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CONTRACT FORMATION Contract In General: o Bargain & Assent: a bargain to which the contracting parties give assent and

o Action or Promise: a consideration which can take the form of either a return promise or an actual performance. o Bargain + Consideration = contract 17 - Mutual Assent Objective Mutual Assent Required y R2d 17 a formation of a contract requires (1) Bargain: a bargain in which there is (2) Manifest Assent: a manifestation of mutual assent to the exchange and (3) Consideration 71: Bargain For Exchange y R2d 71 adopts the bargain theory of consideration: (1) Performance must be Bargained for: To be classified as consideration, performance or promise must be bargained for. (2) Sought and Given: To be bargained for means that it is sought by the promisor and given by the promisee. (4) Performance may be given to y The Promisor y An Agent - some other designated individual y Given By: o Promisee or some other person Did Consideration Induce? Test: Did the consideration induce the promise? (Not universal since there doesnt need to be an inducement)

Bilateral v. Unilateral Contracts: o Bilateral Example: Seller promises X if buyer gives Y - Goods y Mutual Promises: Here the consideration for each partys promise is the promise made by the other. X= consideration for y; y= consideration for x. o Unilateral Example: Promisor (x) will pay promisee (y) $10 if y mows xs lawn y Promise v. Action: o $10= consideration for mowing; o mowing= consideration for $10 y No promises necessary. Obligation for x to pay y starts when y begins to mow. Implicit promise. 71 Inadequacy 71 Bargain v. Gift: o R.2d 71  Must Bargain For: Performance on return promise must be bargained for.  Exchange: Bargained for if unilateral or bilateral K is sought by promisor in exchange for promise, and it is given by promisee in exchange for promise, performance: y Consideration: act other than a promise, forbearance, or the creation, modification, or destruction of a legal relation. Kirksey v. Kirksey Gift: There was No Consideration/Bargain Unilateral Bargain must occur inconvenience is not enough without

Facts: The Ps husband and one of her children died. D wrote to P on informing her that he wanted her and her children to come live on his property because he wanted them to do well. P lived comfortable on Ds estate for 2 years after which time D moved her to a less comfortable house in the woods, which he then evicted her from > No Bargain: P did not bargain for the loss and inconvenience suffered when moving 60 miles. > Not Consideration: This condition to claim the gift isnt consideration - see Willistons Tramp JJ: > Moved in for Gift: In Kirksey case, Kirksey there is no unilateral contract, requires no performance from the P. She moves to collect the gift. In Hamer, the P has to actually do something other than collect the promise in order to receive the promise. The Kirksey case is similar to the Hamer case in that it may appear that both Ps received benefits from the deal, but it is much more subtle in the Kirksey case. At the time of Kirksey, Promissory Estoppel didnt exist otherwise it wouldve been a possible argument for enforcing the promise Willistons Tramp Gift: Inconvenience is not Consideration Alone: Unilateral o Willistons Tramp: Man offers a tramp a coat. Is this a gratuitous promise or an enforceable K? > Gift-Nothing Given: Even if the tramp has to incur a detriment by walking to store to get jacket, he has really given nothing in return. > No Value/Not Bargained For: The man gifting gains nothing, no bargain for an exchange, no K. 71: Consideration 71 (3) The performance may consist of: o Actions (other than a promise), o Forbearance o Creation, Modification, or Destruction of a legal relation Must be Something of Value: receipt by the promisor of something of value from the promisee. > SubjectiveYet what is valuable is determined by the parties subjective y Oral or Action: Requirement of consideration met either by promising or by doing. o Does not have to be in writing.

Hamer v. Sidway Consideration: Giving up Legal Right is Enough: Not Gift Unilateral Unilateral Bargain: X promises Y ($) if Y does A, bargain, consideration ($ for A, A for $) = contract. Facts: D promised to give nephew P $5,000 stopped drinking, gambling, and smoking until he reached 21. Nephew did this and informed uncle, who put the money in bank account to earn interest until nephew was responsible enough to receive it. When Uncle died, nephews wife demanded the Uncles estate pay the money with interest. The executor refused arguing that the nephew benefited the deal, rather than incurring a detriment. > Giving up Legal Right is Consideration: forbearing from doing something that you have a legal right to do is enough to constitute consideration > Substantive Value: Value is in the eye of the beholder, the uncle could have valued nephews action JJ: > In market based economy, economic decisions are determined by the economy. Consideration parallels this economic evolution in that the contracting parties intentions/opinions are all that matter. BenefitDetriment analysis doesnt matter: Who cares if there was a benefit or detriment?! If you want to make something binding, then how do you avoid this consideration issue? 74: Forbearance of a Legal Right R2d 74 (1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless: (a) Vagueness: The claim or defense is in fact doubtful because of uncertainty as to the facts or the law, or (b) Can be Determined as Valid: forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid. (2) The execution of a written instrument surrendering a claim or defense by one who is under no duty to execute it is consideration if the execution of the written instrument is bargained for even though he is not asserting the claim or defense and believes that no valid claim or defense exists 79: No Benefit or Detriment Required R2d 79 If the requirement of consideration is met, there is no additional requirement of: (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage or detriment to the promissee; or (b) equivalence in the values exchanged; or (c) mutuality of obligation St. Peter v. Pioneer Theater Bargainer Decided the worth: Not Gift - Unilateral

Facts: Pioneer Theatre held Bank Nights and advertised $275 cash price to be given to person they randomly selected from the register Great Depression. Ps name was selected as he waited outside theatre. Theatres agent went outside to inform the P, but when presenting ticket manager denied her the award it was Ps husband who won. Husband tried to claim the prize but manager disappeared making it impossible to collect within the time limit ended up 3min short. D argues that the cash prize should be considered a gift. > Promisor Decided Worth: The perceived sufficiency of the consideration is irrelevant. Its within the discretion of the promisor to decide its worthiness prior to making the promise. > If thats what the promisor bargained for, then thats what is required to enforce the agreement. > Unilateral Agreement: The Ps performed the requested actions creating binding K for $275 based on performance. Why do we not want to bind promises for gifts? > Efficiency: The purpose of the consideration doctrine is to allow/promote economic exchange. > Deterrence Reasoning: If we allow people to bind promises of gifts, it will open up greater conflict since at times gifts cant be fulfilled and these will end up going to court. As such, it may in effect deter people from making societalbenefiting promises. > Incentivizes Fraud: There is also the fear it will allow for fraud since gratuitous promises are so informal. Intra-family breach of gratuitous promises can be dealt with outside the courts anyway- e.g. reputation. CONSIDERATION PROBLEMS: SUBSTANTIVE V. FORMALIZED Nominal (Sham) = No Good Raises suspicions when the exchange is nominal for one party Do courts ever look at the adequacy of consideration? > Legal Formality: Only when they suspect nominal, sham, consideration. Courts only want to bind bargained for exchange. Therefore, look for exchange where consideration is not a pure legal formality. o Example: An example of this is where the parties are simply inadequately exchanging money- I give 200k you give $1 (has definite value). Usually done to avoid legal obligations taxes > Can Still Exchange When Valued: However, exchanging $1 for something with no definite value is consideration if bargained for. - Batsakis

73: Performance Cant be Sham or Legal Duty

You cant promise someone that you are going to do something that is already a legal duty. What are you promising here? It is already something you have to do. y R2d 73 Legal Duty is Not Consideration: Performance of a clearly legal duty is not consideration o Cant Be Sham: A similar performance is consideration if it differs enough from the legal duty that it doesnt look like a pretense of bargain

In Re Greene: Hiding the Gift: Legal Formality Sham Consideration Good and Valuable Considerations? Past performance, nominal consideration, is not Consideration: Must Really Exist for K Facts: The bankrupt/married man was having an affair with the P. D promised when they broke up: (1) To pay the P $1,000 a month their joint lives, (2) To assign to her a $100,000 life insurance policy that he would have to pay the premiums for and would result in him paying the P $100,000 if he defaulted, (3) To pay her rent for 4 years. The Ps alleged consideration offered to the bankrupt man was to release all claims she had against him, payment of $1, and other good and valuable consideration. After he defaulted she brought a claim against the estate Formalization / Past Performance is Not Consideration: (1) Legal Formality: Mere formalization is not consideration. Creating what looks like a valid agreement is not sufficient to validate it. Parties need to offer real consideration to make a valid agreement:  Nominal-Sham: Greatly stressed the fact that the $1 is nominal. The court calls it sham consideration, it is simply trying to hide gratuitous promise.  No Real Exchange: Shamconsideration is not bargained for since there is no economic exchange. (2) Past performance is not consideration. The obligations were inferred to mean the promise he had made to marry her during their past-cohabituation JJ: There really was an exchange here. The court probably thought the exchange was for her silence in not exposing their affair. The court doesnt want to enforce this since its blackmail- a felony Batsakis v. Demotsis Inadequate Consideration can be Adequate: Circumstances Show that it was Valued She got exactly what she contracted for Mere inadequacy will not void 79, if consideration is met, there is no additional requirement (b) equivalence in the values exchanged.

Facts: Batsakis agreed to loan Demotsis what was the equivalent of $25 in U.S. currency (given in Greek Currency it was 500k drachmae), and the D agreed to pay $2000 in U.S. currency for the loan. 1942 war-stricken Greece where the P agreed to borrow $25 in Greek currency from P in exchange for note promising $2,000 in U.S. currency with 8% annual interest. She agreed to this because she was otherwise going to starve. He likely demanded these terms because it was very risky to loan money out in an economy as uncertain as Greeces was at the time. > Mutual Agreement: Once consideration is acknowledged, courts dont look at adequacy of consideration > Bargained for Exchange: The D received exactly what they bargained for, $25, and accepted the terms of the contract, $2,000 repayment including 8% interest. > Inadequacy Not Enough: Mere inadequacy is not enough to void a contract. > Dont Want to Deter: The courts dont rewrite contracts after the fact because it would otherwise create uncertainty amongst potential business people and deter future deals from being created, which is contrary to the goal of contract law in making economic societal value. Those in privity are in the best position to understand the values. JJ: Here the circumstances of the situation were likely taken into account by the court. First of all, there is quite a bit of uncertainty at the time. A guy like Batsakis has money, which he might never see again if he loans it out. In this case it seems reasonable to demand the terms that he did. If the courts did not recognize Batsakis claim, then when Demotsis are starving in the future, Batsakis might not be so willing to lend. It has a deterrent effect on the social good. a. Wolford v. Powers: Powers promises that if Wolford will name his son after him = 10k. i. This is a valid K, because Wolford gave consideration (naming son) and the courts dont step in to determine value where there is no reliable external measure of it.

Wolford v. Powers Consideration has Subjective Value Naming Son in Honor: Consideration Facts: The D offered to take care of Ps new-born son financially and provide him a good life and education if the P agreed to name the boy in the Ds honor. The Ds estate cites inadequacy of consideration and refuses to carry out its contractual obligations > Subjective Value: Unless, the party is induced by fraud, the consideration which compensates the party through pleasure, gratitude, or other sentimentalities should remain unchanged/sustained by the court  Weight of Consideration: This is obviously not sham consideration since naming the child after the old man is not a mere formality due to its permanence.  Non-Measurable by Court: The court particularly doesnt inquire within consideration when it involves non-measurable value in the exchange. 79 & Peppercorn Theory (adequacy doctrine): Subjective Value > If the Promisor and promisee want to bargain over a peppercorn, and the promisee ends up paying significantly, the value is really up to them for determination. As long as there is actually a bargain for an exchange, this will be valid. R2d 79: (1) Subjective Value: Value is determined by the parties, there is no esternal standard of value in certain exchanges because of this. (2) Parties are Better Judge of Value: Thus the courts usually stay out of rewriting Ks in these circumstances AGREEMENT Objective Theory of Assent: Mutual Assent NOT the Issue Objective v. Subjective Intent > Mutual Assent: Apart from need for a recognizable offer and acceptance, the parties to a K must be able to establish objective evidence - by some discernible means that they intended to be bound by terms of K. > Subjective test: actual intent theory i. This was dominant in the language of contracts until about a century ago ii. Required that there be a meeting of the minds iii. Problem: hard to determine, induces false intent must conjecture what parties intended Modern Policy: Objective test o Must Manifest: Outward manifestations of parties actual intentions must occur o Disregards Subjective: Does not rely on the actual intentions, just what is out there. o Reasonable Standard: Contractual obligation is imposed based on what a reasonable person would have believed was intended  No Mutual Assent Required: is NOT required, just an outward manifestation.  Incentivizes Responsibility: People need to be careful about what they manifest.

R2d 18 Mutual Assent As Objective Assent Outward Promise or Action: Manifestation of mutual assent to an exchange requires that each party either make a promise or begin to render a performance This is an Objective Standard for Mutual Assent what a reasonable person would perceive or believe to have been the message of the sender. > Exception: If the promisee knows the promisor is not manifesting assent, then no assent Lucy (ct. judges) > Reasonable Standard-Unforgiving: The standard ratchets up- not down. Cant claim that you are not as reasonable as the reasonable person and should be held at a lower standard. The standard does rise for those of greater reasonableness or expertise on the other hand. Lucy v. Zehmer The Objective Theory of Assent Dont Get Drunk and Sell the Farm Facts: Lucy and Zehmer were drinking when they wrote agreement for D to sell his farm. D argued that he was drunk, that he thought the whole thing was a joke, and that he only accepted the Ps offer for 50k because he thought that there was no way the P was serious or that he could raise the money. P argued that the assent was objective, that he had witnesses to prove this, and that he even had the written contract on the back of a bar tab. D said that he manifested his belief that it was a joke to his wife. Lucy won out. > Objective Assent: If your words and actions show agreement that is good enough for the law. > Reasonable Standard: How a reasonable person would perceive those words and actions essentially JJ: They negotiated for some time. Then proceeded to write the contract and make amendments/changes on the actual document as they continued to negotiate. They negotiated full details such as the title and financing. Also the contract was redrafted after there was an objection Leonard v. Pepsico An Objective Assent has to be Reasonable: Drinking Pepsi Does Not Get You a Jet Objective Assent Plus Facts: Leonard argued that Pepsicos commercial objectively promised a Harrier Fighter Plane for 7,000,000 Pepsi Points. The commercial depicted all the swag that drinking Pepsi could get you. A harrier jet was then flown in by a boy showing up to his school, and the 7 million points offer was flashed across the screen with no disclaimer. When Leonard submitted enough points for the jet, Pepsi rejected his acceptance of their offer, claiming that clearly Drink Pepsi-Get Stuff did not include a $23million it was not even in their catalog. The subjective intent was clear. > Objective Assent+Reasonable: In order for an offer to be construed as serious and binding, an objective, reasonable person must have construed it in a like matter. > Reasonableness: A reasonable prudent person would realize that pepsi is not in the business of military jets and that it was just an advertisement. JJ: The real argument being made by the P is that pepsi is misleading people in this commercial, and lets not allow them to use the objective standard to get away with this 71 AGENTS & ASSENT 1. 2. R2d 71 Assent can be given throughsome other designated person were talking agents here. Power to Bind: An agent has the power to enter the principal into a K obligation. a. Principal is Liable for Agent: The Third party who acted through the agent can sue the principal.

(1) General Agent: Authority to enter into any transaction for principal. (2) Actual authority: If a principals words or conduct would lead a reasonable agent to believe that it has authorization to do something, and the agent acts on behalf of principle, there is actual authority here (3) Apparent Authority: If the principals words or conduct would cause a reasonable third party to believe that the agent has been authorized to act, and the agent acts in this way, this is apparent authority. > The agents authority is actually restricted here, but there is no reason that the third party should know that. (1) Inherent Authority: Power of agent is derived solely from the agents superficial scope of authority, which would lead the third party to believe that authority actually exists. Job titles: president, CEO, yadda yadda. (2) Ratification: The agent does not have authority here, but the principal is bound because its conduct affirmed the agents conduct (3) Estoppel: In some cases, where the principal carelessly allows a third party to rely on agent and does nothing to stop the mistake, principal is liable through estoppel. Reason for Holding Principal Liable: A 3rd party could sue an agent, but the agent is likely judgment proof. > Very little or no net worth > To sue agent, it must have some sort of authority > The principal benefits from the relationship, seems fair to hold them liable for the good and the bad o Individuals/Institutions use agents so that they can get more accomplished grow the business while they are out doing other things: golf.

Note: lawyers are agents and typically dont have authority to bind their clients in contracts 3.3 Offer and Acceptance

24, 26 Offer versus Solicitations

R2d 24 OFFER DEFINED An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it R2d 26 PRELIMINARY NEGOTIATIONS A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent Definiteness and Quote To be binding, a quote needs at least: (1) Price, (2) Quantity, (3) Product description. (4) Allows Parties to Know what they have contracted for Intent and Prior Dealings We also look at the parties actions/past negotiation to see if parties had intent to enter into an agreement Lefkowitz v. Great Minneapolis Clear and Definite/Reasonableness/Objective Intent Facts: The store offered 3 brand new fur coats worth to $100 for $1 on a first come first serve basis, and Lefkowitz showed up first. He was rejected. Later the store offered a stole worth139.50 for $1 explaining again first come first serve. The P again showed up first willing to pay the $1 price. The first day, the clerk at the store informed him that the offer was only for women and not for men according to a house rule. The second day, the clerk again stated that the offer was only for women per the house rule. again, there was no disclaimer to show this > Clear and Definite: Where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer > Definitive Value: The advertisement for the Black Lapin Stole is binding because the advertisement stated a definitive value of $139.50 for the price of $1. > Objective Intent: The advertisement also did not specify anything other than show up first, which the P did. > No Disclaimer: The court overruled Ps appeal to the house rule because no such rule was included in the advertisement and therefore it was not a part of the deal. > When Accepted, Offeror Loses Right to Revoke: The court further explained that an offeror has the right to revoke or modify an offer at any time prior to acceptance, but loses these rights upon acceptance or performance in this case JJ: Ads typically solicit offers, but the ad that was enforced left no details open. Stated all the key terms and requested specific performance (be 1st in store) that was performed by promisee. The P was likely taking advantage of a situation where he could turn around and make a quick sale, and thus he was also depriving the store of an offer that it was likely advertising to bring in business.

Dyno Construction Company v. McWane Quotes: Solicitations not Offers Facts: P subcontracted with D to complete a bid that it won. D faxed quantities, prices saying estimate with a note saying please call. P called and told D to order materials. P was sent a contract with terms and conditions on the reverse side, and among them was a provision limiting Ds liability for defective materials. When P said that he didnt get the contract, the Ds agent sent faxed the material but forgot to send the backside of the document. When the P had problems with the pipes that the D sent to it, the D refused liability citing the reverse side of the contract. Ps claimed that it acceptance of terms over the phone constituted the offer, which was accepted: contract. > Quotes Not Offers: A price quote doesnt count as an offer. It doesnt count because its an invitation/solicitation for offers rather than an offer itself.  It lacks definiteness and completeness > Indefiniteness: Ps claim that the phone call was the agreement did not prevail because the price sheet sent said estimate and asked for a phone call, which suggest indefiniteness/ continued negotiation. There was no description as to the place of delivery, time of performance, or terms of payment, either. > Reasonableness: In addition, the P later signed the actual contract when it was faxed showing that they knew the quote wasnt the actual offer 3.3.2 Acceptance, Rejection and Revocation (Including Counter-Offer)

Acceptance Acceptance Common law default rule: offeror is the master of the offer, he works the specifics out for how to accept. Offeror can always revoke the offer at any time before acceptance. R.2d 30: The offeror Can empower offeree to create terms of acceptance (Ever-Tite) Bi-Lateral Contracts Are Important to Projects: If you need to plan, you want a promise. Your planning creates reliance, and therefore you need to be able to depend on promises. Rejecting or Counteroffer are the Same: Reject or counteroffer: once you counteroffer, you have lost ability to accept the terms just presented. Mirror Image Rule 38: Terms of acceptance must mirror that of an offer, or there is a counteroffer.

Last Shot Doctrine 2-207 Only in Performance: seller includes a form with conditions, when the buyer gets their product and starts to use it, the conditions were the ones last shot out in the negotiations, so they stick. Usually good when buyers have not haggled. i. Conditions: when the buyer has haggled out the terms of agreement and then all of a sudden they get terms that change the agreement in this last shot type of way. This would probably not be binding, because it is changing the agreement. 1. Can stick if they do not materially offer the agreement (see 2-207) R2d 30 FORM OF ACCEPTANCE INVITED (1)- The offeror can specify the manner by which the offeree needs to accept. (2) If the offeror does not specify as to how the offeree need accept, then the offeree may accept by any manner that is reasonable R2d 32 INVITATION OF PROMISE OR PERFORMANCE In case of doubt, the offer may be interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses R2d 54 ACCEPTANCE BY ERFORMANCE; NECESSITY OF NOTIFICATION TO OFFEROR Where acceptance is by means of performance, need to communicate acceptance only if reason to know offeror wont learn of acceptance with promptness R2d 56 ACCEPTANCE BY PROMISE; NECESSITY OF NOTIFICATION TO OFFEROR If acceptance by promise and the offer doesnt manifest intention to the contrary, it is essential to an acceptance by promise either that the offeree exercise reasonable diligence to notify the offeror of acceptance or that the offeror receive the acceptance seasonably

R2d 69 ACCEPTANCE BY SILENCE OR EXERCISE OF DOMINION Usually silence is not acceptance: Problem with this is I could send something to you through the mail and say if you keep you pay $, but the costs of not staying silent, ie sending back, may be more costly than just keeping the damn thing = you are forced to accept. ill gotten gains (1) Some exceptions are: (a)Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation (b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction and the offeree in remaining silent and inactive intends to accept the offer (c) Where because of previous dealing or otherwise, it is reasonable tat the offeree should notify the offeror if he does not intend to accept (2) In addition, any offeree who does any act inconsistent with the offerors ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him


R2d 42 REVOCATION BY COMMUNICATION FROM OFFEROR RECEIVED BY OFFEREE An offerees power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract MAILBOX RULE accepted upon mailing, but revoked upon receipt R2d 43 INDIRECT COMMUNCATION OF REVOCATION Effective when the offeree gets reliable information that the offeror has taken action inconsistent with the intent to contract R2d 45 OPTION CONTRACT CREATED BY PART PERFORMANCE OR TENDER (1) where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it Has to be done within a reasonable time 30: Ever-tite Roofing Corp. v. Green Acceptance by Performance: Once Started, Reasonable Time to Complete Unilateral Contract: Must allow reasonable time to complete Facts: The P drafted the terms of agreement here, and the D accepted. The important term was that the P could accept by performance, but could also accept by notification. The D submitted a credit application to obtain approval from a lending agency for credit. The D knew that this process could take some time. When the D was approved for the needed credit line, the P loaded two trucks with his workers and materials and went to the Ds home to commence the job. When they got there, the D informed P that offer was revoked obvious to the P because of other company working. > Acceptance by Peforming: Acceptance by performance is manifested immediately upon commencement. > Reasonableness: When no time limit is specified in a contract for accepting the said contract, a reasonable time must be allowed in accordance with the facts and context of the contract. In addition, it was understood by both parties at the time of contracting that it would take some time to attain credit approval and subsequently commence performance of the contract > At Time Performance Starts: The loading of trucks was reasoned to have been the commencement of performance by the P.

Rejection: Counteroffer or Non Acceptance

R2d 36 METHODS OF TERMINATION OF THE POWER OF ACCEPTANCE Reject: by communicating no acceptance or counteroffer unless the offeree states in the counteroffer that the original offer has not be necessarily rejected (section 38) Any type of qualification is considered a counteroffer

R2d 38 REJECTION OF OFFER BY COUNTER-OFFER Counter Offer: A counter-offer by the offeree, relating to the same matter as the original offer, is a rejection of the original offer, unless the offeror in his offer, or the offeree in his counter-offer states that in spite of the counter-offer the original offer shall not be terminated Option if Not: A counteroffer is a rejection and cant go back because it would otherwise be like an option. The buyer hasnt given the seller anything for this option, which is contrary to the principle that options are valuable. Options are valuable because they fix terms Dataserv Equipment Inc. v. Tech Counteroffer as Rejection Demonstrates that once you counteroffer, you have lost ability to accept. Facts: The contract was in negotiation between the two parties, and in the process the D requested changes to the contractual provisions stating that a third party would install the product. This Indepth Clause was followed with a clause that stated that all of the terms must be accepted in the contract for it to be valid. It also stated that any requested amendments would be a counter offer and would not be binding unless agreed to in writing by the P. The D requested 3 changes including the deletion of the clause 8. Two of the changes were accepted, but clause 8 was not dropped. When the P finally agreed to all of the changes, the D responded that it was too late. The P continued as if the contract was valid informing the D that the features were ready for pickup. The D again stated: no deal. > Rejection: Once an offer is rejected, an offer is terminated and cannot be accepted without ratification by the other party. > Counteroffer as Rejection: By refusing to accept all three terms, the P rejected the Ds counteroffer and the ability for P to accept was terminated. Common Law Provisions Mirror Image, Promisor Control, Last Shot Doctrine The Mirror Image Rule indicates that until the terms of offers mirrored one another, no contract was created. A counteroffer has the effect of extinguishing the original offer. Promisor-Master of Offer: Offerees are not typically allowed to add conditions or limitations in their acceptance; a conditional acceptance is valid only if the acceptance is independent of the condition The Last Shot Doctrine came into play whenever performance of some contract terms occurred in the absence of an exact agreement on all terms of the contract- that is, where one or both parties performed even though the mirror image rule had not been satisfied. Essentially both parties were bound by the terms of the last offer UCC Article 2: No One Reads the Forms Only Details Expressly Accepted Carry the Day UCC assumes that no one reads the forms. Therefore, only details expressly accepted carry and the UCC default terms fill in the rest of the gaps. The buyer could get a seller to mention necessary assent to sellers terms during the bargaining process. This is often referred to as the Battle of Forms. This varies greatly from the common law Last Shot Doctrine where the last terms sent were accepted by the other partys conduct and seeming assent. The UCC also allows for request of money prior to the delivery terms UCC 2-207: General Reasonableness Standards as Contract Law UCC drafted by Carl Luwellen. Thought law of sales needed clarification. Contract law should just reflect business practices rather than the law influencing business practices. Highly dependent on reasonableness. Dont even need to specify price. Can infer market price when not specified. In every contract with merchants there is a reliable standard of good faith and commercial reasonableness. These general reasonableness standards. Invites litigation. When UCC 2-207 is applicable, if the buyer is a non-merchant, then the additional terms would be viewed as mere proposals for addition to the contract. If the buyer is a merchant, the additional terms would be part of the contract unless they materially altered the contract. Thus, a contract would exist on the buyers terms, supplemented by the default rules of the UCC UCC is buyer friendly UCC 2-204 Conduct, Sufficient Agreement in (1) Objective Agreement: A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract (2) Undetermined Agreement-When Does it Suffice? An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined (3) Open Agreement-Valid if Reasonable Basis: Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy

UCC 2-104 Merchant: Person who deals with goods or has knowledge of goods that the transaction involves. This knowledge or skill can be attributed to his employment: agent, broker, intermediary involved in the market process. Step-Saver v. Wyse Battle of the Forms: Inappropriate in Complicated Dealings 2-207 Kills Last Shot Facts: The P and D worked together on a computer system where the D provided the software for the computer network. There were problems with the software, and the P asks for the D to compensate the D stated that there was a warranty during negotiations. D pointed to a box top clause that denied any representations made by its representatives and states that there was no warranty for its product. The D argued that its agreement with the P was conditioned upon the P accepting the terms and conditions on its box-top last shot doctrine, where once P performs the last form is valid > 2-207 UCC Kills Last Shot in Negotiation: If there is no expressed consent by party, section 2-207 says that the default rule is that the last terms of actual agreement will be binding.  Material Alterations-No Good: if last shot materially alters the agreement between the parties. JJ: Contorted application of 2-207. Not really a battle of the forms case. Would require seller to offer the terms substantially earlier in the negotiations. Strongest argument against box-top being actual terms/offer is that they had negotiated for commercial use of the product, which directly conflicts with a term from the box-top Step Saver was not using, just selling for others to. There is no basis for a reasonable offeror to discern how certain terms and conditions such as the non-transferability term were nonessential while others such as the warranty disclaimers were essential. Reasonable person would not be able to construe this as the offer/terms also since no negotiation leading up to this point. Hill v. Gateway Last Form Stands Customer Related Context Facts: Hill ordered a computer from Gateway through a telephone representative and had it shipped. When received, there was a clause stating if the customer wasnt happy, return w/in 30 days for full refund, after that they will only repair any defects. One of the terms included within the terms and conditions in the box was an arbitration clause. The P admits to seeing the terms and condition and choosing not to read them prior to the 30 day period elapsing. The P filed suit against the D in federal court for violation of the RICO statute (mail and wire fraud)for its products shortcomings > Implied Acceptance: The acceptance when Hill did not return the computer. The promisor is master of the offer, and the terms were not unreasonable in light of fact that they were ordinary to these products easy to foresee. JJ: Could argue reasonable person believed it was acceptance when paid. Might have to take steps to get money back. Could create an exception where costs are too high (called rejection costs) such as mailing costs and time dedication. Could argue reasonable person believed it was acceptance when paid. Might have to take steps to get money back. Could create an exception where costs are too high (called rejection costs) such as mailing costs and time dedication. ProCD v. Zeidenberg Last Form is Reasonable Merchant Context-No Bargaining Facts: The P is a software company that compiles more than 3,000 telephone directories into a computer database. The software utilizes a copyrighted application program to search the database according to requested criteria set by users. The software is sold in two formats: discounted consumer version and the premium-charged commercial version. Each software package indicates to users that the software is subject to the terms and conditions within the packaging. The terms and conditions limit the software to non-commercial usage. This notice actually appears on the users screen every time the software runs. The D, purchased the non-commercial version from a retail store in 1994, and began reselling the information through his online business. > Money Now Terms Later: The UCC 2-204(1) does not forbid for the sequence of money now, terms later. This would be bad policy, how crazy would it be to force buyer to go through a long list of all terms or print them on the box all over the box, would cluster the advertising, would be inefficient. > Only Form-Thats Reasonable: Since there is only one form in this contract, UCC 2-207 is irrelevant. 2204(1) allows for the seller to specify the means of the buyers acceptance. The P clearly specified that for industrial use, the buyer would have to purchase the more expensive copy. JJ: Would not be good policy not to allow seller to specify terms such as these. Not only was the D stealing, but the seller would have to jack up prices if everyone could just go and buy the general user copy of its telephone directory. The general users were subsidizing the software for industry. DEFINITE REQUIREMENT Indefiniteness The court will not enforce a contract where it is too indefinite.


(1) Hard to Determine Intent: Where it is too indefinite, it might make you think that there was actually no agreement/intention to be bound in the first place. (2) Hard to Fill in Gaps: Even if there is no question as to the intention to be bound, the court will be reluctant to fill in the gaps assess damages. (3) Common Law Where Vague no Intention: Where the parties did not make their intentions clear, the common law presumed that the failure to reach an agreement on material terms, where no terms could be objectively supplied, implied an intention not to be legally bound. (4) Legal Rules Can Fill Gaps: Legal rules commonly fulfill the function of filling a gap in an agreement between the parties. There are instances where the gaps are so many, or have to do with terms so central to the agreement that the court will not to try and fill the gaps A. Vagueness

Varney v. Ditmars Void Where Not Clear and Definite Facts: D paid P $35/week and offered $5 extra per week and a fair share of the profits on if they continued their work and helped the D through a rough spot. The P had another job lined up at the time that would have paid $40, and yet he stuck with the D because of the promise. The terms of agreement were that P help through Jan 1, and because of an illness the P couldnt attend work in Nov on a day when the D said that everyone must be at work. The D dismissed P for the incident. P alleges that this was simply to avoid giving him what was agreed to. Void for Vagueness: Fair and reasonable share of the Ds profits is vague, indefinite, and uncertain in that it cannot be computed from any evidence offered by the parties Kind of Like Gift/Honor-Good Faith: Such an executor contract must depend upon the honor and good faith of the parties making it and consequently cannot depend on the courts for adjudication. Uncertainty: Dont really know what the promisors intent was when making this offer and the court is reluctant to subject that intent to their interpretation. JJ: The P has firm specific skills. Tailored to a specific firm and may not be transferrable. Not worth to some other company what hes worth to this firm, so cant look at other firms with similar transactions for price indications. Essentially, we cant figure out his value added and for these reasons, the court has no basis to estimate a reasonable portion of the profits Corthell v. Summit Indefiniteness has Gap Filler at Law if External Measures Facts: The P is an inventor who works for the D. He sells the company all of his future inventions for reasonable recognition over his 5-year contract. 3 of the 4 products created during the subsequent years were patented. The D fires the P at the end of his employment contract without compensating the P for those inventions External Measure to Fill in Gaps: Where the agreement is indefinite as to a material term it is unenforceable unless the parties intend some external reference point to fill the gaps here it was market value Certainty Factor: Patents are easy to estimate as well: license fees and profit streams. Referral to reasonable recognition was considered definite enough in this case. JJ: Corthell may be seen as an illustration of how courts can escape the indefiniteness doctrine UCC 2-204 Open Terms Not Disqualifying (3) External Measure Can Fill: does not disqualify a contract for indefiniteness where the price is left out if intention of parties is not in question and can attach a reasonable price, which is usually the market price (spot contract). The courts need to at least be guided to some external measure where the price is left out because they dont want to determine the terms themselves UCC 2-305 Can Contract Where Price is Not Settled (1) The parties if they so intend can conclude a contract for sale even though the price 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 st or recorded by a third person or agency and it is not so set or recorded Why leave terms open? First, they may think the probability of a particular event occurring is too remote to dicker over its consequences. Second, they may fail to foresee the event at all. Third, when the event is not certain to occur but dickering over it may block the agreement entirely, the parties may leave it open. Fourth, each party may assume that the courts will fill a particular gap in its favor


Delicatessen v. Schumacher Agreement to Agree is not Enforceable: Indefinite as to Intent Facts: The D rented a store to the P, a deli. They agreed to a 5 years lease with a renewal clause. The renewal clause does not state the renewal clauses monthly rent. The P and D sharply disagree over the renewal price when the lease expires. ($544/month v. $900/month) > Agreement to Agree-Open Term: An agreement that leaves a material term open without a method for filling that gap is unenforceable. Including where there is an agreement to agree to that open term JJ: The court cant decide what is fair. Real Estate is non-fungible and is defined in its 2D space. No two pieces of property are the same. No possible way to establish a value since there is no external measure. Business cant easily move, so can get more money in rent

D.R. Curtis Company v. Matthews Cooperative Engagement: Good Faith Requirement in Open Contracts Facts: Ps grain broker contacted D to purchase red spring wheat crop, D agreed to because of attractive price offered. Custom informed both parties that the price to be paid is not fixed until the grain is delivered to market. The price is based off three elements: protein content, protein basis, and protein scale. The D believed that the protein basis figure would be established at some future date through negotiation and in future proceedings the protein scale was referred to as to be established. Protein basis was not mentioned, which D believed to mean that either the protein basis was not required or still needing to be mutually agreed upon. When P informed D that 14 percent was the protein basis for the grain contract, D stated that he could not meet that basis, rejected the agreement and sold to another Enforceable Yet Open Ended: The court ruled that parties may make a binding contract for the sale of goods where price is not settled is enforceable as long as they intend to enter into a binding contract, and the price is one that is worked towards as custom would suggest in this case. Custom and Rules Are Clear: If the price is left open by the parties to be established by later agreement and they fail to reach a later agreement, then the price will be a reasonable price at the time of delivery Good Faith: In open preliminary type II Ks - ended contracts there is a good faith requirement because many times there is reliance on the proceedings or a third party involved as here, DR was to sell this grain to another.

Paradigm Lost: Common Law Application to Complex Business Negotiations

Four Factor Test: Type 1 Agreement, Fully Binding Determined under Reasonable Person Standard (1) Expressed Reservation Not to Be Bound if not in Writing? (2) Partial Performance of Contract? (3) All Terms Agreed Upon? Or just Agreement to Agree? (4) Type of Agreement Usually Committed to Writing? 5-Factor Test: Type 2 Agreement Binding Preliminary Agreement (1) Intent to be Bound? Can it be Shown in Language of Agreement? (2) What was Context of Negotiations? (3) Are there Open Terms? (4) Is there Partial Performance? (5) Is the Customary Conduct Here one where You Would Lack Finality of Terms? Ciaramella v. Readers Digest 4 Factor Test / Negotiations 4 Factor Test for Fully Binding Agreements (Ciaramella Test) (1) Whether there is a right (expressed reservation) not to be bound in absence of signed writing (2) Whether or not there was partial performance (3) Were there open terms (4) Whether agreement at issue is the type of K that is usually committed to writing


Facts: The P filed suit against his former employer, the D, for claims arising under the Americans with Disabilities Act and ERISA. The parties negotiated a settlement in principle with regards to the pending case. The draft and subsequent copies included language indicating that settlement would not be effective until executed by all the parties and their attorneys. D drafted an agreement and forwarded it Ps then attorney, Herbert Eisenberg, for review. Eisenberg suggested some further corrections after which performance, Eisenberg said we have a deal. The P took the agreement to another attorney for a second opinion and consequently refused the revised document that Eisenberg already orally accepted. The D filed a motion to enforce the settlement agreement 4 Factor Test Applied: > (1) Reservation: Paragraph 10 of the draft states: This settlement agreement and general release shall not become effective until it is signed by P and D and attorneys, > (2) No partial performance of the settlement agreement, > (3) Open Terms: The parties did not agree to all material terms since the execution copy of the settlement agreement contained a new provision at paragraph 12 (reference letter) that was not present in earlier drafts. This was a material term to the P since it was part of the Ps consideration for dismissing the suit, > (4) Agreement Usually Signed: Settlements of any claim are generally required to be in writing or at a minimum made on the record in open court. The agreement is complex and spans for 11 pages in text and contains numerous provisions that will apply into perpetuity Brown v. Cara Good Faith Requirement: Preliminary Agreement 5 Factor Test: Open Ended Agreement (1) Intent to be Bound? Can it be Shown in Language of Agreement? (2) What was Context of Negotiations? (3) Are there Open Terms? (4) Is there Partial Performance? (5) Is the Customary Conduct Here one where You Would Lack Finality of Terms? Facts: Brown and Cara entered into an open ended agreement to develop Jay Street Property into a real estate development. The P would provide the financing, and relied on Cara to provide the property. D sent a letter to P stating Ds desire to negotiate final terms of the partnership, design, and project financing, which had not yet occurred because the entire outcome rested on whether the property could be suitably rezoned. D was not happy with the negotiations on this matter and, offended, he ended further negotiations. > Good Faith Rule: The parties have an obligation to attempt to reach agreement by negotiating in good faith Reasoning: (1) Intent to be Bound the agreement clearly states the parties agreement to work together to develop, build, market, and manage property. (2) Context of Agreement: Parties understood that project was subject to numerous contingencies (3) Open Terms: The agreement left open terms-critical to everything from design, to business structure, to ownership and management/financing (4) Partial Performance: The court found that Brown provided extensive and valuable performance investment into re-zoning, development, contracts (5) Customary to Lack Finality: The creation of the holding corporation, construction, financing, and management of the Property all required more formal and extensive contracts both practically and as maters of customary form. Agreement clearly contemplated these future agreements, and after rezoning, the parties expended considerable effort to negotiate some of these agreements JJ: Its easier to figure out what is bad faith than what is good faith. A party cant just walk away because a better opportunity arose. Another problem is now regarding trying to figure out what the damages are. Its possible that no agreement wouldve went through, so its possible that the P wouldnt have gotten any profits from the contract. Likely to just get back any costs incurred during period of partial performance or period of preparation for performance. Reliance expenditures possibly recovered as well Problem w/ Broken Type 2 Agreements: Cant really say that if other party hadnt walked away we would have $ because K may never have been finalized. Damage Rewards: If you invested preliminary moneys, you might be able to get that back, but will not get back what you would have earned on that investment. Citibank v. Wachovia: - Binding Preliminary Agreements: Usually Enforceable Unless Federal Law Against Watchovia negotiated an agreement with Citi that did not permit them to look for another deal while Citigroup gets everything ready to execute this open ended agreement. This is a specific performance clause where the court can order for contract to be enforced. Wellfargo steps in, offers a better deal, Wachovia accepts.


Exclusivity Agreements: binding preliminary agreements are exclusivity agreements, aside from Fed Law, should have been enforceable. JJ: In this case, the exclusivity agreement was important. If not there, then as happened here once word gets out that Citi is going to buy stock at low price, Watchovia can shop around and drive the price up. PROMISSORY ESTOPPEL Courts have expanded that set of enforceable promises to include those that are based on reliance- that is they have ruled that promises may be enforced if the promisee has incurred costs, or conferred benefits, on the reasonable expectation that the promise would be fulfilled > R2d 90 Promise, Expecting Reliance, Reliance, Relied to Detriment (1) Promise (2) Promisor should reasonably expect that it would induce reliance (3) Did induce reliance (4) Prevention of injustice requires recovery a. Must be definite and substantial Reasonable in Light of Promise b. The first 3 elements are matters of fact while the 4th element is a matter of law c. Promise could almost be seen as tortious: could even be damages if promise was definite enough d. PE also has similar goals as tort law in creating incentives (be more careful when making promises, corrective injustice/induced reliance) e. Reliance = entire basis of recovery much different than general contract damage f. Incentive: we want people to take optimal care, this incentivizes them not to lead people on and think about the promises that are being made. Haase v. Cardoza Facts: The Deceased and D entered into an inter vivos trust as husband and wife. Some time later, the deceased made a will leaving the P (his sister) $2,500. Approximately 2 years later deceased died. About a year and a half after the death of the Ds husband, the D arranged through her sister to have the P come to her home. The D admitted to the P that the deceased left the appellant $10,000 and the Ps sister $3,000. The D then promised to pay the P $50/month. The D made the monthly payments for 8 months until the P asked the D for a note to cover the balance alleged to be due on the $10,000 Reliance: There needs to be reliance by the P at least for a promissory estoppel claim Really a Gift-No Consideration: There was no consideration, so there is no breach of contract claim. In addition, there is no evidence of reliance by the P, so cant bring a promissory estoppel claim. She was not put in a worse position by the promise Ricketts v. Scotthorn (Reliance, Detriment): Grandfather promises $$$ because he says that none of his children should have to work. Granddaughter quits job. She never gets the money. Should she receive it because he induced her to rely? a. Yes she should. Where one is induced to rely to their detriment = promissory estoppel. She reasonably could assume that Gpas promise was to induce her reliance. Rickets v. Scothorn (PE/Enforceable) Facts: The deceased promised to pay the P, his granddaughter, $2,000 at 6% interest/per year. The deceased, her grandfather, stated: I have fixed out something that you have not got to work anymore induced reliance. None of my grandchildren work, and you dont have to. The P immediately notified her employer of her intention to quit her job. The P later secured a bookkeeper position with her grandfathers consent. On June 8, 1894, the grandfather died after only paying one years interest on the note. Shortly before his death, he expressed regret that he had not been able to pay the balance, but at no time repudiated the obligation. The estate refused to pay the granddaughter the balance on the note Rule: (1) Promise: There was a promise to pay this note, (2) Induced Reliance: She quite her job in reliance, (3) Relied to Detriment: the grandfather induced reliance both by him inferring that she quit and through his relationship of trust with his granddaughter (She trusted her grandfather, family context reasonably expects it since its reasonable to rely upon what your family tells you. This is the strongest argument for reasonable foreseeability) (4) Prevention of injustice promise was definite and formal by it being in signed writing, reliance was definite and substantial in that she lost wages from not working, the reliance is also measureable for possible remedy (lost wages) Status Quo: Need to restore person who relied back to where she would have been if she hadnt relied. 1.

4.1.2 Promissory Estoppel in Context I: Employment



Feinberg v. Pfeiffer (Definite, Formal Promise, Induced Reliance): Where Fienberg had been working for the company as a bookkeeper for 37 years and in a board meeting they approved a lifelong pension. New management tried to say that there was no consideration, but was there reliance. a. Yes there was. The court said that because the promise had induced her to quit her job, placing her in a position where she could get no other (she was 60) promissory estoppel.

Feinberg v. Pfeiffer Co (PE/Enforceable) Facts: The P began working for the D, a pharmaceuticals manufacturer, at the age of 17. She rose the ranks over her years with the company. At the Ds Board of Directors annual meeting at the Companys offices in St. Louis, the President of the D announced that he would like to increase the Ps salary and offer her a retirement plan, which may be executed at any time by her for her loyalty to the company. The Ds pay would be increased from $350 to $400. The D would be paid $200 per month for life upon retirement at any time of her choosing. The D informed the P of the arrangement on the same day, and the P testified that she did not know of the offer prior to that communication. On June 30, 1949, After the P retired, the president died and was succeeded by his widow who retired due to illness and was then succeeded by her son-in-law. The son-in-law consulted an who stated the fact that the payments were gratuitous and not contractually obligated. Following a conversation with the Ds attorney, D sent the P a check for only $100. The P declined to accept the lower amount opting to bring this claim against the D Ruling: There was promissory estoppel: (1) there was a promise, (2) there was reliance in that P retired younger depending on this promise, (3) the D induced reliance, (4) Prevention of injustice Reasonably expected inducement: Intended that would rely by going to her home to communicate their seriousness, Reliance was definite, substantial, and reasonable by the P retiring on the reliance of this promised pension and not being able to get another job due to her older age and her cancerous condition JJ: Unjust enrichment potentially in the sense that the P was more loyal to the company as a result of this gesture and possibly more diligently than professionally necessary. Finding damages is hard (200/life or difference of salary and pension until wouldve left). It raises question as to when wouldve left


Hayes v. Plantations Steel Co (Indefinite Promise, No Consideration, No induced Reliance): Where Hayes worked for a construction co for decades, decides to retire, and before leaving asks owner if he would receive a pension. Owner says youll be taken care of. Hayes is paid for 3 years and then it stops when co is not doing well. Promissory Estoppel? a. No, because the taken care of language would not really induce reliance. Its not really definite, and Hayes made statements indicating he knew this. b. This type of statement would not have induced reliance, and in light of the fact that Hayes intended to retire before pension talks, he did not rely to detriment. He would have retired anyway.

Hayes v. Plantations Steel Co. (No PE/Unenforceable) Facts: The P was an employee of the D from 1947 until his retirement in 1972 when he was 65 years old. The P announced in January 1972 that he intended to retire the following July. A week prior to his actual retirement, Hayes spoke with Hugo R. Mainelli Jr. who was then an officer and a stockholder of Plantations; Mainelli said that the company would take care of him. There was no mention as to a sum of money or a percentage of salary that Hayes, the P, would receive. There was also no formal authorization for pension payments by Plantations shareholders and/or board of directors. There was also never any formal provision for a pension plan for any employee other than for unionized employees who benefit from an arrangement through their union (P was non-union). Hayes received $5,000/month payments starting in January 1973 until January 1976. Hugo Mainelli Jr. testified that it was implied that the check would continue on an annual basis. His father, the cofounder, stated that it was his personal intention that the payments would continue for as long as he was around. Mainelli even visited Hayes after his retirement, and Hayes would ask Mainelli if the checks would keep coming. The payments were discontinued after 1976 due to a series of bad business years and a stockholders dispute resulting in the takeover of the company by DiMartino who cofounded the company the Mainelli Ruling: (1) Not Clear or Definite: Promise is unclear and informal, (2) More of Gift: Most likely couldnt foresee the reliance since was a gift and therefore unreasonable to rely, (3) No Consideration: there was no reliance since the P announced retirement prior to the transaction and the P continuously asked if payments would continue showing that he knew it was a mere gift and not permanent, (4) no prevention of injustice promise was informal and indefinite, unreasonable/no reliance


4.1.3 Promissory Estoppel in Context II: Preliminary and Incomplete Negotiations In general, courts will not grant recovery for early reliance during the negotiation process unless the parties by agreeing on something significant, have indicated their intention to be bound In R.G. Group v. Horn & Hardart Co., the court underscored the baseline requirement that a claim for promissory estoppel reliance is a clear and unambiguous promise; a reasonable and foreseeable reliance by the party to whom the promise is made; and an injury sustained by the party asserting the estoppel by reason of his reliance Coley v. Lang: Where Coley wanted to purchase the name of Langs company IAS, to gain good favor with the government for Ks. Letter signed between two that Coley would use IAS as name in bidding until a definitive K. Things didnt work out, and Lang sued for performance. Was this letter a binding K? And were Langs accusations that he relied on Coley to the amount of 30k reliance? a. No and no. The Letter was just preliminary negotiations, no full and definite agreements, and Lang did not produce evidence that reliance was in any way detrimental. Coley v. Lang (No PE/Unenforceable) Facts: D entered into discussion with P concerning the purchase of IAS corporation mainly owned by P. D did not desire to purchase the assets of IAS, but only desired to purchase the name and good will of IAS. During negotiations, the parties contacted Ds attorney who drafted a preliminary negotiation agreement that both parties signed. The agreement stated that prior to the sale of the IAS stock to D, P would transfer all of its assets and liabilities other than its corporate name, the right use the name in foreign jurisdictions, and its corporate franchise to a new corporation or partnership designated by P and IAS other current stockholders. The agreement also declared that on or prior to September 18, the preliminary agreement letter would be reduced to a definitive agreement binding upon all of the parties and accomplishing the sale and purchase contemplated by the preliminary agreement letter. It was subject to approval of board of directors and shareholders. D testified that P had not sought approval of the IRS concerning a pension and profit sharing plan nor had certain details with the government been completed. Because of this, D realized that the sale would not work out within the contemplate time frame and notified P. The attorney who drafted the letter agreement testified that he informed both parties that the document in question was not binding. P denied that the attorney so informed him Meeting of the Minds: The court reasoned that it is essential the enforcement of such an informal contract that the minds of the parties should meet upon all the terms, as well as the subject matter of the contract, and if anything is left open for future consideration, the informal paper cannot form the basis of a binding contract. (It was an agreement to agree) Open Terms: The parties agreed to sign a written agreement, but left all the material terms open. The P testified that the D had not sought approval of the IRS concerning a pension and profit sharing plan nor had certain details with the government been completed. In addition, the D needed to get the approval of the Board of Directors and stockholders, which he failed to do. Failed the 4-factor test: > 1st, reserved the right to be bound by the final written agreement since both parties knew the contract was subject to the approval of the board of directors and shareholders, and could not be bound until that point. > 2nd, no partial performance by the D. D didnt have to do anything. Missed two bids, but no evidence wouldve got it anyway. No harm detriment done. > 3rd, left several material terms open including the vital pensions and government details as well as the shareholder approval without which no agreement could be created. > 4th, this is a complex deal that requires a written final document. The court explained the promissory estoppel claim failed as well since the court articulated there was no definite and substantial reliance. The D missed two bids during the 18-day period and there is no indication that the D would have bid lowest and subsequently received those contracts. Consequently, the court wouldnt be able to come up with the reliance damages anyway due to this conjectural nature

Hoffman v. Red Owl Stores Inc: Where Red Owl stated just sell one more thing, or buy one more thing and well give you store for 18k. Ended up that they wanted more like 60k when finality of K came around. Estoppel on grounds of K misrepresentation? a. Yes, K misrepresentation created reliance to Hoffmans detriment. Hoffman v. Red Owl Stores, Inc. (PE/Enforceable) Facts: D constantly assured the D that he would set the D up in a store for a mere $18,000. Along the process the P had sold his bakery and other assets. Also the Ds kept communicating that if the P did some step then the P would have his desired store. These promises never materialized. At the final meeting, the Ds agents presented projected financial statements showing that the P would need to offer $34,000 in cash. The D claimed that the $18,000 total was the total unborrowed and unencumbered cash. The P refused to further negotiate Ruling:


(1) There are multiple promises by the P ($18,000 was all that was needed, if the P sold his bakery then would get store, and promise that another $2,000 would put the deal through, (2) The D should have foresaw that the P would rely given that he had relied on all the prior promises, (3) Relied to his detriment in a substantial and definite nature in that he started out a happy little baker, but was forced to make drastic changes to his life including where he lived and selling his business/property. The reliance was reasonable in that there were constant assurances from the D and was no reason not to rely on these assurances, (4) Reasonable reliance in that no reason to not trust them and definite/formal promises as seen through the meetings where they reviewed financial statements/projections JJ: Never cited outside of Wisconsin

4.1.4 Promissory Estoppel and the Statute of Frauds Purposes for the continued use of the Statute of Frauds: (1) the Statute still serves an evidentiary function thereby lessening the danger of perjured testimony, (2) the requirement of a writing has a cautionary effect which causes reflection by the parties on the importance of the agreement, (3) the writing is an easy way to distinguish enforceable contracts from those which are not, thus channeling certain transaction into written form 2. Statutes of Fraud 2-201 b. K must be in writing anytime it is: i. marriage, prenups. ii. K cant be performed within a year iii. K for sale or transfer of land iv. Will v. Where it is more than $500, in sale or K similar to it (3). vi. Or where it is a surety (ie you are a guarantor of another debt or obligation) McIntosh v Murphy (Where Murphy Relied On Oral Promise for 1 Yr K, still Valid): The one where McIntosh was induced to fly to Hawaii for a job with the idea that he had a K to work for a year. Car dealership fired him because of stated poor performance, and McIntosh sued. No K in writing, can McIntosh recover on estoppel even though stat of fraud says writing needed. In other words, can one recover despite stat of fraud writing stip where the promise is oral? c. Yes, where justice so requires, one can recover from an oral agreement that induced the promisee to rely. McIntosh v. Murphy (PE/Enforceable) Facts: The P moved to Hawaii and sold all his property to go work for D there, but was subsequently fired after only a few months. The D called the P about the position on Saturday, and the P moved on Monday. The employment contract was orally promised to be for 1 year commencing on that Monday that the P was supposed to start work. Reliance Negates S of F: Promissory Estoppel can be used to bypass the Statute of Frauds rule where there is substantial reliance Reasoning: The court dismisses the need to fettle with the facts to get the agreement within 1 year as to not fall into the statute of frauds. The court explains that promissory estoppel has been used to overrule the statute of frauds consistently by the courts of Hawaii to prevent injustice that would result in such unconscionable injury that would result from denying enforcement of the contract after one party has been induced by the other seriously to change their position in reliance on the contract. The court explains that in determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant: (a) the availability and adequacy of other remedies, particularly cancellation and restitution; (b) the definite and substantial character of the action or forbearance in relation to the remedy sought; (c) the extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence; (d) the reasonableness of the action or forbearance was foreseeable by the promisor JJ: > Bad Policy: Part (c) allows the court to infer a contract from reliance. Johnston thinks this is a bad rule. > Increases Probability of Reliance: Incentivizes gambling of getting a particular agreement by relying in order to prove ones competency to the counterparty. If you can rely and courts give back reliance damages, then no downside to this risk. > The default employment rule is typically an at-will contract, which mandates no reason to terminate the arrangement by either party. The court refers to the doctrine as equitable estoppel, but its actually promissory estoppel. Equitable estoppel states that cant represent facts one way outside court, and portray them differently in court


Schwedes v. Romain (Oral Promise to Sell, no Performance, No Written K): Where the Romains wanted to sell their land to the Schwedes for 60K and the lawyer successfully kept the Romains from paying, or signing a firm K until the Schwedes were able to find a better seller. This happened in spite of oral promise to sell. Estoppel? i. No, no K in writing (as required for stat of fraud). And no partial performance that would indicate a K agreement either. Out of luck. Schwedes v. Romain (No Partial Performance/ Unenforceable) Facts: The D sent a letter communicating its willingness to sell its property to the P. The P had been in the process of closing a real estate deal with the D. The Ds sold the real estate to a 3rd party for a higher price in the process leading up to the closing where the seller and buyer exchange the title and deed for payment. Some time before the closing Hoover, the Ds attorney the Ps to indicate that the title reports had been received and would be sent by mail to the P. No payment was procured in the mean time. Rule: Acts of partial performance may take a contract out of the statute of frauds where they are unequivocally referable to the contract by them establishing the parties intent to enforce the contract Reasoning: Not ruled sufficient to satisfy statute of frauds since didnt meet the needed criteria for a real estate written contract and also not signed/evidenced to have been accepted through writing by the P. The petitioners cite them securing financing and offering the full purchase price to Hoover as well as the respondents withholding their property from the market while the parties were negotiating obtaining a title report and hiring an attorney to close the deal. The court dismisses this argument explaining that the P failed to distinguish acts undertaken in contemplation of eventual performance and acts which truly constitute part performance of a contract. The court overruled Ps argument for PE by stating that it should only be applied in those situations when the statute would otherwise operate to perpetrate a fraud, which is not the case here JJ: The attorneys statement as to sending the titles is a statement of future intent, which is not binding since its like a gratuitous promise. Cant be false unless there was a 0% chance of his intent to send the reports. If there was payment procured, then there would have been consideration and therefore a breach of contract 4.2 Alternative Grounds of Enforcement: Unjust Enrichment and Quantum Meruit R2d 86 Promise for Benefit Received Promises made in recognition of a benefit previously received by the promisor from the promisee is binding to extent necessary to prevent injustice This has been limited to those promises in which there was an expectation of payment. Therefore promises based on past gifts and moral obligations have not been enforced Implied-in-Fact contract requires all of the elements of an express contract: mutual agreement or consent, intention of the parties, and meeting of minds. These required elements are inferred in implied in fact contracts through the actions of the parties involved. Quasi Contract (Implied-in-Law) there is no need for consent. The elements required are a benefit conferred upon the D by the P, appreciation by D of such benefit, and acceptance and retention by defendant of such benefit under such circumstances that it would be inequitable to retain the benefit without payment of the value thereof (Unjust enrichment benefit conferred, appreciated, and accepted and there is a reasonable expectation of compensation). If, however, the P was voluntarily conferring the benefit, then no obligation is created

Recovery on Past Consideration Quantum Meruit Web v. McGowin (Past Consideration, Direct Benefit): The one where Web saved McGowins life by saving a wooden block from falling on him but at the same time crippling himself. McGowin promised to pay Web a sum of $15 every two weeks for the rest of his life, and does so until he dies. When he dies, the estate cuts Web off. Can a past consideration suffice for a future promise? ii. In this case, yes. McGowin obviously intended to honor this promise, and the material benefit that McGowin received from this past consideration was great enough that there was an obligation to pay. iii. Also, pay was from direct beneficiary to the one that gave past consideration Web v. McGowin (Material Benefit/Enforceable)


Facts: The P jumped out of a window in order to prevent the 75-pound block of wood falling upon the D from injuring the D. The D promised that they would financially provide for the P after the P had rescued the Ds life and sustained lifeparalyzing injuries. The D promised to pay the P $15 every two weeks for the rest of the Ps life Quantum Meruit: McGowin received a benefit; McGowin recognized/appreciated the benefit and promised creating a reasonable expectation of compensation (part of which was due to the employee expecting to be cared for by the employer in such cases of employee loyalty to the employer). JJ: Courts have limited the enforcement of promises based on past benefits to those in which the benefit was conferred with an expectation of payment. > How Enforced: Usually 2 criterion for determining enforceability: Benefit conferred and appreciated, and there is a reasonable expectation of compensation following the promise Quantum Meruit: (1) defendant was enriched; (2) the enrichment was at plaintiff's expense; and (3) the circumstances were such that equity and good conscience require defendants to make restitution. Mills v. Wyman (Past Consideration, Indirect Benefit): The one where Wymans son is sick, Mills is taking care of him, and Wyman promises to pay for this past action. When Wymans son dies, Wyman refuses to pay. Mills recover on past consideration, moral obligation? iv. No, and no. Moral obligation under these circumstances is a no go. Also, past consideration = no good. Services that were given were not at Wymans request could be reason for this. v. Also the consideration in this was given to Wymans son, not directly to Wyman. Mills v. Wyman (No Material Benefit/Unenforceable) Facts: The P cared for the Ds adult son until the son died. After the Ds son died, the D promised to pay for all the expenses incurred for taking care of the Ds son. The D never actually paid the P No Benefit Conferred-No Quantum Meruit: The court held a promise by a father to compensate the P after the P had cared for the fathers adult son and the son eventually died is unenforceable. Not really a benefit conferred since the son was already an adult and the father had no legal obligation toward the son. Also there is no general expectation for the short-term care of a human in danger of dying. We tend to think of it as an obligation. We also dont want to incentivize people in caring for sick/injured people since we want them to call for professional help that can provide adequate care What gives between Web and Mills? d. If these sort of Ks are enforced, bad incentive. With people, as opposed to pets, the idea is that we dont want others just taking care of someone with the idea that they will later collect on it. We want them to take person to hospital. With pets, no big deal. Unjust Enrichment Desney v. Wilder (Past Consideration, Ideas): Intellectual property issue. How to handle situations where idea must be conveyed before promise can be given? Desney had an idea for movie that he gave to Wilder, where secretary said sure well pay you if we use it. Well they used idea but didnt pay. Can he collect on past consideration? Quasi K. i. Yes, this is an issue where because the consideration must be given before the promise = he can recover. Desny v. Wilder (Material Benefit/Enforceable) Unjust Enrichment Facts: The P, an idea man, told their movie idea to a movie producers secretary telling the D that if the idea were used, he would be compensated for it. The D used the movie idea and refused to compensate the P Ideas-Recovery on Past Cosideration: The court reasoned where an idea has been conveyed with the expectation by the purveyor that compensation will be paid if the idea is used, there is no reason why the producer who has been the beneficiary of the conveyance of such an idea, and who finds it valuable and is profiting by it, may not then for the first time, although he is not at that time under any legal obligation so to do, promise to pay a reasonable compensation for that idea- that is, for the past service of furnishing it to him- and thus create a valid obligation

Warner v. Doyle (Past Consideration, Quasi K): The one where Warner was the middleman and he put Doyle in touch with a contractor. Warner says if it works out, I want 3% for putting you in contact. Doyle doesnt pay. Can Warner collect for past consideration? ii. Yes, people who put people in touch get paid. Qausi K. Worner Agency Inc. v. Doyle Unjust Enrichment


Facts: In Worner Agency Inc. v. Doyle, the court held that the defendants admitted that they had benefited from the plaintiffs actions and that they would not have known about a job they bid on and won if the plaintiff had not arranged the meeting of November 1980. The court ruled that there was adequate evidence of a benefit conferred upon the defendants and of it being deemed adequate consideration for the promise to pay the finders fee JJ: Material Benefit: These cases illustrate how the material benefit rule provides assurance to a party who confers a benefit in absence of a definite agreement for compensation, that a subsequent promise to pay for the benefit received will be legally enforceable Benefits in Advance Common in Some Situations: The cases suggest the practice of providing benefits in advance of a definite bargained-for-exchange is common when informational barriers make bargaining in advance impracticable The best position to be in this type of scenario is to have your own resources and connections Even when an agreement, the other can launch it as their own and it will never be the same again even if the P wins Typically when your starting out in an industry, however, you dont know anyone and dont have the capital to go about materializing your idea Quasi K: It is customarily thought that there is a K in these situations. There is a benefit given and then the promise is given afterwords. If you dont have a promise after the benefit, you may not have quasi K. Bad Policy iii. In these kind of Ks, there must be a reasonable expectation of K. If facts hint that there wasnt one (eg like lawn mower comes by my house every week and mows lawn and I pay him, this would be one.) then no quasi K. iv. If not, then you could get a guy that comes by and paint your house and then demands payment out of nowhere. Not good. Bailey v. West (No History Inferring Quasi K): The one where West purchased a horse from a guy and then it was lame. They left it on Baileys farm where Bailey cared for it not knowing who the owner really was. Sends bill to West, West declines, and Bailey continues caring for it. He brings suit for past consideration, enforceable? v. No, in this case not only did West not really have a relationship with Bailey where he could reasonably assume that West would pay him for these services that were provided, but West denied that the horse was his. There was no implied in fact K as Bailey had alleged and won in lower ct. No Quasi K. Bailey v. West (No Implied-in-Fact or Law/Unenforceable) Facts: The D went to Belmont Park in New York to purchase race horses with his trainer in April 1962, which is where and when the D purchased Bascoms Folly from Dr. Strauss. Upon arrival, the Ds trainer discovered that the horse was lame, and so the horse was reshipped to the seller by van as ordered by the D. The seller refused to accept the horse. The van driver contacted the Ds trainer who told the van driver to do whatever he wanted to do with the horse, but that the horse would not be cared for at any farm at the Ds expense. The van driver subsequently brought the horse to the Ps farm, but did not inform the P of what the Ds trainer had informed the van driver over the telephone regarding the Ds intention to not pay for maintaining the horse. The P sent regular bills to the D for the care provided to the horse. After 2-3 months, the D responded to the Ps bill by refusing to playing on the basis that the horse was not his or had been instructed to be left in the care of the P Rule: 1) An implied in fact contract requires all of the elements of an express contract: mutual agreement or consent, intention of the parties, and meeting of minds. These required elements are inferred in implied in fact contracts through the actions of the parties involved. 2) In a quasi contract (implied-in-law), there is no need for consent. The elements required are a benefit conferred upon the D by the P, appreciation by D of such benefit, and acceptance and retention by defendant of such benefit under such circumstances that it would be inequitable to retain the benefit without payment of the value thereof > Unjust enrichment benefit conferred, appreciated, and accepted and there is a reasonable expectation of compensation. If, however, the P was voluntarily conferring the benefit, then no obligation is created Reasoning: 1) No Mutual Agreement: The court ruled that the actions of the parties do not infer mutual agreement or intent to promise between the parties: > The P knew that there was a dispute related to the ownership of the horse, and his subsequent actions indicated that he did not know with whom he had a contract with, > The court also ruled that the D never used the P or had established a prior relationship with the P, > The most important fact deemed by the court was that the Ds trainer informed the van driver, Kelly, that the D would not be responsible for the horses maintenance 2) There is no quasi contract (implied-in-law): > The P knew of the controversy surrounding the ownership of the horse.


> >

The D did not really get a benefit from the P by caring for the horse. Essentially, the P was a volunteer since he boarded the horse assuming the risk that no one would pay for the service since no one was willing to own up to the fact that the horse was indeed their property


Unjust enrichment o 1) benefit conferred, o 2) appreciated, and accepted and there is a o 3) reasonable expectation of compensation.  Exeption: If, however, y 1) the P was voluntarily conferring the benefit, then y 2) no obligation is created

5.0 Defenses to Legal Enforcement of Admitted Contracts 5.1 Subject Matter Limitations on Freedom of Contracts In some instances, though people would like to K for certain things, sex, drugs, surrogacy (in some states), or other illegal activity, the K is unenforceable because of the subject matter at hand.

5.1.1 The Example of Surrogacy Agreements R2d 178 When a Term is Unenforceable on Grounds of Public Policy (1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms Surrogacy agreement Contract where woman agrees to be impregnated and carry a baby to birth, give birth, then baby is adopted by the counterparty. A lot of ways surrogacy is done combinations of sperm and egg. States regulate it differently. For instance, Texas and Arkansas have statutes voiding the rights of surrogates. Other states void surrogacy contracts and criminalize them In Re Baby M: The one where the Sterns enter into a surrogacy K with Mrs. Whitehead, when Mrs. Whitehead reneges, there is a big fight over the custody of the baby. Can the surrogacy agreement be enforced? i. No, there is a statute against such Ks. In Re Baby M (Against Pub. Pol./Uneforceable) Surrogacy Agreement / Statutory Limits


Facts: The Ps executed a surrogacy contract with the D. The D agreed to provide as the mother with the P as the father a child through artificial insemination. The agreement articulated that the D would become pregnant, carry the child to term, bear it, deliver it to the P, and thereafter do whatever was necessary to terminate her maternal rights so that the Ps wife could thereafter adopt the child. The Ps wife was not a party presumably to avoid the application of the baby-selling statute to the agreement. The P would pay the D $10,000 after the childs birth and on its delivery to him. The D realized almost from the time of birth that she could not part with the child. Concerned that the D might commit suicide, the Ps agreed to let the D care for the baby for the 1 week that the D requested after which the baby would be returned to the Ps. It took the Ps 4 months after this date to regain the baby since the Ds fled to Florida with the baby and avoided detection by staying at various locations over the time period. The Ps filed a complaint against the D seeking enforcement of the surrogacy contract, which would grant the P possession and ultimate sole custody of the child Violates Statute = Unenforceable: Unenforceable due to violating state statute and public policy K Structured For Baby: P argues not payment for adoption, which is illegal. Payment of services. Problem is that payment is structured on if they get the baby. The majority of the opinion is in regards to the public policy. Custody Statutes and Parent Rights: Court states no parent has greater right than the other parent (P is Father v. D is Mother). Get this from custodial statutes. Doesnt place best interest of the child at the forefront. Get this from payment-for-adoption statute. Court deeply concerned about payment of money for baby. Might just turn over the baby to bad parents because adopting parties happen to pay the most without taking into account the bond with the baby since the baby isnt born yet. Dont want to incentivize black market for babies. JJ: Court counters the claim that the D has given consent since the D give consent before giving birth and is therefore incapable of knowing the attachment. The money has clouted the mother from seeing this problem. The D is probably less affluent than the Ps. Historical Fallback by Ct: Also women are not capable of making these decisions because they are hysterical/irrational and for legal purposes lack capacity Public Policy arguments > First question in any of these type of cases (Public Policy) is if its illegal. If yes, then done. Even if not, is it void from the source of public policy. > Public policy needs to come from statute or state constitution. Not just what some judge says or believes Johnson v. Calvert (Enforceable) Surrogacy Agreement Facts: In Johnson v. Calvert, the court rejected the comparison between adoption and surrogacy agreements, and instead based its decision on the autonomy of women to enter into surrogacy agreements. > The court held that holding otherwise would foreclose a personal and economic choice on the part of the surrogate mother, > and to deny intending parent what may be their only means of procreating a child of their own genetic stock. > It was also held that it could not be seriously argued that surrogate mother, a licensed vocational nurse who has some well in school and who previously borne a child, lacked the intellectual wherewithal or life experience necessary to make an informed decision to enter into the surrogacy contract. > Adoption law not applicable since the Calverts were the complete biological parents. > Also made regular payments throughout the pregnancy. Just paid for service- not adoption. > Also legislature knew about these agreements since tried to pass statute regulating this, but it was vetoed. Court says its the legislatures to invalidate these contracts for solely public policy reasons. 5.2 Other Problems with the Bargaining Process 5.2.1 Duress 1. Basic Assumption of Duress: a. All cases of equitable recovery, basically: 0 SQ Expectancy b. Where instead of a mutually beneficial K allowing people to exercise preference, party changes the game and threat is made to induce K c. One party says that I will move you towards zero or (-) if you dont make K that I want, no benefit, just a loss for you. i. Either you lose, or you lose more, what is your choice?


R.2d. 175 & 176 a. If assent is induced through an improper threat that leaves no reasonable alternative, K is voidable. i. Threat can be legal or illegal 3 Elements of Duress



a. b. c.

Improper threat made Inducement of promise by threat Reasonable to consider this threat induced

Exchange is better off when involves parties free will/voluntariness R2d 175 When duress by threat makes a contract voidable (1) If a partys manifestation of assent is (a) induced by an (b) improper threat by the other party that leaves the victim (c) no reasonable alternative, the contract is voidable, (2) If a partys manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction R2d 176 When a threat is improper (1) A threat is improper if: (a) what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property, (b) what is threatened is a criminal prosecution, (c) what is threatened is the use of civil process and the threat is made in bad faith, or (d) the threat is a breach of duty of good faith and fair dealing under a contract with the recipient (2) A threat is improper if the resulting exchange is not on fair terms, and (a) the threatened act would harm the recipient and would not significantly benefit the party making the threat, (b) the effectiveness of the threat is inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, or (c) what is threatened is otherwise a use of power for illegitimate ends -H 0 SQ Expect. In duress, party 1 tries to make party 2s SQ (Status Quo) negative Party 2 has to choose between two alternatives both below the SQ Wolf v. Marlton Corp (Legal Threat to Pressure Seller): The one where the Wolfs, due to marriage problems, had their lawyer threaten the Marlton Corp. by stating you either let us out of K to purchase house and give us most of the down payment back, or we will purchase the house and sell it to an undesirable buyer to ruin your reputation. When the seller, then, reneges on the K and keeps the down payment, the case goes to court. Can a threat, even if it is a legal thing for the person to do, create recovery under duress? a. Yes, even if threat is legal or not, or even if it really makes sense, as long as the victim is pressured by the threat (a question for the jury), then they can recover through duress. Wolf v. Marlton Corp. (Duress/Unenforceable)


Facts: The D entered into an agreement with the Ps for the construction and sale of a dwelling in the Ds housing development. The agreement allowed for the D to void the contract and retain all payments paid by the P in the case that the P failed to make payment or settlement as specified by the agreement. The P missed the second payment. The Ps attorney spoke with the Ds sales agent regarding this Ps marital problems. The Ps attorney informed the Ds sales agent that the Ps would go through with the deal if necessary, but they would subsequently resell the property in such a way as to harm the Ds business. The Ps attorney also spoke with the Ds president about the Ps want to get its money back The Ps attorney explained that if the D did not get a specified amount back. The Ds attorney sent the Ps attorney of a material breach of the contract by the P making the agreement null and void assigning the cause of termination as among other reasons Physical or Psychological: The court holds that a distinction between a physical and nonphysical pressure by one party from letting the other party enforce the contract is of very minimal importance. Both consist of duress Reasoning: The pressure exerted against the other party must be wrongful, and that not all types of pressure are wrongful. Further, a wrongful form of pressure is not one determined by the legality or lawfulness of the pressure. Acts and threats are wrongful in the moral or equitable sense. If the threat is made for an outrageous purpose, a more critical standard is applied to the threatened action in deeming it wrongful. There is no reason why economic or moral duress should not be treated as the equivalent as that of physical duress. The party for purely malicious and unconscionable motives threatened to resell such a home to a purchaser specially selected because he would be undesirable for the sole purpose of injuring the builders business. Just threatening injury- its the sole purpose JJ: Court doesnt say if there were any reasonable alternatives. Court doesnt say that it wouldve been a reasonable alternative for the P to give the Ds money back and succumb to the threat. Would create an undesirable incentive for threatners. Threatners could therefore get out of deals where no other alternative for P

Post v. Jones: 19th century whaling ship case where the Ps ship gets stuck in the Artic right before winter set in. Their only choice, if they wanted the 3 other ships who offered rescue to take their whale oil, was to submit to a rigged auction where the three ships took oil at marginal price. Is this duress, or a hard bargain? > In light of maritime law that set forth procedures for just such a thing, this was an improper threat that was effective because of duress Post v. Jones They held a rigged auction and purchased the oil at way below market price. Ps forced to choose between this and not taking any oil. Not reasonable because we have a reasonable value from the salvage law. Wont get anything if P doesnt agree. The Supreme Court voided the contract holding that the D took advantage of their position to force an unreasonable bargain. > The court ruled that one party had absolute power, and the other had no choice but submission Austin Instrument Inc, v. Loral Group (Economic Duress, Lack of Options = No Free Will): Loral had a K with the Navy, under strict time limits, to build radar sets and subcontracted the parts out to Austin. When Loral got a second K, they again contacted Austin for parts. Austin then demanded that they get a K for all the parts needed, that Loral pay a higher cost for them, and that this be retroactively applied to the existing K or they would stop delivery. Loral could find no other who could produce the parts in time, and so they had to go with Austin, and later there was a suit brought. Can Austins economic pressure to Loral be duress, or should Loral have just moved on to another supplier regardless of their deadline? b. Yes, this is duress. c. The Economic pressure that Austin threatened Loral with no other choice, a lack of free will, but to succumb to their unreasonable demands. Austin Instrument v. Loral Corp.


Facts: P was awarded a $6,000,000 contract by the Navy for the production of radar sets. The contract contained a schedule of deliveries and a liquidated damages clause in case of Ps default. P subcontracted 23 components to D. P was then awarded a second Navy contract for the production of more radar sets and again went about soliciting bids. The Ds officer told P that D would cease deliveries of the parts due under the existing subcontract unless P consented to substantial increases in the prices provided for by that agreement both retroactively for parts already delivered and prospectively on those not yet shipped and additionally placed with Austin the order for all 40 parts needed under Ps second Navy contract. After failing to find another manufacturer to subcontract to instead while still meeting the deliver schedule, P succumbed to Ds demands No Alternatives: Duress where the victim is left with no alternatives Reasoning: Typically breach is not an excuse since can recover damages on a breach claim and find another party to contract with. The P was anxious to perform well in the governments eyes. The P could not be sure that it would be able to obtain enough parts from a substitute vendor to meet its commitments. In addition, there is authority that nonperformance by a subcontractor is not an excuse for default in the main contract. Ps normal legal remedy of accepting Ds breach of the contract and then suing for damages would have been inadequate under the circumstances as P would still have had to obtain the parts elsewhere JJ: Duty of Good Faith and Fair Dealing in K: Once youre in a contract, things change. Theres a duty of good faith and fair dealing once in a contract Lewis v. Lewis (Reasonable Person Standard, Econ Duress): Where the husband threatened to take care of her if she did not sign divorce settlement. It was found that the argument took place in public, threats were not connected to signing the document, and that she most likely signed the settlement because she needed money. Would a reasonable person have been threatened here? d. No, no duress here. e. Hard Bargain: She needed the money, no wrong in accepting a hard bargain. Chouinard v. Chouinard (Econ Duress of Own Making, Hard Bargain): Where the president, Fred, of the company needed a loan because of financial mess that he created. Bank would not lend unless the co-owners dispute was resolved. Owner wanted to buy them out, Ed and Al drove a hard bargain, Fred claims duress because he was in a hard spot, duress? f. No, this his poor circumstances were of his own making and so Al and Ed driving a hard bargain was just that, not duress. Fraud: Basic Elements 1. Typically where the buyer has purchased something for more than it is worth based by the false representations of the seller. a. Very subjective, which is a problem. 2. Misrepresentation: a. False assertion of present or past fact i. Generally, in this case, you have to say something ii. Sometimes there is a duty to speak, but in general no. b. Statements of future are usually not fraud, no one knows the future. i. Projections R.2d. 164 a. Assent induced by either a fraudulent or material misrepresentation by other party, upon which other reasonably relies, K is voidable. i. In tort = fraudulent and misrepresentation, stricter rule


Basic Remedies Rescission, Defense against contractual breach Market Mechanism For Ridding Fraud Bad reputation will keep buyers away from the fraudulent seller. However, this would not work for short-term players. Need long-run players who plan on being in play for a while. A short-run seller has no reputation and doesnt care about their reputation since they arent going to be in the market for long. Its also not going to prevent some people from getting hurt. Contract context helps get money back at least for the defrauded victim. This promotes economic transactions since buyers willing to buy from less known sellers since can get money back in court R2d 160-169 (Elements of Fraud) (1) Misrepresentation/False assertion of a past or present fact. Future projections are not facts and therefore cant be fraud. Not saying anything is also not a false assertion except for certain instances such as fiduciary duty to disclose (2) Fraudulent or material in contract context.


Fraudulent intending to induce assent knowing its false. Material likely to induce a reasonable person to assent. If you know someone is less reasonable than a reasonable person and try to take advantage, then its fraudulent in contract law (NOT Tort Law) (3) Induced Reliance ( 167) substantially (no but-for cause) contributes to the induced persons decision to manifest his assent (4) Justifiable Reliance needs to be reasonable R2d 168 Reliance on Assertions of Opinion (1) An assertion is one of opinion if it expresses only a believed, without certainty, as to the existence of a fact or expresses only a judgment as to quality, value, authenticity, or similar matters. (2) If it is reasonable to do so, the recipient of an assertion of a persons opinion as to facts not disclosed and not otherwise known to the recipient may properly interpret it as an assertion (a) that the facts known to that person are not incompatible with his opinion, or (b) that he knows facts sufficient to justify him in forming it R2d 169 When Reliance on an Assertion of Opinion is Not Justified To the extent that an assertion is one of opinion only, the recipient is not justified in relying on it unless the recipient (a) stands in such relation of trust and confidence to the person whose opinion is asserted that the recipient is reasonable in relying on it, or (b) reasonably believes that, as compared with himself, the person whose opinion is asserted has special skill, judgment or objectivity with respect to the subject matter, or (c) is for some other special reason particularly susceptible to a misrepresentation of the type involved > > Spiess v. Brandt (Past, Present Misrepresentation): The one where the Ds told the Spiess that they were making good money, and that because of this when the Spiess bought the resort, they would too. Would not show books. Is this fraud? b. The majority thought Yes, c. There was a false representation of present and past fact, and a future projection that was based on these past and present facts, which induced the Spiess to purchase d. Also, their perceived concealment of the facts by not showing the books played into the fraudulent act i. Dissent: No way, the Ds did make money, and they reinvested into themselves. The Spiess also made money, and only wanted out because they made a poor choice, Ct should not have held fraud. Spiess v. Brandt Facts: The Ps bought a resort from the Ds for $95,000. The contract provided for an initial down payment with a payment schedule for thereafter. After the Ps missed payment, the Ds eventually served on Ps a notice of cancellation of the contract. The Ps brought an action to rescind the contract on the grounds of fraud and misrepresentation. The Ds, prior to entering the agreement and during negotiations, had represented to the Ps: The Ds were making good money out of the resort, The Ps could make good money out of it, The Ps could make all future payments on the contract out of the profits Reasoning: False Assertion Ds claimed they made good money when they in fact lost money. Fraudulent the Ds knew it was false since they refused to supply the books after the P continuously requesting them. The D knew the P would rely because of the Ps youth and lack of experience in business Justifiable reliance Age disparity justified the sellers to be wholly truthful and hand-holding almost like a fiduciary duty according to the majority. Knew of age disparity and took advantage of this as well. Reliance The Ps purchased the resort for $95,000 JJ: Ps had done business before and so werent as inexperienced as the majority made it seem. The Ps also made money while operating the resort as seen by the plane and car they bought Liability for fraud in Contract and Tort Tort actions with regards to fraud tend to have a higher burden of proof than those under contract law since contract law only requires a misrepresentation need be only material or fraudulent while tort law requires misrepresentation need be both material and fraudulent Remedies for Fraud in Contract and Tort The typical remedy for fraud in contract law is rescission whereas it allows for punitive damages in tort law. Rescission calls for the parties to be returned to the status quo ante or the position each occupied before the contract was made. Most courts will also allow restitutionary recovery if necessary to restore a party to the status quo ante Is Fraud a Default, or Mandatory, Rule? Default rules can contract out of Mandatory rules cant contract out of (Cannot contract out of fraud)


Danann Realty v. Harris (Duty to Read): The one where the buyers purchased a building with the clause that no one relies on any representations made. They then come back, upset about the representations that induced them into purchasing. Fraud, or did they have a duty to read? a. They had a duty to read. b. In this case, as is, dont rely clause should have been reasonably understood by the purchasers, who assumed the risk. Fuld Dissent actually defined the majority rule in this case: cant K out of fraud. c. This is boilerplate: not negotiated, general in the K. i. This is against grain of majority opinion that this is not a general K clause ii. Reason that this is important: most people tend to look over general provisions because they were not negotiated, this affects ones duty to read and understand. d. Rather than a specific clause as majority contended, the dissent believed that a clause of no reliance encompassed the whole K. e. Worried that if one could K out of fraud, then how can one rely on representations that induced them into it? i. Under 164, K should be void when misrepresentations induce anyway, so do not rely clause isnt valid. Danann Realty Corp. v. Harris (Specific Disclaimer/Enforceable) Facts: The P alleges that they were induced to enter into a contract of a lease for a building held by the D because of oral representations falsely made by the Ds regarding the operating expenses of the building and the profits to be derived from the investment. The P seeks to affirm the contract, but retrieve damages for fraud. The contract contained a merger and specific disclaimer clause stating: that the D had made no oral promises and the P had not relied on any oral promises. Can Contract out of K: Fraud can be contracted out of with a specific disclaimer clause Reasoning: When you have contract that includes those specific details, then cant argue its boilerplate and therefore didnt read it since it was just added in and never relied on. They knew about it. Sophisticated Parties: In addition, both were sophisticated parties JJ: Johnston says that even though something is boilerplate or standardized doesnt mean that people dont know/rely on it. In addition, this is fraud through contract by this allowing for fraud itself to disclaim liability Warranties (If Not True, Why Fraud?): a. If it says a good or a service is of a certain quality: assertion of present and sometimes past fact. b. The more present or past, the more fraud. At times: a bit gray. CBS v. Ziff Davis Pub (Warranties): Ziff expressly warranted that its financial statements were accurate. CBS conducted inquiry, and didnt believe this, but regardless of this fact. Things didnt work out as CBS hoped, sued over express warranty, the warranty stood. c. Be careful what you assert, warranty is relied on as part of K. d. Warranty is part of what you pay for, so no need to prove belief CBS v. Ziff-Davis Express warrant that financial information is accurate within the contract. P discovers that its not. Rule on Warranties: > Still breach when you know its false. > This is a warranty you paid for. Going to get damages. > Even if known, then should still be able to sue as an incentive to be more careful when making these warranties Failure to Disclose as Fraud Common Law Rule of Caveat Emptor let the buyer beware. > No duty to disclose. > Buyer the responsibility to research. > Whatever cant research, ask the seller (Asking questions is the protection). > Sets up fraud this (asking questions) is the buyers protection. > Exceptions would be things that a reasonable person would not know to ask R2d 161(a-d) When Non-Disclosure Is Equivalent to an Assertion A persons non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only: (a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material.


(b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. (c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part. (d) where the other person is entitled to know the fact because of a relation of trust and confidence between them. Obde v. Schlemeyer (Duty to Disclose where Buyer Cannot Easily Discover): Where the Schlemeyers purchase a house from the Obdes, and the Obdes do not disclose the fact that there is structural damage caused by termites that they did not fix. Fraud? a. Yes, there is a duty to disclose. b. The Seller is seen as the one who can easily reveal information, and the buyer really cant be expected to know things that are not easily seen, so the buyer has a duty to disclose these sort of things. c. Also, the undisclosed fact is objectively detrimental to value Obde v. Schlemeyer (Duty to Disclose & Concealment/Unenforceable) Facts: The Ps purchased the Ds home. The Ds knew of a potential active termite problem and their failure to fully eradicate the problem in the past. The Ds had concealed any superficial signs of termites by hiring a pest expert to do so. Upon learning of the infestation, the Ps ceased performance of a prior installment contract between the Ds and the original owner of the home, allowing for the home to revert back through foreclosure to that owner Duty to Disclose: There is a duty to disclose defects to purchaser where: > (1)the concealed defects in demised premises, dangerous to the property, health or life of the tenant, which > (2) defects are known to the landlord when the lease is made, but > (3) unknown to the tenant, and which > (4) a careful examination on his part would not disclose, > (5) it is the landlords duty to disclose them to the tenant before leasing, and his failure to do so amounts to a fraud Reasoning: > Part (4) is the problem since couldve hired a pest expert of their own for minimal cost, but theres enough active concealment in this case to override this. > Actively concealing the termite infestation makes it harder for the buyers to discover the problem. > The court also dismissed the Ds argument that by foreclosing and not fulfilling their contractual obligations, the Ps had forfeited their right to recovery. > The court said that a vendee is entitled to maintain an action against the vendor for fraud or deceit in the transaction even though he has not complied with all the duties imposed upon him by the contract Reed v. King (Concealment as Fraud): Where Reed purchased house that was site of multiple murder, and King actively told neighbors not to disclose this information. Did King have a duty to tell, and is concealment of this fraud? d. Yes, and Yes. Active concealment is fraud. e. This is not a normal happening that a buyer would think about either. f. It objectively and subjectively affects the value Reed v. King (Duty to Disclose & Concealment/Unenforceable) Facts: The D and his real estate agent knew about the murders of a woman and her 4 children within the Ds property 10 years prior to the sale to the P. The D sold the house to the P for $76,000. The D did not inform the P of the murder and knew that it materially affected the market value of the house when they listed it for sale. The D represented to the P that the premises were in good condition and fit for an elderly lady living alone without disclosing the murder. At some time, the D even asked a neighbor to not inform the P of the murders. After the P moved in, the neighbors informed the P of the murder and that no one was interested in purchasing the home due to the stigma attached to the home from the murder. Due to this stigma, the house is only worth $65,000 Rule: A seller of real property has a duty to disclose where the (1) seller knows of facts (2) materially affecting the value or desirability of the property which (3) are known or accessible only to him and (4) also knows that such facts are not known to, or (5) within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer Reasoning: The court said she didnt know to ask about the murder. A reasonable person wouldnt think to ask this. The seller also told neighbor not to tell the buyer. Like active concealment. When the buyer found out, it was too late. Determine materiality as a matter of law to avoid jury from letting irrational reasons for rescinding contracts. The P alleges it did have a quantifiable material effect on the market value of the home Stambovsky v. Ackley (Subjectively Affects Value, but Abnormal): Where buyer find out after purchase of the home that the former owner created an aura of haunting around the house. Should the seller have disclosed? a. Yes, they should have disclosed. b. A haunted house is not normal.


c. Seller actively created this idea around house. d. It at least subjectively affects the value of house, which plays into whether one would have bought it. Stambovsky v. Ackley (Duty to Disclose & Concealment/Unenforceable) Facts: The P purchased a home widely reputed within the town to be possessed by ghosts. The P did not know of this reputation prior to purchasing the home. Upon learning of this reputation, the P seeks rescission, but the NY supreme court denies this claim due to NYs strict caveat emptor policy at the time Ruling: The appellate court reverses this decision Reasoning: First, it rules that caveat emptor is not so all-encompassing as to render every act of nondisclosure immune from redress. The court holds that exceptions should be created in cases such as this one where common sense dictates that an exception should be created. Secondly, the principle of caveat emptor requires that the P act prudently in discovering the defect prior to purchase, but no prudent investigation could have possibly revealed this defect (who are they going to call Ghostbusters or a psychic). To hold the purchaser liable of discovering this type of fact as well would make them responsible for being omniscient. This would encourage predatory practices otherwise. Thirdly, the seller fostered this belief that the house was haunted in various periodicals and it consequently made the knowledge available to those to whom he had no legal relationship, so he should do similarly with the purchaser whom he has a legal relationship with as a matter of equity. Creating this perception triggers the disclosure requirement Material affect according to the specific perspective buyer- not market as a whole

Laidlaw v. Organ (Where the Information was in the Common Realm): Where the seller did not say anything when asked about the tobacco market and how it was going to affect his purchase of land. Buyer went ahead with purchase anyway, lost out. Duty to disclose? a. No, buyer should have done his research. b. Both men were in the tobacco industry, and assumedly they both had access to this information. c. We want to incentivize buyers to be informed. Laidlaw v. Oregon (No Duty to Disclose/Unenforceable) Facts: The P agreed to buy a large quantity of tobacco from the D. The day before the sale was to be consummated, news arrived that the War of 1812 had ended and the foreign tobacco market was to be opened. This was publicly announced, but the D failed to learn of the announcement prior to executing the agreement nonetheless. Ruling: The event was public knowledge. The D was not a special party. Makes no sense to impose a duty to disclose if they both have equal access to the information Promissory Fraud Promissory Fraud Generally, if you breach a promise not a fraud. Promise is present statement of intent of some future event. Only a false statement of present fact when actually had no intention. Otherwise all contracts would be promissory fraud 1. Promissory Fraud: A statement of present intention to do something in future that you never intended to do in the first place. a. Promises are not usually fraud, though, this would be bad policy. b. Usually promises to do future thing are a breach of K, not fraud. c. Dont mix this up with regular fraud, where past present is key. Hanners v. Balfour Guthrie: Where Hanner sold peanuts to Balfour and relied on term Net cash, receipt of invoice to mean that he would be immediately paid when the invoice was received by Balfour. Balfour didnt pay for 30 days on 2 Ks that had this wording, and Hanner found out that it was his policy to do so in spite of the K all along. Is there promissory fraud? d. Yes, according to the majority there is. e. You shouldnt say hold promise something in a K when you had no intention of doing it. f. Incentive to be careful what you say in your Ks. Adams Dissent: a. It was standard for Balfour to pay Hanners late, average 30 days, on all of the previous transactions. i. Hanners actions accepting this ratified 30 day as norm ii. Also, Hanners himself paid in similar fashion with same clause in K Hanners v. Balfour Guthrie 2.


Facts: D promised to pay upon receipt of contracted peanuts purchased from the P. The P claimed fraud by the D having an internal procedure to always delay payment by about 30 days Promissory Fraud=Ordinary Fraud: For Promissory Fraud, need to show same elements as ordinary fraud claim Ruling: > Misrepresentation had 0 intent of fulfilling promise as seen through internal procedure in direct contradiction. The key in this case was proving reliance. > In K, You Will Pay: The court said it was enough that the promise was in the contract in order to show reasonable reliance > Breach of Promise is Fraud Where Intentional: Distinction of breach of promise and fraud is that breach of promise cannot be fraud unless similar to Hanners where there is 0 intention to carry out the promise. > If Not Intentional, Just Breach: Otherwise every breach of contract case would be fraud. Once its fraud, could be tort, which allows punitive damages

5.2.3 Mistake Mistaken Beliefs About Facts That Exist at the Time of Agreement 2 Types of Mistake 1. R.2d 151, 152, 153, 154: a. 152, Mutual: i. Where mistake has an integral effect on the exchange, K is voidable by adversely affected unless party seeking relieve bears the risk 154. 1. Agreement of parties 2. He is aware at time K is made that he has limited knowledge, but treats as sufficient 3. Allocated on Cts. Beliefe that it is reasonable to do so b. 153, Unilateral: i. Where mistake has integral effect on exchange, K is voidable by adversely affected unless party seeking relief bears risk 154 R2d 151 mistake is a belief not in accord with the facts. Mistake needs to be to a basic assumption underlying the contract R2d 152 When a Mistake of Both Parties Makes a Contract Voidable (1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in 154 R2d 153 When Mistake of One Party Makes a Contract Voidable Where a mistake of one party at time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he 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 R2d 154 When a Party Bears the Risk of a Mistake A party bears the risk of a mistake when (a) the risk is allocated to her 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 > JJ: Abolish it: Johnston says mistake doctrine should be abolished in the U.S. MUTUAL MISTAKE Sherwood v. Walker (Mutual Mistake/Unenforceable) - Recission


Sherwood v. Walker (rescission) FACTS: Banker and farmer D contracted for the sale of a cow from a farm and business operations in multiple states P. D contracted to buy a cow, Rose 2d, for the price of $80. P sought delivery, but D ordered the cow to not be delivered. D introduced evidence that both parties at the time of contract believed the cow to be barren. After the contract of sale was signed, it was discovered that Rose 2d was pregnant. The price of Rose 2d under the altered conditions would have been over $750. HOLDING: The mistake was mutual and material. MAJORITY: > Essence of Thing Bargained For: The Cow was fertile- not barren as both parties believed (essence of contract). The contract would not have existed otherwise since the buyer got a $850 cow for $80 > Both parties supposed the cow was barren and would not breed, and she was sold for an insignificant sum as compared with her real value. > Mistake: The parties would not have made the contract of sale except upon the understanding and belief that she was incapable of breeding and no use as a cow. > The thing sold and bought had in fact no existence. DISSENT: > Dissent looks at the situation as a speculation problem (no evidence P wanted to bread the cow) > Buyer believed that the cow might breed belief about PROBABILITY not facts. > When there is no warranty there can be no mistake of fact when no such fact exists. > No Mistake: Dissent said it wasnt a mistake of fact. Parties had beliefs- not knowledge. Buyer though there was a good probability that cow was fertile while the seller thought it was barren. > Just Good Deal: This is basically behind every market deal. > Sellers Risk: The seller shouldve bore the risk since it was reasonable: it was his cow and hes an expert in cows JJ: > Bad Policy, Bad Incentive: Creates incentive if not found that the D bears risk: It would promote carelessness. Encourages people to not do the type of investigation we would like them to do. > Seller Always Wins: Allows the seller to enter transactions where there is no risk at all for him. It is always a win-win for the seller if mistake is allowed:  If the deal is good for seller, hold the buyer to it = profit.  If the deal is not good for the seller, claim mistake and get out = profit.  Buyer bears 100% of the risk in this scenario, not a good idea. Bad policy. Lenaware County Bd. v. Messerly The land the Ps bought was condemned by the board of health because of the owner prior to the D having installed a septic system not up to code making the land valueless. > Caveat Emptor: If there is an as is clause, then typically the buyersbears the risk. Court says cant really say septic system is collateral

UNILATERAL MISTAKE Anderson Brothers Corp. v. OMeara No Recission Anderson Brothers v. OMeara (no rescission) FACTS: Anderson Brothers (D) sold a barge dredge to an oil well driller, OMeara (P). P thought equipment was usable to dig a trench for barge-access to an oil rig, but sent someone who knew nothing about dredge only about engines to check the barge out did not follow duty to take care. The trencher P bought could only dig trenches for pipes. OMeara discovered his mistake; naval architect informed him it would cost $10K to retrofit; OMeara asks Ds for $10K contribution; Anderson declines; OMeara sues under mistake theory. > Rule: Relief should be denied where the mistaken party exercised no diligence whatever in ascertaining the readily accessible facts before he entered into a contract > No mutual mistake o P and D were operating under different assumptions. o P alone believed that the dredge was capable without modification to the uses he wanted to put it to. > Even if D knew of Ps objective, could have reasonably believed P would retrofit it. > The unilateral mistake is not grounds for recovery under an unconscionability theory because plaintiff, under R. 2d. 154, P failed to exercise due diligence in determining the use to which the dredge might be put o Failure to Take Adequate Precautions: P sent an employee who had no knowledge of dredges to examine the dredge = limited knowledge; o P never inquired as to the use of the dredge something a reasonable buyer would do. JJ: Bought it under time constraint with hope to modify it and when attempt failed, tried to get money back


5.2.4 Unconscionability Typically, courts use the label unconscionable to describe agreements whose process defects do not rise to the level of actionable fraud or duress UCC 2-302 Comment 1 Unconscionability: the basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract Something was wrong with the process, but dont have duress or fraud Common law mandates a duty to read A. Parties have a duty to read contract B. Rationale: Objective Theory of Assent: Reasonably assume the other party read the contract C. Exception: Where a reasonable person would not think the other part would read the contract, then the other party isnt bound.

Merit Music v. Sonneborn (Duty to Read/Enforceable) No Duty to Inform Facts: Getting pinball machine for their bar by borrowing money for machine by lessor. Lessor said just sign this paper thinking the paper was just a formality. Actually guaranteed a certain stream of profits. The lessee didnt read the contract Duty to Read: The buyer has duty to read and understand Reliance: By the provision in question being in the contract, we assume that the party read it since that is what reasonable prudent person would do Birmingham TV v. Water Works (Duty to Read Exception/Unenforceable) Facts: Bailor attempted to rid itself of liability by including a liability disclaimer in the contract. The bailees property was damaged during the bailment. > Procedural Unconscionability: The liability clause was on the reverse of the contract, which the party did not know existed. A reasonable person would not think that the other party would read the contract and so there is not mutual assent and binding agreement. > Duty to Inform: Need to point out the portion that a reasonable person would not know is in contract Williams v. Walker-Thomas Furniture I (cross-collateral clause not unconscionable) FACTS: A single mom with limited education and on welfare cant afford in first place P purchased many household items on an installment plan from Walker-Thomas Furniture D. According to the sales contract, D retained the title to all good sold if payments were in default (Cross-Collateral Clause). P defaulted on her final purchase, a radio set. Ps first purchase was in 1957, and her last purchase was in 1962. There were 14 contracts, each of which contained a long paragraph in extremely fine print. ). It was structured as if the store lent her these things and she has to pay on installment. If defaults on any item, then repossess everything. P claims that there was a lack of meeting of the minds. > HOLDING and Statutory Reasoning: Court condemns Ds conduct but does not step in: [there is] no ground upon which this court can declare the contracts in question contrary to public policy. Therefore, if the K is to be condemned, the legislature must do it. > Duty to Read: Common law duty to read. > Voluntary Agreement: The court first explains that a promisee is bound by a contract that they voluntarily dont read prior to agreeing to if it results in a bad bargain. > No Fraud or Misrepresentation: The court also explains that there was no fraud or misrepresentation involved and there was a mere unilateral mistake- not a mutual mistake. a. Procedural v. Substantive Unconscionability Williams v. Walker-Thomas Furniture Co. II (cross-collateral clause unconscionable)


Williams v. Walker-Thomas Furniture II Facts: Same facts above. Merged with case of one other customer > Common Law Unconscionability is Procedural and Substantive: Common law already allows for an agreement to be struck down for unconscionability. It must be both procedurally unconscionable and substantively unconscionable. > Procedural Unconscionability (a defective bargaining process) o Absence of a meaningful choice  Lack of bargaining power (take it or leave it; contracts of adhesion)  Fine print and technical o In light of the circumstances and education of the parties, did they have a reasonable chance to understand the terms of the K. > Substantive Unconscionability o Terms are one-sided (i.e., the cross-collateral clause) o Whether the terms are so extreme as to be shocking considering the mores and business practices of the industry. Procedural Unconscionability lacked education and therefore couldnt understand the terms. In addition, the Ps lacked bargaining power (take it or leave it scenario). Substantive Unconscionability took away all of the property even after paid the individual balances on most of them. The terms were one sided Common Law Must = Both Procedural and Substantive Uncioncionability Procedural unconscionability includes the (1) absence of meaningful consideration, (2) disparity in bargaining power, (3) the method through which the contract was entered into, (4) lack of education of one of the partys resulting in not understanding the terms, and (5) a maze of terms. Substantive unconscionability includes (1) looking at the terms to see if they were so extreme as to appear unconscionable according to the mores and business practices of the time and place.

Seabrook v. Commuter Housing Co. (Unconscionable)


FACTS: P entered into written lease agreement to lease an apartment in a complex not yet constructed from D. The building was not completed until 3 months after the expected completion date. The lease had a clause that said that if the building was not completed on time, the date of occupancy would commence on the day the building was complete for three years. P claimed this clause was never explained to her. Procedural: > Dense Verbiage: P was presented with a long complex lease, printed in small, practically illegible print. It contained 54 clauses and if typed on normal paper would exceed 50 pages of text. > Complex Legal Jargon: Terms used were not those commonly used or understood by the occasional lessee. Only sophisticated party, in the landlords shoes, could have understood b/c they were drafted through a lawyer. P could not have understood them. > Unequal Bargaining Power: Unequal bargaining power b/c P needed the apartment and D was more sophisticated, had knowledge. Thus, the P had no bargaining power. (Assumes she wouldnt have been able to negotiate around clause). > RULE: The court applies the U.C.C. 2-302 regarding merchants to landlords. Substantive: > Not Reasonable: no limit on the time delay when D would let P out of contract. While reasonableness can be read into the contract, it should not have to be. Landlord under a duty to relieve lessee of their attempt to determine what period of time is reasonable. Terms unreasonable favored D. > No Place to Live: Wouldnt have been able to find another place to live on month-to-month basis while building was completed. Ruling: Unconscionable Reasoning: Procedural Unconscionable court assumes inequitable bargaining power. Assumes she wouldnt have been able to negotiate the clause out. Also that wouldnt have been able to find another place on a month-to-month basis while building was completed. Also she wouldnt be able to understand the highly-technical terms. There were 10,000 words in fine print. Substantive Unconscionability contract did not even provide for a reasonable time after which the lessee would not be bound if the building was not complete. Essentially, the contract was a trap once assented to. This reasonableness could be inferred by the contract, but it shouldve been explicit. Also the terms were unreasonably, expressly tailored to the lessors needs only Henningsen v. Bloomfield Motors, Inc. (Warranties Disclaimer/Unconscionable) FACTS: Henningsen P signed a purchase order form, on the back of which contained a page of fine print type including a clause which limited the warranties of Chrysler and the dealer to 90 days. Liability was limited to replacement, and all other warranties, express or implied, were disavowed. 10 days after purchase, a defective steering mechanism caused the vehicle to crash, seriously injuring P. HOLDING: > Procedural Unconscionability: Unfair Bargaining Position: o Form Contracts: used in modern commercial life by enterprises with strong bargaining position to force favorable terms for them on the other party. o No Opportunity to Bargain: Take it or leave it proposition the form contract is administered by ALL car dealers who serve a ministerial function and has no authority to alter terms; only manufacturer can alter terms. Because all of the big 3 automakers in the U.S. use the boilerplate K, there is no bargaining power. > Substantive Unconscionability: Unfair Terms: o In exchange for the delusive remedy of replacement of defective parts at the factory, the buyer is said to have accepted the exclusion of the makers liability for personal injuries arising from the breach of warranty and to have agreed to the elimination of any other express or implied warranty. o Bad incentives: release from liability limits need to make vehicles safe and prohibits compensation. The manufacturer does not have to internalize the cost of a bad product meaning that it has not incentive to improve it. o Not Equitable: The court explains that an instinctive felt sense of justice cries out against such a sharp bargain Mutual Marine Office v. Atwell, Vogel & Sterling (Conscionable/Enforceable) Custom-Costs


Facts: Try to limit tort liability. Contract between two firms (Insurance Company and Inspective firm). Send inspector to property before Insurance Company insures 3rd party property. The inspector misses the fact that theres a river nearby that floods. Inspecting company in contact justifies disclaiming mistake/tort liability by including in the contract that it enables them to charge lower prices Ruling: Conscionable Clear and Definite: Language and intent of the disclaimer is clear and unequivocal. The parties were on notice of the disclaimer, and it was not forced on one party to the bargain by the other. Customary: The disclaimer was common in the type of transaction involved and was to be expected by ordinary custom. In other words, everyone knew that it would be there particularly in the business-to-business context JJ: Since it was clear and unequivocal it would be applicable to business-to-consumer context. Different from other cases where it is thought that a contract being common across the business eliminates choice and is thus unconscionable. Could be that this is different because it is a service provider and the costs of doing business would be too much if not. Ciofalo v. Vic Tarney Gyms, Inc. (Conscionable/Enforceable) Assumption of Risk-Public Facility Facts: Business to consumer (gym membership). Liability disclaimer enforced. Ruling: Private organization providing a public facility and under no duty to accept the P. Accepting the P, so has right to insist upon such terms as it deemed appropriate JJ: An exception to this ruling would be services rendered by a public carrier or utility, which are deemed necessary. Disclaimers of reckless and intentional torts by private organizations such as the gym in this case are not going to be enforceable

Carnival Cruise and the economic approach Carnival Cruise Lines, Inc. v. Shute (Forum Selection Clause Conscionable/Enforceable) FACTS: P bought tickets from cruise line D. Printed on the tickets in large lettering was a requirement that the back of the ticket be read. The back of the ticket included a Forum Selection Clause limiting liability to suits filed in FL. P was injured during the cruise and filed suit in their home state of WA. Procedural Unconscionability o Easy to Understand: No procedural unconscionability b/c large print drew attention to terms. o Reasonable: No reasonable person would think they could bargain in this deal. > Substantive Unconscionability o Reasonable: Forum of FL a rational forum considering that is the departing place for most of its cruises and headquarters for the cruise line. o Cost Benefits: Reasonable to limit transaction costs with business transactions all over the world. Benefits passed on to those who purchase product due to fewer legal costs. Limits forum shopping. o Not Intended to Limit Negligence Liability: The UCC prohibits service providers such as Carnival from including clauses that limit its liability for things such as negligence and loss of life and limb. o Clearness of Forum: The creates certitude as to place where customer can bring suit, not unreasonable considering that its primary place of business is in FL and the Ps are in the US. JJ: This is not unconscionability case specifically, but is significant because it involves similar analysis by SCOTUS. >

Arbitration Agreements Scott v. Cingular Wireless Arbitration Unconscionable, Not Easy to Use, Against Consumer


Facts: The Ps purchased and signed cellular plans with the D. The contracts were all preprinted and included an arbitration clause requiring arbitration. The arbitration clause also prohibited consolidation of cases, class actions, and class arbitration. Cingular unilaterally retained the right to revise the agreement, which it did in July 2008. The arbitration clause still prohibited class actions, but also explained that Cingular would not pay the arbitration fees for any claim deemed frivolous nor reimburse the claimants reasonable attorney fees unless the sought after amount was at least successfully recovered through the claim. The Ps underlying suit is that they were improperly billed by the D for long distance and out-of-network roaming of up to $45/month. Ps tried to bring class action in court. > FAA but No Fair K: Federal Arbitration Act does not preempt the unenforceable treatment of unconscionable terms within an arbitration clause/agreement. Therefore, unconscionable > Against State Policy: Counter to the Washington State policy requiring class action suits. Court cites the Consumer Protection Act for this state policy since it favors aggregation since it incentivizes attorneys to take small individual claim cases, deters tortfeasing companies, judicially efficient, and compensates victims. > Bad Policy in General: Also focused on the fact that without class actions, attorneys wouldnt take over cases with such small claims. The court backs up this second ground with a declaratory statement for a former division chief from the CPA in Washington and a declaration of an ordinary plaintiffs attorney. In addition, no individual claim had been brought in 6 years. > Limits Liability: This therefore means that it functions to exculpate the drafter from liability for a broad range of undefined wrongful conduct including potentially intentional wrongful conduct and that such exculpation clauses are substantively unconscionable. > The FAA protects arbitration- not exculpation. Being a part of an arbitration clause would not change the unconscionable character of the clause. In addition, the language of the clause prohibits severability (if part is unenforceable then the whole is unenforceable) and since no party argued for severability, the entire arbitration clause is null and void JJ: The P doesnt really bring evidence. The declarations are not from experts. In addition, she just works at the CPA and the attorney has interest in ensuring class actions are bring able. AT&T v. Concepcion Arbitration Conscionable, Ease of Use, Value for Consumer Facts: The Ps purchased cellular plans with the D, AT&T. The contracts were all preprinted and included an arbitration clause requiring arbitration. The arbitration clause also prohibited consolidation of cases, class actions, and class arbitration. The contract provided that following to the P filing a notice of dispute form on the Ds website, the D may offer to settle the claim. If the D does not make such an offer or if the claim is not settled within 30 days, the P may invoke arbitration by filing a separate demand for arbitration accessible through the Ds website. The arbitration clause explained that the D would pay the arbitration fees for any claim not deemed frivolous. In addition, in the event that a customer receives an arbitration award greater than the Ds last written settlement offer, the D is required to pay a $7,500 minimum recovery and twice the amount of the claimants attorney fees. The underlying suit is regarding false advertising and fraud as to cell phones the D advertised as free, but later charged sales tax on and charged to the Ps bill. SCOTUS: Holds that the arbitration agreement is not unconscionable, that it is favored by the FAA and is not slighted towards the corporation it may, actually, be slighted towards the P in that it has many consumer friendly conditions that incentivize arbitration. Arbitration Never Agrees with Class Action: Cannot just strike down arbitration just because its an arbitration agreement. Arbitration never allows for class action. Defeats purpose of class action Scalia Opinion: Class arbitration, even, goes against the fundamental purpose of arbitration. Arbitration is meant to provide a speedy outcome, reduce costs, and increase efficiency because it is arbitrated by a specialist in the field and litigation costs are way down for both parties involved. FAA: Favors arbitration, and cant rid state of it just by saying that we dont like arbitration, must be something substantive like the fact that it unfairly limits liability not case here. Ease of Access: Easier to bring arbitration since you just go to the website and fill out a form. Can choose whether to arbitrate in person, phone or written if less than 10K Incentivizes Arbitration: If at any time the arbitration produces a settlement greater than that originally proposes, 7.5K more and twice the amount of the attorneys fees will be paid to the P. Contract Interpretation 6.1.1 The Parole Evidence Rule Analysis: Two approaches: (if merger clause step 4) 1) Four Corners Rule: if the writing appears complete on its face, it is.


However, can have a separate collateral agreement not covered by the integrated writing with its own subject matter and its own consideration (see Mitchill v. Laith holding that agreement to review ice house was NOT a collateral agreement) b. If NOT completely integrated Step 3 2) Traynor approach: can consider extrinsic/contextual evidence to determine whether the parties thought it was integrated or not. Always look at parole evidence, no other way to fully understand K. a. If NOT completely integrated Step 3 3) Partially Integrated/Unintegrated a. Unintegrated (oral communication or very very very basic writing) i. PER does not apply and extrinsic evidence always admissible b. Partially integrated i. Extrinsic evidence cant contradict an explicit term of the writing and must be compatible with it. ii. Would it ordinarily have been included (naturally omission test sort of)? (see Masterson) 4) Merger Clause a. Four Corners Rule Judges: explicit merger clause proves intent to assent to only what was on paper. Complex Integration (exemplified in UAW v. GM) b. Traynor/Contextualist approach: parole/extrinsic evidence available to determine whether the merger clause itself was assented to by the parties (see dissent in UAW v. GM, and Corbin who argued that Even though it contains an express statement to that effect, the assent of the parties thereto must still be proved [by parole evidence]. If it was not assented to, then step 2. a. Exceptions to Parole Evidence Rule: 1) Parole Evidence Rule will never bar evidence of dealing after the written agreement is executed from entering trial; 2) Parole Evidence Rule will never bar evidence of illegality, I.e. fraud, mistake, duress, unconscionability, or public policy. 3) Parole Evidence is always admissible for interpretive purposes, if there is room for interpretation. 4) Parole Evidence is always admissible for purposes of determining if a writing is partially or fully integrated (Jury will not hear it; only the judge will) R.2d 213: (1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them. (2) A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope. (3) An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement if it had not been integrated. PE rule related to the Statute of Frauds in that it is concerned with preventing fraud. More specifically it wants to deter parties from making up oral promises extrinsic to the contract Threshold Approaches: 1. Four Corners Test look at what is in the writing. If the writing appears complete on its face, then it is integrated. The court doesnt look at parties purposes. 2. Traynor approach words have no meaning in themselves. We need to look at the extrinsic evidence decipher the parties intentions and subsequently give the words meaning. After this point, we can determine if the writing is integrated


Mitchill v. Lath (PE Not Admissible) Older Approach FACTS: D owned a farm and orally promised to remove an icehouse on adjacent land before they sold the property to P. P entered in to written contract to purchase farm; this agreement was not included in the writing. P wanted to introduce parole evidence that they would not have assented without a promise to remove the icehouse. No parole evidence allowed, prior oral agreement excluded from hearing. 4 Corners Test (Determine if Contract is Fully or Partially Integrated (completely ex ante)) - Before an oral agreement can be added to the contract three conditions must exist: (1) The agreement must be a collateral agreement (relationship to written k) (2) Collateral oral agreement must not contradict express or implied provisions of written contract (3) The agreement must be one that parties would not ordinarily be expected to embody in writing y What is ordinarily? o K was in writing b/c St. of Frauds must be in writing o Judge Based Perspective: Looking only at writing as judge consider what would I have included this? What would reasonable drafting attorney have included in writing? o Objectify the practice (if complex biz. deal, what would reasonable negotiator have included?) y Natural Admission Test - Where the oral agreement might naturally be omitted from the written agreement, evidence of that oral agreement is admissible DISSENT: icehouse agreement is separate acts as consideration for other K so they are related. Parties would not have thought to include it w/in the real estate K; Must look at context.

Masterson v. Sine (PE Admissible) Rejection of Four Corners, Support of Natural Admission


FACTS: Dallas and Rebecca Masterson, TIC, conveyed a ranch to Dallas sister Medora and her husband Lu Sine; The conveyance included a repurchase option to vest on or before February 25, 1968; Dallas filed for bankruptcy; His trustee in bankruptcy and Rebecca brought action to establish their right to enforce the option; Trial Court ruled that parole evidence re: assignability of repurchase option only to family members was inadmissible. Reversed: Parole evidence re: the assignability of the repurchase option is admissible. > Partially Integrated: The option clause in the deed does not explicitly say it contains the complete agreement, and the difficulty of accommodating the formalized structure of a deed to the insertion of collateral agreements make it plausible that not all agreements were included. Natural Admissions Test: It would be natural in the FAMILY CONTEXT for them not to fully integrate the agreement. Test Would extrinsic evidence be naturally included in the written agreement? If not, then admissible > Credibility: whether parole evidence is allowed hinges on evidences credibility, not the written documents appearance rejects Four Corners Test. RULE: Naturally included test involves looking to circumstances and context. One cannot decide whether the contract is integrated or not without looking to external circumstances. R.2d 210: A document by itself cannot prove its own completeness (rejection of Four Corners Test) > Rationale: Family context, so it would be natural not to include it. Option clause does not say the agreement is complete and is assignable. In addition, cannot put the oral agreement regarding it being non assignable into the writing because of the strict form of a deed. Also nothing in their negotiation history suggests that they had warning of the disadvantages of failing to put the whole agreement into the writing/deed. DISSENT: Decision opens the door to fraud and takes away from the 4 corners incentive to include all intended, relevant, significant terms within the writing (Negative ex ante effects); Purchase option is property right and default rule is that it is freely transferable / assignable --- so this promise would contradict the terms of the written agreement as implied by the default rule re: assignability of covenant to repurchase. JJ: Its odd that they cant put into deed since they already put the option in the deed Hunt Foods & Industries v. Doliner Parole Evidence Admissible Facts: P corporation undertook negotiations to acquire the assets of Eastern Can Company. Agreement was reached as to the price to be paid by P, but it was found necessary to recess negotiations for several weeks, but the P demanded an option to purchase all of the Ds stock since it feared that D would use their offer as a basis for soliciting a higher bid from a 3rd party during the recess. The D claims he obtained an understanding from the P that it was only to be used in the event that he solicited an outside offer. When the negotiations failed, the option was exercised, but the D declined the tender and refused to deliver the stock > HOLDING: The parole evidence is implausible, but must be impossible to be excluded from court. > UCC 2.202: Writing should be a final expression of the agreement, all terms should be include and cannot be contradicted by outside evidence prior agreement, contemporaneous oral.  Can be supplemented or explain contract if evidence of consistent additional terms is found by court to have been intended as part of complete agreement.  UCC: If additional terms, if agreed, would have certainly been included, parole evidence excluded. > No Contradiction of Term, Clarification is Acceptable: The term is clearly additional, and to be inadmissible it must contradict or negate a term of the writing. Silence does not equal contradiction. > Reasoning: To be inconsistent the term must negate a term in the writing. Overall, the parole evidence here is such that a jury trial is needed. JJ: Incentivizes parties to get implied terms into the writing

6.1.2 Merger Clauses and the Parole Evidence Rule Merger clauses in writing is best way to declare that the writing is a full integration Purpose of merger clauses is to say that anything said prior to the written contract was not agreed to. Additional factors: > Was the merger clause specifically drafted for this agreement or was it an aspect of a form contract? > Does the merger clause refer to prior oral agreementsif it does this likely means that it doesnt prove a complete integration and parole evidence will be allowed. UAW GMv. KSL (inadmissible)


Facts: The P entered into a contract with CMC for the use of its resort for a convention in October 1994. The letter agreement included a merger clause stating the agreement was a merger of all proposals, negotiations and representations with reference to the subject matter and provisions. The P contests that they signed the letter of agreement on reliance of an independent, collateral promise to provide [P] with a union-represented hotel. Both the Ps agent and CMCs agent substantiated this claim in affidavits. Later that month (Dec. 1993), the hotel was sold to the Ds who subsequently replaced the resorts union employees with a nonunionized work force. P canceled the contract and demanded a refund of their down payment, which the Ds refused to give and retained as a portion of the liquidated damages allegedly owed pursuant to the contract > #1: explicit merger clause means that it was the intent of the parties to limit the agreement to words of the agreement. A contract with a merger clause nullifies all antecedent claims. REASONING #1: > Fairness to D: they assumed obligations when they purchased the hotel but it would be unreasonable for them to have to discuss with every party whether parole agreements existed. > Foreseeability: No reason for D to think that everything was not included in the K: Merger Clause. > Intent of the parties: they included an explicit merger clause at the time of the agreement. ISSUE #2 (2) P Claimed Fraud: The P claimed that the CMC fraudulently did not disclose the pending sale of the hotel. The court says fraud cant relate to the prior agreements since the merger clause makes it unreasonable to rely on prior agreements RULE: a. Parole Evidence Rule can be used to demonstrate fraud when i. The fraud relates to the merger clause ii. The fraud invalidates the entire contract b. But fraud cannot be demonstrated by appealing to an oral agreement made in spite of the merger clause i. INCENTIVE: be fraudulent in negotiations b/c merger clause wipes it clean REASONING: > Fraud claims re: union employees are based upon an oral agreement that is nullified by the merger clause. > P made no contention that fraud should invalidate the contract or the merger clause itself. DISSENT: Would consider merger clause but one piece of evidence in determining if the contract was fully integrated. 1. CORBIN: The writing cannot prove its own completeness and accuracy. Even though it contains an express statement to that effect, the assent of the parties thereto must still be proved [by oral testimony and witnesses]. 2. HOLBROOK: Examination of the written document alone is insufficient to determine its completeness; extrinsic evidence that is neither flimsy nor implausible is admissible to establish whether the writing was in fact intended by the parties as a completely integrate contract. 3. QUESTION OF MUTUAL ASSENT: Dissent argues that parole evidence should be heard to ascertain if the parties assented to the merger clause and making the writing the complete agreement between them. WAY TO LIMIT DECISION: 1) Third party involved 2) Sophisticated parties 3) Evidence of fraud relates to previous oral agreement: trying to get Parole Ev. In through the backdoor. Danann Realty Corp. v. Harris (part merger clause/part denial of representation) FACTS: P purchased lease of building from D and claimed D made oral representations regarding the operating expenses and potential profits that induced to enter into the agreement. The contract of sale contained a MERGER CLAUSE and a SPECIFIC DISCLAIMER saying: the seller has not made any representations as to the physical condition, expenses, or any other matter relating to or affecting the premises, and purchaser acknowledges no representations have been made or relied upon by P. ISSUE: are the oral representations a sufficient basis for fraud? MAJORITY: Fraud = default rule that can be contracted out of with specific disclaimer clause - Clause very specific in addressing elements (solidifies intent) - Unreasonable reliance: P sophisticated and represented by council; actually read it DISSENT: Fraud = mandatory rule that cannot be contracted out of - Public Policy: allowing people to contract out of fraud would encourage fraud in negotiations - Boilerplate: clause covers every possible misrepresentation and fraud; very expansive - Reasonable people rely on oral misrepresentations even when agreeing none have been made JOHNSTON NOTE: Even absent fraud, the merger clause was probably too general.

6.2 The Process of Contract Interpretation: Resolving Vagueness and Ambiguity Two Approaches:


1. 4 Corners Rule If the express writing/words are clear, then need not consider anything else in interpreting the contract (Trident) 2. Traynor Approach Extrinsic evidence always admissible to determine the meaning of the contract since words lack an objective/definite meaning. Need to look at surrounding/extrinsic context/evidence to give the words meaning and decipher the parties intention R2d 201 Whose Meaning Prevails (1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning R2d 203 Standards of Preference in Interpretation In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable: (b) (1) express terms, (2) course of performance (previous conduct under this contract), (3) course of dealing (previous conduct in other past transactions), and (4) usage of trade Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co. FACTS: P and D entered into a written contract whereby D would furnish the labor and equipment necessary to replace the upper metal cover of Ps steam turbine. D agreed to perform the work at its own risk and expense and to indemnify P against all lose, damages, and liability resulting from injury to property arising out of performance of the contract. D agreed to procure $50k in insurance to cover liability for injury to property. During work, cover fell resulting in $25k of damages to turbine. > The extrinsic evidence re: meaning of indemnify should have been admissible REASONING: > The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its fact, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. > Need to Find Out Parties Intention: Rational interpretation requires at least a preliminary consideration of all credible evidence (including extrinsic evidence) offered to prove the intention of the parties. If the court decides that the language is reasonably susceptible to multiple meanings, then the extrinsic evidence is admissible to determine which meaning to apply > Traynoreske: Term in question here is indemnify. Words dont have one, objective meaning. Their meaning varies with the verbal context and surrounding circumstances and purposes in view of the linguistic education and experience of their users and their hearers or readers. To ignore this extrinsic evidence would either deny the relevance of the intention of the parties or presuppose an unreal degree of verbal precision. > Thus, Limiting to four-corners test would either deny the relevance of the intention off the parties or presuppose a degree of verbal precision and stability our language has not attained. Rule 1: rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. Rule 2: If the court decides that the language is fairly susceptible of either one of the two interpretations contended for, extrinsic evidence relevant to prove either of such meanings is admissible. JJ: footnote 42 explains that Traynors reasoning is unnecessary to decide the case b/c extrinsic evidence would have been allowed merely to interpret the meaning of indemnify anyway. Traynor is saying a court in CA must always admit extrinsic evidence. Trident Center v. Connecticut General Life Insurance Co.


Facts: The P obtained financing ($56,500,000) for the constructing an office-building complex from the D. The note provided that the P could not prepay the first 12 years. In the case of default, the D may also accelerate the loan by adding a 10% prepayment fee. When 1987 market conditions led to market rates dropping, Trident started to look for ways of refinancing the loan to take advantage of the lower rates. The D refused to budge and reiterated that it could not be prepaid until January 1996. The P brought suit in state court seeking a declaration that it was entitled to prepay the loan now subject only to a 10 percent prepayment fee. P wanted to present PE that it could prepay > In CA, a Party Can Never Draft a K that is PE Fullproof: Must allow extrinsic evidence because bound by Pacific, re: Traynor says parole is always good KOZINSKIS REASONING: > Ps interpretation would create a contradiction between two clauses of the contract. o Clause prohibiting prepayment during the first 12 years o Clauses which say at the option of Holder and in the event Holder exercises its option to accelerate > BOUND by CA LAW: suggest that PER has been obliterated by the PG&E decision since as long as 1 party thinks a term is ambiguous, it is a matter of interpretation and PE can be admitted to help interpret the term (work around). JJ: > Should Have Limited P&E to Facts: Couldve distinguished Pacific by saying Pacifics (Traynors) philosophy of no meaning is just dicta. The key in Pacific was that indemnify had multiple meanings. There is no such problem here. (In other words, could have read Pacific more narrowly to distinguish) Frigaliment Importing v. BNS International Sales FACTS: P contracted to purchased 100,000 lbs of chicken from D. When shipment arrived, P found that the chicken was not the higher grade of chicken they were expecting. P sued for breach on the ground that chicken meant broiler chicken under trade usage. > Party Arguing for Narrow Int. Has Burden: Moving party (P) has the burden of showing that chicken was used in the more narrow sense. There exists an objective meaning of chicken which coincides with the dictionary definition, some trade usage, and Department of Ag. regulations to which the contract made reference. > Established hierarchy (How to Define): (1) Dictionary Meaning: Express terms, English Dictionary Meaning, (2) Haggle Def: Course of Performance/Negotiations, (3) Trade Meaning: Course of Dealing, Trade Usage (4) USDA Regulations TEXTUALIST: 1) Price makes it clear below market value for high-grade chicken. 2) Contract Department of Ag. Standards. CONTEXTUALIST: 1) Ambiguity difference between Trade and Dictionary definitions 2) Trade definition new company and didnt know meanings 3) Look at everything: performance, past performance, trade definitions, dictionary definitions 4) No prior course of dealings where to look

7.1.1 Modification: Substantive Approaches STEP ONE: Interpret the ContractWhat is the purpose of the contract? STEP TWO: Occurrence of an event/thing, the nonoccurrence of which was a basic assumption upon which the contract was made, and the occurrence renders performance (impossible, impracticable, frustrated), performance is excused. (purpose of K frustrated, made impossible/impracticable) (a) Must be An Unforeseen Occurrence or Event; i. If Foreseeable, parties would have contracted for occurrence or reasonably should have contracted for occurrence. ii. If foreseeable, court must determine which party is in best position to bear the risk. (best risk reducer (knowledge)) AND (b) Occurred as result of No Fault of Either of the Parties i. Excuse of occurrence b/c of parties fault creates negative incentiveparties more likely to be at fault. If (a) or (b), then risk allocated to party satisfying (a) or (b)


STEP THREE: Is reasonable alternative performance possible such that not impossible, impracticable, or frustrated? Ks are Strict, Dont Want to Incentivize Breach: Once in a contractual relationship, it is possible to renegotiate the contract. There is a fear that parties will employ their charged bargaining powers once in a contract to coerce the counterparty to make concession that the counterparty would otherwise not assent to if they were not threatened by the party with the strengthened bargaining power. To counter this, there are several methods/rules to address this issue: Rescission:Can avoid this problem by rescinding the original agreement and forming a new one Preexisting Duty Rule/R2d 73 Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain R2d 89 Modification of Executory Contract A promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or (b) to the extent provided by statute; or (c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise UCC 2-209 An agreement modifying a contract within this Article needs no consideration to be binding. The main requirement is that the parties use good faith Alaska Packers Assn. v. Domenico (Preexisting Duty Rule/Unenforceable) Facts: A group of fisherman, D, agreed to work for the P in the Ps salmon cannery in Alaska during their fishing season for an agreed amount (some for $50 per season, others for $60, both group would also receive 2 cents per salmon caught they took part in). When they got to Alaska, they refused to work unless paid $100 per season and the P had no one else to hire to work the cannery. The P therefore forcefully accepted the Ds demands and made written modification to their contract. The P did indicate that he had no authority to make such change No New Consideration: Not enforceable. There is no new consideration. The Ds were just promising to fulfill their preexisting obligation to work for the P. Duress: In addition, it would be a travesty to rule after the P after being coerced by the Ds hold-up game. The boss had no alternative but to modify the Ks and pay fishermen more or the entire fishing season would have been wasted. Angel v. Murray Unexpected Grounds are Valid for K Modification. Facts: Civil action brought by the P against the D. The D had provided the city of Newport with a refuse collection service under a series of 5-year contracts. The D was in the 4th year of such an agreement when the D requested an additional $10,000 from the city council due to unanticipated increased costs accounted by an increase of 400 new dwelling units while the contract had been predicated on an outdated estimated average increase of 20 to 25 new dwelling units per year. The city council agreed to the increase. The P claimed that the D was not entitled to extra compensation because the original contract already required him to collect all refuse generated within the city and therefore included the 400 additional units Rule: R2d 89 (a) only enforces a modification if the parties voluntarily agree and if (1) the promise modifying the original contract was made before the contract was fully performed on either side, (2) the underlying circumstances which prompted the modification were unanticipated by the parties and (3) the modification is fair and equitable Reasoning: (1) Partial Performance: This modification was made at a time that the contract had not been fully performed by either party; (2) Unexpected Circumstance: The contract was premised on the past growth rate of 20-25 percent per year, which dwarfed compared to the 400 unit actual increase; therefore, unanticipated; (3) Equitable: The increase unanticipated costs were substantial according to the evidence, and so the court said it could not characterize the councils modification as unfair or inequitable. Extreme Take: The court also explains that the preexisting duty rule should never be used as the major premise of a decision, at least without giving careful thought to the circumstances for the particular case. Modern Trend: The modern trend supports this by enforcing modifications when unexpected or unanticipated difficulties arise during the course of the performance of a contract even though there is no consideration for the modification as long as the parties agree voluntarily JJ: Sometimes only written modifications are enforceable. But can still enforce oral modifications where there is reliance (89c)


Duress Doctrine Approach Attempt to police modifications through duress are under inclusive, however, in that they dont enforce those achieved under economic duress 7.6.1 The Traditional Approach to Impossibility and Frustration a. Impossibility Courts Generally Inclined to Excuse Performance Based on Impossibility: 262: Where ones death prevents performance. 263: Where one cant perform because of the destruction, deterioration, or failure to come into existence the thing to be performed. > Cant Be Foreseeable or Have anything to do with Fault of Either Party. Where they wont Grant Excuse: Where the thing that brought about impossibility is foreseeable, or courts grant in rare cases here where the performance becomes merely difficult or costly. Taylor v. Caldwell (impossible) Destruction 263 FACTS: Caldwell (D) agreed to rent The Surrey Gardens and Music Hall for four days to P. However, the Music Hall was destroyed by fire, NOT BY FAULT OF EITHER PARTY. The contract contained no express stipulation with reference to the allocation of risk. Not Liable-Impossibility: No breach where impossible to perform in an alternative manner. Performance Relies on Existence of Thing-Implied Condition: The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. Specific Think Ked For Not Replaceable: P contracted for that particular music hall; if it had contracted for any music hall there could have been substitute performance and D could be held in breach. Level of detail in contract regarding Music Hall suggests both parties understood it to be this particular music hall. Howell v. Coupland (impossible) Deterioration FACTS: Potato farmer Coupland (D) contracted with to sell potato merchant (P) 200 tons of regent potatoes grown on land belonging to D. Though the land was sufficient in normal years, a disease attacked the crop and caused it to fail, meaning that only 79 tons of regent potatoes were harvested from the land because the rest deteriorated. Implications-Impossibility: parties understood and agreed that there should be an implied condition that before the time for the performance of the contract the potatoes should have been in existence. Specificity Precludes Substitute Performance: It was not an absolute contract of delivery, but a contract to deliver so many potatoes, of a particular kind, grown on a specific place, if deliverable from that place. If the contract had just said potatoes, D would have been absolutely liable. Seitz v. Mark-O-Lite Sign Contractors (alternative performance/no impossibility) FACTS: Seitz ( ) won a bit to restore the Ocean County Center for the Arts. An element of the renovation was the replacement of a sign, for which contracted with Mark-O-Lite Signs ( ) for $12,800. Contract had a provision which said, The Company shall not be liable for any failure in the performance of its obligation under this agreement which may result from strikes or acts of labor union, fires, floods, earthquakes, or acts of God, or other conditions or contingencies beyond its control. Within a few days of the contract, s expert sheet metal worker was required to enter the hospital and part of his foot was amputated due to diabetes (a known condition). HOLDING: liable b/c reasonably foreseeable occurrence and alternative performance was possible. REASONING: > Interpretation: Purpose of the contract is to restore a sign; nothing implied or stated that that sheet metal worker was special; contract said that as a business would restore the sign. Nothing in the contract contemplates performance solely by Jorgenson. > Reasonably foreseeable: Condition was not sudden, but is a known possibility for those with diabetes. in best position to know and insure against this. > orce Mejeure clause: A probably illness not in the same category as fires, floods, or acts of God. These suggest sudden and unforeseeable. JOHNSTON NOTE: Court wants to incentivize parties to put in clause that require disclosure of such things in their contracts.



R.2d 265: Where, after a contract is made, a partys principal purpose is substantially frustrated without his fault by the occurrence of an event the nonoccurrence 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 (default rule). NOTE: Difference between Impossibility and Frustration: Performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but no literal failure of consideration. Krell v. Henry (frustration) Unforeseen, Frustration of Purpose FACTS: P advertised his apartment for lease for two days as it provided a view of the coronation procession of the King. The king became ill and the procession was cancelled. None of the letters of sale included reference to the coronation, even though the ad did. D argued no consideration and frustration and refused payment. D wins. Purpose: Purpose of the contract was to the coronation process (parole evidence made this assertion clear), and the King becoming ill frustrated this purpose. REASONING: > Interpretation: Court allows parole evidence because it is in interpreting the contract. The two letters show that the purpose of the K was the coronation, even though nothing in the contract said that. Ad that hotel solicited from also made reference to this purpose. > Unforeseen: The kings illness probably would not have been foreseen. Lloyd v. Murphy (no frustration) Evolution of Frustration In Extreme Hardship Narrows Grounds FACTS: P leased to D for a five-year term property for the purpose of displaying and selling new automobiles, including servicing them. Earlier that year, the federal government drastically reduced the ability to purchase automobiles through the National Defense Act. D estimated that 90% of his business was affected by this act. HOLDING: > Foreseeability: Frustration was foreseeable because the law had been in place for more than a year, thus the risk was assumed. > Not Impossible-Maybe Harder: The sale of automobiles was merely restricted, not made impossible. Other businesses still survived selling gasoline and new automobiles. > P Offered Solution: Furthermore, P offered to lower the rent. ANALYSIS: The doctrine of frustration has been limited to cases of extreme hardship. The risk of the frustrating event must not have been reasonably foreseeable. A. Impracticability

7.6.2 Impracticability and Ex Ante versus Ex Post Risk Allocation Performance is possible, but has become prohibitively expensive.

2-614. Substituted Performance. (1) Where without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted. (2) If the agreed means or manner of payment fails because of domestic or foreign governmental regulation, the seller may withhold or stop delivery unless the buyer provides a means or manner of payment which is commercially a substantial equivalent. If delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the buyer's obligation unless the regulation is discriminatory, oppressive or predatory. 2-615. Excuse by Failure of Presupposed Conditions. Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:


(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

Transatlantic Financing Corp. v. United States (not impracticable) - Ex Post FACTS: P contracted with D to transport wheat from the United States to Iran. Though the route of the voyage was not specified, industry practice was to ship through the Suez Canal. Egypt seized Suez Canal Zone; When England and France invaded zone, the Egyptians clogged up the canal with sunken ships. As a result, P sailed around Africa to deliver the wheat to Iran. The additional expenses amounted to $43,000 on a $300,000 contract. HOLDING: Transatlantic cannot recover damages for extra costs because: RULE: 3 Part Test: 1) Unexpected: A contingency something unexpected must have occurred. 2) Risk: The risk of the unexpected occurrence must not have been allocated either by agreement or custom. 3) Price: Occurrence of the contingency must have rendered performance commercially impracticable. REASONING: 1) Yes Unexpected: Closing of the Suez Canal unexpected. 2) P Assumed Risk: Risk implied in contract and in price. P knew of possibility and took no steps via insurance or clause in contract. There is also a reasonable alternative route. 3) Not Too Costly: About 10% increase in costs is not big enough. Eastern Airlines v. Gulf Oil (not impracticable) FACTS: P and D were in a long term contract whereby D would supply Eastern Airlines with oil. In 1970, OPECs actions caused the price of oil to increase dramatically, in conjunction with domestic deregulation. Since the index was tied to the old formulation of oil, it did not reflect the rapid price increases, meant that EA was getting its gasoline for much cheaper than market. Foreseeability: Both contingencies were foreseeable. ANALYSIS: > Knowledge: Deregulation: Gulf Oil knew about the possibility of deregulation and was actually lobbying for deregulation of the oil market; not outside control of the parties. not an unsophisticated party by any means. > Oil crisis: Middle East known to be a volatile region. Aluminum Co. (ALCOA) v. Essex Group (Impracticable and Frustrated)


FACTS: Long-term contract whereby P purchased aluminum from and converted it for use by D. The price was determined by an index, not by ALCOAs costs - supposedly reflective of both parties costs with a little wiggle room. Unforeseen rise in the price of electricity due to actions by OPEC caused ALCOAs prices to go up, though the index didnt reflect this cost. The expected loss was to be around $60m. HOLDING: Impracticable; must renegotiate price term. ANALYSIS: REASONING: > UCC 2.615: Performance is impractical because of extreme and unreasonable difficulty, expense, injury, or loss to one of the parties. y R2d 261 Impracticable: Mere change in degree of difficulty or expense does not suffice for impracticability this is sort of risk that fixed price K is intended to cover. > Focus: Occurrences which greatly increase the costs, difficulty, or risk of performance y R2d 265 Frustration: must be substantially frustrated in order to get out, not enough that that transaction is no less profitable or even that party will suffer a loss. Frustration must be so severe that it cannot be regarded as an assumed risk. > ALCO Satisfies both: Impracticable because too expensive, too much risk. Substantial frustration of Ks purposes. > Loss is Great: Court reasons that the loss here is great (outweighs market risk argument). They look to the extreme deviation from expectations, not the dollar amount. o Counter: $60M is peanuts to a trillion dollar company like Alcoa > Unforeseeable Risks re: OPEC and Price o Counter: Market Risk; sophisticated party that should have foreseen these risks and should thus bear them. > INTERPRETATION: Purpose of Contract was to guarantee a profit, instead Alcoa stands to lose money; Goal was to eliminate risk and now it has developed. o Counter: Alcoa made a bet on the index being correct and it lost; indexes are often, if not usually, wrong. > Unspoken Rationale: Essex was speculating in Aluminum as result of huge price increase; contract purpose was not to allow speculation at competitors expense. JJ: > This was not what the K was intended for. In essence, instead of creating the widgets that it was supposed to with the aluminum that they were getting at a reduced price, they became a reseller because they were getting the material so cheap that it was more profitable to just sell aluminum directly middleman. This wasnt the purpose of the contract, and possible the court saw some kind of unjust enrichment going on here. > Could argue mutual mistake since both parties mistaken regarding the validity of the index, however, this really deals with a projection and not a present or past fact. CONDITIONS AND BREACH Conditions, Obligations and Constructive Conditions of Exchange In General: > Conditions: Interpreted much more literal and strictly than performance obligations (promises). > Express Conditions: Including express conditions to a partys obligation to perform shifts the risks over to the other party. Consequences of a VALID breach: (1) Other party discharges duty; (2) Other party can sue for monetary damages.

Promises and Conditions Promise Jury to determine whether material breach and damages

Howard v. Federal Crop Insurance (promise)


FACTS: Federal Crop Insurance Corp. issued policies to Howard. Howards 1973 crop was extensively damaged and he sought recovery. Clause 5(b) said that it shall be a condition precedent to the payment that the insured establish that the loss had occurred through one of the means the policy was designed to cover. Clause 5(f) said that the tobacco stalks on any acreage of tobacco shall not be destroyed until the Corporation makes an inspection. Promise: Construed as a promise, summary judgment was no appropriate. ANALYSIS: R2d 261: (1) Doubtful: When doubtful, obligations will be construed as promises. (2) Clarity: Since the words are express in one paragraph and not in the other, there is some reason for this. POLICY JUSTIFCATIONS: most strongly against insurer > Best Position: Insurer has power to contract in terms so they should have been included > Dont Want to Incentivize Unjust Enrichment: Most strongly against risk of forfeiture (paid something and got nothing) > Risk Distribution: Better able to absorb the risk JJ: Incentive to be careful about terms included in contract. If you include a specific term in one place, must be consistent and include it in all other areas. If in one area and not in other, shows that term doesnt apply there. Rhode v. Massachusetts Mutual Life - Using Conditions for Bad Faith Enrichment FACTS: Applicant for a life insurance policy died the day he sent in his application. Contract provided that he would be covered from the day that he sent the form, as long as he received clearance as being an acceptable risk. Decedent would have been deemed an acceptable risk, but insurance company denied him fore . HOLDING: Insurer liable to widow, Courts frown on parties who opportunistically seek to justify their nonperformance bases on nonoccurrence of condition. Bad Faith: Opportunistic Behavior on the party of the insurer. JJ: Courts do not enforce parties who use nitpicky, really irrelevant issues, to get out of their obligations. This is not good, we do not want to incentivize. Inman v. Clyde Hall Drilling Co. -Condition FACTS: Inman sued his employer for breach of employment contract after he was discharged from working as a derrickman in Alaska without justification. The contract provided that compliance with its requirement as to giving a thirty-day written notice of a claim prior to bringing suit shall be a condition precedent to any recovery. Statutory Provision Not in Place: No explicit public policy forbidding enforcement of the thirty-day notice provision, even if it is opportunistic behavior. The legislature needs to step in to do this. Clear Public Policy in Case Itself to Rule: The court says that they decline to make broad public policy, can only rule on whether existent public policy issue appeared here they didnt think it did. NOTE: Implied Duty of Good Faith; have to make good faith effort to fulfill condition of contract. NOTE: If event is a promise rather than a condition, the injured party has a claim for damages, but its own performance is not excused unless the breach is material and the party makes no effort to attempt to cure it in a timely fashion. NOTE: It must say condition precedent, not be against public policy, and not be opportunistic for it to be upheld as a conditional precedent instead of a promise. R.2d 224 Condition: A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due. R.2d 225 Condition and Performance: 1) Occurrence or Excused: Performance of a duty subject to a condition cannot become due unless the condition occurs or its non-occurrence is excused. 2) Non-Occurrence Discharges: Unless it has been excused, the non-occurrence of a condition discharges the duty when the condition can no longer occur. 3) Must Have Duty: Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur. R.2d 227 Default=Perform: With respect to uncertainty regarding intended effect of conditions (interpretation problem), the preferred interpretation is one that will reduce the risk of forfeiture. Risk Allocation I. Risk Shift to Other: Conditions shift the risk of an event occurring/not occurring to the other party II. Best Risk Acceptor: Ideally, conditions should shift risk to the party best capable of dealing with the risk, the best risk reducer.



IV. > >

Not True in Practice Always: Homeowner does not know if he can get financing; purchase of home is conditioned upon securing financing; deal will not close if homeowner fails to fulfill condition; Homeowner has allocated risk of his not receiving to the seller. Impracticability, Impossibility, and Frustration are IMPLIED BY LAW CONDITIONS: Condition = nonoccurrence of the event, the occurrence of which makes performance either impossible, prohibitively expensive, or frustrates value of performance. Occurrence frees the promisor from performance, thereby allocating the risk of occurrence to the promisee.

Common Law Approach: Gray v. Gardner: exemplifies the old common law approach re: order of performance. D can defend against breach by arguing condition precedent to his performance. Facts: The parties entered a K for sperm oil with a condition that the terms, more money for the P, would change if another ship with sperm oil entered the harbor within 30 days, more supply meant less money for P in this case: If a greater quantity of sperm oil should arrive in whaling vessels at Nantucket and New Bedford, on or between the 1st day of April and the 1st day of October then this obligation is void. A certain vessel, Lady Adams, with a cargo of oil appears but neither anchors or moors before the hour of midnight passes for Oct. 1st deadline. Intention of Contract: Every Contract is to be taken according to the intention of the parties to it, if such intention be legal, and capable of execution. The subject matter is determined in common understanding, and according to the meaning of the parties. In no sense, can the oil be said to have arrived. Up to Party That Wants Out to Prove: It is like a bond with a condition; if the obligor would avoid the bond, he must show performance of the condition. Rejection by the court that the Ps must prove that the condition did or did not happen, the Ds want out, they must prove. Ds did Not Prove: The vessel is coming until she drops anchor or is moored. Defendants Argument: The burden was on the PL, as the condition was precedent. Until the ship arrived, the promise did not take effect. The pl must show the event occurred. Court Rationale: The words of the K show that there was a promise to pay, which was defeated by the happening of an event, (the arrival of a certain quantity of oil), in a given time. If a person enters into a contract to pay a sum of money with condition that the contract is to be void on the happening of a certain event, the burden is on him to prove that the event has happened, if he would avoid the payment of the money

Conditions Precedent and Conditions Subsequent Implied or Constructive Conditions of Exchange Default Rule: Every party responsible for only their own performance and not that of the other party. There was nothing in the plan regarding the foundation. Straightforward Condition: I perform and therefore you return performance. Eg: > Monday I agree to sell my dog to you for $400 > Thursday, I bring dog, but you say I will pay on Saturday. > I refuse to deliver dog. > Default Rule-Payment at Time of Delivery: Though the K didnt specify when the buyer had to pay, court will say that it was payable at the time of delivery. y Buyer is in breach here. > Default 2-No Duty to Deliver Until Paid: Although the K did not specify whether I had duty to deliver dog if buyer did not pay, court will say that delivery of $400 at time of delivery was conditional precedent of my duty to deliver. y No breach as the seller. > Suppose Instead: Agreement that I pay $1000 and you train dog to be obedient. > Training will take 1 month, but after one week you ask for $250 > I refuse to pay until training is complete, you refuse to continue training > I take dog from you and go to another trainer, at higher price. > Default Rule-Substantial Performance Before Payment: Court will hold that I have no duty to pay until dog training is substantially complete, thus no duty to pay periodically. > Default Condition-Conditions Are Implied: Refusal to continue with training until substantial was implied condition, and you breached contract and not me. Stees v. Leonard - Obligation Relies on Implied Constructive Conditions


FACTS: K for the construction of a building. Building was built 3 stories and then collapsed. Rebuilt to 3 stories and then collapsed again. D alleges that the problem was that the soil was quicksand and that they built according tothe plan. D must perform for what is contracted. Act of God Rule: If a man binds himself to an act in itself possible, he must perform his engagement, unless prevented by the act of God, the law, or the other party to the contract. Hardship Will Not Do: No hardship, no unforeseen hindrance, no difficulty short of absolute impossibility, will excuse him from doing what he has expressly agreed to do. Clarity of K-Duty to Take Care: Whatever was necessary to be done in order to complete the building, D was bound by contract to do. If the building needed stronger foundations or a draining of the land then that is what D was required to do b/c they agreed to do everything necessary to erect and complete the building at the specific site that it was to be built on. Another Point: Here the P seeks reliance damages. He the P can ask what he lost, plus damages Where there is a unilateral mistake (one party knows he may not be able to build but goes ahead and builds anyways) One Bad Thing: On one hand if builder is realeased, the owner is not getting his building at the price which was Ked for. On other, if the builder isnt, the owner is getting a building for a price which he never could have Ked for had the fact of the quicksand been known mistake, unjust enrichment. Limit Liability: The court suggests that the builders bore the risk because they could have provided otherwise in the K by limiting liability. Bell v. Elder - Professor Js Efficiency Argument / No Breach where No One has Performed FACTS: P (Bell) contracted to purchase ten acres of land and form a partnership with D to rezone land. Property values went down, so renegotiated whereby D agreed to furnish water and electrical power to the property. At the time of trial, the Bells ad not obtained or applied for the proper building permits and had not paid the $1,000 installation fee, and the Elders had not furnished water to the property though they were willing, ready, and able to do so. No One Has Performed=No Default: Neither party can be in default until the other tenders their service. COURT SUPPLIES A SEQUENCE. Implied Condition: No order or time is specified for either performance, so the law implies a condition that they be performed concurrently common law of constructive contractual conditions concurrently, the Bells needed to pay the $1000 and show that they were going to use land, then the Elders needed to perform. Efficiency: The requirement of tender prevents the waste of installing a culinary water land to serve land which would be unused. Implied or Constructive Conditions of Exchange & Substantial Performance *All depends on the interpretation of the purpose of the contract* > What is the Purpose of the K? > Did mistake negate that purpose? > Is the value of Performance Equivalent to what Ked for? Jacob & Youngs v. Kent - Functionality as Efficiency FACTS: P (builder) built house for D without the proper Reding pipe as specified in the contract. P checked pipe upon first delivery, but later forgot to check the rest. Some of the pipe was not Reding, though it was of equivalent quality. P sues for remainder of the K. > Substantial Performance: P substantially performed the contract and was entitled to the fee; > Equivalent Functionality-Objective: Expectation value is the diminution in value between the Reding pipes and those installed. > Opportunistic Behavior/Economic Waste: Requiring perfect performance leads to opportunistic behavior and is economically wasteful. > Measure Mistake v. Cost: Cost of ripping out 2500 feet of pipe would be disproportional to the mistake, even for an idiosyncratic bargainer (objective benchmark: Value of mistake v. Cost of replacement) > Mistake Must be Reasonable: Must show that defect was reasonable and in good faith (not intentional) and trivial (i.e., doesnt frustrate the purpose of the K). JJ: May ignore the fact that people pay a premium in some of these Ks and they expect everything to be precisely as they want it whether or not there is functionality. The price paid is for that specific reason, and so equivalency may not always serve the purpose of the K in such cases. O.W. Grun Roofing v. Cope Substantial Performance Must Also Meet Ks Purpose


FACTS: O.W. Grun replaced Copes roof but installed tiles with streaking rather than a solid brown color, making the roof not uniform. K described shingles to be used as russet glow. D acknowledges that it was his obligation to install a roof of uniform color. No substantial performance: We are not prepared to hold that a contractor who tenders a performance so deficient that it can be remedied only by completely redoing and work for which the contract called has established, as a matter of law, that he has substantially performed his contractual obligation. Value is Really Subjective in Homes: In the matter of homes and their decoration, mere taste or preference may be controlling with the homeowner. Rule: Substantial performance must also meet the purpose of the K. COUNTERARGUMENT: Purpose was merely to put a roof over their head. Haymore v. Levinson (attempt to contract out of substantial performance default rule) Opportunistic Behavior FACTS: Builder (P) constructed a home for D with a contract that said $3,000 in escrow until satisfactory completion. Upon completion, D presented P with a list of necessary improvements and P performed. D then presented another list, and P sued for the remaining $3,000 payment. Ps argue that satisfactory completion has subjective meaning, and that until this meaning is met, they do not have to pay. Ps say must only meet reasonable standard. > Reasonable Standard: The party favored by such a clause cannot withhold approval unless apparent reasonable justification for doing so. Need to meet standard of reasonable person. > Impossibility: The Ds also prevented the P from completing the provisions by ordering him off the property this is a lesser issue, not so sure about application. (1) Where the contract is pertaining to something of such a nature that pleasing the personal taste or fancy is an element of predominant performance in the contract (i.e., subjective) (2) Where the contract is pertaining to mechanical utility and operative fitness (i.e., objective). In the latter case, there must be some reasonable justification for not withholding approval. 8.3 Anticipatory Repudiation Policy: Ideal Allocation of Risk: When contingency or event is IDed at time of K, cost of bering risk is minimized by assigning it to party that can better take cost-effective measures to reduce the probability of risk and contractual loss that would occur if it did The Least Cost Avoider. Moral Hazard: When individual lacks the incentive to behave efficiently because he does not fully internalize both the costs and the benefits of behavior. Need to incentivize the least cost avoider to avoid the risk. Hard to ID exactly how to do this, which party is in best position to avoid, its hard to determine. How to: Include terms in agreement requiring mutual adjustment to future contingencies. > Problems: Incentivizes bad faith each party can use mutual adjustment to evade contractual obligations. Incentivizes opportunistic behavior exploit the other by deliberately overestimating its own cost of adjustment, allowing a broader avenue for escape > Hard to do: Because duty to mitigate only arises because of breach, it falls short of allowing cost effective adjustments throughout the life of K o Suggestions: When a better buyer comes along, it may be more economically efficient for the seller to breach and pay the buyer the cost of transaction and the value that it was worth to him. (1) Efficiency for Injured: Allows injured party to mitigate damages, thus cutting social losses and improving efficiency; (2)Justice for Injured: creates option in injured party to sue or wait, but breacher might retract; (3) Just Makes Sense: once you enter into a contract you have a right to be free from actions that would reasonably be interpreted as an intent not to perform b/c that takes the certainty or near certainty of performance. R.2d 250: REPUDIATION: A repudiation is (a) a statement by the obligor to the oblige indicating that the obligor will commit a breach, or (b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach. Common Law: Common law rule requires that anticipatory repudiation be a positive, unconditional, and unequivocal declaration of fixed purpose not to perform the contract in any event or at any time. R.2d 253: (1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach. (2) Where performances are to be exchanged, one partys non-performance will discharge the other partys duty.


R.2d 256: RETRACTION: (1) The effect of repudiationis nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final. (2) The effect of events other than a statement constituting a repudiation is nullified if, to the knowledge of the injured party, those events have ceased to exist before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation final. Anticipatory Breach: Hochster v. de la tour (addresses conceptual problem) No Need to Wait for Damage when it is Indicated FACTS: P (courier) engaged by D to accompany him as a courier on a tour to a foreign country which would commence June 1st. On May 11th, D breached. Pcommenced actions on May 22nd. On July 4th, P was able to secure an equivalent position elsewhere. Can Sue Before Breach Occurs > Repudiation as Breach: Ds repudiation is a breach of contract that is irrevocable once suit is brought; suit can be brought before date of performance. > REASONING: > Impossibility: Breacher has rendered it impossible for other party to perform the contract > Implied Condition=No Prejudice: Where there is a contract to do an act on a specific day, they impliedly promise that in the meantime neither will do anything to the prejudice of the other inconsistent with that relation. > Efficiency: It is surely more economically rational that the P should be at liberty to seek the service under another employer. > Inequitable Balance: Asymmetry would result if one party is allowed to breach and the other is forbidden to seek an alternative until the time of performance. Taylor v. Johnston The Unequivocal Requirement FACTS: P contracted to breed two mares with Ds stallion. Contract specified breeding to take place next year, but horse was sold to a syndicate. P threatened to sue, but D arranged for mares to be bred on new owners farm with same stallion. Ps agent repeatedly turned away from breeding horses. Horses then bred with Kentucky derby winner for $10k, but pregnancies unsuccessful. No Breach. (1) Repudiation: D clearly repudiated when he sold the stallion and released p from reservations (2) Retraction of Repudiation: When the P didnt want to be released, the D arranged for the contract to be carried out at no expense to P by making sure that the breeding could still occur with the sire in KY. (3) No Unequivocal Repudiation: Once amends have been made, there is not conduce equivalent to unequivocal refusal to perform - which requires the promisor to put it out of his power to perform. (4) R.2d 256: Retracted as required when statement is made and before material reliance has occurred for P Truman Flatt & Sons v. Schupf Anticipator Repudiation and Unambiguous Terms FACTS: Landowners (D) agreed to sell land to for $160k. A contingency clause noted that sale was contingent on the buyers rezoning with 120 days of contract, and if that fails this contract shall be voidable at Buyers option and if Buyer elects to void this contract Buyer shall receive a refund Ps attorney sent a letter to landowners informing them of substantial opposition (though no rejection yet) to the rezoning and that they wanted to offer $142k instead. D responded that they would not accept. P responded that they would purchase as provided for in the original contract, but D responded that P had repudiated the contract. HOLDING: > Ps attorneys letter asking for a lower price was not repudiation, but a request for voluntary modification in good faith. (Modification does NOT = repudiation) o Ambiguity: INTERPRETATION: The letter did not constitute a clearly implied threat: at most, the words used gave an ambiguous implication. o Unambiguous: Repudiation requires a definite and unequivocal manifestation that he will not render the promised performance. > Even if P repudiated, his revocation was timely anyway. o The repudiating party has the power of retraction (implicit/explicit) unless the injured party has materially changed his position.  Reliance = (a) notification that promisee is treating repudiation as final; (b) promisee has commenced action for breach; (c) promisee has otherwise changed his position.  If the repudiation is clearly retracted, no anticipatory breach. R2d 256


Relaxation of Unequivocal Rule: Some courts have relaxed the unequivocal rule and given the option to the injured party to treat unclear communications as repudiations. Bonebrake v. Cox: Buyers of bowling alley equipment learned that seller had died. Took numerous steps in an attempt to contact next of kin, check warehouse, etc. Buyers purchased elsewhere and court found that there was, beyond doubt, a reasonable indication of a rejection. Wholesale Sand & Gravel v. Decker: Homeowner wanted gravel driveway installed. Company began work, but they wanted to wait until ground dryer. Removed all equipment. Contacted multiple times by homeowner and always promised to get right on it, but never did. 45 days later homeowner hired another company: on this record, it was reasonable for Decker to conclude that Wholesale would never complete its performance under the contract. JJ: Could have been simply trying to do it right and, thus, a legitimate statement is taken as a retraction. If you cant to the job correctly, should your statements to this effect constitute repudiation? The rule, therefore, can be over inclusive because of these situations. 9.0 Remedies

Expectation, Reliance, and Restitution Pain and Suffering: In contract law, usually no pain and suffering remuneration UNLESS reasonably foreseeable consequence of breach. Sullivan v. OConnor - Pain and Suffering as Restitution (unusual) FACTS: Plastic surgeon (D) promised an entertainer that he would enhance her beauty and improve her appearance through surgery on her nose. Surgery was botched and made her appear worse than before. P went through 3 operations, but only the last one was meant to remedy the other two and was non-scheduled. P wanted difference in value of noise after surgery than nose as promised. (1) Pain and Suffering and Mental Distress Recovery-Public Policy: Should recover more than costs because where the P by reason of the operation was put in more pain than would have otherwise endured if performance had been as promised, should be compensated for this as well. Fee itself is disproportionate to putative expectancy. (2) Breach of promise allowed in this case, even though doctors do not typically make those promises. But doctor was a plastic surgeon who promised specific results. (3) Reliance damages the correct measure REASONING: > No Recovery on Value of Nose: Expectancy damages = default, but too uncertain in this case. You cant attach a dollar value to a beautiful nose. The value needs to be objective. > Restitution = too little of a recovery (just out of pocket expenses for all three surgeries). This would not be enough to dis-incentivize improper conduct in these cases, must also award for pain and suffering. JJ: In this case, expectancy can sometimes be big. Hollywood types are all about looks like that Gossip Girl actress, whats her name, saw her in a chick flick with wife, not bad. But this is neither here nor there, what is important is the expectancy is all related to looks couldve been a famous singer, a movie star, etc. All based on looks. You sell yourself in Hollywood, its a market of human beings. Restitution Entitle to expenses from all 3 operations Reliance Out of Pocket Expense for all 3 operations Pain and Suffering for all 3 operations Difference in earnings w/old nose and actual nose Expectancy Out of Pocket for 3rd operation only. Pain and Suffering for 3rd operation only Difference between earnings w/new nose and w/old nose Difference in emotional well being w/new versus old nose

Out of Pocket Exp. Pain and Suffering Earning Loss

Psychic Loss

Difference in emotional well being w/old and w/actual nose Freund v. Washington Square Press, Inc (expectancy damages)


FACTS: P (academic and author) contracted with publisher to publish his book on modern drama in hardback. Per the terms of the contract, P received $2k upon delivery of the book, and if D deemed it unpublishable he had to inform P in writing within 60 days. A had a duty to publish within 18 months, and P would receive a royalty. D merged with another firm and stopped printing hardcover books, but it was past the 60 days, though they refused to publish in any form. Damages reduced from cost of publishing $10k to $.06. No Expectancy Damage-Too Speculative: Lower courts were incorrect in using the cost of completion as expectancy damages b/c they are too speculative. REASONING: > Damage measure too speculative, yet theoretically you can recover here. Needs to be more than merely speculative, however, needs to be objective (royalties could not be determined b/c not well known author, etc.) i. P admitted no evidence with respect to value ii. P only published one other book, so hard to weigh expected value on such limited data. > Cost of Performance v. Diminution in Value: i. The P was awarded the cost of publishing. This is not what the K was for, however, because he would have never been on the hook for publishing costs just the % value of the books sold. Had purpose of K been to give books to friends, versus to make money, court might have required cost of completion, but not here. Enriches the P at the Ds expense. Default Rule for Uncertainty: If you cant prove expectancy, you recover: Zero. Theory of Efficient Breach: > Where seller Ks to sell 100 widgets for $1000 and are worth $1500 to buyer 1, and buyer 2 comes along and offers 10K for the same service. It would be efficient for seller to breach the contract in this case and pay buyer 1 $1500 for the value it was worth and collect an additional 9.5K Expectation Based Damages: > Basic Assumption: Promisor must either perform or if the promise is breached, but the promisee in same position she would have been in had promise been performed. > On Other Hand: Promiseee shouldnt be entitled to recovery that places in a better position than performance would have done. American Standard v. Schectman FACTS: P made a contract with D to demolish buildings on 26 acres of manufacturing property for which D would pay $275k (since he could resell objects on land). The property was also to be graded one foot below the surface. P resold for near market value, but sued D for cost of completion ($110,500). Look Towards Purpose of K: Court said purpose of the contract was to restore the land, but D claimed it was to resell at market value. HOLDING: Cost of completion, not diminution in value is the proper measure of damages (i.e., 90k that it would cost now to finish the job). REASONING: > No substantial performance: 90k left on the job not trivial to the purpose of the contract since the purpose was restoring the land (not merely reselling it) i. Not incidental to the contract as was the case in Peevyhouse. > Bad Faith: Ds breach was intentional and substantial, unlike the breach in Jacob & Youngs. > Value of Act Not Considered Fortuity that P was able to sell land at near market value. Diminission in value is also rejected by the court as a theory increase in value cannot be only basis of recovery when someone contracts to improve land. > Not Economic Waste Issue: Not unreasonable economic waste, distinguishing from Jacob & Youngs. CRITIQUE: > Purpose of the contract was to resell the land, as shown by the fact that they resold it > To accomplish purpose of K and put party in position it would have been, damages should be difference in value (3K). > Otherwise, windfall for one party or the other. General Rule: Courts will take the lesser of diminution in value versus cost of completion. Peevyhouse v. Garland (law in OK Probably to This Day!?)


FACTS: P owned a farm containing coal deposits and leased the premises for five years for strip mining. In addition, D agreed to perform certain restorative word at the end of the lease period, totaling about $29k. Contract carried out by both parties, except for the remedial work. The cost of restoration would be $29k, while the value restoration would add to market value would be $300. Uses Market Value Determination: Court applies diminution of value rule and awards $300, rather than cost of completion which would be 29k jury awarded 5k of this. (different than American: Cost of Completion) REASONING: > Purpose of K: Contracts purpose was to extract coal; the remedial work was incidental to the contract, and thus there was substantial performance. > Economic Efficiency: Unreasonable to enforce a cost of completion rule when they will receive a greater benefit from the breach than could be gained by performance. Would only increase value by 300 and cost 29K. CRITIQUE: > P contracted for restoration and there was consideration for that promise (probably forewent 3k up front in exchange for this promise) i. If the purpose was both mining and restoration, P should receive expectancy costs. ii. Subjective value of the land much higher considering they forewent this 3K > Incentivizes Opportunistic Behavior: Encourages opportunist breach when cost is substantially greater than value added. > Completion Issue: Not like Jacob & Youngs b/c no economic waste: just completion. JJ: Says that this was an outright bad decision and one that still, shockingly, hasnt been repudiated in OK. Only thing he can think is that the courts favored industry the coalminers - when weighed against the P. Limitations on Expectation-Damage Recovery

Certainty Cant recover if too speculative: See Sullivan v. OConnor. In cases where it is difficult to prove expectancy, one may recover more from restitution or reliance damages.

Foreseeability General Rule: Party only liable for foreseeable consequences unless the other party brings special circumstances to mind. Hadley v. Baxendale - Foreseeablility FACTS: P (Millers) sent one of their workers to establishment of D to fix a broken crank shaft. P told D that mill was stopped and that the shaft must be sent immediately. D said that if it was sent by 12 on any day it would be delivered the following day. However, delivery was delayed and it took several days. P sued for loss of profits. Foreseeability: Ds not liable because the harm was not foreseeable REASONING: (1) Ps Should Have Clarified: At time contract was formed, Ps failed to disclose the serious damages (lost profits and mill shutdown) that would result from a delay: o Carrier did not know that this millshaft was Ps only millshaft. o Special circumstances unknown to breaching party and therefore not in his contemplation at time of contracting (2) To Bear Risk, Price Wouldve Been Higher: D needed to set its price for service and the price set did not reflect risk of untimely delivery in this case b/c D lacked information; D would have charged a higher price (reserve for contingencies) or contracted out of liability (waiver). Spang Industries v. Aetna Mitigation, Damages, Conditions, - Reliance Damages


Facts: the P successfully bid on contract to build bridge for NY and subcontracted out to D for the steel supply. The contract had term: Delivery to be mutually agreed upon. Eventually D did could not deliver on its June date, the P contacted D twice threatening to cancel if no return correspondence and early August was settled on. Overall, D provided the materials late causing the P to incur expenses when D did not unload materials at RR station as promised and when P had to pay overtime and run tests to see if cement would set properly in cold to complete job on time. D sues P for the money it refuses to pay, P counter sues D for the extra expenses it incurred. Ct. awards D the balance on K offset by Ps extra costs plus interest - Affirmed. > Condition: Court found that the delivery to be mutually agreed upon meant that its initial agreement to send the materials in June, with the knowledge of what P was planning on, meant that Ds excuse that it had not agreed and opted out in January created a breach none of the excuses that D gave for opting out sat well with the court. The condition had been met, and the D was liable for damages that arose from his late delivery Ps overtime and extra expenses setting concrete during cold months. > Mitigation: the P acted promptly and unloaded the materials, and worked with the city to go ahead and find a way to complete its project on time. If P had not, then the damages would have been much more because it would have been forced to wait until the next spring to sue for the damage amount resulting from its breached contract to build bridge for the city it would have sued for expectancy profits of what could have been here. > Interesting to note that the court actually whittled down reliance damages because of Ps failure to establish the supervisor, overhead, and equipment costs were the cause of Ds delay.

Duty to Mitigate Rockingham County v. Luten Bridge When there is a Breach, Mitigate P Only Liable up to Breach FACTS: Luten(D) entered into K with county (P) to build a bridge as part of a newly constructed road. In February, the County Board reversed itself and notified Luten of the breach. At the time of repudiation, Luten had spent $1900. Luten treated the repudiation as invalid and completed the project for a total cost of $18000 and sued the County for payment. Can Recover Up To Breach: Court held that Luten could recover reliance damages of $1900 and its lost profit for the whole venture, but could not recover the additional costs of $16,100. Duty to Mitigate: Victim of breach has a duty to mitigate and cease actions that increase the other partys liability. REASONING: (3) Dont Want to Prohibit Breach: Work done after breach is valueless to the breaching party (literally in this case) (4) Efficiency: Work done after breach is a waste of economic resources Mitigat Can Be Finding Other Buyer: This duty to mitigate can take the form of finding someone else who wants a good, finding other sellers, etc. JJ: Was evidence that Luten had the previous county board in his pocket. The road literally led to nowhere and was not useful at all, the court probably saw an efficiency problem here as did the new board who didnt want to pay because the project was useless. Parker v. Twentieth Century Fox Mitigation for Work and Not Legally Obliged Unless Similar FACTS: Fox hired Shirley MacLaine to play a lead role in a play adaptation of a feminist Broadway play called Bloomer Girls. Fox guaranteed MacLaines fee of $750K (pay-or-play clause), however, they subsequently dropped the film and offered MacLaine a role in a Australian Western movie with the same compensation but without the same script approval and director approval rights. MacLaine declined the offer and sued for her guaranteed fee. Substantially Similar and Mitigation for Work: MacLaine under no legal obligation to mitigate because it was not substantially similar to the original and of a different/inferior kind Inferior and not equivalent b/c: 1) Musical v. Dramatic Role; 2) LA v. Australia; 3) Not something MacLaine believed strongly in; 4) No approval rights over director/script meaning workers rights are taken away. DISSENT: Should have been a trial to determine whether they were substantially similar. The court has never held that employment in the same field counts as substantially different. What is important is that its in the same field: same kind of work, same kind of pay, same job. Specific Performance General: (5) If thick market, the thing contracted for can be replaced o Damage can be undone by compensating the buyer to allow them to gain same thing somewhere else returned to S Q.


(6) If thin market, the thing cannot be replaced and price cannot reasonably be calculated family heirlooms-land, artwork, high end limited items. o Good reason for specific performance in this circumstance o Assigning damages too high will discourage efficient breach o Assigning damages too low will encourage inefficient breach. (7) If transaction costs are low enough, we can allow specific performance and the original buyer will then, in turn, sell to the higher valuing buyer. UCC 2-716(1): Specific performance may be decreed where the goods are unique or in other proper circumstances. (1) Common Law: Unique was the traditional Common Law approach: ONE-OF-A-KIND (2) Widened Approach-Expenses, Delay and Inconvenience: other proper circumstances widens SP to include when replication is difficult to obtain without expensive delay and inconvenience. R.2d 360: In determining whether the remedy in damages would be adequate, the following circumstances are significant: (a) Difficulty Proving: the difficulty of proving damages with reasonable certainty, (b) Difficulty Substituting: the difficulty of procuring a suitable substitute performance by means of money awarded as damages, and (c) Damages Likely? the likelihood that an award of damages could not be collected. Sedmark v. Charlies Chevrolet (specific performance) FACTS: Corvette collectors entered into a contract with Charlies Chevrolet to purchase a limited edition (of 6,000) Corvettes styled after the Indy 500 pace car that year for approximately $15,000. P put down deposit of $500 and received requested modifications to the car. No formal written contract was ever signed. When car was delivered from manufacturer, D refused to deliver the vehicle, requiring him to bid on the car since it was argued that the price now exceeded $15k due to market demand. Specific Performance IS a proper remedy because: (8) No Common Law: The Corvette was not unique in the traditional, common law approach. (9) But Thin Market: However, there was a thin market and high transaction costs associated with replacing: o 360(a) IMPOSSIBLE TO AFFIX ADEQUATE DAMAGES b/c one cannot estimate the price of replacement. o (c) Not Likely to Get Proper Damages: Cant put a value on transaction costs, meaning P would be undercompensated. o (b) Difficulty Substituting: Car of this kind with same mileage, condition ownership, and appearance could be purchased in the market only with great difficulty, and at great expense, delay, trouble, and loss. REBUTTAL: The only additional loss is one of delay, which is merely a loss of some subjective value

Klein v. PepsiCo. (No Specific Performance, Money Damages Will Do) FACTS: UJS (broker) contracted with PepsiCo to purchase a G-II Corporate Jet and then was going to sell it to Klein. Trial judge ruled there to be a valid contract through a letter agreement, but PepsiCo reneged on the deal and denied ever forming a contract. Klein sued for specific performance, even though he purchased a G-III instead as a substitute, and there were comparable GIIs on the market. No specific performance, b/c the jet was not unique and a replacement could have been acquired with little expense of time and effort. (10) Thick Market: Pcould cover b/c the market was sufficiently thick: 21 such jets on the market, 3 of which were similar to the one contracted for; Klein bid on 2 such jets and ended up buying a different model; low transaction costs (just broker fee probably). (11) Damages are adequate: Klein was going to purchase and resell jet to a third party probably anyway. (12) Increase in Replacement Not Sufficient: An increase in the price of replacement alone does not merit specific performance - The GII that Klein had Ked for was cheaper at the time because the prices for them subsequently went up.


Beverly Glen Music v. Warner (No Specific Performanc-Involuntary Servitude-Unconstitutional) FACTS: Anita Baker breached contract with P and signed with a competitor. Ds wanted to force her to perform. Involuntary Servitude: Beverly Glen Music cannot specifically enforce the contract or enjoin Anita Baker from working for a rival group due to the constitutions prohibition on involuntary servitude. JJ: Though Anita Baker provides a service that is unique and irreplaceable, specific performance is generally not enforced by courts in labor relations because we dont force people to work in situations that they dont want to involuntary servitude. Cant enforce Ks for certain things. Liquidated Damages General: If LD are too high, you could prevent efficient breaches. R.2d 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 2-719(1): Damages for breach may be liquidatedbut 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 non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty. Damages can be liquidated in a contract only if (1) Uncertain/Difficult: the injury is either "uncertain" or "difficult to quantify"; (2) Reasonable/Anticipated/Difficulty Substituting: the amount is reasonable and considers the actual or anticipated harm caused by the contract breach, the difficulty of proving the loss, and the difficulty of finding another, adequate remedy; and (3) Damages NOT Penalty: the damages are structured to function as damages, not as a penalty. > If these criteria are not met, a liquidated damages clause will be void. Lake River Corp. v. Carborundum (Liquidated Damages were Penalty Not Enforceable) Ex Post Analysis FACTS: Carborundum, (D) manufacturer of Ferro Carbo, an abrasive powder used in making steel, contracted with Lake River (P) to bag and distribute its product to costumers in the Midwest. Contractually, Carborundum insisted the Lake River install a new bagging system (89K), and in consideration for this, Lake River insisted on a minimum quantity of product to be bagged and shipped. The contract included a minimum-guarantee clause by which D agreed to ship at least 22,500 tons, and if it failed, Lake River could invoice D for the difference. D shipped only 10k tons, and P invoiced for the rest ($241k). Penalty not Damages: If the estimated damages from the clause greatly exceeds a reasonable upper estimate of what damages are likely to be, this is a penalty and not a liquidation clause not allowed. > The penalty would reap P a windfall profit of anywhere from 400% to 130% of the worth of contract, better off having the D breach in this case not efficient, unjust enrichment. REASONING: (13) The measure of damages is unreasonable because: o Super Compensatory: relative to all possible anticipated damages. The fixed sum of damages greatly exceeds the actual damages regardless of when breach occurs (400% to 130% of anticipate damages) o Analysis: (1) Were the damages uncertain at the get go? No, the P knew that he expected to earn 107k from the contract and had sunk 89k into the new machine beginning 444k in damages are excessive and 160k at end is too big as well clause set up to always benefit the P. (2) Were the damages too much when viewed after the fact? Yes, 444k is 4 times the amount that the contract was going to give him and too much at end to. y Dont want to incentivize contracts that make it more profitable for a breach to occur for the P and deter a D from breaching when it is efficient. o The formula should have deducted Ps savings from nonperformance. JJ: > IL Refuses to Enforce but in reality where the parties are both sophisticated, why wouldnt you? > Ex Post Analysis: The court held that the analysis determining whether the liquidated damage was too excessive to be enforced should be one of hindsight. Thus, regardless of whether the anticipated damages were seen to be more and were hard to determine at the outset, and regardless of whether the parties contracting for this were sophisticated, the liquidated damage clause really served as nothing more than a cap.


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Still, though, the expected damages in this case were never as high as the liquidated. So would have failed both the Ex Ante and the Ex Post test to determine if actual damages were reasonable. Always Good for the Breaching Party: Effectively, the liquidated damage clause in Illinois has been turned into a cap on what the breacher has to pay it is always good for the breacher, and never so for the promisor. If the actual damages are more than the liquidated, the promisor gets the liquidated. If in hindsight, the liquidated damages are higher than that of the actual, then the promisor gets the actual and the liquidated is void.

Super Compensatory: Damages awarded are bigger than actual damages, creates a situation where the breaching party is less capable of breaching when it is not economically efficient, and a situation where the other party stands to gain more when the contract is breached than if the performance had occurred. Common Law v. Modern by JJ: At common law, liquidated damages were not looked favorably upon and werent often enforced especially when super compensatory. This has begun to change, as seen in Sun Shipping where more modern courts are enforcing these damage clauses. Judicial Economy by JJ: And why not? If liquidated damages were always enforce in the cases of sophisticated parties where one is sophisticated and the other is not, there should be an exception the parties have already determined what the value of performance and breach mean to each other. The damage therefore doesnt need to be assessed by the courts and it is not necessary to pass the cost of this dispute onto the judicial system in fact there wouldnt be any dispute if we held sophisticated parties to their agreements. Sun Shipping v. Lake River by JJ: Sun Shippings Ex Ante method of determining whether to enforce liquidated damages seems like the more fair approach. Lake Rivers method turns liquidated damages into nothing more than a cap for damage, which may be more efficient and reduce costs for the breacher in that case, there really is no reason to put a liquidated damage clause into a contract unless you are the party that would possibly breach. Why the Courts Arent Needed Even When Super Compensatory JJ: The courts fail to take into account that sophisticated parties negotiated into the contract in the first place, and thus if liquidated damages were always held, the parties would then negotiate their way to a better settlement its what they do. If the liquidated damages are too high, the party that stands to breach can always bargain out of it is the breach would be efficient. The liquidated damage, in this sense, only stands for the maximum amount that the breacher may end up paying. California and Hawaiian Sugar v. Sun Ship (Liquidated Damages OK) Ex Ante Analysis


FACTS: C&H is a sugar cooperative growing sugar in HI then transporting it to CA. The growing season is from April to October, and C&H decided to commission a boat to aid in transport. It accepted offers from Sun Ship to build the barge and from Halter to build the tug. The agreement with Sun Ship specified a delivery date of June 30, 1981 setting LD at $17k/day, while an agreement with Halter set LD at $10k/day. Both companies missed their deadline by close to a year, and the court held that the liquidated damage clause should be upheld. > Analysis: (1) Are the Parties sophisticated? Yes, then they understood the terms and there is good reason to hold them to it. (2) Ex Ante: Were the damages reasonable at the get go? It is hard to judge what the expectancy damages were going to be if the breach occurred, and they were reasonable at the time. Both parties, with the help of legal counsel, thought that the terms were reasonable as well. (3) Ex Post: In light of ex ante agreement, whether the damages were super compensatory in view of hindsight does not matter. > Court compares LD clause to anticipated damages (rotting sugar, inability to meet customers demands) and determines that it was a reasonable anticipation of loss. HIGH RISK OF DAMAGES. > Where damages are real but difficult to prove, injustice will be done the injured party if the court substitutes the requirements of judicial proof for the parties own informed agreement as to what is a reasonable measure of damages. > The parties are sophisticated and promised each other $17k. JJ: If they didnt want to pay damages if the other party was in default, they could have easily written it into the K. Why didnt they? Well probably because this would have set up bad incentives. If you think about it, if one party can only be in default if the other was, then it incentivizes them to work in coordination to make sure neither defaults you can imagine one party saying to the other, slow it down, were not ready, in order to keep either from breach. Assignment & Delegation General: (1) While duties can be delegable, the original promisor cannot delegate out of his liability. (2) Assignment = transfer of right to performance. The law presumes assignability. R.2d 317(2): A contractual right can be assigned unless: (a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him, or (b) the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy, or (c) assignment is validly precluded by contract. R.2d 322(2): A contract term prohibiting assignment of rights under the contract, unless a different intention is manifested, (a) does not forbid assignment of a right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation; (b) gives the obligor a right to damages for breach of the terms forbidding assignment but does not render the assignment ineffective; (c) is for the benefit of the obligor, and does not prevent the assignee from acquiring rights against the assignor or the obligor from discharging his duty as if there were no such prohibition. Crane Ice Cream v. Terminal Freezing FACTS: Frederick entered into a contract with Terminal Freezing to deliver up to 250 tons of ice per week, and to forgo ice purchases from other deliverers below the 250 ton limit. Frederick was bought out by Crane Ice Cream, who became a party to the contract by assignment. Terminal Freezing sought to end the contract to deliver ice. HOLDING: Ice delivery contract is NOT assignable. REASONING: > The rights and duties of are too personal a nature to assign. i. Contract allowed for Frederick to weigh the ice as it came in: on the loading platform of the said W. C. Frederick. ii. Crane Ice Cream is a large operation in several states. > could predict amount of ice to be used by Frederick, and important aspect since the K is very open (up to 250 tons). > No ice may be purchased by Crane as it could have intended to supply its ice cream from a different store. Evening News v. Peterson FACTS: Evening News ( ) acquired another station in the District of Columbia in June of 1978. Peterson was a newscaster for Evening News whose employment contract was designated to another station. claims that his contract required him to perform unique and unusual services and because of the personal relationship he had with his previous employer the contract was not assignable. ISSUE: Is the contract assignable?


HOLDING: Yes REASONING: > Nothing in the contract made reference to his person relationship with the managers of the former station. His K was with the station, not individual people. > Reporting assignments were substantially the same before and after assignment. Peterson even won awards after the assignment. > Peterson waited for over a year before bringing suit, when he hoped to move elsewhere. RULE: Contract rights as a general rule are assignable. This rule, however, is subject to exception where the assignment would vary materially the duty of the obligor, increase materially the burden of risk imposed by the contract, or impair materially the obligors chance of obtaining return performance. R.2d. MERGER CLAUSE: The K also included a merger clause. Thus, the writing is an integration and parole evidence may not be admitted. However, Peterson will argue that such evidence is needed to interpret the language of the K. The court found that silence does not equal vague or ambiguous language.