications:

RESTITUTION CASES

Osteen v. Johnson (1970)

 Facts: Under an oral agreement, P paid D $2,500 to promote his daughter as a singer/composer of
western country music by mailing flyers, arranging for P’s daughter to record two records ,and to
mail these records to disc jockeys. P’s daughter recorded a record, and of the 1,000 records
pressed, D sent 340 copies to disc jockeys, 200 were sent to P, and the remainder were retained
by D. D also promoted P’s daughter nationwide through mailings and other advertisements.
Copies of the second record were never pressed or mailed out despite relative success w/ first
record
 HELD: D must return the $2,500 fee, minus the actual benefit that his actions provided P.
 RULE: Restitution damages are available where there has been a contract breach of vital
performance (“substantial” breach); measured by the amount gained by the breaching party less
the reasonable value of the services the breaching party has already performed.
United States v. Algernon Blair (1973)
 Facts: P was subcontractor who provided labor and materials to D. D refused to pay for some of
the work. P sued for restitution. D claims that P would have lost money had the contract been
completed, so P is not entitled to any recovery.
 Held: Quantum meruit allows a P to recover the value of services he gave to a D, irrespective of
whether he would have lost money on the contract and been unable to recover in a suit on the
contract (expectation).
 Rule: Restitution damages may be measured by quantum meruit, the market value of a goods or
service, irrespective of expected loss on the contract.
Kutzin v. Pirnie (1991)
 Facts: Pirnie paid a down payment of $36,000 to buy a house from Kutzin, but later breached.
Contract contained no liquidated damages or forfeiture of deposit clause. Trial court entered
judgement for $17,325, but Appellate Division allows Kutzins to keep entire deposit.
 Held: Pirnies are entitled to a refund of the excess between their deposit and the amount that they
own in damages.
 Rule: a breaching party that has partially performed has a restitution claim against the recipient of
the performance, as necessary to prevent unjust enrichment.

DISGORGEMENT
Disgorgement is used to describe cases where the breacher has received affirmative benefits as a result of
the breach but the benefits didn’t come directly from the disappointed party. There is an aspect of unjust
enrichment in this case, but we can’t really call what happens restitution, since the amount that’s been
saved –or disgorged--didn’t belong to the disappointed party to begin with, so it’s not being restored. It
isn’t very common, but it is appropriate in some cases.
Ruxley Electronics and Construction LTD. v. Forsyth
 Facts: REC contracted to build a swimming pool with max depth 7’ 6” but pool built was only 6’
9.” Forsyth refused to pay the balance $39,000. REC sued for the remaining balance and F
counterclaimed for breach of contract. Facts found: 1) pool constructed was safe for diving 2)

50
 because the pool was safe for diving, value was not diminished, the only way to increase the
depth would be to demolish and start over which would cost $21,000 (and F had no intention of
building a new pool. 
 Held: Spending $21,000 on a new pool would be unreasonable since the cost would be wholly
disproportionate to the advantage of having a pool 7’ 6”. If F awarded 21,000 it would end up
with BOTH a pool that is substantially complete and profits of 21,000. This would be a windfall.
They did award damages for loss of pleasure and amenity of not being able to dive 7’6” as deep. 
 Important: Judge’s decision mentions that swimming pools are not necessities, they are for fun.
“I think that where a contract is for the provision of a pleasurable amenity...it is entirely proper to
award a general sum for the loss of the amenity.”

UCC SELLER/BUYER BREACH STATUTES

SELLER BREACH BUYER

BREACH

CATALOG OF REMEDIES 2-711 2-704

RESALE OR COVER 2-712 2-706

CONTRACT-MARKET 2-713 2-708(1)

INCIDENTAL DAMAGES 2-715 2-710

SPECIFIC PERFORMANCE 2-716 2-709

NON-CONFORMING GOODS 2-714

LOST PROFIT Limited to consequential damages under 2- 2-708(2)

715(2)

UCC DAMAGES CASES

Egerer v. CSR West (2002)

 Facts: Egerer contracted with CSR to buy fill at a rate of $0.50 per cubic yard. CSR stopped
supplying. After the breach, Egerer did not cover, and several months later, obtained price quotes
for replacement fill ranging from $8.25 to $9.00, but the prices exceeded his budget. A year later,
he purchased replacement fill at a cost of $6.39. Court awarded the difference between $8.25 and
$0.50 per cubic yard. CSR appealed, contending that the court relied on the market price of a
superior product six months after buyer learned of the breach.
 Rule: When a seller breaches, the buyer may recover damages equal to the difference between
market price (at the time buyer learned of breach) and the contract price.
 Held: A court is granted reasonable leeway (UCC 2-723) in measuring market price when no
immediate substitutes are available. Although the quotes Egerer received were months after the

51
 breach, they were reasonable and customary. CSR failed to offer evidence that suitable
replacement fill was available at a lower price at the time of the breach
HWH Cattle v. Schroeder (1985)
 Facts: HWH contracted to buy 2000 cattle from Schroeder. HWH was then going to sell the cattle
to Western Trio for a profit. Schroeder could only deliver 1397 cattle. Trial court limited HWH’s
damages to his expected profit from the sale to Western Trio. Plain Market-Contract damages
would have given HWH a windfall.
 Held: Upheld the trial court’s holding.
 Rule: The expectation measure places an individual in as good a position as if the contract had
been completed, but no better. If the expected profit is lower than profit from cover or
hypothetical cover, damages are limited to the original expected profit. Courts are hesitant to
award windfalls (punitive damages).
 Note: This case really could have gone either way. Not all courts apply this rule.

Other Remedies
LIQUIDATED DAMAGES
 Restatement 356, UCC 2-718: liquidated damages must be reasonable in light of actual loss and
difficulties of proof
 Damages beyond this limit are unenforceable penalties
 Damages can be additionally limited under §2-719
 Parties can contract for damages that are below expectation damages, just not above expectation
damages
o Note: it’s difficult to see if something is a penalty re-characterized as something else
 Ie reward or option
o If it’s done fairly, a court will probably enforce, but if it looks like a penalty, it may be
hard to enforce
 If that is the case, said damages must not be a penalty and must instead be a reasonable
approximation of damages resulting from breach
o See Wasserman’s Inc. v. Middletown – where liquidated damages clause void as penalty
because no attempt at reasonable approximation of damages caused by breach
o If it’s impossible to calculate what those damages would be at the time of K, then any
liquidated damages clause is void as penalty
 See Hutchinson v. Tompkins
o Courts scrutinize these clauses severely, will void them on a basis separate from
unconscionability
o Can get around this if phrased as buyout option – courts look more favorably on those
Deposit under UCC:
 if the buyer paid a deposit, and then breaches, then his deposit back, minus any liquidated damage
clause, or in the absence of such a clause, a $500

LIQUIDATED DAMAGE STATUTES

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 RESTATEMENT §356 (1) Damages for breach by either party may be liquidated in the agreement but only at
an amount that is reasonable in the light of the anticipated or actual loss caused by the
breach and the difficulties of proof of loss. A term fixing unreasonably large
liquidated damages is unenforceable on grounds of public policy as a penalty.
UCC § 2-718: (1) Damages for breach by either party may be liquidated in the agreement but only at
an amount which is reasonable in the light of the anticipated or actual harm caused by
the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of
otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated
damages is void as a penalty.

LIQUIDATED DAMAGE CASES

NPS LLC v. Minihane (2008)

 Facts: P, developer of Gillette Stadium (home field of the New England Patriots), entered into
an agreement with D, Minihane, for the purchase of a ten-year license for two luxury seats. D was
to pay $3,750 per seat annually for the 2002 to 2011 seasons. A liquidated damages provision
provided that in the event of a default, D would be required to pay the balance for all the years
remaining. D paid a $7,500 security deposit and made a $2,000 payment toward the license fee
for the 2002 season but made no further payments. P sued seeking the full amount due under the
contract. The trial judge denied the liquidated damages, finding them “grossly disproportionate to
a reasonable estimate of actual damages made at the time of contract formation.” P appealed.
 Held: The liquidated damages provision is enforceable. The judgment is modified to award NPS
the total amount of unpaid license fees due under the agreement: $65,000 plus interest.
 Takeaway: (1) Where damages are difficult to estimate at the outset, and the defendant is
required to pay no more than the total amount he would have paid had he performed his
obligations under the contract, the sum provided bears a reasonable relationship to the anticipated
actual damages resulting from breach. (2) In the case of an enforceable liquidated damages
provision, mitigation is irrelevant and should not be considered in assessing damages.

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THE DUTY TO MITIGATE
 Not a formal duty, but rather a limitation on damages.
 Once a party breaches, nonbreaching party has a duty not to increase damages caused by
breach.
o not really a “duty” but nonbreacher won’t recover for additional damages if he failed to
mitigate
 for personal services: duty to mitigate means you only have to accept substantially similar offer;
no duty to accept different or inferior offer
o See Shirley Maclain Parker v. Twentieth Century Fox – no duty to accept part in different
movie in different genre in different place
 Supposed to stop performance after notice of breach
o See Rockingham County v. Luten Bridge – nonbreacher kept building bridge after
notified of breach, could only get damages for performance prior to breach
 Under UCC: duty to mitigate includes cost of cover (you buy substitute good, get money for that
purchase) or hypothetical cover (you choose not to cover, get market price if you had covered)
 The principle operates defensively as a limit on the damages that a non-breacher cannot recover
from a breacher.
o Generally a promisee cannot collect damages that could have been avoided by
reasonable mitigation.
o The basic idea: a person who suffers a breach of contract is expected to take steps to
minimize loss from breach, rather than run up the tab, even if they are totally innocent. 
 Example) if the cheapest way for the Peevyhouses to deal with that big hole in
their back yard is to sell their field at the market price to somebody who doesn’t
mind the big hole, and use proceeds to buy another piece of land that doesn’t
have a big hole in it, that might be what we expect them to do. 
 Losses incurred in avoiding damages (incidental damages):
o A plaintiff may recover reasonable costs incurred in attempts to mitigate damages. It does
not matter whether these attempts are successful or not.
o (Mr. Eddie, Inc. v. Ginsberg below)

REASONABLE EFFORTS:
The plaintiff only needs to make reasonable efforts to mitigate. They do not need to incur considerable
expense, risk, or humiliation. 

RESTATEMENT DUTY TO MITIGATE

§ 350 AVOIDABILITY AS A
LIMITATION ON DAMAGES
(1) Except as stated in Subsection (2), damages are not recoverable for loss
that the injured party could have avoided without undue risk, burden or
humiliation.
(2) The injured party is not precluded from recovery by the rule stated in
Subsection (1) to the extent that he has made reasonable but unsuccessful
efforts to avoid loss.

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NOTE ON DUTY TO MITIGATE

 A Plaintiff who fails to mitigate does not recover damages for the avoidable loss (See
Rockingham County below)
 Different justifications for duty to mitigate:
o Efficiency: we want to give incentives for people to take cost-justified precautions when
something goes wrong – even when that something wrong is someone else’s fault
o Equity: it’s fair for people to bear the consequences of their failure to keep their promises
–but not for those consequences to be unnecessarily magnified by the promisee’s
carelessness or spite.
o Responsibility:  the defendant shouldn’t be able to make a mess and foist the cleanup
costs onto an innocent plaintiff, but the plaintiff shouldn’t treat the defendant’s breach as
an occasion to abandon ordinary norms of prudent behavior
 If the choice is between being strict about requiring mitigation and thus undercompensating the
plaintiff, and being forgiving about mitigation and thus overcompensating the plaintiff, most
courts will choose the latter.
o But the flexibility of the standard —because it’s a standard and not a rule —can leave
parties very uncertain about where they stand.

DUTY TO MITIGATE CASES

Shirley MacLaine Parker v. Twentieth Century Fox (1970)

 Facts: MacLaine contracted with Fox to play a female lead in the film Bloomer Girl, guaranteeing
her $750,000. Fox did not produce the film, and instead offered MacLaine a part in a Western
film, Big Country, Big Men. MacLaine did not accept the offer. Fox argued that MacLaine
unreasonably refused to mitigate damages by not accepting the second offer.
 Held: MacLaine did not have to accept a substantially different position, nor seek an inferior
position to mitigate.
 Rule: Where the contract regards personal service, the plaintiff does not need to accept a position
that is inferior to or substantially different from the one contracted for.
 General Rule of Employment Discharge: “...is that the measure of recovery by a wrongfully
discharged employee is the amount of salary agreed upon for the period of service, less the
amount which the employer affirmatively proves the employee has earned or with reasonable
effort might have earned from other employment...the employee’s rejection of or failure to seek
other available employment of a different or inferior kind mat not be resorted to in order to
mitigate damages.
Mr. Eddie, Inc. v. Ginsberg (1968)
 Facts: Ginsberg was wrongfully dismissed by D early in term of 3 year employment contract. He
took another job which he held for 34 weeks and earned $13,760. After he left he spent $1,340
unsuccessfully looking for other employment.
 Held: Ginsberg entitled to recover remaining salary minus the $13,760 but plus the $1,340
expense. 
 Rule: “the expenses for which a recovery may be had include necessary and reasonable
disbursements made in an effort to avoid or mitigate the injurious consequences of the
defendant’s wrong...if such expenses are the result of a prudent attempt to minimize damages

55
 they are recoverable even though the result is an aggravation of the damages rather than a
mitigation.”

Rockingham County v. Luten Bridge (1929)

 Facts: Rockingham County contracted Luten to build a bridge. Rockingham County then decided
not to proceed with the bridge and sent notice to Luten. Before Luten received notice, it had
performed $1,900 worth of work on the bridge. Luten continued construction of the bridge and
then sued for the full contract price.
 Held: When the non-breaching party receives notice of a breach, the contract is considered
broken, and the non-breaching party must cease performance. Luten is not entitled to costs
accumulated after notice of breach.
 Rule: A plaintiff cannot recover for damages that could have been prevented by reasonably
refraining from action.
 The case was remanded. What was the proper measure of damages?
 Lost profits + labor and materials used up to $1,900 (not the rest)
 “...[W]e do not think that, after the county had given notice while the contract was still executory,
that it did not desire the bridge built and would not pay for it, plaintiff could proceed to build it
and recover the contract price...after plaintiff had received notice of the breach, it was its duty to
do nothing to increase the damages flowing therefrom.”
Bomberger v. McKelvey (1950) [GOOD CASE FOR RULE VS. EXCEPTION OF DUTY TO
MITIGATE]
 Facts: Ps orally consented to pulverize and remove a building on parcels possessed by Ds for
$3,500. Ps planned to use materials obtained from this demolition to build a new building under a
separate contract w/ a different party. Ds were not able to secure materials for the examined
supermarket and informed Ps that the demolition project was canceled. Ps ignored this instruction
and demolished the building. Ds filed a counterclaim against Ps seeking damages for trespass and
waste.
 Held: Ps fully performed & were entitled to the full $6,000 due under the agreement.
 Takeaway: The general rule requiring a party to stop performance of an executory contract on
repudiation may give way where the plaintiff is not interested solely in profit from the agreement
but must proceed with the work in order to fulfill contractual obligations to another.
Madsen v. Murrey & Sons Co. (1987)
 Facts: Seller manufactured pool tables. Buyer agreed to buy 100 custom pool tables that they
planned to add special electronic lighting and sound effects to. Buyer breached. Seller dismantled
100 pool tables and used part of salvageable material to manufacture other pool tables, used the
balance as firewood on the basis that selling them rather than dismantling them would have
damages its reputation for quality. 
 Held: Seller had a duty to mitigate its damages and had failed because using for salvage and
firewood rather than trying to sell or market the tables at full value or discounted price was
unreasonable.
In re Kellet Aircraft Corp. (1950)
 Facts: Amerform contracted with Kellet to fabricate 5000 shower cabinets at $13.18 each. Kellet
knew Amerform needed for government orders in July, August, September 1946. In September K
sent A written notice of inability to perform. A approached 4 alternative companies and went

56
 with one who could do it for $18 per cabinet starting immediately rather than one that would
make them at $13.18 starting in four weeks.
 Held: Court reversed trial court’s ruling that K had failed to properly mitigate damages.
 Rule: “Whether or not the buyer’s obligation to mitigate damages has been discharged depends
on the reasonableness of its conduct. In this connection, reasonable conduct is to be determined
from all the facts and circumstances of each case, and must be judge in the light of one viewing
the situation at the time the problem was presented.

SPECIFIC PERFORMANCE
 SP is an equitable remedy, available only when the usual legal remedy is inadequate
o Presumptively available for real estate (at least traditionally), presumptively unavailable
for personal services (though sometimes a negative injunction serves the same purpose)
 Restatement § 360 - Factors Affecting Adequacy of Damages
o Difficulty of proving damages w/ reasonable certainty
o Difficulty of procuring substitute performance by means of funds awarded as damages
o Difficulty of obtaining damages from breaching party
 Courts dislike requiring specific performance because it gives them more work that they’re
probably not qualified to supervise
o See London Bucket Co. v. Stewart
 Only given when damages are insufficient
o See Walgreen v. Sara Creek
 Can be done if damages are unknown and costly to calculate
 Presumptively available for real estate: land is unique, can’t be substituted with
damages
 Not given if it’s a contract for personal services, however, courts may sometimes enforce a
negative injunction (covenant not to compete) if parties included an exclusivity clause in the
agreement
o See Lumley v. Wagner which de facto results in a positive injunction
 UCC 2-716 governs goods specific performance: given only if goods are unique or “other proper
circumstances” exist
o But still unusual and most likely to be awarded when there is no substitute
o Section (3) allows buyer of goods to force delivery under common law of replevin if
buyer has certain rights over those specific goods

SPECIFIC PERFORMANCE CASES

London Bucket v. Stewart (1951)

● Facts: Stewart sought specific performance of a contract to install a heating system in his motel.
● Held: Specific injunction denied.

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 ● Takeaway: Contracts for building construction are generally not specifically enforced, because
ordinary damages are an adequate remedy and because courts are reluctant to expend resources
on the extensive supervision of performance.
Walgreens Co. v. Sara Creek Property (1992)
● Facts: Walgreens had exclusivity clause in Sara Creek’s mall. Sara Creek tried to bring in
another pharmacy as an anchor tenant. Walgreens sued for an injunction against it.
● Held: Specific injunction granted.
● Takeaway: SP granted because damages would be hard to calculate (over the long period of
time) and because it would encourage parties to go back to the negotiating table.

SPECIFIC PERFORMANCE AND COVENANT NOT TO COMPETE

● Often expressly provided by contract today

● Like a negative injunction built into the contract
○ Can be similar to specific performance because will often force someone to follow
through a contract for personal service that they no longer wish to uphold because they
will not be able to compete/work anywhere else if they don’t.

COVENANT NOT TO COMPETE

Lumley v. Wagner (Chancery Division, 1852)

● Facts: Lumley entered into a contract with Miss Wagner for her to sing for three months at his
theatre. Contract included a covenant not to compete. Gye then entered into a deal with Wagner
for her to sing at his theatre for more money. Lumley sued for SP.
● Held: Court can’t order SP b/c it can’t make her sing, but issued a negative injunction that she
couldn’t perform elsewhere in England.
● Takeaway: A negative injunction can serve the same purpose as SP if it denies breacher any
other option.
Lumley v. Gye (Queen’s Bench, 1853)
● Facts: Same facts as above, but Lumley sued Gye for maliciously interfering with his contract.
● Held: Lumley won.
● Takeaway: There can be tort liability for intentionally inducing a breach of contract.

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Interpretation
STANDARDS OF INTERPRETATION
 Restatement §227 gives us six conceivable standards of interpretation of language and other
manifestations of intention:
 General vs. Specific
o When should we focus on narrower definitions of a term (Terms of Art)?
 Initiator vs. Recipient
o Who was in the better position to be informed or clear up misunderstandings?
 Objective vs. Subjective
o When should we look into subjective interpretations of a contract?
 Form vs. Substance
o When should we look at what was really going on behind a contract? (Parole Evidence
Rule)
*N.B. Courts are likely to default to the terms on the left unless they are given an reason to take the
alternative approach.

WHAT HAPPENS WHEN THERE IS AMBIGUITY?

 If no ambiguity:
o If both parties attach the same meaning to a term, it is interpreted in accordance with that
meaning, even if it is unreasonable.
 Where parties have attached different meanings to a term…
o One Party Knows: If party A knows, or has reason to know, that party B attaches a
different meaning, but party B does not know that party A attaches a different meaning,
party B's meaning prevails, even if it is less reasonable. (Embry v. McKittrick)
o Both Parties Know: If both party A and B know that the other attaches a different
meaning, then there is no contract.
 Equally Reasonable Meaning:
o If both parties attach a different meaning, and neither party knows, or has reason to know,
that the other attaches a different meaning, and the two meanings are equally reasonable,
neither meaning prevails, and there is no contract. (Raffles v. Wichelhaus)
 More Reasonable Meaning:
o If neither party knows, or has reason to know, that the other party attaches a different
meaning, the more reasonable meaning prevails.

NOTE ON CAPACITY TO CONSENT

 A party does not have the capacity to consent if he is: (a) under guardianship, or (b) an infant,
or (c) mentally ill or defective, or (d) intoxicated.
o A person is "intoxicated" if he is unable to understand in a reasonable manner the
nature and consequences of the transaction.

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60
CLASSIC V. MODERN INTERPRETATION
 Classic
o Intent does not matter
 You said what you said
o Would even enforce contract that defies party’s intentions
 Modern
o What would parties reasonably intend?
o If parties mutually had unreasonable interpretation, that prevails
o When parties construe ambiguous terms differently in good faith, courts may look to
evidence outside the contract to determine the “proper” interpretation of the term
 See Frigaliment Importing v. BNS International – court spends a lot of time
trying to determine if “chicken” as a specific meaning in this context

INTERPRETING PURPOSE OF CONTRACT FROM LANGUAGE

 Courts now consider what the purpose of the contract was to determine if the parties breacjed it or
not
o See Spaulding v. Moore – purpose of K was to support kid in going to college, since he’s
not going to college anymore no need to pay
o Have to avoid absurd results in contract and take contract as a whole
 See (Beanstalk Group v. AM General Corp.)

INTERPRETATION CASES

Lucy v. Zehmer (1954)

 Facts: Lucy offered to purchase a farm from Zehmer after the two had been drinking together.
Zehmer expressed doubt that Lucy could come up with the money, and drew up a contract.
Zehmer then had his wife co-sign the contract, telling her that it was a joke.
 Holding: If the words or actions of one of the parties have only one reasonable meaning, any
undisclosed intentions have no bearing on the contract.
 Rule: Intent only matters in contract formation to the extent communicated in some way between
all parties to a contract, or manifested by the parties’ conduct. ○
o When the court interprets the assent to and terms of a contract, it examines the objective,
not subjective, manifestations of intent of each party.
Raffles v. Wichelhaus (1864)
 Facts: Raffles agreed to ship cotton to Wichelhaus on the ship Peerless. There were two ships
named Peerless. Raffles thought they meant the Peerless leaving in December, while Wichelhaus
thought they meant the Peerless leaving in October.
 Holding: Objective manifestations do not clarify the contract here. Neither party knew the
subjective intentions of the other. Both parties had equally reasonable interpretations of the terms.
No contract.
 Rule: When there is mutual misunderstanding by both parties in a contract as to the meaning of a
term, and neither party had reason to know of the other's interpretation, there is no contract.
Frigaliment Importing v. BNS International (1960)

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  Facts: PL bought "chicken" from DF for $0.33/lb. DF interpreted "chicken" to mean stewing
chickens (fowl), while PL interpreted the term to mean young chickens (broilers). The market rate
for fowl was $0.30/lb and $0.36 for broilers. PL complained about the first shipment, but allowed
DF to make the second shipment anyway.
 Holding: PL has not met its burden of persuading the court that its narrower interpretation should
apply.
 Rule: When parties construe ambiguous terms differently in good faith, courts may look to
evidence outside of the contract to determine the "proper" interpretation of the term.
 Analysis:
o What “external evidence” did the court look at?
 Plain Meaning: Dictionary definition [both definitions of chicken were in the
dictionary]
 Negotiation Process: Didn't help in this case.
 Trade Usage: When one party is not a member of the trade, the other party must
show: (1) actual knowledge or (2) that the usage is so pervasive that the party’s
acceptance of it may be presumed. [BNS was new]
 Other Contract Provisions: Contract referred to Dept. of Agri. Regs., which
define "chicken" to include fowl.
 Market Factors: Looked at the market prices, didn't help in this case.
 Course of Dealings: Frigaliment allowed the second shipment after receiving the
first batch. (Though Frigaliment complained.)
Embry v. McKittrick (1907)
 Facts: Embry was employed by McKittrick, and near the termination of his contract, asked
McKittrick for an extension. McKittrick said something along the lines of "go about your
business without worry." Two months later, Embry's employment with McKittrick was
terminated without extension.
 Holding: McKittrick had reason to know that Embry would have interpreted "without worry" to
mean that his contract would get extended.
 Rule: Where parties have attached different meanings to a promise or agreement or a term, and
party A had reason to know of the meaning attached by party B, and party B did not have such
reason to know of party A's meaning, party B's meaning will attach.
o Also: When the court interprets the assent to and terms of a contract, it examines the
objective, not subjective, manifestations of intent of each party
Spaulding v. Morse (1947).
 Facts: PL and DF divorced and made an alimony agreement. DF promised to provide $1,200 for
their son every year until he went to college, & then $2,200 per year for four years. At 18, their
son was drafted into the army, and PL sued to continue the $1,200 payments.
 Holding: The intent of the agreement was to provide for the son’s maintenance and education,
and while he was in the army he did not need to be provided for. DF does not have to continue
payments.
 Rule: If the circumstances change from what was originally envisioned by the parties, the terms
of the contract will be interpreted in light of their overall purpose.

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OTHER CONSTRUCTION PRINCIPLES
PLAIN MEANING
Contracts are generally enforced according to the ordinary meaning of the words used, regardless of the
parties' intent.

ABSURDITY DOCTRINE
The terms of a contract should not be interpreted literally where doing so would lead to absurd results.
(Beanstalk v. AM General)
 In such cases, courts may look to extrinsic evidence.

CONSTRUCTION AGAINST THE DRAFTER

Ambiguity is generally construed against the drafter.

NEGOTIATED OR ADDED TERMS

Such terms are given greater weight than standardized terms.

TERMS OF ART AND TECHNICAL TERMS

are given their technical meaning when used in a transaction within their technical field.

PRINCIPAL PURPOSE:
Words and conduct are interpreted in light of all the circumstances and the principal purpose of the
contract.

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ROLE OF WRITING
PAROL EVIDENCE RULE
BLACK LETTER If an agreement is expressed in the form of an integrated writing, THEN parol
PAROLE EVIDENCE evidence may not be admitted to contradict the writing. If an agreement is only
RULE partially integrated, then parol evidence can come in to supplement or explain the
writing, but not to contradict it.
 Based on principle that when parties reduce their agreement to writing, they intend for the written
record to be the final expression of their agreement
o So evidence of terms that were agreed to but were not in writing are suspect and may be
misleading
 Rule does not bar
o interpreting meaning of terms of writing
o or support of affirmative defenses
 See Lucy v. Zehmer – mistake
o (See other exceptions below)
 Oral modifications not barred under PER
o although they are barred in sales cases by 2-209
o deciding whether or not to enforce them done by trade rules of common law
 UCC 2-202: can always hear parol evidence re: course of performance, course of dealing and
trade usage
o But it cannot contradict, can only explain and supplement
 Enforcement determinations depend on integration determination made by court (see below)

PAROLE EVIDENCE RULE EXAMPLE

 A offers to sell his outline to B…

o if B gives A $50 and promises not to share it with anyone else.
o (Note: this term is not included in the written form of the contract.
FINAL CONTRACT IF B SHARES AND A SUES…
SCENARIO 1 B then counteroffers that he will buy the The additional term – the promise not to
outline for $50, but that he wants to share share that was not included in the written
it with his friends. A agrees and the final agreement, would be misleading.
written contract says "A sells his outline to B
The promise not to share would not be
for $50."
misleading.
SCENARIO 2 B agrees to A's initial offer. Both parties The promise not to share would not be
want the contract in writing. However, they misleading.
only write "A sells his outline to B for $50.”

 From a court’s perspective, the contract looks the same no matter which scenario took place
 But the evidence that B promised not to share in one would be…

64
 o misleading in Scenario 1 given the additional unwritten term
o not misleading in Scenario 2 since the additional term was part of the full agreement

EXCEPTIONS TO PAROL EVIDENCE RULE

 Affirmative defenses: fraud, duress, mistake, transcription errors

 Conditions precedent (collateral agreements)
 Interpretation exception
o To explain but not contradict the writing
o Expect parties to disagree on ambiguity of language
 To show consistent additional terms if the integration is partial

INTEGRATION
PER does not come into play until we have an integrated agreement.
 If the parties did not get to the point of agreement or if they got to an agreement but didn’t agree
that it the writing was an integration of the agreement, then the writing does not have any legal
status.
 Writing is typically given more weight than oral evidence, but in absent integrated agreement,
writing won’t be legally authoritative.

PARTIAL INTEGRATION
If a written contract has been partially integrated, then parol evidence is inadmissible to contradict
terms already adopted, but can be used to add terms to the contract

MERGER CLAUSES
Parties can include merger clauses that explicitly state that the contract is integrated. They can also
include clauses providing that the contract is to be decided according to the laws of a particular
jurisdiction that has a liberal or conservative view of the rule.

TWO WAYS TO DETERMINE IF A WRITING IS INTEGRATED

 Who decides: The judge

 Four Corners Approach: look at K w/o parol evidence, ask if parties intended it to be integrated,
if not, look at parol evidence
o Williston added looking at the surrounding context with this
o Means that merger clauses are generally upheld (probably more so the more
sophisticated the parties are) unless caused by fraud and/or duress
 See this in Mitchell v. Lath – cannot introduce evidence about the removal of the
icehouse because the introduction of that evidence into a facially-complete
contract would contradict the contract’s completeness
 Contextual Approach: look at K with parol evidence, ask if parties intended to overwrite parol
evidence. If they did, throw out that evidence
o Merger clauses just create rebuttable presumption
o Standardized forms may leave more wiggle room for conditions or agreements because
it’s a standard form and parties aren’t likely to modify it

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  See Masterson v. Sine where court held that it wasn’t unreasonable that some
terms of the agreement weren’t included in the written agreement because of the
structued nature of the deed
 Traditional exception: courts will only allow evidence in of agreement if
o 1) agreement is a collateral agreement (separate from original agreement)
o 2) it doesn’t contradict written provisions (express or implied) and
o 3) the agreement is something parties wouldn’t normally be expected to write down
 See Mitchell v. Lath – court rejects on basis that it would have been written down

ACTUAL APPROACH: IT’S ALWAYS A FACTUAL QUESTION

1) Look for formalistic things like merger clauses

a. If they are sophisticated parties, a merger clause is probably enough
2) Then Williston & Corbin approach
a. W: terms of the contract itself, does it have a merger clause, terms you would expect
b. C: don’t make a decision until you look at PE to decide

COLLATERAL AGREEMENT RULE

 Even where contract is sufficiently integrated, if the parol agreement is sufficiently distinct from
the scope of the writing, it can be seen as a distinct contract
 A collateral agreement must
o 1) be collateral in form
o 2) not contradict express or implied provisions of the written contract
o 3) be one the parties would not ordinarily be expected to embody in the writing
 If these criteria are met, the agreement is different enough to be outside the integrated agreement,
but not so distinct that the main agreement can’t serve as consideration
o While it does not require consideration, consideration would make it more plausible
 This remains an exception today but modern courts are more flexible with PER so it’s less
important

COLLATERAL AGREEMENTS VS. PAROL EVIDENCE RULE

 Collateral agreement: argue you had a separate oral agreement related to the written contract
 Parol evidence rule: argue that your written agreement had an additional term that was not
written in the final agreement
 Difference: CAR is the traditional method and does not use extrinsic evidence to determine if
the contract was integrated
 Modern approach allows you to use external evidence to determine if a contract was integrated,
so you argue that the parol evidence shows the written portion of a contract does not represent the
whole contract

COMPARE TO STATUTE OF FRAUDS AND ORAL MODIFICATIONS

 Statute of Frauds
o PER does not require there be writing
 but provides that an integrated writing is authoritative for matters within its scope

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 o Both PER and S/F impose formal tests to guard against error and fraud
o Both when relied strictly can defeat expectations and reliance
 Both are subject to exceptions
 Oral Modifications
o Aren’t governed by PER, but present similar functional problems
 Wouldn’t the parties have put the modification in writing if they meant it?
 Or should they have?
o Parties can bar oral modifications under 2-209 if they wish
 And possibly under the common law
o But even in the absence of a bar, it’s hard to know what weight to give to them

PAROLE EVIDENCE UNDER THE UCC

Parol evidence can never be used to contradict a writing.
 UCC §2-202(a): a final written expression may be explained or supplemented by course of
performance, course of dealing, or usage of trade.
 UCC §2-202(b): Parole evidence can be used to provide consistence additional terms unless the
writing is a complete integration.
 UCC’s approach presumes partial integration until a full integration can be proven (Hunt Foods
v. Doliner)
 §2-202 reflects Corbin’s influence

UCC §2-202: PAROL EVIDENCE

§ 2-202. FINAL Terms with respect to which the confirmatory memoranda of the parties agree or
WRITTEN which are otherwise set forth in a writing intended by the parties as a final expression
EXPRESSION: PAROL of their agreement with respect to such terms as are included therein may not be
OR EXTRINSIC contradicted by evidence of any prior agreement or of a contemporaneous oral
EVIDENCE. agreement but may be explained or supplemented by course of performance,
course of dealing, or usage of trade (Section 1-303) ; and by evidence of consistent
additional terms unless the court finds the writing to have been intended also as a
complete and exclusive statement of the terms of the agreement.

NOTES ON RESTATEMENT § 2-202

 Parol evidence can never be used to contradict a writing

 Under subsection (b), parol evidence can be used to provide consistent additional terms unless
the writing is a complete integration 
 Under subsection (a), trade usage, course of dealing, and course of performance are always
admissible to explain or supplement 
 With hierarchy of authority as provided in §1-303

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UCC § 1-303 COURSE OF PERFORMANCE, COURSE OF DEALING, USAGE OF TRADE DEFINITIONS
COURSE OF (a) A “course of performance” is a sequence of conduct between the
PERFORMANCE parties to a particular transaction that exists if:
(1) the agreement of the parties with respect to the transaction
involves repeated occasions for performance by a party; and
(2) the other party, with knowledge of the nature of the
performance and opportunity for objection to it, accepts the
performance or acquiesces in it without objection.
COURSE OF DEALING (b) A “course of dealing” is a sequence of conduct concerning
previous transactions between the parties to a particular transaction
that is fairly to be regarded as establishing a common basis of
understanding for interpreting their expressions and other conduct.
USAGE OF TRADE (c) A “usage of trade” is any practice or method of dealing having
such regularity of observance in a place, vocation, or trade as to
justify an expectation that it will be observed with respect to the
transaction in question. The existence and scope of such a usage must be
proved as facts. If it is established that such a usage is embodied in a
trade code or similar record, the interpretation of the record is a question
of law.

EXPLAINING EXPRESS TERMS VS. CONTRADICTING THEM

 Found in §1-303:
o the court must read the express terms as being consistent with
 trade usage
 course of dealing and
 course of performance
o whenever it is reasonable to do so. But if this cannot be done, then express terms get top
priority, course of performance second priority, course of dealing third priority, and trade
usage fourth priority.

APPLICATION FROM CASES

 If additional term, must ask whether its consistent with the instrument
o Inconsistent term must contradict or negate (Hunt p. 602)
 If additional term are such that they would have been included in the document if agreed to, then
inadmissible (Hunt p. 602-3)

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PAROL EVIDENCE CASES

Mitchel v. Lath (1928); Collateral Agreement Rule

 Facts: Mitchell bought land from Lath under a written contract, and sought to enforce an oral
agreement (not written down) to remove an icehouse from the land across the road that his wife
has made with the seller.
 Held: The icehouse agreement is so closely related to the subject of the written contract that it
cannot be enforced. It is a term that is expected to be contained in the writing.
 Rule: An oral agreement cannot vary the terms of a written contract unless three conditions exist:
o (1) the agreement must be a collateral one
o (2) it must not contradict express or implied provisions of the written contract and
o (3) it must be one that the parties would not ordinarily be expected to embody in the
writing
Masterson v. Sine (1968)
 Facts: Mastersons granted land to Sines through a deed. Deed included an option that Masterson
could buy the land back. Masterson’s trustee sued to exercise the option in the deed. Sine claimed
that the option could only be exercised by a family member.
 Held: Because of the structured nature of a deed, it is unlikely that a deed itself incorporates all
existing oral agreements.
 Rule: An agreement is not completely integrated if the writing omits an additional term which
might naturally be omitted from the writing.
Hunt Foods & Industries, Inc. v. Doliner
 Facts: P corporation undertook negotiations to acquire assets of Eastern Can Co., owned by
Doliner( D). Negotiation agreement reached on price ($5.9M cash, $5.7 in stock) but form of
acquisition, amongst other things, not agreed upon. Negotiations recessed. P feared D would use
offer as basis for soliciting higher bid from 3rd party, so demanded option to purchase which was
prepared and signed
 D claims that he obtained an understanding that it was only to be used in event that he solicited an
outside offer. P contends no condition. Negotiations failed and P tried to exercise option.
 Analysis: Term D claims was agreed to is “additional” to what is in writing. Presents question
whether its consistent.
 RULE: to be inconsistent the term must contradict or negate a term of the writing.
 Held: evidence inadmissible only where writing contradicts the existence of the claimed
additional term.

TRADE AND COURSE OF DEALING CASES

Foxco Industries, LTD. V. Fabric World, Inc. 5th Ct. App (1979)
 Facts: Foxco (P) recovered $26k in lower court against Fabric World (D), AL corp. D argues
court erred in allowing published standards of the Knitted Textile Association to establish
meaning of disputed contract term. 1st order – P rep traveled to D to show D new fall line of
fabrics. This resulted in written order for “first quality” goods. D refused to pay when it got goods
it considered defective. Later that year P rep returned to show spring line. Didn’t say anything

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 about last order. Ordered another $36k of fabric. P tried to cancel order because of a drop in the
price of finished goods. D wrote to say it could not accept cancellation.
 Held: For P affirmed. The Knitted Textile Association’s standards could certainly qualify as trade
usages, and thus were admissible to explain contractual terms notwithstanding D’s unawareness
of them.
 Takeaway: It does not matter whether a party is aware of the industry usage and cutom or of the
standards in question: the parties to a contract such as the one in ussue are presumed to have
intended the incorporation of trade usage in striking their bargain
o UCC 2-202 explicitly provides that trade usages may help explain or supplement contract
terms

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The Basic Principles of Offer and Acceptance
 Sometimes we look to offer and acceptance to determine whether the parties entered into a
contract.
 Sometimes we look to the totality of the circumstances to figure out if the parties entered into a
contract and if the answer is yes, we go look for the offer and acceptance

MUTUAL ASSENT OVERVIEW

 For contractual liability to arise, there needs to be mutual assent: both parties need to agree to
be bound.
 Deciding whether there has been mutual assent requires an evaluate the party’s external
manifestations.
 In traditional terms, we do this by requiring an offer and an acceptance
 But offers and acceptances are rarely labeled with these terms.
o Actual business documents don’t come labeled this way.
 Remember that acceptance by conduct is a legitimate method of contract formation as long as
terms are reasonable

Offer
 An offer is a manifestation of willingness to enter bargain so other party will understand his
assent is invited and will conclude bargain (Restatement 24)
 The next-to-last communication before the bargain is sealed
 Whether communication is an offer or an invitation to negotiate depends on the commercial
context
 An invitation to negotiate does not have any binding force
o See Lonergan v. Scolnick: P corresponded with D about land, but D never explicitly
offered it to him
 Common ones:
o Purchase order or sales contract – generally presumed to be offer
o Price quote – generally presumed to be invitation to negotiate
 Can be offer in appropriate language and context
o Advertisement: generally not an offer unless clear and specific instructions, performance
promised in turn for something requested
 See Lefkowitz v. Great Minneapolis Surplus Store
 Depends on the parties’ intentions and surrounding circumstances
 Once an offer is made, the offeror can unilaterally modify the terms of the offer before
acceptance, HOWEVER, after acceptance, the offeror may not impose additional or arbitrary
conditions on the offer
o See Lefkowitz v. Great Minneapolis Surplus Store

OFFER RESTATEMENT AND UCC STATUTES

RESTATEMENT §24: An offer is the manifestation of willingness to enter into a bargain, so made as to

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 OFFER justify another person in understanding that his assent to that bargain is invited and
will conclude it.

UCC §2-205: FIRM An offer by a merchant to buy or sell goods in a signed writing which by its terms
OFFERS gives assurance that it will be held open is not revocable, for lack of consideration,
during the time stated or if no time is stated for a reasonable time, but in no event may
such period of irrevocability exceed three months; but any such term of assurance on a
form supplied by the offeree must be separately signed by the offeror.

OFFER DETERMINATION

To determine whether a letter, bid, email, or gesture counts as an offer, will depend on whether it is…
 clear enough
 complete enough
 and unconditional enough
…so that it could be accepted and its acceptance will conclude the matter.

FIRM OFFERS
 An offer that creates the power of acceptance.
o If the offeree accepts, a contract is created
 When an offeree takes some irreversible action without accepting…
o Either because the offeror promised to hold the offer open (Dickinson v. Dodds)
o Or because it was reasonable to do so under all of the circumstances (Drennan v. Star
Paving)
 A court’s decision whether to protect the offeree will depend on whether the law views these
offers as “firm”

COMMON LAW FIRM OFFERS

An offer can become a “firm offer”…
 With real consideration
 Nominal consideration
o R2K §87 (1)
 Reasonably induced reliance
o R2K §87 (2)
 Part performance
o R2K §45

FACTORS TO CONSIDER

 To whom, when, and where it was made

 Detail and formatily of communication
 Complexity of the underlying transaction
 The importance of a timely conclusion
 The parties’ relationship to date

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  Have they done business together in the past?
 Background conventions:
 Social
 Moral
 Trade/industry

RESTATEMENT OPTION CONTRACTS

RESTATEMENT §87: (1) An offer is binding as an option contract if it
OPTION CONTRACT
(a) is in writing and signed by the offeror, recites a purported consideration for the
making of the offer, and proposes an exchange on fair terms within a reasonable
time; or
(b) is made irrevocable by statute.
(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 contract to the
extent necessary to avoid injustice.
RESTATEMENT §45: (1) Where an offer invites an offeree to accept by rendering a performance and does
OPTION CONTRACT not invite a promissory acceptance, an option contract is created when the offeree
CREATED BY PART tenders or begins the invited performance or tenders a beginning of it.
PERFORMANCE OR  This only applies to unilateral contracts (“does not invite a promissory
TENDER acceptance”)

(2) The offeror's duty of performance under any option contract so created is
conditional on completion or tender of the invited performance in accordance with the
terms of the offer.
 Doesn’t mean you can only recover reliance; full contract is created with all
damages options

OFFER CASES

Dickinson v Dodds (Chanc., 1876, p. 486)

 Facts: Plaintiff believed he had the power to accept until 9am on Friday. He learned that
Defendant was negotiating with another party and immediately brought his acceptance to the
house where Defendant was known to be staying and left written acceptance with his mother-in
law. Defendant had sold the property to Allen on the day before, Thursday. Defendant, found him
before 9am on Friday at the train station and handed him a copy of the acceptance.
 Held: For D. Offer to “leave option open until Friday” could be revoked at any time.
 Takeaway: Because no consideration or acceptance, there was no binding agreement to keep the
property unsold until 9 o’clock Friday morning, so promise could be revoked.
o Unless something is a “firm offer,” it can be revoked at any point before acceptance.
o This might well come out the same way under the Restatement today.

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Baird v. Gimbel Bros. Inc (1933)
 L. Hand opinion in contractor case
 Facts: Subcontracting supplier of linoleum revoked his offer before communication of acceptance
from plaintiff (contractor) reached him
 Held: Subcontractor not held not liable for damages under promissory estoppel
 Reasoning: Judge Hand addresses promissory estoppel, says it’s not applicable in the case of a
business transaction, because:
o There are rules in place monitoring business transaction, can’t circumvent the rules and
then claim §90
o Meant for donative promises and this isn’t even a promise
 It was an offer, meant to be accepted before it was relied upon
 Doesn’t become a promise until it’s accepted
 Reliance isn’t reasonably induced, sub would be being held to “promises” he didn’t even make
Drennan v. Star Paving Co. (1958)
 Facts: Plaintiff is a contractor and won a bid for a school job. Defendant had bid on being a
subcontractor for plaintiff. After plaintiff was given job, defendant said he couldn’t do job for
$7131.60 but needed at least $15000. Plaintiff found someone else to do it for $10,948.60 and
tried to recover reliance damages from defendant
 Held: Court allows plaintiff to recover because it says defendant should have known that if its bid
was lowest, it would be accepted and they weren’t going to be given a chance to say yes or no
again
 Reasoning: Traynor makes an argument for reliance, believes it’s relevant here. Doctrinally
innovative because first he implies a promise, and then he invokes promissory estoppel
o RSC §87 – Option Contracts, adopts this rule (kind of)
 Doesn’t adopt the implied promise, says you don’t even need a promise, the firm
offer by itself is enough to justify reliance
 Not promissory estoppel, really “offerery” estoppel
Lonergan v. Schonick (1954)
 Facts: D placed an ad in newspaper offering property for sale. P inquired about details. D wrote
letter describing property, giving directions, and asking for price. Correspondence about the land,
but D sold to someone else before P received the letter telling him to act fast because there was
another interested buyer.
 Rule: Merely asking a person whether he is interested in purchasing a property does not constitute
an offer to sell the property to that person. There is no contract until the parties have agreed to
some specific thing.
Lefkowitz v. Great Minneapolis Surplus Store (1957)
 Facts: D published newspaper ad stating it would sell three fur coats worth $100 for $1 each.
Stated they would be sold on a “first come, first served basis. P was first person to present
himself at the store and offer to buy the items, however store refused to sell him on the ground
that a “house rule” dictated that offers were intended for women only.
 Held: The store’s advertisement was clear, definite, explicit offer and acceptance by L formed
valid and enforceable contract.

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  Rule: An advertisement constitutes a binding offer if it is clear, definite, and explicit, and leaves
nothing open for negotiation.

ACCEPTANCE
 Manifestation of assent to terms of oferee
o Written acceptance generally sufficient for bilateral contracts
o Performance sufficient for unilateral contracts
 Rejection of a previous offer immediately kills that offer
o See Akers v. JB Sedberry, Inc.
 Offers can expire if no response within reasonable length of time
 Can revoke offers at any time before performance has begun if no consideration put down
o See Dickenson v. Dodds
 Unilateral contracts used to be abled to be revoked at any time before
performance was completed now only if performance has not yet started
 Have to distinguish between preparations and performance

COUNTEROFFERS
 Cannot accept offer if you responded with a counteroffer by adding conditions
o See Ardente v. Horan
 Unless other party implicitly or expressly renews the previous offer
o See Livingstone v. Texas

SILENCE AS ACCEPTANCE
 Restatement §69
 Offeree accepts benefit (dominion)
o Courts more likely to say salience = consent if unjust enrichment exists
 Offeror made clear silence  consent (intention) and
 Previous dealings show it’s reasonable
o See Vogt v. Madden where silence was not acceptance because previous agreements all
required explicit assent before contract existed
 Sometimes duty to speak exists, if the person is then silent, they are estopped from saying no
acceptance

MIRROR IMAGE RULE

 Traditionally, the acceptance had to match the offer in all essential particulars
o Although last-shot doctrine still applied here if performance occurred in the the absences
of exact agreement
 This has been modified some with UCC 2-207 in goods cases – now can still be acceptance so
long as no material alteration of contract that would result in other party not agreeing if they
knew of such alteration
 Modern courts in general more flexible: don’t let trivial differences get in the way
o An acceptance with a minor discrepancy that does not change the original terms is a
valid acceptance of a contract

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 o But courts still require a reasonably unambiguous indication of acceptance
 Not always clear what terms are material/if something is an acceptance or a
counter-offer
 Restatement 57 requires a “clear and unequivocal acceptance, but not clear what
that means

REVOCABILITY
 Can usually revoke an offer unless specified otherwise.
o UCC 2-305 allows merchants to make firm offers: irrevocable for up to 3 months if
supported with signed writing

EXPIRATION
Offers can expire as specified or after “end of reasonable time” (context-specific).

COMMUNICATED REVOCATION
 Offers may be revoked upon receipt by the offeree of a manifestation of the offeror’s intent not to
enter into the proposed contract (Restatement §42)
 Offer will still be on the table until the offeree has been informed

INDIRECTLY COMMUNICATED REVOCATION

 Offers may alternatively be revoked upon the offeree learning that the offeror has taken “definite
action inconsistent with” an intent to enter into the proposed contract (Restatement §43)

CONTRACTING AROUND DEFAULT FORMATION RULES

Formation rules are default rules rather than mandatory rules, so parties can contract around them by
being sufficiently clear.
 Offeror takes the lead
o When an offeror proposes a bargain, they also get to propose what counts as acceptance
 Examples: acceptance by deposit, notarized

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Implied Contracts, Preliminary Negotiations, and Indefiniteness
IMPLIED CONTRACTS
 If a contract exists, what are it’s terms?
 Courts have held that terms can be implied..
o in fact – parties didn’t mention specific terms, but they intended them
o in law – parties didn’t intend terms, but court supplies them anyway because the law
requires it
 If parties agree to come to an agreement via a bargain, Courts have held that they have a good
faith duty to negotiate but not necessarily to agree
o See TIAA and preliminary agreements above
o Sometimes parties won’t even agree to come to an agreement, but during the course of
preliminary negotiations one party will rely enough on another party to justify imposing
liability if negotiations fall apart (Red Owl)

GENERAL FACTOR’S COURT WILL USE TO DETERMINE PARTY’S INTENTION

 Expressions of intent
 Context of negotiations
 Status of open terms
 Partial performance
 Customary form for such transactions

PRELIMINARY NEGOTIATIONS
 Typically, an indefinite agreement does not create a binding contract
 BUT sometimes preliminary negotiation can create liability
 This liability can be understood through 2 different doctrines:
o 1) reliance (See Garwood Packaging v. Allen; Hoffman v. Red Owl Stores)
o 2) bargain (See Channel Home v. Grossman; TIAA v. Tribune)
 Modern approach of making promises to negotiate in good faith enforceable does not obligate
parties to reach agreement
 but it DOES prohibit them from withdrawing from negotiations for bad faith reasons or for
considerations that are beyond the scope of the originally agreed allocation of risks
 There are two types of binding preliminary agreements:
o 1) completed agreement
o 2) commitment to commit
 Note: conditions precedent to enforcement don’t matter. They’re not bound to perform but to
negotiate in good faith.

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PRELIMINARY AGREEMENT TYPE #1: COMPLETED AGREEMENT
 Completed agreement on all or most of all negotiated terms
 Such that court fill in the gaps
o As with an open price term under UCC 2-305 or a requirements or output contract under
2-306
 Remedy: performance

PRELIMINARY COMPLETED AGREEMENT FACTORS

 Is there an express reservation of the right not to be bound in the absence of signed writing?
 Has there been partial performance?
 Have the terms been agreed on?
 Is this the kind of agreement generally committed to writing?

UCC OPEN PRICE TERM (FIRM OFFER)

UCC § 2-305: OPEN 1)The parties if they so intend can conclude a contract for sale even though the price
PRICE TERM is not settled. In such a case the price is a reasonable price at the time for delivery if
a)nothing is said as to price; or
b)the price is left to be agreed by the parties and they fail to agree; or
c)the price is to be fixed in terms of some agreed market or other standard
as set or recorded by a third person or agency and it is not so set or
recorded.
2)A price to be fixed by the seller or by the buyer means a price for him to fix in
good faith.
3)When a price left to be fixed otherwise than by agreement of the parties fails to be
fixed through fault of one party the other may at his option treat the contract as
cancelled or himself fix a reasonable price.
4)Where, however, the parties intend not to be bound unless the price be fixed or
agreed and it is not fixed or agreed there is no contract. In such a case the buyer
must return any goods already received or if unable so to do must pay their
reasonable value at the time of delivery and the seller must return any portion of the
price paid on account.

PRELIMINARY AGREEMENT TYPE #2: COMMITMENT TO CONTRACT

 expresses mutual commitment to a contract on agreed major terms
o but while recognizing minor terms that still need to be negotiated (and can’t be filled in
by a court)
 The key difference between the two is whether the agreement authorizes a court to fill in the
gaps if the parties do not
 Commits parties to negotiate in good faith (TIAA)

PRELIMINARY COMMITMENT TO CONTRACT FACTORS

 Is there apparent intent to be bound to negotiate further?

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  Is there a reason for the contract to not be completed?
 Are there open terms?
 Has there been partial performance?
 Is it necessary to put the agreements in final form?

PRELIMINARY NEGOTIATIONS AND REVOCABILITY CASES

Sateriale v. R.J. Reynolds Tobacco Company (9th Circuit, 2012)

 Facts: D, a tobacco company, operated a customer rewards program (Camel Cash) from 1991 to
2007. Under the terms of the program, D urged consumers to purchase Camel cigarettes, to save
Camel Cash certificates included in packages of Camel cigarettes, to enroll in the program, and to
redeem their certificates for merchandise featured in catalogs distributed by D. Ps alleged that (1)
in reliance on D’s actions, they purchased Camel cigarettes, enrolled in the program and saved
their certificates for future redemption; and (2) in 2006 D abruptly ceased accepting certificates
for redemption, making the plaintiffs’ unredeemed certificates worthless. P brought this action for
breach of contract and promissory estoppel (among other claims). The district court dismissed
both claims for failure to state a claim.
 Held: For P. Dismissal for indefiniteness is unwarranted.
 Takeaway: The fact that one of the parties reserves the power of fixing or varying the price or
other performance does not compel the conclusion that the contract is too indefinite to be
enforced if the exercise of this power is subject to prescribed or implied limitations, such that the
variation must be reasonable or in good faith.
Channel Home Centers v. Grossman (3rd Circuit 1986)
 Facts: D was setting up a mall, and was anxious to get P to commit to renting out one of the
spaces in the mall. They engaged in significant negotiations to rent, including site visits,
discussions of renovations to the mall, etc., and the parties concluded a letter of intent. They
agreed on some terms, but not all. When another store offered to rent the space from D, he sent a
letter to P saying they had run out on a (possibly made-up) 30 day time limit, and D rented the
space to the new store. P sued, claiming a breach of contract from the letter of intent.
 Held: For P. The letter of intent and course of negotiations showed (i) an intent to be bound, (ii)
sufficient specificity for the agreement to be enforced, and (iii) consideration on both sides
 Takeaway: Parties may enter inter agreement to agree, where they are obligated to negotiate in
good faith and cannot withdraw from the contract without good reason.
o Note: this agreement to agree can be explicit (as in this case) or implicit in the course of
negotiations (TIAA v. Tribune)
TIAA v. Tribune Co. (1987)
 Facts: Two companies agreed to enter into a complex transaction and to begin negotiating the
terms. After conditions changed, D tried to walk away from the deal
 Held: for P. Parties were bound to negotiate in good faith over missing terms.
 Takeaway: An incomplete contract can create a binding preliminary agreement to negotiate
remaining terms in good faith.
Hoffman v. Red Owl Stores
 Facts: During the long course of negotiations to establish a franchising contract, D induced P’s
reliance, but backed out of the deal later.
 Held: for P.

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  Takeaway: Reliance can create a binding preliminary agreement.

3 QUESTIONS WHEN APPLYING PROMISSORY ESTOPPEL:

1) Was the promise one which the promisor should reasonably expect to induce action or
forbearance of a definite and substantial character on the part of the promisee?
2) Did the promise induce such action or forbearance?
3) Can injustice be avoided only by enforcement of the promise? (Policy Q for court)

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81
STANDARDIZED FORMS
 Reflect the realities of current business.
 Saves costs of negotiations and drafting.
 Rendered in fine print and jargin – the typical user won’t have a good sense of what they contain.
 Courts generally enforce standardized agreements even if the terms are unfavorable and they
know people don’t read them
o See Carnival Cruise Lines v. Shute
 Under Restatement 211, terms are enforced if party has reason to believe that the form is
regularly used to embody terms of the same type
o Unless there is a super unusual term that would have caused the party to withdraw assent
if he knew about it
 See Darner Motor v. Universal - court allowed equitable estoppel to prevent
enforcement of form K against P)
 Courts have generally taken a pro-drafter approach:
o a party is bound to all terms in a standard form except for terms that are patently
unreasonable
o drafter held to good faith and terms that are conscionable
 More courts are even more deferential to forms than 211
 Acceptability of form-contract terms is a fact-intensive inquiry and different courts may hold
different views of whether particular terms are acceptable.
o Wise for drafters to obtain explicit assent to potentially controversial terms (disclaimers,
limitations of damages, privacy policy terms)
 Hyperlinks to details
 Clickbox acceptance before finalizing contract (see more in
 UCC prescribes particular standards for some of these:
o Warranty disclaimers must be conspicuous under §2-316
o Damage limitations must meet substantive requirements of §2-719
 You can still negotiate over some terms
o But rarely over the ones that don’t vary much among transactions
 Impact on signing party need not be negative – if fair and not unduly one-sided they create
sensible basis for contracting and save transaction costs to keep prices down for consumers

INTERPRETING STANDARD FORMS

 Presumption of knowing assent usually doesn’t apply

 Formalist authorities: enforcing everything or nothing (Peerless, Peeveyhouse)
 Less formalist: more willing to delve into details (Frigaliment)
 Go back to interpretive approach
o General and special
o Initiator and recipient
o Form and substance
 Authorities disagree

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RESTATEMENT §211: BLANKET ASSENT
RESTATEMENT (1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise
§211 manifests assent to a writing and has reason to believe that like writings are regularly
STANDARDIZED used to embody terms of agreements of the same type, he adopts the writing as an
AGREEMENTS integrated agreement with respect to the terms included in the writing.
(2) Such a writing is interpreted wherever reasonable as treating alike all those similarly
situated, without regard to their knowledge or understanding of the standard terms of
the writing.
(3) Where the other party has reason to believe that the party manifesting such assent would
not do so if he knew that the writing contained a particular term, the term is not part of the
agreement.

 If a party assents to a form contract, and has reason to believe that the form is regularly used to
embody terms of the same type, he adopts the form as an integrated agreement with respect to the
terms included in the writing
 Exception: where the other party has reason to believe that the party manifesting asset would not
do so if he knew the writing contained a particular term, that term is not part of the agreement
(Restatement §211(3))
 Example: Buying a movie ticket. The ticket says you can’t bring in food. Even if you don’t read
the ticket, you are bound by the food term because most people know that tickets are used to
embody additional terms regarding conduct.

ENFORCEABILITY OF STANDARDIZED FORMS

 Not all terms appearing in standardized forms will be enforced…but most will be
o Determinations generally come down to reasonableness:
 As long as terms are within bounds of normal practice
 Or don’t excessively push the envelope
 Factors:
o What is the relative sophistication of the parties?
o Did the parties actually read and understand the terms?
 Do parties in their position usually read and understand?
o Are other communications such as parol evidence contrary to the form in a way this is
likely to be misleading?
o How one-sided are the terms?
o How unusual are the terms?
o General business context – same as unconscionability
 Checklist:
o Bad faith?
 Does term indicate a bad-faith motive?
 Carnival ct. held that the forum selection clause did not indicate an
intention to deny passengers a means of pursuing legitimate claims
o Assent through fraud?

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  Overreaching?
o Notice?

INTERPRETATION VS. UNCONSCIONABILITY

 Courts often declines to enforce a standardized term either on the grounds of mutual assent or
unconscionability
 Often not clear whether court is saying:
o parties are not permitted to agree to a given term or
o parties didn’t agree to that term
 in consumer cases, unconscionability is more important
 if it’s assent, it’s possible to rewrite the offending term or alter the procedure

CONSPICUOUSNESS FACTORS

 Larger font
 Contrasting type
 Different color
 General test: whether attention can reasonably be expected to be called to the exclusion
o Having to scroll down to the bottom or initial that you agree before you can move
forward will make a court more willing to enforce

STANDARDIZED FORM CASES

Carnival Cruise Lines, Inc. v. Shute, Sup. Ct. (1991).

 Enforced
 Facts: Sup. Ct. considering whether 9th circuit correctly refused to enforce a forum-selection
clause contained in tickets issued by CCLs to S. S bought tickets for 7-day cruise. Paid agent who
forwarded the payment to CCL’s headquarters. Tickets sent to S had notice on left hand lower
corner of conditions “Please read contract on last pages”. Conditions subject passengers to
dispute litigation in FL. Respondent injured in Mexico. P filed suit in WA.
 Held: not unconscionable because (1) economic savings from being able to select a forum are
passed on to customers and (2) there was no indication that Carnival chose Florida in bad faith
 Decision motivated by whether court thinks it was unfair or not and consideration of what is
generally acceptable in the industry
Darner Motor v. Universal (1984)
 Not enforced
 Facts: P had insurance from D that covered their lessee’s for up to $30k. P upgraded to an
“umbrella policy” from D, and also asked D to increase their coverage to $100k. D said that the
umbrella policy already included $100k. P’s lessee got into an accident. D said that the 100k only
included P, not P’s lessee.
 Holding: Equitable estoppel (protect individuals from standard form contracts) may be used to
prevent the enforcement of boilerplate terms which are more limited than the coverage expressly
agreed upon
 Rule: R2K §211:

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 o (1) if party assents to a form contract, and has reason to believe that the form is regularly
used to embody terms of the same type, he adopts the form as an integrated agreement
with respect to the terms included in the writing
o EXCEPTION: (3) where the party has reason to believe that the party manifesting assent
would not do so if he knew the writing contained a particular term, the term is not part of
the agreement
 PER: The promise that the “umbrella agreement” included lessees was parol evidence that
directly contradicted an express term of the contract
 Restatement §211, Comment F:
“…a party who adheres to the other party’s standard terms does not assent to a term if the
other party has reason to believe that the adhering party would not have accepted the
agreement if he had known that the agreement contained the particular term. Such a believe or
assumption may be shown by the prior negotiations or inferred from the circumstances.”
 Takeaway: In a contract of adhesion, equity may be used to prevent the enforcement of
boilerplate terms which are more limited than the coverage expressly agreed upon

DISCLAIMERS
 In general limited by unconscionability and public policy doctrines
 Inconspicuous warranty disclaimers are not enforceable
o Conspicuousness determined by whether attention can reasonably be expected to be
called to the exclusion
 If disclaiming implied warranty of merchantability must mention “merchantability”
o Doesn’t have to be in writing but if it is, must be conspicuous
o If covered by UCC must comport with procedural requirements of §2-316
 If disclaiming fitness for particular purpose, must be in writing and conspicuous, but does not
have to mention specific fitness

DISCLAIMER CASE

Anderson v. Douglas & Lomason Company (1995)

 Facts: P (Anderson) was fired for taking a box of company pencils and sued claiming that this
violated the D's (company) progressive discipline policies in the employee handbook since this
was his first offense. The policy provided for termination only after the third offense. The central
issue was whether the handbook created an employment contract. Iowa’s employment
relationships are presumed to be at-will, so in the absence of a valid employment contract a party
may terminate whenever.
 Held: For D. A disclaimer in the employment handbook prevented the policy from constituting a
contract.
 Takeaway: a disclaimer prevents the formation of a contract by showing the parties’ intention not
to make an offer.

SHRINKWRAP/CLICKWRAP
SHRINKWRAP
Paper agreements enclosed with the packaging of an item

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  Courts generally uphold these agreements so long as the agreement makes clear that the purchaser
can reject the terms by returning the goods
o See Defontes v. Dell
 Majority approach seen in ProCD v. Zeidenberg: where additional terms are inside the box rather
than printed on the outside, they are enforceable unless the terms are objectionable under ordinary
contract law

SHRINKWRAP CASES

DeFontes v. Dell (2009)

 Contracted not enforced – no clear opportunity to reject
 Facts: P (consumers) filed a class action and claimed they were wrongfully assessed a store tax
on their purchase of a service contract in conjunction with a computer purchase from D (Dell). D
sought to enforce an arbitration provision contained in the agreement that accompanied the
delivery of the computers. D argued that P had three separate opportunities to review.
 Held: For P because it was not clear that they could reject the terms by sending the computers
back.
 Rule: A purchaser of goods will only be bound by additional terms in a shrinkwrap agreement if
the agreement makes clear that the purchaser can reject the terms by returning the goods.
ProZD v. Zeidenberg (1996)
 Majority approach – contract enforced
 Facts: P sued D, buyer of software, for violation of the shrinkwrap license limiting the software to
non-commercial uses.
 Held: A contract can be formed by the purchase of a product even though the detailed terms of
the transaction are not known until later.
o The customer accepts the goods under UCC §2-606(1) when, after the opportunity to
inspect, he fails to make a rejection.
 Rule: Where additional terms are inside the box rather than printed on the outside, they are
enforceable unless the terms are objectionable under ordinary contract law.
o “When a merchant delivers a product that includes additional terms and conditions, but expressly
provides the consumer the right to either accept those terms or return the product for a refund
within a reasonable time, a consumer who retains the goods beyond that period may be bound by
the contract.” Defontes quoting ProCD (pg. 725)

CLICKWRAP
 Electronic K to which user must agree to T&C prior to use of product/service
o These are also enforced so long as users have notice of the existence of additional
terms. When actual notice of inconspicuous terms is not available, internet users
may still have “inquiry notice” if a reasonably prudent offeree would know to look
for the additional provisions before accepting
o Courts have held that clicking “I acknowledge” and “I agree” is sufficient to clearly
indicate acceptance of terms
 See Hancock v. AT&T: Acceptance can be silence or conduct

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CLICKWRAP CASE
Hancock v. AT&T (2012) (pg. 732)
 Facts: U-verse case. Arbitration provision in clickwrap terms. The terms were presented
upfront, and P (customers) had to check a box indicating acceptance. Other Ps who signed up
before the arbitration provision received an email notifying them of the additional terms.
 Held: For D. It is enough to manifest assent by clicking “I acknowledge” and “I agree” buttons.
For Ps who subscribed before and got email – it was conspicuously stated in a bullet point that an
arbitration provision had been added.
 Rule: Clickwrap agreements are enforceable when customers are given notice of the terms and
conditions, and the customers are afforded the opportunity to review the agreement and the
customer clearly indicates acceptance.

ROLLING CONTRACTS
“ROLLING CONTRACTS” AND “CONTRACT FIRST, TERMS LATER”
 Where terms are only revealed to the offeree after she has bought the goods or services, there may
be a dispute about whether a contract was formed at all, or even if both parties concede that a
contract exists, there may be a dispute about whether the standardized terms formed part of the
contract

ADHESION CONTRACTS

 If there is no adequate market mechanism to allow the other party to negotiate a change in terms
or seek an alternative, there is a strong danger of adhesion – take-it-or-leave-it basis
 Inquiry into choice and alternative options may be important
o Example: if there is a monopoly on groceries that compels consumers to sign contract
with arbitration provision and it is the only grocer in a 100 mile radius
o Not clear there is a contractual basis for a claim here
 Unconscionability is not meant to be used to redress an imbalance of bargaining
power

FOUR APPROACHES OF COURTS

 1) apply traditional offer and acceptance rules

o Terms not divulged to offeree at the time are not part of the contract because the offeror
cannot unilaterally impose terms on the offeree after the contract was formed
 2) court treats offer and acceptance as occurring at signing (as in #1) but if standard form, a
reasonable buyer should have known that and ascertained what the terms were (fulfill his or her
“duty to read”)
o He is taken to have agreed to any of the standard terms that are reasonably expected
 3) court may adjust the view of when an offer and acceptance occurred – the delivery of the terms
is an offer and buyer accepts the offer if he does not reject it within a reasonable time by
returning or declining the benefit of the contract
o Important: this imposes a duty to read at the time of delivery and gives the buyer the
opportunity to refuse to contract on the offeror’s standard terms

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  4) the court does not get too involved in the technicalities of offer and acceptance (clearly
contract was intended by the parties) instead focuses on the disputed term to decide if (1)
offeree had a reasonable opportunity to become aware of it and (2) if the term itself is fair
and (3) within range of reasonable expectations

ProCD Inc. v. Zeidenberg

 District court applies first approach
 Appeals court reversed adopting third approach
 Held: license was a term of the contract and the buyer accepted by failing to return the software
and using it
o Facts made this conclusion possible because license expressly gave the buyer the right to
return the software for a refund if the license terms were unacceptable

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o

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Substantial Performance and Material Breach
 Doctrine dealing with issues of performance of contract
 Not about whether a contract existed but whether a contract was performed, and if it wasn’t
performed, who failed to perform first?
o Flipside of each other, depends on timing and who makes claim

SUBSTANTIAL PERFORMANCE
What happens if performance of a contract isn’t perfect but is still done?
 Performer can generally sue on the contract for expectation damages.
 Alternatively, if no substantial performance, the non-breacher can rescind and breacher can
sue off the contract for restitution damages.
o See Jacobs & Young v. Kent (Cardozo opinion): court found substantial performance
existed because defect was insignificant, omission was innocent, and the contract was for
a large, complex project so some variance is excusable
o Some courts willing to say substantial performance exists even if omission/deviation is
intentional, so long as its done in good faith
 See Vincenzi v. Cerrio
o Modern trend is to be more forgiving in applying substantial performance doctrine

BASIC CONCEPTS
 Implied condition – if you substantially perform, you are entitled to be paid, but if you don’t
substantially perform, you’re not entitled to be paid
 If no substantial performance, the aggrieved party can suspend own performance, gets right to
rescind.
o Aggrieved party has option of suing on the contract or off
o Following rescission, breacher gets a quantum meruit claim (and so does aggrieved party
if it overpaid).
 Conversely, if substantial performance, the aggrieved party is limited to suing on the contract for
lost expectation (usually measured by difference in value)

Most aggrieved parties would rather have the option of rescission

 An option is always valuable, at least in expected terms
 Difference in value may be small or hard to prove (e.g., land value in Peevyhouse, Reading vs
Cohoes pipe)
 Equitable discretion is unlikely to favor a generous assessment of quantum meruit
 Rescission allows the aggrieved party to transfer price risk to the breacher 

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  Even if suit is worthwhile, rules on substantial performance affect parties’ bargaining in shadow
of law

Jacob & Youngs v. Kent, NY Ct. App. (1921)

 Facts: Jacobs is general contractor who used wrong pipes in the building of a mansion for D. D
finds out and doesn’t want to pay the remaining $3,000.
 Holding:
 Reasoning: P substantially performed its contract with D with only trivial defects and is thus
entitled to receive the remainder amount owed.

UCC CONTRACTS
Prior to UCC, goods contracts required perfect tender: goods had to conform exactly.
 UCC 2-601 nominally preserves this, but only if the buyer rejects the goods initially.
 Otherwise, if defect is discovered after acceptance, 2-608 applies: buyer can only reject goods if
the defect substantially impairs the value to the buyer.
 Sellers supposed to be given opportunity to cure breach:
 UCC 2-508: buyers must act in good faith; can’t reject goods just b/c the deal is no longer
favorable, have to give seller oppty to substitute conforming goods. TW Oil v. ConEd.

UCC § 2-508. CURE BY SELLER OF IMPROPER TENDER OR DELIVERY; REPLACEMENT.

(1) Where any tender or delivery by the seller is rejected because non-conforming and the time for
performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure
and may then within the contract time make a conforming delivery.
(2) Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe
would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer
have a further reasonable time to substitute a conforming tender.

T.W. Oil, Inc. v. Con Ed (1982).

 UCC §2-508 (2) – outside the contract period


GETTING AROUND SUBSTANTIAL PERFORMANCE

EXPRESS CONDITIONS

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  Courts will generally uphold express conditions precedent (contract says this condition has to
happen before other performance occurs (usually payment)), therefore not applying the
substantial performance doctrine
o See Oppenheimer & Co. v. Oppenheim: court refuses to allow P to enforce K against D
because express condition that confirmation had to be in writing:
 Court says they won’t overrise parties’ intent
 Can think of substantial performance as an implied condition in any
contracts
 However, if language is not clear, courts will generally interpret such language as a promise, not
a condition, allowing substantial performance to apply
o Failure of a promise means that the promisor is liable for breach, while failure of a
condition means that liability is avoided
 And conditions will sometimes not be enforced if enforcing such a condition would cause a
disproportionate forfeiture (Restatement 229)
o The burden is on the party seeking to excuse a condition
 Conditions precedent vs. conditions subsequent
o Precedent: must be satisfied before contract goes into effect
o Subsequent: allow contract to be voided/changed after the fact if a certain condition
occurs
 can’t be established under parol evidence rule
o can often change condition from precedent to subsequent based on how you read K

Good Faith and Best Efforts

COMMON LAW GOOD FAITH
 Doesn’t exist until contract has been formed
 Must be faithful to agreed common purpose, consistent with justified expectation of parties
o See Saggebush v. Stocar for lack of good faith: parties would have prevented building of
identical gas station had they thought of it
 Relevant in the context of termination clauses, in which the terminating party cannot act on “bad
cause”
o “good cause” or “no cause” termination is permissible provided there is a valid
termination clause
 If there is no termination clause, “good cause” may be required
o “bad cause” termination is impermissible
 Termination against public policy
 Termination against contract provisions, even if implied-in-fact
 E.g. cannot promulgate employee termination procedure and apply the
procedure selectively

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 o Wagenseller v. Scottsdale Memorial Hospital
 Termination against good faith, an implied-in-law provision; good faith
does not manifest through “bad cause” termination

UCC GOOD FAITH

 Honesty in fact and observance of reasonable commercial standards
 Relevant in the context of requirement contracts, in which the buyer must act in good faith
(UCC 2-306)
o Following the letter of the contract
o Purchasing in accordance with contract estimates/performance or past history
 Parties may include a “more or less” clause
 UCC 2-306 (1) says that buyers cannot request a quantity “unreasonably
disproportionate” to stated estimates or prior output
 Some jurisdictions interpret language to set a quantitity ceiling, but not a
quantity floor
 Some think that good faith requires parties to have a jusitifcation for
failure to purchase some minimum amount
o Adhering to industry standards

BEST EFFORTS
 UCC
o 2-307(2) implies a duty of best efforts in all exclusive dealing contracts
o 3 interpretations
 Acting in good faith
 Production at a volume that maximizes gains of both parties (“optimal output”)
 See in Bloor v. Falstaff Brewing Corp.
 Due diligence and ordinary business prudence (not as high a req as optimal
output)
o No real consensus over what “best efforts” are, but it at a minimum involves giving fair
consideration to other party’s needs
 Common Law
o Courts have implied a promise of best efforts when other party promises exclusivity
 See Wood v. Lucy, Lady Duff-Gordon

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