ContractsDart and Bamzai Sykes 2001-02

1. Remedies for breach of contract

Expectation damages- Calculated to put the party in the position she would have been had the other party performed.

o Includes both out-of-pocket costs and expected profit.o Idea behind expectation damages is often described as giving the non-breaching party the

“benefit of the bargain.”- Calculating expectation damages.

o Generally speaking, expectation damages are the value of the promised performance minus the benefits, if any, the plaintiff received from not having to complete own performance.

See, e.g., Hawkins v. McGee (p3). Expectation damages are proper when a doctor breaches a contract for a skin-graft hand operation. The appropriate measure for damages is the value of the expected hand minus the value of the hand as it is.

o Cost of completion vs. decrease in value. Generally speaking, the non-breaching party gets the difference in monetary value between the contract as expected and the current situation; the non-breaching party does not get the cost of remedying defective performance.

See, e.g., Peevyhouse (p19). Plaintiff could not receive the cost of remedying damage to the land of their family farm, even though they had specifically stated that a condition for them entering the contract was that defendant would fix land after he extracted coal from it. Instead, plaintiff received the value of their undamaged family farm minus the value of the damaged family farm.

But see Groves v. John Wunder Co. (p11). Plaintiff was allowed to recover costs to remedy defective performance.

Note that twenty years later, the court deciding Groves limited the decision to its facts (bad faith) and declined to extend its analysis further to a good faith defective performance.

Restatement 2 § 348 – you get the “diminution in the market price” or “the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value.”

If the cost to complete performance is actually less than the difference in market value, then the P gets cost of performance.

“If the cost of competing the contract . . . is within the contract price, less what had already been paid . . . no ‘compensable damages’ have occurred.” P wants difference of market value, can’t get it. The rule seems to be, P can’t get a windfall from the breach.

See Louise Carolin v, Dix Constr, in which the amount left to be paid was actually more than the cost of completion

Cases where the contracting party does get cost-of-completion damages are limited to construction contracts.

See, e.g., Freund (p79). Plaintiff was not entitled to collect cost-of-completion damages to publish his book, but was only entitled to royalties from the sale of the book (which, in this case, were too speculative).

Second Restatement allows for recovery of costs to remedy only if they are not “clearly disproportionate” to change in value of the land. Don’t want to encourage economic waste.

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o Reasonable certainty. Can only recover for losses that are established with “reasonable certainty” and are not too speculative. When determining whether or not damages are “certain,” the court will likely be generous to the injured party.

See, e.g., Freund (p79). Plaintiff could not recover for lost royalties from defendant’s failure to publish his book because damages were too speculative.

New business. Courts are reluctant to award profits to a new business because of their speculative nature.

But see Fera v. Village Plaza, Inc. (p82). Plaintiffs, new businessmen, could recover for expected profits because they presented detailed testimony that shows how much the typical profits of their type of business would be.

Public whim. Courts are especially unlikely to find certainty when profits might depend on the public whim, as in the case of a sporting or entertainment event.

Cost of completion unknown. If a contractor cannot show his own costs of completion with certainty, then even though the contract price is known, expectation damages might not be granted.

o Restatement of Contracts, Second (p83) states “[e]vidence of past performance will form the basis for a reasonable prediction as to the future… However, if the business is a new one or if it is a speculative one that is subject to great fluctuations in volume, costs, or prices, proof will be more difficult. Nevertheless, damages may be established with reasonable certainty with the aid of expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like.”

- Substantial performance. If a plaintiff suing for a defendant’s breach has only substantially performed, then the defendant can counterclaim for damages she has suffered by the fact that plaintiff did not complete performance.

- Divisible. If a contract is divisible into parts, and a defendant breaches one part of the contract, the plaintiff can still claim damages for the parts of the contract that she fulfilled.

- Alternative damage measures. Where lost profits are too speculative, the court will often give reliance or restitution damages.

Reliance damages- Calculated to put party in as good a position as she was in prior to the making of the contract.

o Allows recovery of losses suffered by virtue of reliance on the contract.o Calculated using cost to plaintiff, not value to defendant.

- When used. o Speculative expectation damages.

Speculative “lost profits” situation is the principle kind of suit on the contract in which reliance damages are rewarded.

See, e.g., Sullivan v. O’Connor (p7). A few courts have awarded only reliance damages in suits brought by patients against doctors who affirmatively promised to achieve a certain result, such as, in this case, plastic surgery that would repair the plaintiff’s nose.

o When the plaintiff is a vendee in a land contract.o Promissory estoppel.

No legally enforceable contract, but the plaintiff is entitled to some protection.- Limitations on reliance recovery.

o Limited to contract price.o Contract would have lost money.

Most courts refuse to allow reliance damages to exceed expectation damages, but place the burden of proof on the defendant to show what the plaintiff’s loss would have been.

Defendant can show that plaintiff would have lost money on the contract had he continued and completed performance.

This is an “efficient breach”o Incidental vs. essential reliance expenditures.

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Most modern courts award recovery for both.o Expenditures prior to signing of contract.

Normally not permitted to recover reliance expenditures made before the contract was signed, since these expenditures cannot be said to have been made “in reliance on” the contract.

Restitution damages- Calculated to allow party to recover value conferred on other party through efforts to perform

contract.o Fundamental principle is unjust enrichment.o The value is usually the sum that the defendant would have to pay to acquire the

plaintiff’s performance, and not the subjective value to the defendant.- When used.

o Partial performance. Aggrieved party has the right to rescind the contract, and recover restitution

damages for any work already done.- Suits in quasi-contract. Where recovery “on the contract” is unavailable.

o No contract. But the plaintiff nonetheless deserves damages for benefits conferred. Emergency situations. Gifts. No recovery if intended as a gift.

o Contract is unenforceably vague or against public policy.o Parties are discharged from the contract because of impossibility, impracticability, or

frustration of purpose.o Plaintiff himself has materially breached the contract.o Quantum meruit. Where a breaching party can recover or cross-claim for a benefit

conferred.- Calculating restitution damages.

o Not limited to the contract price . If the partial work done by plaintiff has already enriched defendant in an amount greater than the contract price, this entire enrichment may be recovered.

Full performance. If the plaintiff has fully performed the contract, then the party cannot sue for unjust enrichment, but can only sue on the contract. This can lead to the strange result that a plaintiff is penalized for finishing off his performance.

o Contract would have lost money. Full restitution is available even when a contract would have lost money.

See, e.g., Algernon Blair (p99).o Restitution for the breaching party. Restitution damages for the breaching party can be

recovered under the theory of quasi-contract. UCC §2-718(2).

Enforcement in equity- Specific performance (an order to render promised performance) and injunctions (an order to

refrain from doing something) will only be enforced if money damages are an inadequate remedy.o For enforcement in equity, contract’s terms must be definite enough to allow the court to

frame an adequate order, and the court’s task of enforcing and supervising must not be unduly difficult.

E.g., courts are particularly unwilling to supervise performance of personal service contracts.

- When used.o Damages are too speculative.

E.g., contracts that involve taste or sentiment, such as where the buyer has a particular sentimental attachment to a work of art.

o Damages are not a substitute for performance of contract.

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E.g., in the conveyance of real estate, where each parcel of land is deemed unique. In general, where a substitute for the contracted good is unavailable.

Note that even when the buyer has contracted to resell, the court will enforce an injunction, since the buyer can argue that he will be liable for an amount in damages that cannot accurately be determined through litigation.

Courts will also order conveyance of land where a buyer breaches, unless the seller has already reconveyed, in which case damages will be an adequate remedy.

E.g., in the breach of an employment contract, where working for a competitor would harm the interests of the first employer. In general, where a contract promised forbearance, damages will not be a substitute.

Employer must show that employee’s services are unique or extraordinary, because she has some special skill or has acquired some special knowledge of the employer’s business.

Injunctive relief will not be granted if the employee has no other way to make a living.

Unique good. E.g., it is extremely difficult to obtain specific performance for a sale of

goods.o UCC §2-716(1): “Specific performance may be decreed where

the goods are unique or in other proper circumstances.”o Price increase is not enough to show specific performance is

necessary, since this could easily be covered by damages.o Inability to cover is strong evidence of “other proper

circumstances.” Patents and copyrights.

o Damages are unlikely to be collected if rewarded.

Limitations on damage awards- Duty to mitigate.

o Plaintiff loses ability to recover if he does not make reasonable efforts to avoid damages.o See, e.g., Luten Bridge Co. (p39). Plaintiff cannot recover for any damages that were

incurred after defendant told him to stop working. “A plaintiff cannot hold a defendant liable for damages which need not have been incurred…”

o Reasonable efforts. The plaintiff is only required to make reasonable efforts to mitigate damages.

o Personal services contracts. Where the contract is for personal services, the courts are especially lenient, and do not force an employee to mitigate damages by taking work substantially different from, or inferior to, the one contracted for.

See, e.g., Parker v. Twentieth Century Film Corp. (p45). Shirley MacLaine did not have to take a roll in a “Western type” movie in order to mitigate damages when the studio breached a contract to do a “musical” with her. The work in the two movies is “different and inferior.”

o Duty to cover for sales goods. UCC §2-712(1) provides that a “buyer may ‘cover’ by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.”

See Missouri Furnace.o Duty to dispose of rejected goods. UCC §2-603(1) provides that if a buyer rejects goods

from a seller, he must make reasonable efforts to sell the goods for the seller’s account if they are “perishable or threaten to decline in value speedily.”

o Seller’s duty to mitigate. Where the buyer has wrongfully rejected goods, the seller may bear the adverse consequences of not mitigating.

Resale. The seller may choose to resell the goods, in which case she will get the difference between the contract and resale price.

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Market price. The seller may choose not to resell, in which case she will get the difference between the contract and the market price. As a result, she will bear the risk if the market price changes.

Contract price, where resale is not feasible. For example, when the goods are customized and no other buyer would want them.

Lost profits. If none of the above methods protect the seller’s interest, she may sue for lost profits.

o Lost-volume seller. See e.g., Neri v. Retail Marine Corp. (p62). Non-exclusive personal contracts.

o Affirmative conduct that increases loss. If the party suing for damages affirmatively takes unreasonable steps that damage their own position, they will not be able to sue for damages.

- Foreseeability.o See, e.g., Hadley v. Baxendale (p67). Plaintiff could not recover profits lost because

broken shaft was not delivered by a common carrier on time, since the profits were not “foreseeable” by a reasonable person at the time of contract. An information-forcing rule intended to make those who will sustain large damages disclose their urgency to a common carrier.

o Breach of warranty. Any injury proximately caused by a breach of warranty is considered “foreseeable.”

- Overhead that would have been spent anyway is not included when calculating damages.- Emotional harms. Damages for emotional disturbance are only available where the breach has

also caused bodily harm, or the contract “is of such a kind that serious emotional disturbance is a particularly likely result.” Rest. 2d, §353.

Contractual controls on the damage remedy- Liquidated damages are enforceable if they are a reasonable estimate of damages, viewed as of

either the time of the contract or in hindsight when the actual loss is known. In some courts, the harm caused by the breach must also be uncertain or very difficult to calculate accurately after the fact for the clause to be operative.

2. Offer and Acceptance

Mutual assent- Parties must reach “mutual assent.” Both must intend to contract, and they must agree on the main

terms of the contract.- Agreement only required for major terms. Parties need not agree on all the terms of the

contract; instead, they must agree on the “major” or “essential” terms.o Usually includes parties, subject matter, time for performance, and price.

- Indefiniteness. A vague offer may be void for indefiniteness.o E.g., I’ll sell you the number of widgets you want for $5 each is too vague.o If parties’ subsequent course of dealing implies that the vague parts of the contract were

filled in, then the court will find a contract.o Rest. 2d, §33(2) states that contracts are sufficiently definite “if they provide a basis for

determining the basis of a breach and for giving an appropriate remedy.”o Courts will supply the missing term if parties leave it open and seem to intend a

reasonable term will apply. UCC §2-204(3) will supply a missing term provided that the parties “intended to

make a contract and there is a reasonably certain basis for giving an appropriate remedy.”

But, in contracts not for the sale of goods, courts are far less likely to supply a missing term. See, e.g., Joseph Martin Delicatessen (p347), where an option to renew a lease was not enforced because there was no indication as to the price.

o Indefiniteness will be defeated by subsequent performance of parties.

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- Misunderstanding. For there to be a contract, there must be a “meeting of the minds.”o If there is a misunderstanding as to a material term and neither party knows or has reason

to know of the misunderstanding, there is no contract. Rest. 2d, §20(1). See, e.g., Raffles v. Wichelhaus (p359), where there is no contract because

neither of the two parties knew that the other party was referring to a different boat named “Peerless.”

o Where one party either knows of the misunderstanding or objectively should know of the misunderstanding, the contract is interpreted against them.

o A party has the right to waive the misunderstanding and use the other party’s interpretation. An ambiguous contract is therefore not void but voidable if both parties wish to void it.

- Objective theory of contracts. What matters is not what each party subjectively intended, but what a reasonable person in the position of the other party would have thought the first party intended. Therefore, a court will look at whether a person manifested intent.

o Secret intent. As a result, secret intent is irrelevant to determining whether a contract exists.

o Particular terms of contract. The objective theory will also be used to interpret the meanings of particular terms of a contract.

- Presumption of intention to be bound.o Business transactions. It will be presumed in business settings that the parties intend to

be bound – for example, even if one party made an offer in jest and the other party seriously and reasonably accepted the offer, the contract will be binding.

Exception: manifest intent not to have business relations. If both parties clearly do not intend to have business relations, then a court will not enforce.

o Domestic and social situations. Where an agreement is made in a social or domestic setting, the presumption is that legal relations were not intended.

- Effects of adopting a writing. Where two parties reach an agreement on a contract and decide that they will put it in writing, they will be bound to the extent that they intended to be bound even before the legal document was drawn up.

o Letter of intent contemplating more formal agreement. Will be binding to the extent that the letter of extent manifests an intention to bind the parties.

References to further negotiations or procedural formalities cut against enforceability.

The more complex a transaction, the less likely a letter of intent will be enforced.

“Subject to” letters of intent generally will not be enforced. See, e.g., Empro Manufacturing (p352).

- Standardized Formso When used against individual consumers, there is a very high standard for

commercialized forms – no room for negotiationo Contract cannot be misleadingo If form releases company from warranties, there should be some kind of quid pro quoo It is very hard for a company to disclaim liability to an individual who suffers an injury

Offer and acceptance- Offer is a statement or act that creates a “power of acceptance.”

o When a person makes an offer, she is indicating that she is willing to be immediately bound by the other person’s acceptance, without further negotiation.

o “The manifestation of willingness to enter into a bargain.” Rest. 2d §24.o Validity of different types of options:

Offer made in jest. An offer the offeree knew was made in jest is not enforceable.

Expression of opinion. Expressions of opinion are to be differentiated from an offer using the objective “reasonable person” test.

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Future intent. If the offer was an expression of future intent, it is not binding. Invitation to bid or open negotiations. An offer objectively considered an

invitation to bid or to begin negotiations is not binding. Exception: if the invitation to bid contains language binding the offeror

to accept the highest bidder. E.g., an auction, where the auctioneer is bound to accept the highest bid unless there is a reserve.

Price quote. Probably valid if it is addressed to a specific individual, makes clear the quantity in question, and doesn’t reserve to the person quoting the power to close the deal.

Advertisement. Offer is not valid unless the ad expresses a commitment to sell a particular number of units or to sell items on a particular manner.

- Acceptance is a statement or act that indicates the offeree’s immediate intent to enter into the deal proposed by the offer. A contract is formed as soon as the acceptance occurs.

o Only a person who the offeror intended to give the power of acceptance may accept an acceptance.

o An offeree generally has to know of the offer at the time of his alleged acceptance. Cross-offers not binding. If parties make cross-offers without knowledge that

other party was also making an offer, the parties are not bound. Unless the subsequent conduct of both parties implies that they

intended to be bound. Reward. Generally, someone who does an act without knowing of a reward

cannot claim the reward. Exceptions: if the reward is granted by a public agency, there is usually

a noncontractual right to recover.o Method of acceptance. The offeror, being the “master of his offer”, may prescribe the

method of acceptance. When not satisfied in the offer, the acceptance may be given “in any manner

and by any medium reasonable in the circumstances.” Rest. 2d §30(2). Acceptance of a unilateral contract. Offeree can accept by performing act.

Intent to accept is presumed if offeree begins performance. Offeree not required to give notice before performance, but must give

notice to offeror that performance has been rendered. Acceptance of a bilateral contract. Offeree accepts by promising to perform.

Assent can occur through words or actions so long as it appears reasonable to offeror that offeree is accepting.

Silence. Under certain circumstances, silence may be acceptance.o Old common law stated that silence was not assent when an

insurance company offered to renew a policy unless it heard to the contrary and plaintiff’s house burnt down after plaintiff relied on this and didn’t respond. Prescott v. Jones (p247).

o Modern law holds that silence can be assent when offeree has reason to understand this is the case. E.g., course of dealing.

o An offeree who silently receives the benefit of services (not goods) will be held to have accepted a contract if she had reasonable opportunity to reject them and knew the provider expected to be compensated for them.

Exception under UCC – goods sent in the mail may be taken as gifts

o “Battle of the forms.” Acceptance that varies from offer by adding or changing terms. Mirror image rule. Under common law, the acceptance that varies from an

offer is usually a rejection and counter-offer. To accept, it has to be a precise mirror image of the offer.

Last shot rule. Mirror image rule gives an advantage to the party who fires the last shot if the other party starts performance.

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Modern view. Proposed changes generally do not invalidate the acceptance unless it is made conditional on offeror’s assent to the new terms.

UCC §2-207. Subsection (1) states that an acceptance is functional even though it states terms different from those offered, unless it is expressly made conditional. Subsection (2) states that additional terms become part of the contract unless the offer expressly limits acceptance to the terms of the offer, the acceptance materially alters the contract, or notification of objection to them has already been given. If the acceptance is silent on any terms in the offer, those terms in the offer are included in the contract.

If the offer and acceptance really just don’t agree, then there’s no contract at all.

Expressly conditional. This requirement is strong – offeree must specifically say that she will not continue unless changes are made.

Materially alters. If the acceptance disclaims all warranties, then this will not become part of the contract.

Conflicting clauses. Majority of courts apply the “knockout” rule, in which conflicting clauses cancel one another out.

o Gap-filler. Parties’ contracts can conflict even if there are no clauses that directly conflict. For example, if the offeror does not mention warranties in the offer, it is an implied part of the contract that the UCC gap-filler on implied warranty of merchantability is included, which would knock out offeree’s disclaimers of warranty.

Additional terms in acceptance. Only included in contract if both parties are merchants. Otherwise offeror has to explicitly agree to it.

Confirmation. If the parties have already orally agreed to a contract, and a form is sent to confirm the contract, the terms of the oral contract will govern, unless both parties send confirmations that conflict. In that case, the knockout rule will be applied.

o Whether offer was still in effect. Figure out whether the offer ended before the acceptance occurred. These apply only when an offer is revocable.

Rejection or counter-offer by offeree. Lapse of time. If the offer does not set a time limit, the offer terminates after a

“reasonable period of time.” Rest. 2d, §41(2). Direct negotiations. When parties are bargaining face-to-face or over

the telephone, the offer is traditionally held to remain open only during the conversation, unless indicated otherwise.

Letter & telegrams. Reasonable period is usually measured from the time the offer is received, not the date sent. Caldwell v. Cline (p367).

Revocation by offeror. A revocation of offer does not become effective until received by

offeree. Lost revocation. As a result, if a revocation is lost at mail, it never

becomes effective. Indirect communication of revocation. If an offeror behaves in a way

inconsistent with an intention to enter the proposed contract, and the offeree learns of it indirectly, there is a revocation.

o See, e.g., Dickinson v. Dodds (p390), where the court held that the offeree’s learning that the offeror had reached an agreement with another buyer functioned as a revocation of the offer.

o Rumor or offer made to another party. Neither rumor nor finding out that an offer was made to another party is sufficient for an offer to be revoked.

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Revocation of an advertisement. Can be accomplished through the same means as the advertisement was put out.

Death, incapacitation, subsequent illegality. Revokes offer whether or not offeree or offeror has notice.

Option. Offeror promises that she will keep the offer open for a certain time. In other words, the offer is irrevocable.

Impossibility. Even in the case of an option contract, impossibility, such as the death of a party, will terminate the contract.

Consideration. For there to be an option contract, there must be some sort of consideration. In other words, there must be some benefit that flows back to the offeror from keeping the offer open.

o Offeror cannot bind himself by gratuitously promising that on option will be kept open when there is no consideration.

Counter offer does not terminate irrevocable offer. UCC §2-205. Merchants for the sale of goods are obligated to keep

open option contracts if there is a signed writing and the offer gives explicit assurance the offer will be kept open.

Temporary irrevocability. If the offer is for a unilateral contract or it is unclear whether it is for a unilateral or bilateral contract, and the offeree in reliance begins performance.

For a unilateral contract, see, e.g., Brackenbury v. Hodgkin (p384). Mother contracts with daughter to leave her home and come look after her until her death. Held that the fact that daughter began performance made contract temporarily irrevocable, but daughter still had to continue looking after mother until her death for contract to be enforced. If the offeree later completes performance, then she is entitled to the terms of the contract.

Note: according to Rest. 2d, §45, doctrine generally does not apply for unilateral contracts when offeree only makes preparations to perform.

o See, e.g., Petterson v. Pattberg (p377). Insurer offers a reduction if plaintiff pays off mortgage immediately; plaintiff takes money to insurer’s house, but insurer has in the meantime sold off the mortgage. Plaintiff’s pre-performance reliance on insurer’s offer did not make contract binding.

For a case where it is unclear whether there is a unilateral or bilateral contract, see Allied Steel v. Ford (p368). Allied Steel forced to compensate Ford for damage caused by Ford’s employees, since it said so in the contract, and Allied Steel accepted the contract by beginning performance.

o UCC §2-206. Offeree can bind both himself and offeror by giving notice of acceptance after partial performance within a reasonable time.

Note: according to Rest. 2d, §87(2), “an offer which the offeror should reasonably expect to induce action or forbearance of substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.” Contrast with Rest. 2d, §45.

o See, e.g., Drennan v. Star Paving (p398) where a subcontractor was bound to his bid because the general contractor relied upon it in his bid.

o Contrast Drennan with James Baird v. Gimbel Bros. (p395), where Learned Hand held that a subcontractor was not bound by a bid, since no consideration flowed to him.

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Obviously, the doctrine of temporary irrevocability does not apply when the offer makes explicit that the right to revoke is kept open.

o When acceptance becomes effective. For a unilateral contract, acceptance is effective upon performance. The

interesting case is a bilateral contract. Mailbox rule. Acceptance is effective upon proper dispatch, even if lost

during transmission. Manner of acceptance. Must be invited by offeror or otherwise

reasonable or faster under circumstances.o Rest. 2d §67: even if the manner of acceptance is not invited

or reasonable, the acceptance is good if it is received without delay. Otherwise it is only effective upon receipt.

Both rejection and acceptance sent. o Rejection sent before. The acceptance is effective on receipt

only if it arrives before the rejection.o Rejection sent after. The acceptance controls and is effective

on dispatch even if it received after the rejection. However, if the rejection was received before the

acceptance, and the offeror reasonably relied upon it, the offeree might be estopped from enforcing the contract.

See, e.g., Morrison v. Thoelke (p429) where buyer of real estate was not allowed to retract an acceptance sent in the mail by calling up seller.

The mailbox rule obviously doesn’t apply if the offeror explicitly states otherwise – e.g., “acceptance is only good when personally received.”

Acceptance of option contracts. Only becomes effective on receipt by offeror, not on dispatch. Rest. 2d, §64.

Mistaken transmission. If an acceptance becomes mistakenly changed in transmission, the court will generally enforce a contract as received by offeree.

- Bilateral and unilateral contracts. o A bilateral contract will contain a conditional promise, and will propose that the other

party accept the offer by making a promise in return.o A unilateral contract proposes an exchange of an act for the offeror’s promise.o The distinction is less important than it used to be.o General presumption for bilateral contract “since this immediately and fully protects

both parties.” Davis v. Jacoby (p371). See, e.g., Davis v. Jacoby (p371), contract was bilateral, and therefore

enforceable, where offeror promised to leave estate to offerees in will if they took care of his affairs and offeree’s promised to take care of affairs in return.

o Differences. Whether offeror may revoke the offer once the offeree relies on the offer to her detriment.

3. Grounds for enforcing promises: (1) Consideration- Consideration. Parties generally must give consideration for a contract to be enforceable.

o Evidentiary and cautionary function.- Two requirements for consideration:

o Both parties must give up something. Suffer a “legal detriment.”o Bargain. Both parties must have bargained for what the other party is giving up. In other

words, the “legal detriment” must have induced the other party’s promise.o Inadequacy of consideration. Does not prevent the contract from being enforceable.

See, e.g., Batsakis v. Demotsis (p216), where the court claimed, “Mere inadequacy of consideration will not void a contract.”

Equity. Courts of equity are much more willing to look into the adequacy of consideration.

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- Gifts.o Most of the time, a mere promise to gift cannot be enforceable.o See, e.g., Kirksey v. Kirksey (p246). Held that promise to provide a place to live for

sister-in-law if she came to see promisor was not enforceable, even though sister-in-law relied to her detriment by expending money on the trip to visit, because promisor was not “bargaining for” his sister-in-law’s trip. Instead, the trip was a mere precondition for the bargain.

Promissory estoppel. May be applicable in a case like this.- Non-economic benefits.

o Bargain may be present even though the promisor does not derive an economic benefit from the transaction.

o See, e.g., Hamer v. Sidway (p205), where the uncle bargained for the nephew to be, in effect, a good Christian. Held that uncle was bargaining for something that he wanted, and this, in itself, was sufficient.

o Altruistic pleasure. However, altruistic pleasure is not sufficient.- Will not satisfy the consideration requirement.

o Past consideration. Where the detriment has been suffered before a promise is made, it has obviously not been “bargained for” by the promisor.

Past services rendered. A promise to pay for past services rendered is usually not held to be supported by consideration.

See, e.g., Mills v. Wyman (p231), where defendant’s promise to pay plaintiff for taking care of his son when his son was ill was held not to be enforceable.

But see Webb v. McGowin (p236), where defendant’s promise to pay for the injuries plaintiff suffered when saving him was held to be enforceable (see below, promises binding without consideration).

Exception: pre-existing debt. Where there is a pre-existing debt, and the statute of limitations prevents the lender from suing on the creditor’s obligation, the creditor’s promise to pay back the debt is enforceable in some jurisdictions. This is the “moral obligation” exception. (see below, promises binding without consideration).

o Nominal or sham consideration. Gifts are often made in bargain for “$1” or “love and affection.” Generally, this

kind of stuff won’t hold up in court. But see, e.g., Batsakis v. Demotsis (p216), where consideration of $25 in

occupied Greece during WWII was held to be sufficient consideration for a promise to repay $2000.

In close cases, reciting the formalities that there is consideration might make a difference. Hence, in Kirksey, had the brother said “in consideration for you coming to visit me,” this might have held up in court.

o Pre-existing duty rule. If a party is already legally obligated to do something, her promise to do it is not valid consideration.

See, e.g., Alaska Packers’ Ass’n v. Domenico (p560). Held that the agreement was unenforceable due to lack of consideration and duress when workmen in a remote location in Alaska demanded and received higher wages for work that they had already contracted to do. Defendant was under no obligation to pay the increase in wages because nothing flowed back to him from the bargain.

Reward. A promise to pay a reward or bonus is unenforceable if the party is already under an obligation to perform. See, e.g., Denney v. Reppert (p593), where police officers and employees of a robbed bank were not allowed to collect a reward because they already had a legal duty to furnish information.

“Three party”. When a third party offers to pay for a duty owed between two original parties, the courts may or may not find valid consideration.

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Valid consideration. Found when a general contracts with a subcontractor to do work, general subsequently becomes insolvent, and then owner offers to pay sub to continue work.

No valid consideration. When a jockey is offered additional money to win a race he was obligated to try and win anyway.

Exception: when there are changed circumstances in the middle of a contract, the parties can modify the contract with consideration only flowing in one direction (see below).

Exception: when it is a sale of goods case and therefore governed by the UCC (see below).

o Ability to determine own performance. For example, a promise to perform or not to perform is not valid consideration. A reservation to “change my mind” will mean there is no consideration.

Reserving more than one option. Only binding if either option would be valid consideration for the promise.

Right to terminate. Courts are split as to whether or not there is consideration if there is a blanket right to terminate clause.

Termination after partial performance. Constitutes consideration. Termination upon inability to perform. Constitutes consideration. Modern view. Blanket right to terminate may be consideration if there

is a duty to provide reasonable notice. UCC §2-309(3). Allows court to find an implied duty to provide

reasonable notice of termination where contract is silent.o Conditional upon happening of future event.

Future event outside of promisor’s control. Then the promise is consideration. Future event partially within control. Court will imply a promise to make the

event happen.- Will satisfy or no consideration requirement.

o Sale of goods. Under the UCC §2-209(1), a contract modification needs no consideration to be binding so long as it does not violate any express conditions in the original contract, such as a “no oral modifications” clause.

o Debtor/Creditor. Immediate payment. A debtor’s immediate payment of a pre-existing debt in

exchange for a concession of a discount can be valid consideration. “Payment in full”. If the debtor writes “payment in full” on the check

and the creditor cashes it, then this will be a discharge of the entire debt, even if the creditor crosses out the writing.

Extended deadline. Creditor’s offer to extend payment deadline is supported by valid consideration if the debtor agrees to pay interest.

o Unanticipated circumstances altering a pre-existing contractual duty. A modification to the contract with consideration only flowing in one direction is binding if it is “fair and equitable in view of circumstances not anticipated by the parties when the contract was made.” Rest. 2d, §89(a).

o Promise not to bring suit. If the promise not to bring suit is valid or the claim-holder has a bona fide subjective belief that it is valid, then the forbearance is valid consideration.

Settlement. The promise not to bring suit in exchange for less money in settlement is supported by valid consideration.

o Requirement and output contracts. Contracts that require a party to buy all of a certain good from a seller or to sell all of their output to a buyer are supported by valid consideration. UCC §2-306 states that requirements and output contracts do not “lack mutuality of obligation.” Consideration is found in an output contract if the seller is also bound to deal exclusively, and in a requirement output if the buyer is also bound to buy exclusively. This is different from a continuing offer that is revocable at will.

o Implied promise.

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See e.g., Lucy, Lady Duff Gordon (p299), where Cardozo found consideration in agent’s duty to make “reasonable efforts” to market designs even though there was no obligation to sell any designs.

o Voidable or unenforceable promises. Promises that are voidable or unenforceable for some reason (e.g., Statute of Frauds, there is a minor) are still good consideration.

4. Grounds for enforcing promises: (2) promises binding without consideration- Promises to pay past debt.

o A promise to pay a past debt that is no longer legally enforceable is binding without consideration, if in writing.

o Courts often spout some nonsense about “moral consideration.”o Policy rationale: allows debtors to improve their credit rating.o Rest. 2d, §82 and 83. States that promise to pay a debt barred by the statute of

limitations or discharged in bankruptcy is binding without consideration.o If the debtor promises to pay only a portion of preexisting debt, that is all he will be

held liable for.- Promise to pay for benefits received.

o May or may not be enforceable depending on situation. See, e.g., Mills v. Wyman (p231), where defendant’s promise to pay plaintiff

for taking care of his son when his son was ill was held not to be enforceable. But see Webb v. McGowin (p236), where defendant’s promise to pay for the injuries plaintiff suffered when saving him was held to be enforceable (see below, promises binding without consideration).

o Modern trend is more toward Webb.- Reaffirmation of voidable promise.

o For example, a minor who reaches the age of majority may reaffirm a debt that he incurred while still a minor.

- Modification of contract.o Sale of goods. UCC provides that a modification of a contract for the sale of goods does

not have to be supported by consideration. UCC §2-209(1) states that an “agreement modifying a contract within this article needs no consideration to be binding.”

No oral modification if barred by contract. However, this is limited by UCC §2-209(2), which states that “a signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.”

Waiver. A party can be held to have waived the no oral modification clause. UCC §2-209(4) states that “[a]lthough an attempt at modification… does not satisfy the requirements of [a valid no-oral-modification clause] it can operate as waiver.”

- Option contract. o A promise to hold an offer open usually does not need consideration if the option is in a

writing and recites that consideration has been paid for the option. Rest. 2d §87 states that no consideration is really required to keep an option

open so long as the exchange is for “fair terms within a reasonable time.” UCC §2-205. The “firm offer” provision allows for the creation of an option

contract without consideration.- Guaranty contract.

o A promise to pay the pre-existing debt of another person is usually enforceable if it is in writing and recites that consideration has been paid.

- Promissory estoppel.o Predicated on promisee’s reliance to detriment.o A promise is enforceable without consideration if:

Rest. 2d §90(1):

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“promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person…

which does induce such action or forbearance… is binding if injustice can be avoided only by enforcement of the

promise.”o See, e.g., Hoffman v. Red Owl Stores (p408). Promissory estoppel found where one

business party gave assurances to another that a binding agreement would be reached, the other party relied on these assurances to his detriment, and the contract fell through.

o See, e.g., Goodman v. Dicker (p279). In reliance on defendant’s promise that plaintiff will become a franchisee of defendant’s national radio sales business, plaintiff spends money preparing to open up a shop. Held that promissory estoppel is applicable, and plaintiff can recover reliance damages.

o Reliance damages. Promisee is generally only able to recover reliance damages. See, e.g., Wheeler v. White (p355), where promisee was able to recover on

promise even though it was indefinite with respect to basic terms for his foreseeable, definite and substantial reliance.

Policy rationale: promisee should not be able to recover full expectation damages because he was partly at fault for failing to insist upon an enforceable contract.

o Promises to make gifts. May be enforced if they induce detrimental reliance. See, e.g., Ricketts v. Scothorn (p247) where grandfather’s promise to support

granddaughter if she quits work held enforceable. See, e.g., Seavey v. Drake (p266) where an oral promise to convey land as a gift

was held to be enforceable after promisee had relied on it by building a house and living there for twenty years.

o Gratuitous bailments and agencies. See, e.g., East Providence Credit Union (p261), where promissory estoppel

was found when party reasonably relied on promise by bank to pay insurance premiums by not paying insurance premiums themselves, and their car was destroyed by fire.

o Offers by subcontractors. Discussed in the “options” section above, bids by subcontractors may be held

binding to a general who uses the bid in a contract for a job, on a sort of promissory estoppel theory.

o Policy rationale: promissory estoppel often turns on whether we think the promisor is negligent or lacks good faith in giving a promise, or the promisee is reckless in relying on the promise without a valid contract.

- Written promise to make a charitable contribution.o See, e.g., Allegheny College (p248), where a charitable contribution was held to be

enforceable. Cardozo finds consideration in the college’s promise to name a scholarship fund after donor, but this could be decided on a promissory estoppel theory.

o Oral promises to charities not covered. But see Congregation Kadimah Toras-Moshe v. Deleo (p192), where an oral promise to contribute money to a synagogue was held to be unenforceable.

Interpretation of contracts- Parol evidence rule. Writing intended by parties to be a full and final expression of agreement

may not be supplemented or contradicted by any oral or written agreements prior to the writing.

o Parol evidence rule does not apply when: Fraud, illegality, duress, mistake, lack of consideration or other facts

making contract void or voidable. The contract is conditional.

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Collateral agreement prior to writing. If the prior agreement is supported by other consideration, the parol evidence rule does not apply.

o Integration. Parol evidence rule tends to apply only to documents that are integrations, or final expressions of agreement.

An integrated document can be either partially or totally integrated. Merger clause. A contract can include a merger clause to show parties’ intent

that the contract is fully integrated. Judge, not jury, determines whether contract is integrated.

Four corners rule. View that the judge should not look beyond the “four corners” of the document in making decision whether contract is integrated.

Actual intent. View that the judge should look at the actual intent of the parties involved to determine whether the contract is integrated.

UCC §2-202(b) Comment 3. Takes a middle view by stating that the additional terms cannot be such that “if agreed upon, they would certainly have been included in the document.” In other words, if the additional terms are so important that reasonable parties would put them down to writing, then the court cannot admit parol evidence.

o Contemporaneous side writing. Treated as though it was part of the main written contract.

o Interpretation. Does not bar admission of evidence about the subjective meaning the parties intend to give particular terms.

See, e.g., Pacific Gas & Electric Co. v. Thomas Drayage (p494), where defendant was allowed to enter parol evidence in the record to show that an indemnity clause only applied to third-party property and not to plaintiff’s property. A contract has to be “fairly susceptible” to an interpretation for parol evidence to be admitted.

A subsequent oral agreement to explain or interpret or add terms in the writing is admissible.

If a “no oral modification” clause exists, then it will be considered waived if a party stands by and doesn’t say anything, letting another party do work following an oral modification. Universal Builders v. Moon Motor Lodge (p573). Recall UCC §2-209(4) states, “Although an attempt at modification… does not satisfy the requirements of [a valid no-oral-modification clause] it can operate as a waiver.

Custom, course of dealing, and trade usage are admissible to determine what the meaning of a word was.

o UCC §2-202. “Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented… (a) by course of dealing or usage of trade… or by course of performance…; (b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the agreement.”

- Ambiguous terms should be interpreted against the drafting party.- Negotiated terms will prevail over standardized terms.- Omitted terms. The court may supply a reasonable term in a situation where the contract is silent.

o Rest. 2d §204. “When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.”

o Good faith. UCC §1-203 has a very strong good faith clause. Exception: the clause is irrelevant when there is a specific contractual term that

a party can terminate with ten day’s notice for any reason. See, e.g., Corenswet v. Amana Refrigeration.

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o At will employment. In the absence of any fixed term of contract for employment, the court will interpret the contract to be at will, even if the parties state the contract will be “permanent.”

For-cause. A significant minority of courts has moved towards a good-faith requirement for the termination of employment contracts.

Wrongful discharge. Some courts have defined a tort action of wrongful discharge. See, e.g., Sheets v. Teddy’s Frosted Foods (p315), where wrongful discharge was found when plaintiff quality control director was fired for telling the FDA about defendant’s false labeling.

- Parol evidence rule can be finessed by referring to evidence as “interpreting terms in contract” rather than “adding,” or “contradicting” – see Pacific Gas & Elec. Co v. G.W. Thomas Drayage & Rigging Co.

Mistake- Part can rescind contract on the basis of mistaken belief about an existing fact.

o Mistake must be about existing fact, and not about what will happen in the future.o Mistake as to market conditions is not sufficient.

- Mutual mistake. When there is a “meeting of the minds,” but it later turns out that both parties made a mutual mistake as to some basic fact.

o Rest. 2d §152. Must concern a basic assumption on which the contract was made, have a material effect on fairness of the deal, and the risk of this type of mistake was not allocated to the party trying to rescind.

Mistake can’t be a result of negligence (math mistakes, scrivener’s errors are good)

There cannot be reliance on the contract such that inequity will occur if voidedo See, e.g., Sherwood v. Walker (p602) where seller was able to rescind contract for a sale

of his cow when both he and buyer mistakenly thought the cow was barren, and it turned out to be pregnant.

Mistake went to the “very nature of the thing,” – contract is voido Test for mutual mistake

Contract is nullified when Mistake goes to the very nature of the thing Or one party has reason to believe the other party is mistaken Parties do not recognize the uncertainty of the nature of the object See Smith v Zimbalist

o Allocation of risk. Disadvantaged party cannot claim mutual mistake if the risk is allocated to him.

Agreement of parties. If the parties agree to allocate the risk of mistake on one party (as in a quitclaim deed), the courts will find this binding.

Conscious ignorance. If a party had reason to know, but proceeded in conscious ignorance, the courts will make that party bear the risk of a mistake.

Seller of land. For example, if oil is found by a buyer on the land after contract is signed, the seller cannot rescind for mutual mistake.

o Policy rationale: perhaps the issue turns on whether or not we want to encourage someone’s ability to judge whether or not a cow is barren or capable of having baby cows. General Principle of Inertia – these are arbitrary windfalls; courts stay out.

- Unilateral mistake. Harder to have contract rescinded.o Rest. 2d, §153. The three basic requirements for mutual mistake must exist, and also the

party asking for rescission must show (1) the mistake is such that the contract is unconscionable or (2) other party had reason to know of the mistake or actually caused it.

o Unconscionability. Typically, party will have to show both that they will be severely harmed by enforcing contract and that other party has not relied on it.

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Cf. Drennan v. Star Paving (p398), where subcontractor’s unilateral mistake on a bid for a contract did not rescind the contract because the general contractor had relied on it.

Hinson v Jefferson – where contract was void because mistake made the property unusable for the purpose of the purchaser (transition to frustration of purpose)

o Reason to know. If subcontractor’s addition is so far off that general should know the bid can’t be for real, then the general should be put on notice that something is wrong.

5. Assignment of rights and third-party beneficiaries

Third party beneficiary- A person who is not a party to a contract becomes a third-party beneficiary at the time the contract

is formed, if the parties to the contract intend to confer a benefit on that person.o Right to bring suit. A third-party beneficiary has the right to bring suit against one of the

original parties if the latter does not perform. Beneficiary’s assent or knowledge unnecessary. Beneficiary has a right to sue

on the contract even though he did not know or did not assent to it.- Common law rule. Third-party beneficiary may not recover on a contract because she is not in

privity wit the promisor. Still in force in England and Massachusetts.- Early cases and Rest. 1st §133(1). Allowed a third party beneficiary to sue only is he was a

“creditor beneficiary” or “donee beneficiary.”o Creditor beneficiary. If performance of a promise would satisfy an actual or supposed

or asserted duty of the promisee to a third party, and it does not appear that the promisee was just making a gift to the third party, then the third party is called a creditor beneficiary.

See Lawrence v. Fox (p855), where plaintiff third-party beneficiary could sue to recover on a contract made between defendant Fox and another person Holly, that Holly would pay Fox a certain amount, and in return Fox would pay back Holly’s debt to Lawrence.

o Donee beneficiary. If the promisee entered the contract for the purpose of conferring a gift on a third party, the third party “donee beneficiary” is given the right to sue the promisor.

See Seaver v. Ransom (p861), where defendant’s promise to his dying wife that he would leave money to plaintiff if she left her estate to him was held enforceable on plaintiff’s suit.

- Rest. 2d §302. Abandons the “donee beneficiary” and “creditor beneficiary” categories. Instead a third party can recover if she falls into the category of “intended beneficiaries”; otherwise, she is said to be an “incidental beneficiary.”

o Intended beneficiary. For a third party to be an intended beneficiary, it must first of all be the case that giving him the right to sue would be “appropriate to effectuate the intentions of the parties.” Rest. 2d §302(1).

o Moreover, the beneficiary must further fall into one of the two following categories: Payment of money. The “performance of the promise will satisfy an obligation

of the promisee to pay money to the beneficiary.” Intended benefit. “The circumstances indicate that the promisee intends to give

the beneficiary the benefit of the promised performance.”o Contrast with incidental beneficiary. By contrast, an “incidental” beneficiary – one

who would be benefited by performance, but upon whom the original parties did not intend to confer a benefit – may not sue.

E.g., B contracts with A to buy new car manufactured by C. C is an incidental beneficiary, even though promise can only be performed if money is paid to C.

o Indicators that a third-party is an intended beneficiary. Reliance. If third party could reasonably rely on contract. Running of performance. If it goes directly to the third party.

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Parties’ intentions.- Vesting of rights. The contracting parties’ power to modify or discharge the contract terminates

when the third-party beneficiary’s rights have “vested.” Vesting occurs when, before the beneficiary receives notice of the medication, the beneficiary either: (1) changes her position in justifiable reliance on the contract, (2) brings suit on the contract, or (3) manifests assent to it.

Impossibility, impracticability, and frustration

- All three doctrines concern situations where, after the formation of a contract, unexpected events occur that affect the feasibility or possibility of a party’s performance and cause the parties to be excused from continued performance under the contract.

- Remedy: when a contract has been discharged for any of the reasons, some courts still allow parties to recover restitution or reliance damages in quasi-contract. Often a court will allow recovery for restitution damages before the unexpected event occurred (i.e., will allow recovery of benefits conferred before a building burnt down).

- Risk allocation. If the parties themselves have allocated the risk of a certain event in a contract, then the contract will supersede the three doctrines.

Impossibility- If performance by a party has been made literally impossible by the occurrence of unexpected

events, then the contract may be discharged. - Rest. 2d §261. “Where after a contract is made, a party’s performance is made impracticable

without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”

o Must be supervening impossibility. The impossibility must be supervening; and impossibility that existed at the time of contracting (but was unknown to one or both parties) will fall under the doctrines of mistake.

o Must be objective impossibility. “It is the difference between ‘the thing cannot be done’ and ‘I cannot do it.’” Rest. 2d, §261.

E.g., financial inability not objective. A party’s inability to perform due to his own insolvency or lack of necessary capital will not allow a use of impossibility as a defense

o Must be about a basic assumption.o Must not be the fault of the party seeking discharge.o Parties must not have allocated risk otherwise.

- Literal impossibility:o Destruction or unavailability of the subject matter of the contract. If performance of

the contract involves a particular object that is destroyed through the fault of neither party, the contract is discharged. Discharge will only occur if the particular subject matter is essential to the contract; if the subject matter is of collateral importance, the contract will only be partially discharged. If a particular object or property was specifically mentioned in the contract, its destruction will discharge the parties of their obligations.

See Taylor v. Caldwell (p638), where contract was discharged due to impossibility after defendant’s music hall burnt down. Conclusion based on the theory that parties regarded the continued existence of the hall as the “foundation” of the contract, and that the contract contained an “implied condition” that both parties would be excused if the hall ceased to exist.

Where to allocate risk in certain situations. Contract to build a structure from scratch. Most courts hold that a

contractor will be liable for the damages if a structure being built from scratch burns down before it is completed.

Building renovations. If a building burns down during renovations, a contractor will usually be able to plead impossibility, and may be able to get restitution damages for any benefit conferred on the other party.

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Contracts for the sale of goods. A contract for the sale of goods can be deemed impossible if the seller’s means of manufacturing the good is destroyed. However, if the seller is able to cover on the market and the contract was not for his specific good, then no impossibility exists.

o UCC §2-615(a). Unless otherwise agreed, “delay in delivery or non-delivery… is not a breach of [seller’s] 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.”

o Avoidance in case of unique goods. If the contract calls for the delivery of identified or unique goods, and a casualty to the goods occurs “before the risk of loss passes to the buyer”, the contract is “avoided” if the loss is total. UCC §2-613(a).

o Failure of means of performance. Defective or unrealistic specifications. If specifications for a product turn out

to be defective or unrealistic (in that they won’t produce the desired result), the question turns on whether the producer impliedly warranted that the product could be made.

But, if the error was made at the time of contract, then it would fall under the mutual mistake rather than the impossibility doctrine.

Due to third person. If a seller cannot make a contract with a supplier, she is normally held to have assumed that risk. However, if a specified supplier breaches a contract with a seller, many courts will discharge the seller from the contract.

o Death or incapacitating illness. Personal services. If a contract calls for significant personal services from a

deceased party, the contract is discharged. Death of third person. A death of a third person necessary to the

performance of a contract will also be grounds for discharge. Threat of illness or death. If a party believes performance of a

contract will result in serious illness or death, the contract may be discharged.

o Contract has been made illegal by a subsequently passed law. Where one party is at fault. If the impossibility occurs because one party has

an injunction put upon them, they will not be excused due to impossibility. UCC §2-615(a). Provides that “delay in delivery or non-delivery in whole or in

part by a seller… is not breach of his duty… if performance as agreed has been made impracticable… by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”

- Temporary impossibility. Suspends the duty of performing until the impossibility ends. Rest. 2d, §269.

Impracticability- If performance by a party has been made highly impractical by the occurrence of unexpected

events, then the contract may be discharged. Unexpected events can include an extreme increase in cost or a tremendous increase in the time needed for performance.

- Foreseeability. The more foreseeable the increase in costs, the less likely it is that the parties intended that the buyer of the goods or services would bear the risk of a large cost increase.

o Fixed price contracts. As a result, if parties agree on a fixed price, and the risk of a rise in market price was foreseeable, the court will almost certainly hold that the parties implicitly allocated risk.

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- UCC §2-615(a). Seller’s non-delivery or delay in delivery is excused “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…”

o Examples: war, embargo, local crop failure, unforeseen shutdown of major sources of supply.

Frustration of purpose- When unexpected events completely or almost completely destroy a party’s purpose in entering

into the contract, the parties may be excused from performing. - See, e.g., Krell v. Henry (p667), where a contract to rent an apartment for a two-day period was

discharged because the reason that defendant entered the contract was to view the coronation of King Edward VII, which was called off.

o But see Lloyd v. Murphy (p672), where defendant was not entitled to the defense of frustration, since the intervening event (WWII) was foreseeable at the time parties negotiated the contract, and defendant’s business of selling cars was not entirely nullified by the government’s order to restrict sales of new cars, but merely curtailed.

- Rest. 2d §265. “Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.”

- Factors to consider.o Foreseeability and allocation of risk.o Extent to which event deprived party of all of his anticipated benefit.o Whether party was at fault.

6. Conditions – events that must occur before a party’s performance is due Precedent/Subsequent

- Condition Precedento Any even which must occur before performance under contract is dueo Party who receives performance must prove occurrence

Burden of allegation and proof on the plaintiff-promisee A necessary element of proof Exception: an insured generally does not have to prove all conditions

precedent, only satisfaction of those conditions the insurance company claims (special defense) to not have been satisfied.

o Restatement just calls them conditions - Condition Subsequent

o Any even whose occurrence discharges the duty of performanceo Party who owes performance must prove occurrence

Burden of allegation and proof on the defendant-promisor Therefore it becomes an affirmative defense Changes the dynamics of the case – see Gray v. Gardner

o Restatement calls them events of discharge- Restatement prefers condition over discharge - No substantive difference – both operate to discharge a contractual duty

Express and constructive conditions- Express conditions

o An event made a condition by agreement of the partieso Agreement can be stated explicitlyo Agreement can be “implied in fact”

Implied from the party’s conduct Often implied if in contract one act is explicitly determined to follow

another, but words “express condition” not used- Constructive conditions

o Not agreed on by parties

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o Court imposes as a matter of law for purposes of fairnesso Sometimes based on longstanding business traditions

Distinction between conditions and promises - An act can be both condition and promise, but all conditions are not promises

o Promise is made in return for an act or another promiseo Conditions are not made in return for anythingo The non-occurrence of a condition does not breach contracto If it is doubtful, it’s a promise – Rest § 261; see Howard v. Federal Crop

Insurance Corp.- Rules for distinguishing

o Intent of parties Often determined by words – “if,” “on condition that,” “provided that,”

“unless,” Intent more important than words – if actions make it clear that promise was

meant, contractual language using terms like “conditional” are ignoredo Implied promises

Express language may create a condition and give rise to an implied promise simultaneously.

This is likely if the occurrence of the condition is in control of the promisoro Giving rise to a promise

Express language of condition may give rise to an implied promise Likely if the occurrence of the condition is within the control of the

promisorLegal effect of express conditions

- Strict compliance with condition is ordinarily necessary- No condition means no right of recovery

o Where promise to perform is conditional, there can be no breach until the occurrence of the conditions attached to the duty. See Mascioni v. I.B. Miller

o When payment of money is to be made from a specific fund, and not otherwise, the failure of such a fund will defeat the right of recovery. See Parsons v. Bristol Dev. Co.

- Conditions of satisfactiono Operation

Performance is conditional on the satisfaction of some third party – personal satisfaction required

Opinion must be rendered honestly and in good faith Condition is excused when the third party fails to exercise honest judgment,

or is guilty of collusion with promisor Often used in construction cases – no payment until architect issues

certificate of satisfaction Can be used even without third party – personal satisfaction of promisor

However, this looks like an invitation for fraud So courts use a different standard – what would be objectively

satisfactory for a “reasonable man”o Exceptions

Third party refuses to look at work or issue certificate –condition is impractical, therefore excused, see Grenier v. Compratt Constr. Co

Withholding of certificate is in “bad faith”, see Second Nat’l Bank v. Pan-American Bridge Co

Operation with substantial performance – some courts will use a looser standard if one party has substantially performed, see Nolan v. Whitney – most courts won’t go this far

There must be some kind of reliance loss

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Rug seller must meet approval to sell rugs – approver arbitrarily rejects. No excuse, because no loss – rug seller can re-sell rugs elsewhere

- Excuse of express conditionso Operation

Renders a conditional duty absolute, even though the condition specified has not occurred

Damages recoverable for breach of the duty are not always the same as they would have been had the condition occurred.

o Impossibility of Performance – impossibility that would discharge the promisor’s duty to perform will also excuse a condition if

Debt for previous performance rendered has already arisen and The condition is only an incidental one

o Impracticability If occurrence of the condition is not a material part of the agreed exchange,

and forfeiture would otherwise result, courts will excuse the condition, see Grenier v. Compratt Constr. Co.

o Forfeiture, see Rest, 2nd § 227 Courts frequently avoid applying the “strict compliance” rule where a

forfeiture would result This is often the case when there is a defective performance If the parties intend that one party carry the burden for the condition, then

that party has assumed the risk, even in the face of forfeitureo Waiver of condition

Before or at same time contract is executed Courts allow parol evidence to prove this

After execution, before the non-occurrence of the condition Modification must be in writing (SOF), should not be a material

part of the bargain Waiver after non-occurrence

Can be implied by continuation of performance or acceptance of benefits

Can also be waived expresslyConstructive conditions – order of performance

- Test for implied conditionso Would the parties have reasonably assumed the implied condition would be in the

contract? Good faith ex.

o Would the contract make sense without the implied condition? Is it an assumption necessary for the contract’s utility?

- At common lawo No constructive conditions. In a bilateral contract, you bargain for a promise with a

promise. Neither promise is conditional upon the other. See Nichols v. Raynbred- Can you use as a defense of nonperformance of a bilateral contract the nonperformance

of the other party?o Three types of bilateral contracts see Kingston v, Preston

Mutual and independent Promises are independent; breach of one is no excuse for breach of

the other. No constructive condition Conditional and dependent

Performance of one depends on the prior performance of the other. The second performance is thus conditional on the first Non-performance of the first condition is therefore an excuse for

breach of the second Mutual conditions to be performed at the same time

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Promises are conditional, but either could go first Non-performance is no excuse for non-performance If one party is ready to perform, and offers, it has a cause of action

against another party that refuses to perform Both parties’ performance is conditional on the other party’s offer

to perform – Rest. 2nd § 238, UCC § 2-507o Only the second type (conditional and dependent) makes the performance of

one promise a constructive condition of performance of another 2nd restatement makes the third type (mutual conditions to be performed at

the same time) the default category. Rest 2nd 234 lists five situations of this type

Same time is fixed for performance Where time is fixed for one party, no time for the other Where no time is fixed for the performance of either party Same period is fixed in which parties may perform

The only situation in which simultaneous performance did not apply was Where different periods are affixed within which each party is to

perform Demonstrates a heavy inclination towards simultaneous performance of

promises UCC § 2-507 – “tender of delivery is a condition to the buyer’s duty to

accept the goods and, unless otherwise agreed, to his duty to pay for them. UCC § 2-511 – “Unless otherwise agreed tender of payment is a condition

to the seller’s duty to tender and complete any delivery”7. Substantial PerformanceDoctrine

- No particular definition of substantial performance- Modern trend:

o Antithesis of material breach If a party has materially breached, it has not substantially performed, and

visa versa Question whether there has been a material breach is exactly the same as the

question whether there has been a substantial performance- Consequences of non-material breach (substantial performance)

o When one party breaches a contract non-materially, the other party always has a claim for damages

o The issue is whether or not the other party may suspend his own obligations under the contract – if breach is non-material, then no

Factors determining whether a breach is material – Restatement 2 nd § 241 - Deprivation of expected benefits

o How greatly has the breach injured the “essence” of the contracted benefits- Adequacy of compensation for loss

o Can damages be adequately calculated? o If calculation of damages is impossible, court less willing to find substantial

performance- Part performance

o The greater the part of the performance, the less likely the breach will be deemed material

The more that has been done, the more forfeiture if the non-breaching party gets to breach too

Breach at the outset – this will be deemed material, though relatively trivial – no forfetuire

- Likelihood of cure of breacho If breaching party is able to cure the breach, less likely that it is material

- Willfulness of breach

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o Willful breach is more likely to be considered material However, willful trivial defects do not constitute material breach See Jacobs & Young v. Kent

- Delay in performanceo Will generally constitute a material breach ONLY if it operates to significantly

deprive the other party of the benefit of the contracto Time is not “of the essence” unless the contract otherwise states

- Damageso If performance is merely substantial, both sides get damages

Performing party gets the contract price NOT restitution – quantum meruit

o Even if breach is material, performing party can get quantum meruit

See Plante v. Jacobs Two possibilities for non-performing party’s damages

Performance cost of fixing the defecto This can create economic waste – if fixing will not

increase the worth as much as the cost of fixing, it’s economic waste, though it seems fair

Difference of the worth of the property as it was intended and the present worth.

o This is the choice when performance creates economic waste. It ignores the idiosyncratic values of personal taste.

Substantial performance in contract for the sale of goods- there is no substantial performance in contract for the sale of goods

o UCC § 2-601 – as long as a contract does not involve installments, unless otherwise agreed, if the goods or tender of delivery fail in any respect to conform to the contract, the buyer must

Reject the whole or Accept the whole, or Accept any commercial unit or units and reject the rest This is called the “perfect tender rule”

o UCC § 2-508 Seller can cure a defective performance before delivery, or after delivery, if

the seller had reasonable grounds to believe that the different performance would be acceptable, see Bartus v. Riccardi

o UCC § 2-608 Buyer can revoke acceptance if 1) acceptance was based on a reasonable

assumption that the non-conformity would be fixed (and it has not been), or 2) buyer had not yet discovered non-conformity at the time of acceptance

8. Anticipatory BreachGeneral features

- Definitiono When a party makes it unmistakably clear, before performance under the contract is

due, that he does not intend to perform, he has breached the contract by anticipatory repudiation

o The non-repudiating party has thereafter the right to bring an immediate action for breach of contract, see Hochster v. De La Tour

- What constitutes a repudiation?o Traditional view – if promisor left any chance open for performance, there is no

repudiationo Modern view – any positive statement by the obligor to the obligee that is reasonably

interpreted by the obligee to mean that the obligor will not or cannot perform. This could come in the form of:

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Statement that he will not perform A voluntary action that would make performance impossible An indication by the promisor or some other means that the promisor will

be unable to perform- Retraction of repudiation

o Repudiation may be retracted until the aggrieved party has either Sued for breach Changed his position materially in reliance (mitigated damages) Stated that he regards the repudiation as final

Damages/options for the non-breaching party- Non-breaching party can immediately sue on the contract

o Damages for buyer – limited to loss of covering the contract. If buyer finds goods at equal price elsewhere, with no loss of time, etc, there is little reason for damages

o Damages for seller of goods – likely to be the profit on the item, see Neri v. Retail Marine Corp.

o Damages for builders/performers of services – profts plus whatever expenditures already made at time notice was given

- Non-breaching party can elect not to sue until after the date performance is due – duty to mitigate damages

o For buyer – two options Can cover now, or cover later Common law rule for damages: difference between the price at the time of

the breach and the contract price Time of breach could be the time of repudiation Or it could be the time performance was due – repudiating party

could always retract until then. If prices are fluctuating, this will make a difference in damage

UCC § 2-711, 2-610 – though UCC is unclear on this issue, courts interpret it as saying that the buyer has the option of covering right away, or to await performance “for a commercially reasonable time.”

o For seller of goods Should mitigate damages by selling to another If high volume, can still get profits damages – Hochster v. De La Tour

o For builders/performers of services Must stop work at the time of repudiation. Costs spent on construction after

the time of repudiation will not be awarded as damages – Rockingham County v. Luten Bridge

Damages are: reasonable expenditures + anticipated profits – amount not spent in performing. Constant overhead expenditures are not included in calculation because they are expended anyway, see Leingang v. City of Mandan Weed Board

9. The Statute of Frauds – these contracts must be written and signed to be validFive Categories of Contract that must fall under

- Executor-Administrator – a contract of an executor or administrator to answer for a duty of his decedent

- Suretyship – a contract to answer for the debt or duty of another- Marriage – a contract made upon consideration of marriage- Land Contract – a contract for the sale of an interest in land- One Year – a contract not to be performed within one year from its making

Exceptions to the Statute of Frauds- Part performance can displace the SOF (for damages on the contract)

o Mere payment is not enough to make specific performance available (you might get P.E.)

o For land contracts, entry into possession is the crucial element

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o Oral purchaser’s commitment must be irreparable such that injury will occur unless specific performance is given

- Equitable estoppelo NOT suing on the contract here, just getting back costso an oral, ancillary promise may be enforced if the circumstances show objectively that

a fraud, or a substantial injustice tantamount to a fraud would result from the strict application of the statute.

- Promissory estoppelo Also NOT suing on the contracto Lower standard, promise doesn’t have to be false at the time, just has to turn out to

be false

10. Miscellaneous Defenses: illegality, duress, misrepresentation, unconscionability, and lack of capacity

Illegality- A contract is illegal if the subject matter is unlawful, whether it is barred by statute or found to be

against public policy.o Supervening illegality. If a law recently passed has made the contract illegal, party can

often recover for restitution or reliance damages. However, if the conduct was illegal at the time of contracting, neither party can recover any damages.

- Fraud – a contract can be void due to express fraud.o Commonly, courts find constructive fraud

When one of the contracting parties has a fiduciary duty (either through a professional or personal relationship) then a failure to uphold this duty in good faith will void the contract.

- Public policy – if a contract is in direct opposition to public policy, it also will be voided

Duress- A party may assert that he entered into or modified a contract because of unfair coercion arising

from the other party’s wrongful act of threat. The act or threat must be great enough to overcome the free will of the party asserting the defense.

- Free will. A subjective standard is used to see whether someone’s free will has been overcome.o Examples:

Violence or threat. Imprisonment. Wrongful taking or keeping of party’s property. Threats to breach a contract, exercising legal rights in oppressive ways.

See, e.g., Austin Instrument v. Loral Corp. (p554), where defendant responded to plaintiff’s threat to breach contract if they didn’t get more money by granting a higher price. Defendant then sued to call off the contract under the theory of duress, claiming that the contract was signed because they had no legal remedy at the time of threat, and would have lost their reputation in the industry if they allowed other party to breach.

Nullification of a modification resulting from a threat to breach contract can also give rise to a lack of consideration defense

The threat to breach must deprive the non-breacher of free-willo If possibility of immediate suit exists, some courts will not

grant it – Smithwick v. Whitleyo If situation changes such that changing the contract is

necessary, then there is no duress, and there is consideration – Brian Constr. & Dev. Co. v. Brighenti (the finding of new debris case) – must be things “not anticipated” – Rest. 2nd § 89

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o Not enough to take advantage of a situation is which a party is weakened, must have actively created the situation

- Remedy is usually restitution.Undue Influence

- Definition: persuasion that tends to be coercive in nature – “taking unfair advantage of another’s weakness of mind” – duress and menace not needed

- Standard characteristicso Inappropriate timeo Unusual placeo Insistent demand that contract be formed at onceo Untoward consequence of delayo Multiple persuaderso Absence of third party advisorso No time to consult an attorney or financial advisors

- Case in point – Orodizzi v. Bloomfield School Dist

Misrepresentation – can be intentional, negligent, or innocent- An aggrieved party may sue for rescission or breach or defend in a suit when the other party to the

contract makes an intentional or even innocent misrepresentation. The aggrieved party must have justifiably relied on a misrepresentation of fact, and not opinion.

- Fiduciary relationship. If parties are in a fiduciary relationship, there will be a duty to disclose facts.

o Fiduciary relationship can have professional dutyo Or personal duty – father, sister, babydaddy

- Cushman v Kirby – evasive though truthful answers can be construed as misrepresentationo But not if the truth is obvious

- Restatement: if there is a problem that goes to the basic nature of the contract, then the seller has a duty to disclose, even if the buyer does not ask, unless the buyer should reasonably find out on his own.

o Could this merge into the doctrine of mistake?

Unconscionability- Contract must be shockingly unfair.- Gross disparity in bargaining power.- UCC §2-302(1). “If the court as a matter of law finds the contract or any clause of the contract to

have been unconscionable at the time it was made, the court may refuse to enforce the contract, or is may enforce the remainder of the contract without the unconscionable clause, or it may limit the application of any unconscionable clause as to avoid any unconscionable result.

- Sykes finds it unnecessary – can get the same results through lack of notice (if standardized form), capacity, duress, or undue influence – see Waters v. Min Ltd (where undue influence would have applied) – good faith requirement, etc.

- Likely to be held unconscionable:o Exculpatory clauses – relieving party from liability for intentional wrongs, negligence,

implied warranties, etc.o Unfair surprise – weaker party does not know what he is getting intoo Liquidated damages – where they are penal in nature and do not attempt to reflect

reimbursement for actual losses- Paradigm case – Williams v. Walker-Thomas Furniture Co.

o Inequality in bargaining position, grossly unequal bargaino Sykes says: maybe this is the only way the D could do business; higher risk means more

benefit to the seller

Capacity- A party who does not possess the capacity to contract may generally avoid the contract.

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- Minority. A contract with someone under 18 is voidable by the minor party.o Ratification. A party may ratify a contract made with a minor once he reaches the age of

majority.o Halbman v Lemke o But if minor makes extra money of the deal (buys a car and then sells it) then he has to

pay damages (the contract price of the car up to the new selling price); otherwise there would be unjust enrichment

o Exception – necessary items. A contract with a minor is NOT voidable if it is for the purchase of necessary items

Also, if minor represents his age, contract is not voidableo Age at time of contract is dispositive – if minor is older when he voids, that’s ok, it’s still

voidable- Mental incompetents. Persons who are mentally incompetent may sometimes avoid contracts

they sign.o Non-incompetent party must have notice that incompetent party was incompetent – Sykes

on orange sunshine (notice can be constructive)o There must not be irrevocable reliance – other party has to be able to get to the starting

pointo The standard for a lack of metal capacity

Old test – you must not know what you are doing New test – your actions must be such that they would not have occurred but for

the mental illness. Faber v. Sweet Style Mfg. Corp. – the manic Donald Trump Restatement 2nd § 15 – inconsistent with Faber – must be “unable to

understand” or “unable to act in a reasonable manner” Law is moving in the direction of Faber

Warranties- Express warranty. To be enforceable, the warranty must be “part of the basis of the bargain”

between buyer and seller. That is, the buyer has to have relied on the seller’s warranty.o Puffing. UCC §2-313(2) provides that “It is not necessary to the creation of an express

warranty that the seller use formal words such as ‘warrant’ or ‘guarantee’ or the he has a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.”

- Implied warranty of merchantability. A merchant is normally held to make an implied promise that the goods are “fit for the ordinary purposes for which such goods are used.”

o UCC §2-314. “Unless excluded or modified… a warranty that goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.”

o Disclaimer. This warranty may be disclaimed. However, the disclaimer must mention the word “merchantability.” In addition, the disclaimer must be conspicuous if in writing.

“As is.” An implied warranty is disclaimed by use of the phrase “as is.” An implied warranty will not be held to exist with regard to defects that should

have been revealed upon examination by the buyer. If disclaimed in a standardized agreement, there must be clear notice, it must be

visible, obvious

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