Contracts Wrap-Up (061202)

Contracts
“The whole duty of

government is to prevent
crime and to preserve
contracts.”
- Lord Melbourne,
British Prime Minister
10/14/08 2
What is a “Contract”?
“a promise or set of promises, for breach

of which the law gives a remedy, or the
performance of which the law in some
way recognizes a duty”
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The Purpose of a Contract
Contracts exist to make business matters

more predictable.
10/14/08 4
Sources of Contract Law
Is the contract on Yes Specific provision
Sale of goods? Of the UCC applicable?
No Yes
No
Common law governs UCC governs
10/14/08 * Restatement (Second) of Contracts 5

Types of Contracts
 Classified by Formation
- Express Contract: formed by language,

oral or written
- Implied Contract: formed by
manifestations of assent other than
language
 i.e., by conduct
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Quasi Contracts
 Definition: an obligation which is not based
on contract but is imposed to avoid injustice
 Requirements: a court will impose a quasi

contract when (1) the plaintiff confers a benefit
upon the defendant, (2) the defendant knows or
appreciates the benefit, and (3) the defendant's
retention of the benefit is inequitable.
 Remedy: the plaintiff recovers the reasonable

value of the benefit she conferred upon the
defendant.
10/14/08 7
THEORIES OF CONTRACT LIABILITY
Theory Description Example

Express Promises are X promises to paint Y’s car
Contract communicated by in return for Y’s promise to
language pay X $100.
Implied Parties’ conduct (i) X fills her car with gas at

Contract indicates that they Y’s gas station. There is a
assented to be bound contract for the purchase
and sale of the gas.
Quasi-Contract One party is unjustly X contracts with Y to build a

(Not a contract enriched at the house for Y. X becomes ill
expense of another and is unable to continue
at all) party, so that the after completing a third of
enriched party must the work. X cannot sue on
pay restitution to the the contract, but may
other party equal to the recover the benefit conferred
10/14/08 unjust enrichment. on Y. 8
Types of Contracts
 Classified by Acceptance
- Bilateral: both parties make a promise to do

something to each other ☞ exchange of
promises
- Unilateral: one party makes a promise to the
other that the other party can accept only by
doing something specific
 Under the modern view, most contracts are

bilateral.
10/14/08 9
Carlill v. Carbolic Smoke Ball
 FACTS:
- The Carbolic Smoke Ball Co. (the Company) placed
an ad in various newspapers stating that it would
reward ￡ 100 to whomever contracted influenza or
the cold after purchasing and using one of its smoke
balls, which the company claimed prevented
influenza.
- After reading the ad, Mrs. Carlill purchased the ball
and used it as directed.
- When she contracted influenza she sought to
recover the reward.
10/14/08 10
 ISSUE: Must the offeree of a public offer for a
unilateral contract notify the offeror of
acceptance prior to performance of the
condition sought?
 HOLDING: No
10/14/08 11
 RATIONALE:
- Generally speaking, a person who makes an offer for
a unilateral contract should not expect notice of
acceptance apart from the performance of the
condition.
- I believe that in cases of where an offer is held out to
the public for performance, there is an exception to
the rule that notification must precede performance.
- I reject the Company's contention that there is no
binding contract because the offer was made to no
one in particular.
10/14/08 12
- Offers of this kind, are offers to anybody who
performs the conditions of the offer, and anybody
who does perform the conditions accepts the offer.
- The Company's argument that no contract existed for
want of consideration is without merit.
- Clearly the Company received a benefit.
- A use of their product by the public in a manner to
get the public to have confidence in their product,
leading to further sales of the product.
- Furthermore, there is a distinct inconvenience to the
purchaser in using the product three times a day.
Appeal dismissed.
10/14/08 13
Types of Contracts
 Valid, Void, Voidable, and Unenforceable:
- Valid Contract – one that meets all of the
requirements of a binding contract
- Void Contract – no contract at all; without legal
effect
- Voidable Contract – a contract capable of being
made void
- Unenforceable Contract – An unenforceable
contract is one otherwise valid but for which
some defense exists extraneous to formation
(e.g., the Statute of Frauds).
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Elements of a Contract
 Mutual Assent: the parties to a contract
must manifest by words or conduct that they
have agreed to enter into a contract.
 Consideration: each party to a contract must

intentionally exchange a legal benefit or incur
a legal detriment as an inducement to the
other party to make a return exchange.
 No Defenses to Formation
- Legality: The contract must be for a lawful
purpose.
- Capacity: The parties must be adults of sound
10/14/08
mind. 15
Is there an Enforceable Contract?
Offer (promise, undertaking, or commitment with definite and

certain terms communicated to offeree) and
Mutual Assent
Acceptance before termination by revocation, rejection, or
operation of law
Bargained for exchange of something of legal value or

Elements Consideration
of Substitutes for consideration, such as promissory estoppel,
detrimental reliance, or good faith modification under U.C.C.
Contract
Mistake (mutual or, under certain conditions, unilateral) or
Lack of capacity (makes contract void or voidable) or

No Defenses
Illegality (usually renders contract void) or
Statute of Frauds
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Mutual Assent
Offer & Acceptance
In General
 For an agreement to be enforced as a contract,
there must be mutual assent.
- In other words, one party must accept the other’s
offer.
- Mutual assent is sometimes referred as “Meeting of
the minds.”
 How judges decide whether a contract was

made? ☞ Objective assessment
- whether a reasonable person would conclude that
there was an agreement
- based upon the parties’ conduct
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THE OFFER
“An offer creates

a power of acceptance
in the offeree.”
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Essentials of an Offer
 Intent: determined by an objective standard of
what a reasonable offeree would have
believed.
 Definiteness: offer's terms must be clear

enough to provide a court with a basis for
giving an appropriate remedy.
 Communication: offeree must have

knowledge of the offer and the offer must be
made by the offeror to the offeree.
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Intent
 These are not offers:
- Offers made in anger, jest, or undue
excitement
- Expressions of opinion
- Statements of Intention
- Preliminary negotiations
- Advertisements, Catalogues, Price Lists, and
Circular
 They are treated as Invitations to negotiate
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Definiteness of Terms
 Terms (Expressed or Implied)
- Identification of the parties
- Subject matter of the contract

 Real estate transactions require identification of land and
price terms.
 In contracts for the sale of goods, the quality must be certain
or capable of being made certain.
 In an employment contract, the duration of employment must
be specified.
- Consideration to be paid
10/14/08
- Time of payment, Delivery, or Performance 22
 UCC and Open Terms: The UCC has
provisions for supplying some missing
contract terms.
- Open Price
 The UCC establishes a price, based on market
value or valuation by a neutral party.
- Output and Requirements Provisions
 An output contract obligates a seller to sell all of
his output to one buyer, who agrees to buy it.
 A requirements contract obligates a buyer to
obtain all of his needed goods from the seller.
10/14/08 23
 UCC and Open Terms (cont):

- Delivery, Time, and Payment
 Usually, delivery is at the seller’s business,
time must be reasonable and payment is due
upon receipt of goods.
- Warranties
 An implied warranty of merchantability: Goods
must be of at least average, passable quality in
the trade.
 An implied warranty of fitness: Goods are to be
suitable for a particular purpose.
10/14/08 24
Communication
 Offeree’s knowledge of the offer:

- Directly by the Offeror
- Indirectly by an Agent of the Offeror
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Preliminary Negotiation
 It is important to distinguish between preliminary

negotiations (not offers) and promises (offers).
Consider:
- The language used;
- The surrounding circumstances;
- The prior relationship of the parties;
- The method of communication - the broader the
communicating media (e.g., an advertisement), the less
likely it is an offer;
- The custom of the industry; and
- The degree of definiteness and certainty of terms.
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Termination of Offer
 An offer may be accepted only as long as

it has not been terminated.
 It may be terminated by
- (i) an act of either party or
- (ii) operation of law.
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Termination by Act of Parties
 Termination by Offeror
- Revocation
 Termination of Offeree
- Rejection or
- Lapse of Time
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Termination by Operation of Law
 Death or insanity of either party

- Unless the offer is of a kind the offeror could
not terminate, e.g., an option supported by
consideration
- Death or insanity need not be communicated
to the other party
 Destruction of proposed contract’s
subject matter
 Supervening illegality
10/14/08 29
Termination of Offer
Revocation by Rejection by Termination by
Offeror Offeree Operation of Law
When Effective when Effective when Effective as soon

Effective received received as illegality arises
Express
revocation or Death of either
Express rejection,
implied (e.g., party, destruction
counteroffer, or
Methods offeree discovers
lapse of
of subject matter,
offeror sold supervening
reasonable time
subject matter to illegality
someone else)
Option contract,
merchant’s firm
Limitations on offer, detrimental Generally cannot
Power to reliance, reject if already
beginning accepted
Terminate performance on
unilateral contract
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Duration of Revocable Offers
Offer Effective
Communicated Intent
Definite and certain
OFFER
No Offer No Offer
OPEN
Offer Terminated
Lapse of time Death
Revocation Incompetency
Rejection Destruction of subject matter
Counteroffer Subsequent illegality
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Acceptance of Offer
 Definition: positive and unequivocal expression

of a willingness to enter into a contract on the
terms of the offer.
 Mirror Image Rule: except as modified by the

Code, an acceptance cannot deviate from the
terms of the offer.
10/14/08 32
The Acceptance
 Valid acceptance of a bilateral contract

require:
- (i) an offeree with the power of acceptance;
- (ii) unequivocal terms of acceptance; and
- (iii) communication of acceptance.
10/14/08 33
Who May Accept
 The person to whom the offer was addressed
has the power of acceptance, as does a
member of the class to whom the offer was
addressed.
 Although the right to accept most contracts

cannot be assigned, option contracts supported
by consideration can be assigned to a “new”
offeree.
10/14/08 34
Acceptance Must Be Unequivocal
 Common Law
- Acceptance must mirror the offeror’s terms,
neither omitting nor adding terms.
- Otherwise, it may be a counteroffer (i.e., a

rejection).
10/14/08 35
Acceptance Must Be Unequivocal
 UCC Rules
- In contracts involving the sale of goods, an acceptance need not
mirror the offer’s terms (i.e., an acceptance that deviates from the
offer is not necessarily a rejection and counteroffer).
- Whether the offer terms or the acceptance terms govern depends
on the status of the parties.
 Nonmerchants - Terms of Offer Govern
 If one of the parties is not a merchant, the terms of the offer
control.
 The new or different terms are considered mere proposals.
 Merchants - Acceptance Terms Usually Included
 In transactions between merchants (i.e., both parties are
merchants), the new or different terms proposed in the acceptance
become a part of the contract unless they materially alter the
agreement, the offer expressly limits acceptance to the terms of
the offer, or the offeror has already objected to the new or
different terms.
 Additional terms that materially alter the agreement do not prevent
10/14/08 contract formation, but become part of the contract only if the 36
Generally Acceptance Must Be
Communicated
 Acceptance is judged on an objective standard

(i.e., would a reasonable person think there was
an acceptance?); the offeree’s subjective state
of mind is irrelevant.
 The modern rule and the UCC permit

acceptance by any reasonable means unless
the offeror unambiguously limits acceptance to
particular means.
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“Mailbox Rule”
 Under the mailbox rule, if acceptance is by mail or

similar means and properly addressed and stamped, it
is effective at the moment of dispatch.
- If it is improperly sent, it is effective upon receipt.
 Limitations on Mailbox Rule:

- The rule does not apply if the offer stipulates that
acceptance is not effective until received.
- The rule does not apply if an option contract is involved
(acceptance effective upon receipt).
- If the offeree sends a rejection and then sends an
acceptance, whichever arrives first is effective.
- If the offeree sends an acceptance and then a rejection, the
acceptance is effective (i.e., the mailbox rule applies) unless
the rejection arrives first and the offeror detrimentally
relies on it.
10/14/08 38
Promissory Estoppel
 Definition: a doctrine enforcing some noncontractual
promises.
 Requirements: a promise made under

circumstances that should lead the promisor reasonably
to expect that the promise would induce the promisee to
take definite and substantial action, and the promisee
does take such action.
 Remedy: a court will enforce the promise to the extent

necessary to avoid injustice.
10/14/08 39
Consideration
INTRODUCTION
“Courts will enforce a bilateral or unilateral

contract only if it is supported by
consideration or a substitute for
consideration.”
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ELEMENTS OF CONSIDERATION
1. Bargained-for Exchange
2. Legal Value Element
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Bargained-for Exchange
 The parties must exchange something.

- In the case of a bilateral contract, they
exchange promises.
- In the case of a unilateral contract, they
exchange a promise for an act.
10/14/08 43
 Gift: There is no bargain involved (i.e., no

consideration) when one party gives a gift to
another.
- Act or Forbearance by Promisee: An act or
forbearance will be sufficient if it benefits the
promisor.
- Economic Benefit Not Required: If one party gives
the other peace of mind or gratification in exchange
for something, it may be sufficient to establish a
bargain.
10/14/08 44
 Past or Moral Consideration: A promise given
in exchange for something already done does
not satisfy the bargain requirement.
- Exceptions: Where a past obligation is unenforceable
because of a technical defense (e.g., statute of
limitations), that obligation will be enforceable if a
new promise is made in writing or is partially
performed.
- Also, under the modern trend, if a past act was
performed by the promisee at the promisor’s
request, a new promise to pay for that act will be
enforceable.
10/14/08 45
Legal Value Element
 Adequacy of Consideration
- In general, courts do not inquire into the adequacy
or fairness of consideration.
- However, if something is entirely devoid of value
(token consideration), it is insufficient.
- Sham consideration (recited in the contract, but not
actually paid) may also be insufficient
- Where there is a possibility of value in the thing
bargained for, consideration will be found even if the
value never comes into existence.
10/14/08 46
Legal Value Element
 Legal Benefit and Legal Detriment Theories

- The majority of courts require that a party incur
detriment (by doing something he is not legally
obligated to do or by refraining from something he
has a legal right to do) to satisfy the legal value
element.
- Under the minority rule, conferring a benefit on the
other party is also sufficient.
10/14/08 47
Preexisting Obligations
 Preexisting Public Obligations: public duties
such as those imposed by tort or criminal law
are neither a legal detriment nor a legal benefit.
 Preexisting Contractual Obligation:

performance of a preexisting contractual duty is
not consideration.
 Modification of a Preexisting Contract:

- under the common law a modification must be
supported by mutual consideration
- under the Code a contract can be modified without
new consideration
10/14/08 48
SUBSTITUTES FOR CONSIDERATION
 In some special situations, consideration as defined

above is not necessary to create contractual liability. In
these cases, a “substitute” for consideration will suffice.
 Promissory Estoppel or Detrimental Reliance:

Promissory estoppel is a sufficient substitute. The
following elements must be present:
- (i) the promisor should reasonably expect her promise to
induce action or forbearance,
- (ii) of a definite and substantial character, and (iii) such action
or forbearance is in fact induced.
10/14/08 49
Dougherty v. Salt
 FACTS:
- An eight year old boy received from his Aunt a promissory
note for $3,000 payable at or before her death.
- The promissory note was made out by use of a preprinted
form.
- The boy's guardian testified at trial as to how the note came to
be given.
 The Aunt was visiting her nephew and remarked what a nice boy
he was.
 The guardian replied that he certainly was a nice boy and
proceeded to tell the Aunt how well the boy was doing in school.
 The Aunt replied that she would like to take care of the little boy .
10/14/08 50
Dougherty v. Salt
- The guardian expressed some doubt, apparently because other
relatives had also expressed a desire to take care of the boy but
had taken it out in talk. [all talk and no action]
- The Aunt stressed that she really wanted to do something for the
boy and asked the guardian why she couldn't make out a note to
the boy.
- The guardian replied that he did not think anything would be
wrong with making out a note and the Aunt asked him to make
one out for her right then.
- The guardian produced a blank, preprinted promissory note form
that contained the words "value received."
- The form was filled out and signed.
- The Aunt then handed the note to her nephew and told him that
because he had always done for her, she had made the note out
for him.
10/14/08 51
Dougherty v. Salt
- She further cautioned the boy not to lose the note, as one day it
would be valuable.
- The boy or his guardian apparently tried to collect the note from
Salt, the Aunt's heir (or executor), after the Aunt's death.
- At trial, the judge submitted the question whether there was
consideration for the promised payment.
- The jury found that there was, but the judge set aside the
verdict for the boy and dismissed the complaint on the ground
that there was no consideration for the note.
- On appeal, a divided appellate court reversed on the ground
that the form of the note was sufficient evidence of
consideration.
- An appeal was taken to the New York Court of Appeals.
10/14/08 52
Dougherty v. Salt
 ISSUE: Is a statement in a preprinted, form note

that the note was given for "value received"
sufficient evidence of consideration?
 HOLDING: Cardozo, J., No
10/14/08 53
Dougherty v. Salt
 RATIONALE:
- The statement in the note raises an inference that there was
sufficient consideration given for the note.
- However, the facts of this case as related by the boy's own
guardian are sufficient to overcome and rebut the inference of
consideration.
- As can be seen from the testimony from the plaintiff's own
witness [the guardian], there was no consideration given for the
note.
- The note was simply a voluntary and unenforceable promise of
an executory gift, despite the note's form language of being for
"value received."
- The boy was not a creditor, nor was the Aunt repaying a debt or
other obligation.
- In light of the surrounding facts, the form of the preprinted blank
note is not enough to imply consideration.
10/14/08 54
Hamer v. Sidway
 FACTS:
- William Story promised his nephew that if he would
refrain from drinking, using tobacco, swearing, and
playing cards or billiards for money until he was 21
years old, he would pay him $5,000.
- The nephew agreed, and fully performed the
conditions inducing the promise.
- When the nephew turned 21, he wrote to his uncle,
informing him that he had performed his part of the
agreement , and was entitled to the $5,000.
- Story wrote back, agreeing that his nephew was
entitled to the sum, but he offered to keep the money,
plus interest, so as to prevent unwise spending on the
nephew's part.
10/14/08 55
Hamer v. Sidway
- The nephew agreed to this, and Story kept the money
for him until his death twelve years later.
- At the time of his death, Story had not paid over to his
nephew any portion of the $5,000 and interest.
- Hamer presented a claim to the executor of Story's
estate for the amount due plus interest.
- She had acquired the interest through several mesne
assignments from Story's nephew.
- The claim was rejected by the executor and Hamer
filed suit.
10/14/08 56
Hamer v. Sidway
 ISSUE: Must the promisor be benefited in order
for consideration to be valid?
 HOLDING: No
10/14/08 57
Hamer v. Sidway
 RATIONALE:
- In general, a waiver of any legal right at the request of another
party is a sufficient consideration for a promise.
- Any damage, or suspension, or forbearance of a right will be
sufficient to sustain a promise.
- Consideration means not so much that one party is profiting
as that the other abandons some legal right in the present, or
limits his legal freedom of action in the future, as an
inducement for the promise of the first.
- Now, applying this rule to the facts before us, the promisee
used tobacco, occasionally drank liquor, and he had a legal
right to do so.
- That right he abandoned for a period of years upon the
strength of the promise of the testator that for such
forbearance he would give him $5,000.
10/14/08 58
Hamer v. Sidway
- We need not speculate on the effort which may have been

required to give up the use of those stimulants.
- It is sufficient that he restricted his lawful freedom of action
within certain prescribed limits upon the faith of his uncle's
agreement, and now, having fully performed the conditions
imposed, it does not matter whether such performance
actually proved a benefit to the promisor, and the court will not
inquire into it;
- but, were it a proper subject of inquiry, we see nothing in this
record that would permit a determination that the uncle was
not benefited in a legal sense.
- Few cases have been found which may be said to be
precisely in point, but such as have been, support the position
we have taken.
10/14/08 59
Hamer v. Sidway
 Terminology
- EXECUTOR: A person appointed by a testator to carry out the
directions and requests in his will, and to dispose of the property
according to his testamentary provisions after her decease.
- MESNE ASSIGNMENT: If A grants to B, and B assigns his
interest to C, and C in turn assigns his interest to D, the
assignments made by B and C would be termed mesne
assignments; that is, they are assignments intervening between
A's original grant and the vesting of D's interest under the last
assignment. (MESNE=MEAN)
- TESTATOR: One who makes or has made a will.
10/14/08 60
Wood v. Lucy
 FACTS:
- Lucy, Lady Duff-Gordon was a famous fashion designer.
- In order to profit from her fame, Lucy employed Wood.
 Wood was granted the exclusive right to endorse products using
Lucy's famous name for one year.
 In return, Wood agreed to split the profits with Lucy .
- Wood sued for breach of contract after he discovered that Lucy
had endorsed products without his knowledge and without splitting
the profits.
- Lucy demurred on the ground that a valid contract never existed
between the parties.
- In granting the demurrer and dismissing the complaint, the
Appellate division found that the contract lacked mutuality, as
Wood never promised to do anything.
- Wood appeals.
10/14/08 61
Wood v. Lucy
 ISSUE: May a court imply a promise to make
reasonable efforts in an exclusive-dealing
arrangement?
 DECISION AND RATIONALE: Cardozo, J. Yes
10/14/08 62
Wood v. Lucy
 RATIONALE:
- A court may imply a promise to make reasonable efforts in an
exclusive-dealing arrangement.
- Indeed, Wood never expressly promised to use reasonable
efforts to endorse Lucy's products or to market her designs.
- However, such a promise may be fairly implied by the court.
- Lucy gave an exclusive privilege to Wood, and his acceptance
of the exclusive agency was an assumption of its duties.
- To hold otherwise would be to undermine the purpose of the
agreement.
10/14/08 63
Wood v. Lucy
- Lucy's sole compensation for the grant of exclusive
agency was to receive one-half of all profits.
- He agreed to account monthly for all moneys
received, and to take out the necessary patents,
copyrights, and trademarks.
- Unless Wood gave some reasonable effort, Lucy
could never get anything.
- In line with the intention of the parties, we determine
that Wood made an implied promise, and thus that
the contract was not lacking in mutuality of obligation.
- Reversed.
10/14/08 64
Wood v. Lucy
 Terminology
- EXCLUSIVE DEALING ARRANGEMENT: An
agreement whereby a distributor expressly or
implicitly contracts to supply all of a seller's goods,
using the distributor's best efforts.
- UCC 2-306: Exclusive dealing contracts are valid
and, unless otherwise agreed, impose an obligation
on the seller to use his best efforts to supply the
goods.
10/14/08 65
Webb v. McGowin
 FACTS:
- Webb's work required him to clear the upper floor of a lumber
mill by dropping heavy pine blocks from the upper floor of the
mill to the ground below.
- During one such occasion, on August 3, 1925, while Webb was
working within the scope of his employment, Webb diverted a
75-pound block, that he was clearing, from dropping on Greeley
McGowin below, by falling with the block to the floor below.
- Webb was successful in preventing any injuries to McGowin .
- However, Webb received serious bodily injuries, resulting in his
right leg being broken, the heel of his right foot torn off and his
right arm broken.
10/14/08 66
Webb v. McGowin
- He was badly crippled for life and rendered unable to
do physical or mental labor.
- On September 1, 1925, McGowin agreed to pay
Webb $15 every two weeks from the time he
sustained his injuries to and during the remainder of
Webb's life.
- It was agreed that McGowin would pay this amount
to Webb for Webb's maintenance.
- McGowin paid the sum so agreed up until McGowin's
death on January 1, 1934, at which time they were
discontinued.
- Webb sued McGowin's estate for the balance of the
payments due.
10/14/08 67
Webb v. McGowin
 ISSUE: Are past acts of saving a party from
death or serious boldly injury sufficient
consideration to support a subsequently induced
promise?
 HOLDING: Yes
10/14/08 68
Webb v. McGowin
 RATIONALE:
- Any holding that saving a man from death or grievous bodily
harm is not a material benefit sufficient to uphold a subsequent
promise to pay for the service, necessarily rests on the
assumption that saving life and preservation of the body from
harm have only sentimental value.
- Had McGowin been accidentally poisoned and a physician,
without his knowledge or request, had administered an antidote,
a subsequent promise by McGowin to pay the physician would
have been valid.
- Likewise, McGowin's agreement to compensate Webb for
saving him from death or grievous bodily injury is valid and
enforceable.
10/14/08 69
Webb v. McGowin
- In the business of life insurance, the value of a man's
life is measured in dollars and cents according to his
expectancy, soundness of his body, and his ability to
pay premiums.
- In the act of saving McGowin from death or grievous
bodily harm, Webb was crippled for life.
- This was part of the consideration of the contract
McGowin made with Webb.
- Benefit to the promisor or injury to the promisee is a
sufficient legal consideration for the promisor's
agreement to pay.
- The court below erred in sustaining the demurrer, and
for this error the case is reversed and remanded.
10/14/08 70
Webb v. McGowin
 CONCURRENCE: (Sanford)
- “This case is about achieving justice.” “I do not think
that law ought to be separated from justice, where it
is at most doubtful.”- Chief Justice Marshall in
Hoffman v. Porter, Fed Cas. 6,5777; 2 Brock, 156,
159.
 CONCURRENCE: (Foster)
- McGowin benefited substantially from the
performance by Webb, and when this is considered
with the injuries to Webb, this constituted sufficient
consideration to support McGowin's subsequent
promise to pay Webb.
10/14/08 71
BREACH &
REMEDIES
10/14/08 72
WHEN DOES BREACH OCCUR?
 If
- (i) the promisor is under an absolute duty of
performance and
- (ii) this duty has not been discharged
 then this failure to perform is accordance

with the contractual terms may be held to
be a breach of contract.
10/14/08 73
Contract Remedies protect three interests
 Expectation interest
- Remedies that protect this interest seek to put a promisee in the
position she would have been in if the breaching promisor had
performed.
- Using this approach gives the injured promisee the benefit of her
bargain.
 Reliance interest
- Contract remedies sometimes seek to put the promisee in the
position she would have been in if she had not entered into the
contract.
- Contract law protects the promisee’s reliance interest by
reimbursing the promisee for loss caused by relying on the
contract.
 Restitution interest
- Contract law sometimes tries to protect the promisee’s restitution
10/14/08
interest by requiring the breaching promisor to return to the 74
promisee any benefit received by the breaching promisor.
Substitutional relief is typical and specific
relief is extraordinary
 Definitions:
- Relief is substitutional when it is intended to give the promisee something
in substitution for the promised performance.
- Relief is specific when it is intended to give the promisee the very
performance that was promised.
 Contract law typically provides for substitutional relief in the form of an

award for money damages, instead of specific relief in the form of a
court order that requires the breaching party to perform.
- Rest §359(1) provides that “[specific performance or an injunction will not
be ordered if damages would be adequate to protect the expectation
interest of the injured party.”]
- UCC §2-716 provides that “[specific performance may be decreed where
the goods are unique or in other proper circumstances.”]
10/14/08 75
Hawkins v. McGee
 FACTS:
- Hawkins and his father went to a surgeon to have a
considerable amount of scar tissue removed from
the palm of his hand, and the grafting of skin taken
from his chest in place thereof.
- The scar tissue was the result of a severe burn
which Hawkins had received nine years earlier.
- Hawkins claims that Dr. McGee promised him a
perfect hand after the operation; and that he said, "I
will guarantee to make the hand a hundred per cent
perfect hand" or "a hundred per cent good hand."
10/14/08 76
Hawkins v. McGee
- Prior to the operation, Hawkins' hand was "a

practical, useful hand," but as a result of the
operation, the motion of his hand had become
so restricted that the hand was useless to
him.
- Hawkins brought a suit in assumpsit against
the surgeon, Dr. McGee, for breach of the
alleged warranty of the success of the
operation.
10/14/08 77
Hawkins v. McGee
 ISSUE: Is the true measure of the plaintiff's
damage the difference between the value to him
of a perfect hand, and the value of his hand in
its current condition, including any incidental
consequences fairly within the contemplation of
the parties when they made their contract?
 HOLDING: Yes.
10/14/08 78
Hawkins v. McGee
 RATIONALE:
- The only substantial basis for Hawkins' claim is the
testimony that McGee also said before the operation
was decided upon, "I will guarantee to make the hand
a hundred per cent perfect hand" or "a hundred per
cent good hand."
- Hawkins was present when these words were alleged
to have been spoken, and, if they are to be taken at
their face value, it seems obvious that proof of their
utterance would establish the giving of a warranty in
accordance with his contention.
10/14/08 79
Hawkins v. McGee
- McGee argues, however, that even if these words were

uttered by him, no reasonable man would understand
that they were used with the intention of entering into
any contractual relation whatsoever, and that they
could reasonably be understood only as his expression
in strong language that he believed and expected that
as a result of the operation he would give Hawkins a
very good hand.
- It is unnecessary to determine at this time whether the
argument of McGee…would…be regarded as
conclusive, for there were other factors in the present
case which tended to support the contention of
Hawkins.
10/14/08 80
Hawkins v. McGee
- There was evidence that McGee repeatedly

solicited from Hawkins' father the opportunity to
perform this operation, and the theory was
advanced by Hawkins' counsel that McGee sought
an opportunity to experiment on skin grafting, in
which he had little previous experience.
- …if McGee spoke the words attributed to him, he
did so with the intention that they should be
accepted at their face value, as an inducement for
the granting of consent to the operation by Hawkins
and his father, and there was ample evidence that
they were so accepted by them.
10/14/08 81
Hawkins v. McGee
- The jury was permitted to consider two elements of damage:

 pain and suffering due to the operation, and
 positive ill effects of the operation on Hawkins' hand.
- Authority for any specific rule of damages in cases of this kind
seems to be lacking, but when tested by general principles
and by analogy, it appears that the instruction was erroneous.
- We conclude that the true measure of Hawkins' damage in the
present case is the difference between the value to him of a
perfect hand or a good hand, such as the jury found McGee
promised him, and the value of his hand in its present
condition, including any incidental consequences fairly within
the contemplation of the parties when they made their
contract.
10/14/08 82
Hawkins v. McGee
- The pain necessarily incident to a serious

surgical operation was a part of the
contribution which Hawkins was willing to
make to his joint undertaking with McGee to
produce a good hand.
- It was a legal detriment suffered by him which
constituted a part of the consideration given
by him for the contract.
10/14/08 83
Hawkins v. McGee
 Terminology
- ASSUMPSIT: A common law form of action
which lies for the recovery of damages for
the non-performance of a contract.
10/14/08 84
Peevyhouse v. Garland Coal
 FACTS:
- Peevyhouse owned a farm containing coal deposits, which it
leased to Garland Coal for a period of five years for coal
mining purposes.
- A "strip-mining" operation was contemplated in which the coal
would be taken from pits on the surface of the ground, instead
of from underground mine shafts.
- In addition to the usual covenants found in a coal mining
lease, Garland Coal specifically agreed to perform certain
restorative and remedial work at the end of the lease period.
- This work involved the moving of many thousands of cubic
yards of dirt, at a cost estimated by expert witnesses at about
$29,000; however, Peevyhouse sued for only $25,000.
10/14/08 85
- During the trial, it was stipulated that all covenants and
agreements in the lease contract had been fully carried out by
both parties, except for the remedial work; Garland Coal
conceded that this work had not been done.
- Peevyhouse introduced expert testimony as to the amount and
nature of the work to be done, and its estimated cost.
- Over objections, Garland Coal thereafter introduced expert
testimony as to the diminution in value of the farm resulting from
the failure of Garland Coal to perform as agreed in the contract
that is, the difference between the present value of the farm,
and what its value would have been if Garland Coal had done
what it agreed to do.
10/14/08 86
- At the conclusion of the trial, the court instructed the
jury that it must return a verdict for Peevyhouse, and
left the amount of damages for jury determination.
- On the measure of damages, the court instructed the
jury that it might consider the cost of performance of
the work Garland Coal agreed to do, together with all
of the evidence offered on behalf of either party.
- The jury returned a verdict for Peevyhouse for $5,000
only a fraction of the cost of performance, but more
than the total value of the farm even after the
remedial work is done.
10/14/08 87
 ISSUE: Did the trial court err in instructing the
jury that it might consider the cost of
performance of the work the defendant agreed
to do, together with all of the evidence offered
on behalf of either party, in determining the
amount of damages?
 HOLDING: Yes.
10/14/08 88
 RATIONALE:
- It may be observed that there has been only one
case which has come to our attention in which the
cost of performance rule has been followed under
circumstances where the cost of performance
greatly exceeded the diminution in value resulting
from the breach of contract. Groves v. John
Wunder Co.
 Incidentally, it appears that this case was decided by a
plurality rather than a majority of the members of the court.
10/14/08 89
- It is of some significance that three out of four
appellate courts have followed the diminution in
value rule under circumstances where, as here, the
cost of performance greatly exceeds the diminution
in value.
- It is highly unlikely that the ordinary property owner
would agree to pay $29,000 (or its equivalent) for the
construction of improvements upon his property that
would increase its value only about $300.
10/14/08 90
- 23 O.S.1961 provides as follows:

 Sec. 96: Notwithstanding the provisions of this
chapter, no person can recover a greater amount
in damages for the breach of an obligation than he
would have gained by the full performance thereof
on both sides."
 Sec. 97: Damages must, in all cases, be
reasonable, and where an obligation of any kind
appears to create a right to unconscionable and
grossly oppressive damages, contrary to
substantial justice no more than reasonable
damages can be recovered."
10/14/08 91
- The primary purpose of the lease contract was merely to
accomplish the economical recovery and marketing of coal from
the premises, to the profit of all parties.
- The special provisions of the lease contract pertaining to
remedial work were incidental to the main object involved.
- We therefore hold that where, in a coal mining lease, the lessee
agrees to perform certain remedial work on the premises
concerned at the end of the lease period, and thereafter the
contract is fully performed by both parties except that the
remedial work is not done, the measure of damages in an action
by the lessor against the lessee for damages for breach of
contract is ordinarily the reasonable cost of performance of the
work.
10/14/08 92
 However, where the contract provision breached was merely
incidental to the main purpose in view, and where the economic
benefit which would result to the lessor by full performance of the
work is grossly disproportionate to the cost of performance, the
damages which the lessor may recover are limited to the
diminution in value resulting to the premises because of the
nonperformance.
 Under the most liberal view of the evidence herein, the diminution in
value resulting to the premises because of nonperformance of the
remedial work was $300.
 We are of the opinion that the judgment of the trial court for
Peevyhouse should be, and it is hereby, modified and reduced to
the sum of $300, and as so modified it is affirmed.
10/14/08 93
 DISSENT: Irwin, J.
- In the instant action, Garland Coal has made no attempt to
even substantially perform.
- The contract in question is not immoral, is not tainted with
fraud, and was not entered into through mistake or accident
and is not contrary to public policy.
- It is clear and unambiguous and the parties understood the
terms thereof, and the approximate cost of fulfilling the
obligations could have been properly ascertained.
- There are no conditions existing now which could not have
been reasonably anticipated when the contract was negotiated
and executed.
- Garland Coal could have performed the contract if it desired.
- It has accepted and reaped the benefits of its contract and now
urges that Peevyhouse's benefits under the contract be denied.
10/14/08 94
- If Peevyhouse's benefits are denied, such benefits would

inure to the direct benefit of Garland Coal.
- Therefore, in my opinion, Peevyhouse was entitled to specific
performance of the contract and since Garland Coal has failed
to perform, the proper measure of damages should be the
cost of performance.
- Any other measure of damage
 would be holding for naught the express provisions of the
contract;
 would be taking from Peevyhouse the benefits of the contract and
placing those benefits in Garland Coal which has failed to
perform its obligations;
 would be granting benefits to Garland Coal without a resulting
obligation; and
 would be completely rescinding the solemn obligation of the
contract for the benefit of Garland Coal to the detriment of
Peevyhouse by making an entirely new contract for the parties.
10/14/08 - I therefore respectfully dissent. 95
Shirley McLaine v. 20C-Fox
 FACTS:
- MacLaine, a well-known actress, entered into a
contract with Twentieth Century-Fox under which
MacLaine was to play the female lead in the
contemplated production of a motion picture entitled
"Bloomer Girl."
- The contract provided that Twentieth Century-Fox
would pay MacLaine a minimum "guaranteed
compensation" of $750,000.
10/14/08 96
- Prior to the beginning of the contract period,
Twentieth Century-Fox decided not to produce the
picture, and notified MacLaine in writing of that
decision and that it would not comply with its
obligations to her under the written contract.
- In the same letter, Twentieth Century-Fox instead
offered to employ MacLaine as the leading actress in
another film tentatively entitled "Big Country, Big
Man," so as to avoid any damages to her.
10/14/08 97
- The compensation offered was identical, as were 31
of the 34 numbered provisions or articles of the
original contract.
- However, the format of the new movie was a drama
filmed in Australia, while the original film was to be a
musical filmed in California.
- MacLaine was given one week within which to accept;
she did not and the offer lapsed.
- MacLaine then commenced this action seeking
recovery of the agreed guaranteed compensation.
10/14/08 98
 ISSUE: Did the court err in awarding the plaintiff
the salary due her under the repudiated
contract?
 HOLDING: No.
10/14/08 99
 RATIONALE:
- MacLaine's complaint sets forth two causes of
action.
 The first is for money due under the contract;
 the second, based upon the same allegations as the first,
is for damages resulting from Twentieth Century-Fox's
breach of contract.
- Twentieth Century-Fox in its answer admits the
existence and validity of the contract, that MacLaine
complied with all the conditions, covenants and
promises and stood ready to complete the
performance, and that Twentieth Century-Fox
breached and "anticipatorily repudiated" the
contract.
10/14/08 100
- It denies, however, that any money is due to MacLaine
either under the contract or as a result of its breach,
and pleads as an affirmative defense to both causes
of action MacLaine's allegedly deliberate failure to
mitigate damages, asserting that she unreasonably
refused to accept its offer of the leading role in "Big
Country.“
- The general rule is that the measure of recovery by a
wrongfully discharged employee is the amount of
salary agreed upon for the period of service, less the
amount which the employer affirmatively proves the
employee has earned or with reasonable effort might
have earned from other employment.
10/14/08 101
- However, before projected earnings from other
employment opportunities not sought or accepted by
the discharged employee can be applied in mitigation,
the employer must show that the other employment
was comparable, or substantially similar, to that of
which the employee has been deprived.
- The employee's rejection of, or failure to seek, other
available employment of a different or inferior kind
may not be resorted to in order to mitigate damages.
- The substitute "Big Country" offer was significantly
different from, and inferior to, the original employment
offer.
10/14/08 102
 DISSENT:
- I believe that the approach taken by the majority (a
superficial listing of differences with no attempt to
assess their significance) may subvert a valuable legal
doctrine.
- The inquiry in cases such as this should not be
whether differences between the two jobs exist (there
will always be differences) but whether the differences
which are present are substantial enough to constitute
differences in the kind of employment or, alternatively,
whether they render the substitute work employment
of an inferior kind.
10/14/08 103

Contracts Wrap-Up (061202)

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Contracts Wrap-Up (061202)

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Contracts

“The whole duty of

“a promise or set of promises, for breach

Contracts exist to make business matters

Is the contract on Yes Specific provision

Sale of goods? Of the UCC applicable?

Common law governs UCC governs

10/14/08 * Restatement (Second) of Contracts 5

- Express Contract: formed by language,

 Requirements: a court will impose a quasi

 Remedy: the plaintiff recovers the reasonable

Theory Description Example

Implied Parties’ conduct (i) X fills her car with gas at

Quasi-Contract One party is unjustly X contracts with Y to build a

- Bilateral: both parties make a promise to do

 Under the modern view, most contracts are

 Consideration: each party to a contract must

Offer (promise, undertaking, or commitment with definite and

Bargained for exchange of something of legal value or

Lack of capacity (makes contract void or voidable) or

 How judges decide whether a contract was

“An offer creates

 Definiteness: offer's terms must be clear

 Communication: offeree must have

- Subject matter of the contract

 UCC and Open Terms (cont):

 Offeree’s knowledge of the offer:

 It is important to distinguish between preliminary

 An offer may be accepted only as long as

 Death or insanity of either party

When Effective when Effective when Effective as soon

 Definition: positive and unequivocal expression

 Mirror Image Rule: except as modified by the

 Valid acceptance of a bilateral contract

 Although the right to accept most contracts

- Otherwise, it may be a counteroffer (i.e., a

 Acceptance is judged on an objective standard

 The modern rule and the UCC permit

 Under the mailbox rule, if acceptance is by mail or

 Limitations on Mailbox Rule:

 Requirements: a promise made under

 Remedy: a court will enforce the promise to the extent

“Courts will enforce a bilateral or unilateral

 The parties must exchange something.

 Gift: There is no bargain involved (i.e., no

 Legal Benefit and Legal Detriment Theories

 Preexisting Contractual Obligation:

 Modification of a Preexisting Contract:

 In some special situations, consideration as defined

 Promissory Estoppel or Detrimental Reliance:

 ISSUE: Is a statement in a preprinted, form note

 HOLDING: Cardozo, J., No

- We need not speculate on the effort which may have been

 then this failure to perform is accordance

 Contract law typically provides for substitutional relief in the form of an

- Prior to the operation, Hawkins' hand was "a

- McGee argues, however, that even if these words were

- There was evidence that McGee repeatedly

- The jury was permitted to consider two elements of damage:

- The pain necessarily incident to a serious

- 23 O.S.1961 provides as follows:

- If Peevyhouse's benefits are denied, such benefits would

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