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					Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008


                                            A CONTRACT
Restatement (Second) of Contracts:§1:
Contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance
of which the law in some way recognizes as a duty.


I. OFFER AND ACCEPTANCE
-offer + acceptance=contract!!
Formation of a contract requires offer and acceptance! An offeror may revoke his offer at any time prior to
its acceptance by the offeree. Also a legal requirement that parties to a contract evidence their intention
actually to be bound by the terms of their agreement. Once the “offer” has been made, the next step is
acceptance. Once accepted the offer becomes a contract to which both parties are bound and neither can
renege without liability to the other.

A. Mutual Assent
-Parties must intend to contract and agree to at least main terms of the deal under an objective theory (not
what each party subjectively intended rather what a reasonable person on position of other party would
assume the party meant)

Objective Theory of Assent and Torts
With the objective theory of assent, we base assent to an offer or to an acceptance by a reasonable person
understanding of the maker's manifestation. So, when the guy in the Embry case said what he said, a
reasonable person would've taken that to mean that he was assenting, even if the guy didn't mean it. The way
this ties in with torts is this: If in Embry, we had not upheld the contract b/c of the guy's intent, we would be
effectively punishing Embry (imposing liability on him). However, tort theory says liability goes to the
person who was negligent. The supervisor was negligent in his actions by making Embry think what he
thought. So, we impose liability (valid agreement) on him instead. It's kind of like the Prosser argument that
someone's gotta lose, so we may as well make it the person who did something wrong.

Restatement §17 – The formation of a contract required a bargain where there is a manifestation of mutual
assent to the exchange and a consideration. (Gifts are NOT binding because there is no consideration)

Restatement §18 – Manifestation of mutual assent to an exchange requires that each party either make a
promise or begin to render performance.

Restatement §19 – Conduct as Manifestation of Assent
(1) can be made wholly or partly by written or spoken words (cannot dismiss contract merely because was
oral);
(2) party must intend to engage in the conduct or know or have reason to know that the other party may infer
from his conduct that he assents (reasonable person standard – Embry v. Hargadine);
(3) subjective aspect to assent, because even if objectively standard is met, unreasonable perception of other
part can come into play. i.e. If employee knew contract wasn’t being created, then no contract.

Embry v. Hargadine, McKittrick Dry Goods Co. (MO Ct. of Appeals, 1907)
Facts – π employment contract expired, goes to boss and demands a contract, says will qui immediately if
does not get one. ∆ says ‘go ahead, you’re all right; get your men out and don’t let that worry you.’
Issue – Was there a meeting of the minds? Was it reasonable for π to assume ∆ words created a contract?
Holding – Yes π had right to rely on the demand. No reasonable man would have taken the conversation as
anything other than an assent to the demand for a contract.



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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008


Lucy v. Zehmer (SC of Virginia, 1954)
Facts – π says to ∆ that he will give him $50 thousand for the farm. ∆ plays along and the parties create a
contract on a napkin at the bar. π later comes to pay for farm and ∆ says no it was a joke, and refused to
transfer the farm. π sued for specific performance.
Holding - If an agreement is made “in jest” by one party, but interpreted as a legitimate agreement by the
other party, the agreement is enforceable. So here there was a contract.
Reasoning – Since the π reasonably thought that the∆ was serious, and since the language of the contract
was plain and unmistakable, the parties’ mutual promises were enforceable despite ∆ undisclosed intention to
regard his actions as a joke.
Variation – If π had understood ∆ to be a joker there would be no contract, it would be unreasonable to
enforce a contract that both sides knew was a joke. (if either A or B knew other party was joking, no MA)
Variation 2 – Both parties are joking and successfully fool the other party. To extent that both sides were
joking, Katz thinks inconceivable that contract would be enforced. Can’t be ruled out based on anything we
have read but would be a very bizarre implication.

* Mutual Assent’s Similarity to Torts *
-Very similar in Embry where employer negligently gave idea of a contract and in Zehmer where seller
negligently gave idea of sale so in both instances the court found were liable for damages.
-In Nebraska Seed the court found no contract was created, so no liability for damages.
-Basically in both Embry and Zehmer we are holding one party liable for creating a misunderstanding.
-In torts we would just provide monetary damages for harm incurred (such as time spent consulting with
attorney but that is it – torts is like reliance damages – put back in position would have been if the negligent
act had never occurred).
-The problem is that we have a torts view of liability with these sorts of contracts BUT we give damages in
light of contracts, which are much larger than would be with torts.
-Learned Hand – risk of injury v. cost to avert the precaution. You don’t want people to go to infinite pain to
prevent any harm; we want people to engage in a rough and ready cost analysis, because this is more
efficient. When compare care somebody would take to avoid an accident with care someone would take to
prevent a misunderstanding in a contractual case. How careful should you be to avoid entering into a
contract that don’t want to enter into?
-Combining torts standard with contract liability (expectation rather than reliance) leads to an
extraordinary amount of risk aversion. i.e. Under torts there would be no issue with the Zehmer joke but in
contracts you get an enormous amount of liability (forcing a party to act). This is NOT efficient.

B. The Offer
1. An Offer Defined
-Need to know when a communication is to be regarded as an “offer” and when it is to be taken merely as an
invitation to engage in bargaining and negotiation.
-An offer is the manifestation of willingness to enter into a bargain. It creates a power of acceptance.
Restatement §22 – Mode of Assent: Offer and Acceptance
(1) The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by
one party followed by an acceptance by the other party
(2) A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified
and even though the moment of formation cannot be determined.
-Subsection two implies that a court could have found differently in Nebraska Seed

Restatement §24 – Offer Defined – An offer is the manifestation of willingness to enter into a bargain so
made as to justify another person in understanding that his assent to that bargain is invited and will
conclude it.
-Frames the issue in the way the Nebraska Seed court frames it. This manifestation was not one that allowed
a reasonable person to understand that a contract was made.

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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008



Nebraska Seed Co. v. Harsh (SC of Nebraska, 1915)
Facts - ∆ sent letter to π enclosing a sample of seeds that was selling. π writes back and says I want to buy at
terms stated in the contract, wire as soon as can and send out the seeds. ∆ refused to deliver seeds and π
brings suit.
Holding – Court finds that there was no contract because the letter was a general not firm offer. i.e. It did not
include a delivery date or a precise amount of seeds. Therefore it was just an invitation to trade, not an offer
and is thus not binding as a contract.
-In these instances it is generally the rule that the order constitutes the “offer” and the purchaser who plays
the role of offeror

Leondard v. Pepsico (S.D.N.Y. 1999)
Facts – π saw a commercial that said for 7,000,000 pepsi points would get him a Harrier Jet. He raised
money for the points and sent in an order form with the Jet written in. Pepsi returned money and form saying
there was no offer made so could be no acceptance, no contract.
Holding – Court found that there was no liability for Pepsico because no reasonable person would believe
that the Harrier Jet was actually on offer.
-Generally advertisements are regarded as nothing more than invitations to deal. Therefore it is the
customer not the advertiser who occupies the status of “offeror” and it is up to the seller’s discretion to
accept the offer.
Distinguished Precedent: Lefkowitz – Advertisement said that first three customers got fur coats for $1.
Man shows up and store says no, only applies to women. Court held that the advertisement must be
construed as an “offer” because it invited a particular performance, and once that performance occurred the
offer was accepted and could not be revoked.
Carlill v. Carbolic Smoke Ball – If a party makes an extravagant promise is probably because have
something to gain so should hold them to their promise. Court holds that reward must be given because once
performance began by the other party there was no need of acceptance to make the contract binding.
Issues: Pepsico shows the difficulty of using a tort standard with expectation damages. If used torts damages
all that the court would have had to do is figure out the modest reliance damages and award them. Since the
court cannot do that, the only thing they can do is negate that there was a contract by negating precedent
cases.
Remember that most advertisements are not offers to sell, rather they are merely an invitation to
trade/negotiate. They only become offers where they include sufficient words of commitment to sell.

2. Revocation of an Offer
-There has undeniably been an offer but before acceptance has occurred, it has been revoked.
Restatement §35 – The Offeree’s Power of Acceptance - An offer gives the offeree a continuing power to
complete the manifestation of assent by acceptance of the offer BUT a contract cannot be created by
acceptance of an offer after the power of acceptance has been terminated.

Restatement §36 – Methods of Termination of the Power of Acceptance – An offeree’s power of acceptance
may be terminated by (a) rejection or counter-offer by the offeree; (b) lapse of time; (c) revocation by the
offeror; (d) death or incapacity of the offeror or offeree.
-The offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under
the terms of the offer.

Restatement §42 – Revocation by Communication from Offeror Received by Offeree – An offeree’s power
of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to
enter into a proposed contract.

Restatement §43 – Indirect Communication of Revocation – An offeree’s power of acceptance is terminated


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Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008

when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and
the offeree acquires reliable information to that effect.

UCC §2-205 – Firm Offers – An offer by a merchant to buy or sell goods in a signed writing which by its
terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time
stated, or if no time is stated for a reasonable time.
*Means that the seller has made an irrevocable offer (even though no consideration is given by the offeree)
that must remain open for the specified period!

Dickinson v. Dodds (England, 1876)
Facts - ∆ wrote a memo offering to sell land to π by a certain date. π wanted to take him up on the offer and
∆ says I changed my mind and sold it to someone else.
Holding – Court says this is okay because ∆ put the offer out there and until π informed him that he would
enter into the contract, no contract existed. Restatement §42 affirms this.
Reasoning – Courts and the restatement do not enforce one-sided offers because there is a lack of mutuality;
only one is bound until the other agrees. According to the UCC a firm offer for goods can be put forth that
must be kept open until the promised date.
-Notwithstanding the worry about mutuality and superficial injustice, the more consistent view is the one
where a commitment can be made that is binding (opposite of Dickinson and Restatement).
Revocation – A promise to hold an offer open is not binding and can always be withdrawn before acceptance
occurs. You do not have to formally communicate the revocation if the other party happens to learn about it.
This is a tricky rule to administer and a bright line rule stating that offer is on the table until revocation would
be much cleaner, spawn less litigation.

C. Acceptance
-An acceptance of an offer is a manifestation of assent to the terms theof made by the offeree in a manner
invited or required by the offer.
1. Mirror Image Rule
- Acceptance must mirror the offer for the acceptance to create a legally binding contract.
Restatement §59 – A statement of acceptance is effective only if it is a mirror image of the offer and
expresses unconditional assent to all of the terms and conditions imposed by the offeror.

Restatement §61- Acceptance which Requests Change of Terms
An acceptance which requests a change or addition to the terms of the offer is not thereby invalidated unless
the acceptance is made to depend on an assent to the changed or added terms.
-If the acceptance is made to depend on the added terms then it is a counter-offer. A counter-offer is treated
as the legal equivalent to an outright rejection. A subsequent effort by the offeree to accept the original offer
is ineffective.

UCC §2-207 - Additional Terms in Acceptance or Confirmation
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a
reasonable time operates as an acceptance even though it states terms additional to or different from those
offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or
different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants
such terms become part of the contract unless:
        (a) the offer expressly limits acceptance to the terms of the offer;
        (b) they materially alter it; or
        (c) notification of objection to them has already been given or is given within a reasonable time after
        notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract

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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

for sale although the writings of the parties do not otherwise establish a contract. In such case, the terms of
the particular contract consist of those terms on which the writings of the parties agree, together with any
supplementary terms incorporated under any other provisions of this Act.

*Basically overthrows mirror-image rule with routine merchandise transactions by treating the supplier’s
acknowledgement as “acceptance” of the purchaser’s offer rather than counteroffer, even though includes
terms that are “additional or different from” those that appear on the order-form or where orally agreed to.
Unless the supplier expressly conditions its acceptance on the purchaser’s assent to the supplier’s terms,
there is a contract of which the terms are those contained in the purchaser’s offer.
Last Shot Rule – The seller is not allowed to throw in a material change at the end.

UCC §2-207 - A Change from the C/L
  1. It abolishes the mirror image rule
          a. Additional or different terms are included but NOT if the acceptance to the offer is expressly
               made conditional on acceptance of the additional terms
  2. A proposal for a contract can be accepted by silence (as long as is not material).
  3. Knockout Rule – where there are conflicting terms in the offering and accepting documents they
      conflicting clauses knock each other out and neither enters the contract. Rather the UCC gap filler
      provision or the C/L is used.

Ardente v. Horan(SC of RI, 1976)
Facts – Parties entered into agreement for π to buy house from ∆ for $250,000. ∆ found bid acceptable then
π executed the agreement with a letter saying that he accepted but required that some of the furniture stay
with the house. ∆ would not accept/sell house, π sued for specific performance.
Holding – The court proceeded under the assumption that the letter was a counter-offer and the final
communication would have been acceptance but since the ∆ never agreed to the counter-offer no contract
was entered into.
Reasoning – If an acceptance does not mirror the offer then it counts as a counter-offer. In this case, the π
included additional terms in its acceptance, which actually made the acceptance a counter-offer.
Further – The use of the mirror image rule is just here even though ∆ wants to walk and find a pretextual way
to do it because the other side was being manipulative and further if it had been a contract created and ∆
wanted to instantly revoke, he couldn’t have, would have been liable for expectation damages.

Step-Saver Data Systems, Inc. v. Wyse Technology (3d Circuit 1991)
Facts – π SS places a phone call to ∆ TSL to order product. P.O. from π includes terms re price, quantity,
shipping and payment terms. ∆ ships invoice with same terms as P.O. Product has a box-top license. π
opens the box, tripping (or not) the box-top license.
Issue – At what point was a contract formed? Step 1 (phone call), step 2 (P.O.), step 3 (Invoice), step 4
(opening of box)? Is the π bound by the terms of the box top?
Holding – π is not bound by the terms of the agreement because they are too significant to be incorporated
into contract that was previously formed.
Common Law – If we just apply the common law as a baseline do we say π is bound by the box top?
(a) We could say there was a proposal to modify the contract that was accepted by opening the box.
(b) We could say that under the mirror-image rule this is a counter offer that is accepted by opening the box
(c) We could decide that there is a contract formed through the phone call, P.O. and invoice confirm the
phone call and box top is an offer to modify the contract which is accepted by opening the box.
* Although we can modify situation, person who sent the last document gets his way – last shot rule
- Under the common law it seems relatively clear that the box top terms would be agreed to because you can
propose that the contract be modified and opening the box indicates that the buyer accepted the modification
§2-207 – Does it govern this analysis?
(1) – Mirror image rule is out of commission, there can be an acceptance even though it does not mirror the
offer. AND (2) Additional terms become part of the contract unless (b) they materially alter it.

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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

* Under this section if an additional term is unimportant it becomes part of the contract but if it is important
it does not become part of the contract.
∆ Argument – Tries to argue that would get the same result under 207 as common law by saying that the
box-top is just a modest modification so it is not precluded by the UCC. Court doesn’t buy it.
-Strongest argument is that the box top was a conditional acceptance. The court still doesn’t buy it

2. Acceptance by Performance
Unilateral Contract – Acceptance is affected with performance. If you do X, I promise I’ll do Y. With a
Unilateral contract, the accepting party isn’t bound until performance is completed and can stop at any point
but the offeror is locked in once performance begins. Once performance is complete, offeree is deserving of
the benefits of the contract.
Bilateral – Acceptance occurs with a promise. The exchange is a promise for a promise at which point the
parties are bound. This is the normal type of contract.

Restatement §45 – Option Contract Created by Part Performance or Tender
(1) Where an offer invites an offeree to accept by rendering a performance, an option contract is created
when the offeree tenders or begins the invited performance;
(2) the offeror’s duty of performance under any option contract so created is conditional on completion or
tender of the invited performance in accordance with the terms of the offer.
 Example – I offer someone money for painting, they don’t say yes or no, they just start painting. Midway
through I decide I don’t want the painting anymore. Is this okay? NOPE, the artist isn’t bound, but you are.
With a unilateral contract only the offeror is bound (upon beginning of performance), not the offeree. This is
opposite of a bilateral contract where both parties would be bound by the contract.

*If the party has simply made a preparation to perform (i.e. bought the paint) use R87(2) Option Contract–
“an offer which the offeror should reasonably expect to induce action … of substantial character on the part
of the offeree before acceptance and which does induce such action … is binding in an option contract to the
extent necessary to avoid injustice. Can also use §90 promissory estoppel

Restatement §62 – Effect of Performance by Offeree Where Offer Invites Either Performance or Promise
Where an offer invites an offeree to choose between acceptance by promise and acceptance by performance,
the tender or beginning of performance is an acceptance by performance. Such an acceptance operates as a
promise to render complete performance.
Example – Once painter begins painting he cannot stop. His acceptance of the contract is given with his
beginning to perform and his performance operates as a promise to render a complete performance.


Petterson v. Pattberg (NY Ct. of Appeals, 1928)
Facts – π owed ∆ the sum of $5,450, the debt being secured by a mortgage belonging to π. ∆ offered to
reduce the principal of the debt by $780 if π prepaid the entire amount due by 5/31. Late in May the π came
to the ∆ door to pay off the mortgage. The ∆ said it was too late. π brought suit claiming breach.
Holding – Court found that offer was withdrawn by ∆ before π tendered the money, so the offer was
considered to have been revoked.
Reasoning – If we assume that π is under §45 then he can leave the bargain whenever he wants but how
about the ∆ creditor because acceptance begins when the offeree tenders or begins the invited performance.
So here the π would want to say has begun performance so that creditor is bound by contract and ∆ wants to
say that no performance has occurred so that he can say no contract has been created.

3. Acceptance by Silence
Restatement § 69 – Acceptance by Silence or Exercise of Dominion
(1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the


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Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008

following cases:
         (a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them
          and reason to know that they were offered with the expectation of compensation;
         (b) Where the offeror has stated or given the offeree reason to understand that assent may be
          manifested by silence or inaction, and the offeree in remaining silent and inactive tends to accept the
          offer;
         (c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify an
          offeror if he does not intend to accept. (situation in Hobbs)
(2) An offeree who does any act inconsistent with the offeror’s ownership of offered property is bound in
accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as
against the offeror it is an acceptance only if ratified by him.

Hobbs v. Massasoit Whip Co. (Supreme Court of MA, 1893)
Facts – π sent eelskins to ∆. ∆ received them and kept for some months until they were destroyed. ∆ gave π
no notice that he declined to accept.
Issue – If buyer knows that seller has reason to believe that the skins are being accepted, then the silence
will count as acceptance.
Holding – Yes ∆ Hobbs has to pay π. Conduct that can be regarded as acceptance is acceptance in the eye of
the law, regardless of the state of mind of the parties. In this case, due to the prior dealings of the parties the
buyer could reasonably infer that the seller believed the items had been accepted.
VARIATION 1 – Mailing for a book of the month club of which are not a member. You get two free books
if you are willing to become member. You read books but say I don’t accept and am keeping the books. Is
this okay?
VARIATION 2 - With a box-top case, a package of computer programs arrives with obligation to pay if you
decide to open box and use programs. You decide to use and decline to pay. HERE it seems like liability
would be imposed because clearly accepted and used items.
VARIATION 3 – There is no contract and I hit someone. What are my civil liabilities? I am liable for the
harm that I do – which is a basic principle of Torts. Can the victim set up their own amount of damages by
posting a sign? It seems absurd that we can do away with tort and specify whatever we want for damages but
on the other had it seems unreasonable that we buy something and don’t want to abide by its terms. Herein
lies the difficulty with cases like Hobbs.
Fundamental Contracts – We don’t vet bargains as to their substantive factors. If there is a taker for an offer
that is very high, we accept it. We don’t second guess agreements as to price. The fairness and substantive
content of a bargain is very rarely regulated – because of freedom of contract.


II. INTERPRETATION OF A CONTRACT
A. Ambiguity – Interpreting the Meaning of the Terms

Restatement §201 – Whose Meaning Prevails
(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is
interpreted in accordance with that meaning.
(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is
interpreted in accordance with the meaning attached by one of them if at the time of the agreement was made
         (a) that the party did not know of any different meanings attached by the first party; or
         (b) that party had no reason to know of any different meaning attached by the other, and the other
         had reason to know the meaning attached by the first party.
(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though
the result may be a failure of mutual assent.

Restatement §202 – Rules in Aid of Interpretation

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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008


(1) Words and other conduct are interpreted in light of all the circumstances, and if the principal purpose of
    the parties is ascertainable it is given great weight.
-Looks at writing as a whole (2); uses generally prevailing language (3); evidence of repeated occasions of
performance within the parties (4); course or performance, course of dealings and trade usage (5).

Interpreting §201(1) – Since both parties meant to contract about a boat called Peerless, it does not matter if
the boat was actually called Unique. It only matters what meaning was attached to a term and agreed as to a
meaning at the time the contract was formed.
Interpreting §201(2) – Generally speaking, if there is a divergence in meaning, there is no contract unless one
party has an understanding of the other’s meaning. This understanding just has to exist at time the parties
enter into the contract.
Interpreting §201(3) – If there is an innocent misunderstanding then there is no contract. But if one party
does understand that there is a problem, or ought to understand that there is a problem then the contract was
formed in favor of the innocent party. (when know of misunderstanding are considered at fault)

Raffles v. Wichelaus (Ct. of Exchequer, 1864)
Facts – π and ∆ enter into a contract in which π would sell to the ∆ 125 bales of cotton to arrive on “Peerless”
from Bombay. Cotton arrived on a different “Peerless” than ∆ thought it would.
Holding – Court said that since the parties were speaking about different boats there was no meeting of the
minds and thus no binding contract.
Reasoning – If interpretive task becomes too difficult then the court may decide the contract never occurred.

Frigaliment Importing Co. v. B.N.S. International Sales Corp. (S.D.N.Y. 1960)
Facts – Parties entered into a contract regarding the sale of chicken. Parties are in dispute over the meaning
of “chicken” in the contract. π contends that word is meant in narrower sense (young chicken) and ∆
contends that is used in wider sense (stewing chicken).
Interpretation Arguments – Express terms of the contract, course of dealings and trade usage.
Holding – The term “chicken” can be taken to refer to “stewing chicken or fowl” and that ∆ had a subjective
belief that it was delivering what was requested by the contract. Also, it was significant that ∆ subjective
belief coincided with an objective definition of the term (the Department of Agriculture’s definition).
Reasoning – Court said that it was reasonable for the seller to believe that the contract meant all types of
chicken and that it was unreasonable for the buyer to believe the term had just one meaning.
Meaning with Raffles – Could we have decided this case like Raffles v. Wichelhaus and decide that there
was no meeting of the minds and thus no contract? The court seems to think that unlike Raffles there wasn’t
an innocent misunderstanding so the contract stands.

B. Vague Terms – Agreements to Agree
Essential Elements to a contract
1. Parties to the contract; 2. Subject matter of contract; 3. Time for performance; 4. Price.
*Courts may supply a missing term.
Restatement §204 - Supplying an Omitted Essential Term – 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.
- A lack of an essential term does not bar enforcement of the contract since the court can provide the term.


UCC §2-204 – Formation in General
 (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including
conduct by both parties which recognizes the existence of such a contract;
(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its


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Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008

making is undetermined.
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the
parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate
remedy.

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

- (c) Seems to be what Sun Printing had although Cardozo is unwilling to enforce because of the missing
time factor in addition to the unset price.


UCC §2-309 – Absence of Specific Time Provisions; Notice of Termination
(1) The time for shipment or delivery or any other action under a contract if not provided in this Article or
agreed upon shall be a reasonable time.
(2) Where the contract provides for successive performances but is indefinite in duration it is valid for a
reasonable time but unless otherwise agreed may be terminated at any time by either party.
(3) Termination of a contract by one party except on the happening of an agreed event requires that
reasonable notification be received by the other party and an agreement dispensing with notification is
invalid if its operation would be unconscionable. A term specifying standards for the nature and timing of
notice is enforceable of the standards are not manifestly unreasonable.


Sun Printing & Publishing Assn. v. Remington Paper & Power Co. (NY Ct. of Appeals 1923)
Facts – Parties were in agreement that would be a 16-month agreement for the purchase of 16,000 tons of
paper in all. They set the price for the first four months and then said for the subsequent months they said the
price would be agreed upon 15 days in advance of expiration of each period for a price that would be no
higher than the price charged by the Canadian Export Paper Company. Buyer wants to enforce the contract
and seller does not.
Issue – Was there a contract that is sufficiently definite for it to bind each side or is it merely an agreement to
agree at a later date?
Holding – Court says that lack of agreed upon terms invalidated the contract. It was indefinite because not
only was the price not set but there was no specific time period for picking the price.
Dissent – Contract stated sufficient terms; could use the highest price that they set. Can deal with
indefiniteness by looking at contract on a month-by-month basis. Shouldn’t allow parties to get out of a
contract when it is clear they intended to agree.
Rule – In general we are wary about enforcing a contract that someone didn’t enter into.
Why parties entered into the contract – It is clear that the buyer entered into the contract because he gets a


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Alisa Waxman                                                       Contracts Outline, Katz, Fall 2008

commitment that will not be charged more than the benchmark price so he is protected from high prices. It is
clear that the seller wanted to enter into the contract but we can’t figure out why.
Note – It is not clear the §204 would invalidate or create the contract.
Cottnam v. Wisdom – What might make one think that imposing terms is not an egregious infringement on
freedom of contract. Is imposing terms as drastic as when we actually create a contract?
-All contracts will have some holes; none will ever be 100%. Frequently we will have to guess at what to do
with these gaps. It seems extreme to invalidate the contract in this system unless they are sufficiently vague
and indefinite to merit deciding that there is no contract.
-Where do we draw the line between merely filling in gaps and declaring no contract?

*Under the UCC an agreement to agree does not make a contract fatally indefinite and thus unenforceable as
long as the parties intend to make a binding contract.

C. Parol Evidence Rule
- Rule says that if the contract seems to be the complete embodiment of what the parties intended to contract
then evidence outside of the document should not be permitted.
-Integration of the contract must be decided as a matter of law
- Evidence of a prior agreement may never be admitted to contradict an integrated writing, and may
furthermore not even supplement an integration, which is intended to be complete.
- One of the tools we can consult to determine what the contract means.

UCC §2-202 – Final Written Expression: Parol or Extrinsic Evidence
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
are as 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 (§1-205) or by course of performance (§2-208); and
(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 terms of the agreement

Restatement §209 – Integrated Agreements
(1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an
agreement.
(2) Whether there is an integrated agreement is to be determined by the court as a question preliminary to
determination of a question of interpretation or to application of the parol evidence rule.
(3) Where the parties reduce an agreement to a writing which in view of its completeness and specificity
reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is
established by other evidence that the writing did not constitute a final expression.
- (3) Seems to give the same answer as Pacific Gas that parol evidence will always be allowed
-Way around this is to use a merger clause – provides explicitly that the contract is an integrated agreement


Restatement §210 – Completely and Partially Integrated Agreements
(1) A completely integrated agreement is an integrated agreement adopted by the parties as a complete and
exclusive statement of the terms of the agreement.
(2) A partially integrated agreement is an integrated agreement other than a completely integrated agreement.
(3) Whether an agreement is completely or partially integrated is to be determined by the court as a question
preliminary to determination of a question of interpretation or to application of the parol evidence rule.

Restatement §213 – Effect of Integrated Agreement on Prior Agreements
(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them

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Alisa Waxman                                                       Contracts Outline, Katz, Fall 2008


(2) A binding completely integrated agreement discharges prior agreements to the extent that they are within
its scope
(3) An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior
agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a
term which would have been part of the agreement if it had not been integrated.

Restatement §214 – Evidence of Prior or Contemporaneous Agreements and Negotiations
Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible in
evidence to establish
(a) that the writing is or is not an integrated agreement
(b) that the integrated agreement, if any, is completely or partially integrated;
(c) the meaning of the writing, whether or not integrated;
(d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;
(e) ground for granting or denying rescission, reformation, specific performance, or other remedy.

Interesting Question – What do we do when the contract appears to be complete on its face but one of the
parties says that it is not?
    (a) Can use the four corners rule from Thompson and say that if it looks complete it is complete.
    (b) Can use the rule from Brown and say that we need to look elsewhere to decide if the document
         actually was complete. If it was not, then documents are allowed in.

Thompson v. Libbey (Supreme Court of Minnesota 1885)
 Facts - ∆ argued in writing to purchase logs from π. ∆ argues breach of warranty of quality based upon oral
agreement. Warranty was not expressed in written agreement because written agreement was not a complete
expression of their entire agreement.
 Holding – Court holds that the contract was a complete expression because on its face it can be considered a
complete expression of an agreement. No allusion to any missing terms. Question of whether it is an
integrated agreement is based upon looking only at the document itself. (Cannot present external evidence as
to whether the agreement is not a complete expression).
-Four corners rule – When the judge decides whether a term is ambiguous, he may not consult any
extrinsic evience whatsoever. That is, the existence of ambiguity is to be determined solely by looking
within the “four corners” of the contract itself. Thus not only will the court not consider evidence about
the context surrounding the making of the agreement, it will not even consider evidence about the context
surrounding the making of the agreement. Relatively few courts follow this strict rule.
Rule – Parol evidence is inadmissible if the contract is completely integrated.

Brown v. Oliver (Supreme Court of KS 1927)
Facts – π and ∆ entered into a contract for the sale of land with a hotel on it. Through oral communication it
appeared that the furniture in the hotel was part of the purchase. Two years later ∆ gained lease of hotel and
removed the furniture. π sued for replevin of furniture. ∆ argued that entire transaction was contained in the
written agreement, which made no reference to ownership of furniture, so parol evidence was inadmissible.
Holding - Court does not just look at agreement to determine if parol evidence rule can be used. It looks to
what occurred with the scrivener to determine if the contract covered certain aspects in order to determine if
the parol evidence rule should be allowed.
Reasoning - Court must determine the scope of the contract and can be done so by looking at outside
evidence. Rejects Thompson holding regarding the four corners rule.
Rule – If an element is not covered at all by a contract, parol evidence is admissible.

Pacific Gas and Electric Co. v. G. W. Thomas Drayage & Rigging Co. (Supreme Court CA 1968)
Facts - ∆ contracted to remove and replace upper cover of π steel turbine. ∆ agreed to indemnify π from risk
and damage to π. Through the course of the work, π material was damaged and π brought suit. ∆ claimed


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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008

that insurance was only meant to cover injury to third persons not π property. ∆ wants to introduce evidence
to what it meant.
Holding – Parol evidence is admissible because the language of contract is susceptible to a different
meaning.
Rule – The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not
whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is
relevant to prove a meaning to which the language of the instrument is reasonably susceptible.
- Court held that no words can be understood without looking at the context of their meaning and the
circumstances in which they were used
- Court holds that even plain language is subject to interpretation, so evidence should be admitted if the
language is reasonably susceptible to a different meaning.
- According to Traynor we always need parol evidence to figure out what the terms mean…
- Wouldn't be a basis for excluding anything b/c words can always have another meaning other than which
the context in which they were uttered….

Trident Center v. Connecticut General Life Insurance Co. (9th Circuit 1988)
Facts – π entered into a loan with ∆ at rate of 12.25% for 15 years. π wants to prepay the loan because the
interest rates are lowering and ∆ doesn’t want to allow this because in essence π is attempting to return a
good once the price has dropped. Contract says once you agreed to the loan you are committed and there is
NO prepayment. Language of the agreement is extremely clear that there is no prepayment before twelve
years except there is something in the contract which seems to give π some home, ‘in the event of default,
the prepayment fee will be 10%.’
Issue – Is the π allowed to introduce extrinsic evidence showing that he is allowed voluntarily default, so that
can prepay plus 10% fee? The contract is not ambiguous, clearly doesn’t grant borrower right to default.
Holding – Court has to allow extrinsic evidence because of Pacific Gas.
Reasoning – Under Pacific Gas it does not matter how clearly a contract is written, nor how carefully it is
negotiated, the contract cannot be rendered impervious to attack by parol evidence.
* Pacific Gas casts a long shadow of uncertainty over all transactions negotiated and executed under the law
of CA and allows costly and protracted litigation to be essentially unavoidable.

* If you were drafting a contract and really wanted to make sure that the other party could not introduce
extrinsic evidence you could include a merger clause explicitly providing that the contract was an integrated
agreement.
- In the face of such a clause most courts would not allow additional evidence.
-ADVANTAGES – The clause will prevent an incentive to create evidence supporting your case and the
parties are often okay with having a less accurate but cheaper and more effective outcome.

Lucy v. Zhemer versus Parol Evidence
- In Lucy we have an objective standard that did not involve any writing but we are trying to figure out
whether to go with what the parties really meant or with the meaning of the outward actions of the parties
-Parol evidence also has an objective standards view but with parol evidence instead of actions we are trying
to figure out what the written document actual said/meant.

Parol Evidence Hypotheticals
(1) Two people are negotiating over the sale of a house. $200,000 is on the table, switches to $180,000 and
the figure goes back and forth. Oral agreement for the lower price, this is followed by document, sent by
seller who agreed to lower price, stating price at $200,000. Buyer feels timid about brining up price and
decides to sign anyway. Afterward points out the mistake, seller admits that made a mistake but won’t fix it.
Contract includes a merger clause. Will buyer be able to bring in parol evidence?
- Restatement §214(d) seems to indicate that agreements or negotiations prior to or contemporaneous with
the adoption of a writing are admissible in evidence to establish illegality, fraud, duress, mistake, lack of
consideration, or other invalidating cause


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Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008

- It is unclear if we would be able to use section because of the merger clause but would be worth a try.


III. CONSIDERATION
-A contract will generally not be enforceable unless it is supported by consideration.
A promise is supported by consideration if:
(1) Detriment – The promisee gives up something of value, or circumscribes his liberty in some way (i.e.
he suffers a “legal detriment”); (must do something he does not have to do or refrain from doing something
he has a right to do)
+
(2) Exchange – The promise is given as part of bargain; that is, the promisor makes his promise in
exchange for the promisee’s giving of value or circumscription of liberty.

*Thus, Promises to make gifts are not enforceable because they don’t satisfy the bargain element. Even if
the gift requires a certain condition, there is not consideration if the condition was not bargained for but one
a gift has been made it cannot be rescinded for lack of consideration!

Restatement §71 - Requirement of Exchange; Types of Exhange
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his
promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
        (a) an act other than a promise, or
        (b) a forbearance, or
        (c) the creation, modification, or destruction of a legal relation
(4) The performance or return promise may be given to the promisor or to some other person. It may be
given by the promisee or by some other person.

Comment b:
"In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement:
the consideration induces the making of the promise and the promise induces the furnishing of the
consideration."
Comment d. – Pretend Exchange
- A sham or nominal consideration does not satisfy the requirement of exchange.
• This is the basic requirement that an exchange is necessary for consideration

Restatement §79 – Adequacy of Consideration; Mutuality of Obligation
If the requirement of consideration is met, there is no additional requirement of
(a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or
(b) equivalence in the values exchanged; or
(c) “mutuality of obligation”
* We do not second-guess the soundness of the bargain, if the parties see fit to make this exchange that is it.

Curious Tension Between Expectation and Consideration Cases
- Expectation damages measure the damages in a contract as though it had actually been completed. If one
looks at it this way it makes it more difficult to justify the different treatment that contracts gives to gifts.
Gifts are only honored if they have been completed but they are not binding until this point. This is exactly
the opposite of the way we treat a promise with consideration (where the promise is honored if it has not
been completed).

A. Distinguishing Bargains from Gratuitous Promises

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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008



Restatement §81 - Consideration as Motive or Inducing Cause
(1) The fact that what is bargained for does not of itself induce the making of a promise does not prevent it
from being consideration for the promise
(2) The fact that a promise does not of itself induce a performance or return promise does not prevent the
performance or return promise from being consideration for the promise.
*Generally it is okay if the inducement is not what you are bargaining for but just another part of the contract
*Don’t be too focused on motivation or inducement in deciding whether or not something has been
bargained for. The exchange doesn’t have to be the only motivation.
Example – Where you induce someone to come toward you by holding up $10 does not necessarily turn it
into consideration. This makes sense because in a gift there is a benefit that you expect to get.

Johnson v. Otterbein University (Supreme Court of Ohio)
Facts – π promises to donate $100 to ∆ in three years if money is used for a specific purpose. Come time to
donate π takes back his promise.
Holding – This was a conditional gift rather than a bargained for exchange so there was no condition and
thus it is not enforceable.

Making the Case for Enforcing the Pledge
§71 – This is the worst section for the University because there was no exchange
§81 – Even if the loan repayment was just a marginal concern of the donor’s, it doesn’t matter. Under this
section the fact that the loan repayment wasn’t the objective doesn’t matter.
§79 – Basically says that we do not second guess the value of what Johnson gets in exchange for his pledge
so this section suggests the contract should be enforceable.
§86 – You could say that Johnson (promisor) previously received a benefit from the University (promisee).
It would not be difficult for the University to argue that it conferred all sorts of benefits on Johnson.

Hammer v. Sidway (NY Ct. of Appeals 1891)
Facts – Uncle promised to give nephew $5,000 if abstained from smoking, drinking and gambling until 21.
Nephew takes him up on his promise. Now have a relative of nephew suing estate of uncle.
Issue – Was there consideration or was this merely a gift with conditions (i.e. no contract)?
Holding – Yes there was a contract because the nephew gave up his right to smoke, drink and gamble. He
suffered a legal detriment by giving up his freedom to engage in these acts.
Determining Damages – What about reliance damages in this case? The nephew complies and doesn’t do
any of the things forbidden under the contract. What damages can he get? Should we net pleasure minus the
health benefit for determining damages?
What if – Nephew had no desire to smoke or drink. Would that make any difference?
Torts – Suppose this were a tort suit for someone who was involuntarily exposed to second hand smoke.
This person is horrified by the second hand smoke and would be willing to pay a lot of money to avoid it.
Do we use this to determine damage?
- NO, we use the reasonable person standard.
Hypo – What if someone posts a reward for finding his lost cat. Person finds the cat and afterwards learns
about the award. Does it meet the consideration requirement?
- No without any awareness there cannot have been any bargaining!

Making the Case Against Enforcing the Promise
§71 – The mere fact that someone has to do something to get a gift does not mean that there is consideration.
It is just a condition on receiving the gift. It does not seem to be a stretch to say that no drinking and
smoking was simply a precondition to being eligible for the gift. A donor can specify all sorts of conditions.
§81 – This section is not very helpful. It goes more toward finding consideration and enforcing the bargain.
§79 – On the fact of it goes for the nephew because it says that the court should not look into what each party
got from the other party.

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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008

§86 – Support not enforcing the promise but only marginally.
* If you emphasize §71 then you would not enforce the promise and if you emphasize the other three then
you would enforce the uncle’s promise to the nephew.

B. Moral/Past Consideration
Restatement §86 - Promise for Benefit Received
(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is
binding to the extent necessary to prevent injustice.
(2) A promise is not binding under Subsection (1)
        (a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been
         unjustly enriched; or
        (b) to the extent that its value is disproportionate to the benefit.
*An important exception to the consideration requirement. Doing what “justice” requires means that at times
we will have to fill in parts of the contract/enforce contract without consideration.

Moore v. Elmer (Supreme Court of MA)
Facts – Man had been visiting a clairvoyant, man signed a document stating that he would pay off
π mortgage if he died before 1900 as π had predicted. π brings suit to force the estate to honor the contract.
Holding – No contract because past consideration is inadequate
Rule – “Past consideration is no consideration”
Normal – What is the more normal past consideration case? We only have a rule prohibiting it because there
is a category of cases where it would be quite appealing to enforce it.
Note – A promise made in recognition of a benefit that has been previously received is only binding to the
extent necessary to prevent injustice.
-Example – If you have a long-term employee who is about to retire and you promise her that you will
award a pension. Should this be enforced?
         - Looks like no because the consideration came too late for consideration and enforcement is not
         necessary to prevent injustice.

 Mills v. Wyman (Supreme Court of MA 1825)
Facts – π is a good Samaritan who gave ∆ son shelter and care until the child died. ∆ writes to π and
promises to reimburse him for his actions. Then there is a complete turnaround and π brings suit because
∆ refuses to pay.
Issue – There is no consideration but is enforcement necessary anyway to prevent injustice?
Holding – No, §86(1) only applies when benefit is conferred on son. In order to need to prevent injustice the
benefit must have been conferred on the actual ∆, not the ∆ decedent.
Cottnam v. Wisdom – There we spoke about unjust enrichment but the difference is in that instance the
implied contract was with the decedent who received the benefit and the π. Here is with decedent parents.

Webb v. McGowan (Supreme Court of AL)
Facts – π prevents log from falling on ∆ decedent, saves his life and in the process suffers grave injures.
Decedent promises to pay π every two weeks for rest of life in consideration for saving his life. After
McGowan death estate refuses to make promised payments.
Rule – A moral obligation is a sufficient consideration to support a subsequent promise to pay where the
promissory has received a material benefit for which he subsequently and expressly promised to pay.
Holding – Court held that there was a benefit received by McGowan that was sufficient to constitute
consideration and create a binding promise.
Mills v. Wyman – Distinguishable from Mills because the benefit went directly to the party involved.
What if: The good Samaritan turned out to be a child molester? Would that make a difference in deciding
whether to apply §86 (to the extent necessary to prevent injustice)?
* This is the quintessential case of liability notwithstanding lack of consideration because needed to prevent


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Alisa Waxman                                                       Contracts Outline, Katz, Fall 2008

injustice. Could bring in outside idea (i.e. is a child molester) to argue against need to prevent injustice.
* Here it would have been a better approach to resort to the quasi contract approach from Cotnam rather than
create an entirely new restatement § to deal with these types of cases.

In What Kinds of Cases Do We Need Legal Enforcement?
*Think about the ex ante view. What would the parties do before they knew of the litigation? It is okay to
fabricate transactions for parties if we are confident that they would have agreed to the services.
Legally Binding
Making of Promises: Commercial – encourage; Charitable – discourage
Carrying Out of Promise: Commercial – need to be legally bound so don’t renege; Charitable – unlikely to
want to renege so enforcement not necessary.

Need for Enforcement
    (1) Commercial Setting – Enforcement is necessary because there is no charitable motivation to induce
        the other side to act and you don’t want them to back out as soon as you have fulfilled your part.
        The enforcement is what induces the other side to fulfill their part of the bargain.
    (2) Non-Commercial Setting – The altruistic nature of giving a gift means that the need for
        enforcement is low. It is not particularly that the donee is able rely on the promise because the donor
        is not getting anything in return for his gift. If we do not enforce, then whoever is supposed to
        perform last will have an incentive not to deliver.
* Ask if this is the kind of case where legal enforcement is necessary. The quid pro quo of a gift is
fundamentally different from that of a commercial promise.

Deterrence of a Promise
   (1) Commercial Setting – having a strong enforcement scheme encourages promises. Your promise
        would not be worth much if there were no enforcement. So rather than deterring the making of a
        promise in the commercial setting, it will actually increase the comfort in entering into a contract.
   (2) Non-Commercial Setting – There is a worry that if we are too strict with the enforcement of a gift
        then there will be a decrease in gifts. Although when we encourage a gift situation where the donor
        is no longer alive and the law is suddenly needed then the courts torture the restatement to find
        consideration. Donors want to know their promises will be enforced after death.
* Ask if we would be unduly inhibiting promises if we have enforcement?

Hammer v. Sidway
Enforcement - We need enforcement here because we are dealing with the estate. We want it to fulfill the
promises that the original promisor made. Although we are dealing with a charitable promise, it is not one
that we can count on being effectuated out of the goodness of the donor’s heart because he is dead.
Deterrence – If we want to encourage the making of such promises, it needs to be known that they will be
enforced after death.
* So both Johnson and Hammer can be reconciled with the concept of enforcement and deterrence.
*This is the same case with Webb v. McGowin because again we are dealing with the estate. Especially if
we think of this case ex ante. As in Cotnam v. Wisdom, if you find yourself in an emergency, we would
agree to be saved and thus be willing to provide compensation for the benefit received.

Mills v. Wyman
Enforcement – There is no real need for enforcement because the person who is offering to pay didn’t
receive the material benefit. We thus cannot be sure that ex ante, payment would have been agreed to.
Deterrence – There is no worry that these kind of promises will be deterred if they are not enforced. They
are of a charitable nature and will mostly be enforced out of the goodness of the donor’s heart. Also, the
innkeeper learned of potential payment after he assisted the son, so we will not deter Samaritan acts.

C. Contract Modification and the Preexisting Duty Rule

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Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008


Restatement §89 – Modification of Executory Contract
A promise modifying a duty under a contract not fully performed on either side is binding
(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when
    the contract was made; or
(b) to extent justice requires enforcement in view of material change of position in reliance on the promise.
*Can use PE §90 with this section!

UCC §2-209 – Modification, Rescission, and Waiver
(1) An agreement modifying a contract within this Article needs no consideration to be binding
-Abolishes the pre-existing duty rule as long as there is good faith. The test of ‘good faith’ between
merchants or as against merchants includes observance of reasonable commercial standards of fair dealing I
the drade, and in some situations require an objectively demonstrable reason for seeking a modification.
Comment – Contract modifications under this section must meet the test of good faith imposed by this Act.
- General rule is that if parties to an existing contract agree to modify the contract for the sole benefit of one
of them, the modification will usually be unenforceable at common law, for lack of consideration.
-Exception is where the modification is fair and equitable in view of circumstances not anticipated by the
parties when the contract was made.

Stilk v. Myrick (Court of Common Pleas)
Facts – Sailors are crossing ocean, some of the sailors desert the ship and the captain promises to pay sailors
money that would have gone to other sailors if they do the work of the sailors who deserted. The return to
London and the captain refuses to pay the extra amount, saying that they only gave me what was owed under
the contract.
Holding – There was no consideration because of the soldiers’ preexisting duty created by the prior contract.
Under §89 – In general such modifications are binding.
-(a) there seems like no problem for justifying the modification because of unexpected circumstances but the
court says that it is hardly an unanticipated event because people fall ill, desert frequently.
-(c) Sailors cannot really say that they relied on the promise because they had already agreed to work hard in
their initial contract.
-But if in reliance on the promise to be paid more the sailors spent extra money they would have had a strong
case for enforcing the modification under (c).
Good Law? –The sailors bargained for a certain amount of effort under the contract, and then bargained for
the extra effort so there really was consideration.
-The captain voluntarily offered the pay increase to the sailors.
-There is also the windfall argument that the captain gets extra work for no extra money.
-Economists think that this case was wrongly decided and that the modification should have been recognized.

Alaska Packers’ Assn. v. Domenico (9th Circuit 1902)
Facts – Packers have a contract to be paid a certain amount. Midway through performance they demand a
new contract for a higher level of pay. Threaten to strike unless their demands are met. Manager agrees
because he has no choice but warns them that they have no right to modify the contract. At the end of the
season the company refuses to pay for lack of consideration.
Holding – The preexisting duty created by the pre-existing contract means that there was no consideration for
the extra amount so it does not have to be paid.
Good Law? – This still seems like good law because of the coercive nature of the employees. Economist say
that this case was correctly decided, NO modification should have been recognized because this case is just
like the robbery case. We do not want to incentivize coercive actinos.

*Under the UCC §2-209 it seems like the modification rule is not still good law. It seems to sweepingly
allow all modifications but in the comments it is implied that in some instances a modification to a contract
may be struck down for a lack of consideration if there is evidence of a lack of good faith.


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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008

The Restatement is also modification friendly.
-Under the traditional common law rule, modification is flatly refused!
We want to allow modifications to the extent that incentivize harder work but not so hard that
incentivize holdup actions.

Hypo – Suppose have prison kidnappers who are only willing to return hostages for certain changes in their
privileges at the jail plus a waiver of punishment. Jailors agree and hostages are released. Is this binding?
-If we have a rule that no ‘coercive’ contracts are ever enforced, what would happen?
Benefit – We may want to strike a bargain where it is beneficial (i.e. if you are the victim in the hostage
situation you want these coercive contracts to be enforceable)
Con – We do not want to encourage or incentivize robberies/kidnappings.

Liability Rules – Calibresi Cathedral Articles
-Liability rules are a sort of forced exchange where you are allowed to take something from someone under
certain circumstances but you are forced to pay for it. Generally the victim will get the minimum that he
would have accepted if there had been an agreement.
*Damages for liability are generally much lower than damages for the breach of a contract.
It seems like we should be more hospitable to modification in the criminal settings (to save lives) than in the
commercial setting but this is not the case. The UCC seems to be worried that there are times when parties
do want modifications to be enforced and not allowing the enforcement will prevent transactions from
occurring at the optimal time.

D. Adequacy of Consideration
Restatement §79 – Adequacy of Consideration; Mutuality of Obligation
Comment d – Pretended Exchange – A purported consideration that was not bargained for but was a mere
formality or pretense. Such a sham or nominal consideration does not satisfy the requirement of §71.

Newman & Snell’s State Bank v. Hunter (Supreme Court of Michigan 1928)
Facts – Mr. Hunter died leaving a debt to the bank. Bank had 50 worthless shares of his company as
security. His estate is worthless, not even enough money to pay his funeral costs. Bank comes to convince
her that she owes the money for husband’s estate. Bank offers her the 50 shares if she signs an IOU in her
name.
Holding – The court finds that the IOU was not adequate consideration because it wasn’t worth anything.
"When P surrendered this worthless piece of paper to the D, it parted with nothing of value and D received
nothing of value, the P suffered no loss or inconvenience and D received no benefit.”
Expanded Bargain Point of View – It seems like the court struggled to find in ∆ favor. Ask the enforcement
and deterrence question to understand why found the way that they did.
(1) What is the need for legal enforcement in this kind of case?
-Widow has the same motivations as in Johnson (desire to salvage husband rep, felt morally bound).
-This is the sort of promise that doesn’t need enforcement.
(2) How will this level of enforcement affect the making of promises of this type?
-If we enforce them then it is more likely that these problems will not be maid. This is very similar to charity
cases so we do not want to enforce it.



Schnell v. Nell (Supreme Court of Indiana 1861)
Facts – Wife dies and leaves $200 to a number of people in her will. All of her property reverts to her
husband and he says he will honor her will out of love and respect for his wife. In return π agreed to pay one
cent and also agreed to forbear any claim he had against ∆ estate.
Holding – The contract is not legally enforceable because the consideration of one cent is a nominal


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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

consideration, which is not allowed because it indicates that no real “bargain” was present.
Hypo – We have a tort suit, victim brings suit against driver who hit him. Considerable uncertainty over the
negligence of the driver. There is a settlement. Later we find that driver was not negligent. Do we pay
money back to him?
Hypo 2 – We have a manslaughter case where driver hit victim. Again considerable uncertainty about
whether the driver was negligent. We have a settlement in criminal court (plea bargain). We have evidence
that is about to come out that will settle the truth. Both parties want to enter in binding plea bargain. Do we
let them?
*It is far from clear that settlements constitute bargains that we want to enforce. It is in the context of
consideration that we debate whether they should be enforced.


IV. PERFORMANCE AND CONDITIONS
A. Implied Duty of Good Faith Performance

Restatement §205 – Duty of Good Faith and Fair Dealing
Every contract imposes upon each party a duty of good faith and fair dealing in its performance and
enforcement.
Comment – (b) “good faith” in the case of a merchant means honesty in fact and the observance of
reasonable standards of fair dealing in the trade.
*There is an implied obligation of good faith and fair dealing in all contracts under R and UCC!!!

UCC §1-203 – Obligation of Good Faith
Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.

Goldberg 168-05 Corp. v. Levy (Supreme Court of NY 1938)
Facts – Landlord had a lease with tenant for 10 years where rent was a set price plus 10% of profits from the
business. There was a provision that if the tenant’s profits fell below a certain amount he could be released
from the original lease.
Issue - ∆ diverts business to another location so that the profits fall below the specified amount in order to be
able to get out of the contract. Is this okay?
Holding - ∆ was not acting in good faith because due to his violation in performance of the contract, π could
not fully enjoy the fruits of the contract.
Rule – There is an implied covenant of good faith in all contracts.
Variation 1 – Suppose landlord was fairly unpleasant and continually appeared in tenant’s office complaining
about performance, asking why profits weren’t higher.
-If tenant was only responding to landlord’s actions then it seems like he was acting in good faith.
Variation 2 – Landlord is having an affair with tenant’s wife.
-Same issue because misconduct works both ways.
Ex Ante – There is an indication that parties negotiating in good faith would want to include a clause
regarding the need to operate in good faith.
-The other side of the issue is that including a requirement of good faith means that the contract will be
vague because it is difficult to determine exactly what the term means. The purpose of drafting a contract is
to get around vagueness.
Contract Around – Is there a possibility that parties could contract around this requirement?
-It is not clear that you could contract around a requirement for good faith (i.e. no contracting around penalty
damages – they simply aren’t allowed). Contracting around is worth a try but the enforceability is uncertain.

B. Conditions, Waiver and Estoppel

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Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008

Waiver – A party who owes a conditional duty may indicate may indicate the he will not insist upon the
occurrence of the condition before performing. In this event, the party is said to have waived the condition.
-Generally courts are more likely to find that a condition has been waived if it is a minor one. If the
condition is material then it will likely not be waived unless there is consideration.
-If a promisor continues his own performance after learning that a condition of duty has failed to occur, his
conduct is likely to be found to operate as a waiver of the condition.
-When a party continues his own performance after breach, or otherwise waives a condition, he has not
necessarily lost his right to recover damages for breach of this condition.

Restatement §84 – Promise to Perform a Duty in Spite of Non-Occurrence of a Condition
(1) Except as stated in subsection (2), a promise to perform all or part of a conditional duty under an
antecedent contract in spite of the non-occurrence of the condition is binding, whether the promise is made
before or after the time for the condition to occur, unless
         (a) occurrence of the condition was a material part of the agreed exchange for the performance of the
          duty and the promisee was under no duty that it occur; or
         (b) uncertainty of the occurrence of the condition was an element of the risk assumed by the
         promisor.
 Comment b. – Waiver and “Estoppel”; Mistake – “Waiver” is often inexactly defined as “the voluntary
relinquishment of a known right.” When the waiver is reinforced by reliance, enforcement is often said to
rest on “estoppel.”

UCC §2-209 – Modification, Rescission and Waiver
(1) An agreement modifying a contract within this article needs no consideration to be binding.
(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be
otherwise modified or rescinded, but except as between merchants…
(3) The requirements of the statute of frauds (§2-201) must be satisfied
(4) Although an attempt at modification or rescission does not satisfy the requirements of (2) or (3) it can
operate as a waiver.
(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by
reasonable notification received by the other party that strict performance will be required of any term
waived, unless the retraction would be unjust in view of a material change of position in reliance on the
waiver.

Clark v. West (Court of Appeals of NY 1908)
Facts – Parties have a contract for Clark to write a treatise for ∆. One of the conditions of the contract is that
if author drinks during writing will receive $2 and if he does not drink he will receive $6.
Holding – The court finds that the condition could be waived because it was not a contract to write books in
order that the π would keep sober but a contract containing a stipulation that he should keep sober so that he
could write satisfactory books.
Next Step – Thus it was simply one of the minor conditions akin to method of delivery that could be waived
by the ∆. So if π can prove an express waiver his action can stand. The ∆ will have to pay the $6 minus any
damages incurred as a result of π action.
Waivers – The waiver doctrine only applies to minor, subsidiary parts of the contract. It creates a small
excepting to the modification doctrine. So it is not inconsistent with pre-existing duty because only
immaterial conditions can be waived.
-Courts are okay with this because we do not feel uncomfortable reading the contract to say, “with regard to
immaterial conditions, modifications are implicitly assumed” but if something major is involved we do not
feel the same way because it is then a material modification, which is not okay.
Sobriety Clause –
(1) If not sober, then no premium. π is only paid $2.
(2) Clause was waived so premium amount of $6 minus any damages incurred by ∆.


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Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008

(3) If not sober, liquidated damages determined by the $2/$6 rule.

V. BREACH
A. Breach – Constructive Conditions

Express conditions – any condition on which the parties agree, whether their agreement is stated explicitly,
or merely implied from the parties’ conduct. (“w/in 10 days after satisfactory completion of work)
          Requires strict compliance
Constructive Conditions – is one not agreed on by the parties but which the court imposes as a matter of
law, in order to ensure fairness
          Requires substantial compliance
Condition precedent – any event, other than a lapse of time, which must occur before performance is due
Condition subsequent – an event which operates by agreement of parties to discharge duty of performance
after it has become absolute.
Concurrent conditions – exists only when parties to a contract are to exchange performance at same time.

Kingston v. Preston (Court of King’s Bench 1773)
Facts – Contracted to serve ∆ for 1.25 year as a silk mercer and then ∆ would give up his business to π, in
return for a security. ∆ refused to give up business at end of term because π hasn’t met all the conditions.
Holding – The π has not fulfilled his part of the contract so ∆ is also not required to perform.
Rule – In a contract with a condition precedent, the second party is not required to perform if the first party
does not fulfill his duties.
New Regime – You cannot bring suit until you have at least substantially fulfilled your part of the contract.
For Example – If employee began one week after supposed starting date but fulfilled all other conditions, he
would have been able to bring suit for non-performance. A minor lack of performance does not apply to this
holding.

Morton v. Lamb (Court of King’s Bench 1979)
Facts - ∆ promised to deliver corn but π didn’t have money so didn’t deliver as agreed.
Rule – Each side has to be ready to perform his part of the contract before can sue for breach.

B. Breach - Cost of Completion v. Diminution in Value and Perfect Tender

Restatement §348 – Alternatives to Loss in Value of Performance
(2) If a breach results in defective or unfinished construction and the loss in value to the injured party is not
proved with sufficient certainty, he may recover based on
         (a) the diminution in the market price of the property caused by the breach, or
         (b) the reasonable cost of completing performance or of remedying the defects if that cost is not
          clearly disproportionate to the probable loss of value to him…


Restatement §241 – Circumstances Significant in Determining Whether a Failure is Material
In determining whether a failure to render or to offer performance is material, the following circumstances
are significant:
(a)     the extent to which the injured party will be deprived of the benefit which he reasonably expected;
(b)     the extent to which the injured party can be adequately compensated for the part of the benefit of
        which he will be deprived;
(c)     the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d)     the likelihood that the party failing to perform or to offer to perform will cure his failure, taking
         account of all the circumstances including any reasonable assurances;


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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008


(e)     the extent to which the behavior of the party failing to perform or to offer to perform comports with
        standards of good faith and fair dealing.

UCC § 2-601- Buyer’s Rights on Improper Delivery (Perfect Tender Rule)
If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may
(a) reject the whole; or
(b) accept the whole; or
(c) accept any commercial unit or units and reject the rest.


UCC § 2-508 – Cure by Seller of Improper Tender or Delivery; Replacement
(1) Where any tender or delivery by the seller is rejected because non-conforming and the time for
performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may
then within the contract time make a conforming delivery. The seller shall compensate the buyer for all of the
buyer’s reasonable expenses caused by the seller’s breach of contract.
 (2) Where the buyer rejects a non conforming tender which the seller had reasonable grounds to believe
would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have
a further reasonable time to substitute a conforming tender.

Jacob & Youngs v. Kent (Court of Appeals of NY 1921)
Facts – π contractor built a residence for ∆. Contract specified that Reading pipe be used. π messed up and
did not use the correct pipe so the ∆ refused to pay the remaining amount due to π who brings suit.
Cardozo’s Holding – Where substantial performance has occurred you loose the right of repudiation, rather
you get the difference in market value between performance and requested performance.
Conditions      If the other side has substantially performed minus a trivial shortfall then I cannot say I
                will not do my part. AS long as they have substantially performed (made the house) you
                have to perform (pay); that doesn’t preclude you from requesting damages.
Substantial     If there is substantial performance, then the other side cannot hold back the performance
Performance (here has to pay) but still doesn’t mean you aren’t entitled to more than substantial
                performance, you are entitled to perfection – only way to do that here is monetary
                compensation:
Damages         Damages will be diminished value between the house as is and the value of the house if
                the Reading pipes had been installed. The other option would have been to opt for the
                cost of having the work done as requested. But as soon as makes the decision about the
                relationship between conditions and substantial performances (with substantial
                performance the other side has to perform) then it would make not sense to award
                damages in the cost of completion.
                -π would not have to perform, he would in fact receive more money than he has held back.

Groves v. John Wunder Co. (Supreme Court of Minnesota)
Facts – π leases land to ∆, ∆ breaches deliberately regarding the grading of the land. The cost to put the land
required by the contract would be $60,000 but the added value would only be $12,000.
Holding – The court requires that the ∆ performs what was required under the contract.
Justification for Difference – You can say that unlike Jacob, here there are issues of fraud rather than the
good faith breach in Jacob. The measure of damages is cost of putting land as requested by π.

Peevyhouse v. Garland Coal Mining Co. (Supreme Court of Oklahoma 1962)
Facts – π leased land to ∆, part of the contract was for ∆ to do remedial repairs. ∆ doesn’t do it. π brings
suit.
Holding – π is only entitled to damages in the amount of diminution in value.
Rule - Where a contract provision breached is merely incidental to the main purpose, and where the


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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

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.

Ramirez v. Autosport (Supreme Court of NJ)
Facts – π entered into a contract with ∆ to purchase a camper and trade in his van. When π went to pick up
the camper it had a number of defects so π did not accept it. The defects weren’t fixed over time and
eventually π sued to rescind the contract and get the value of his traded in van back.
Rule - Under a contract for the sale of goods, the seller is required to furnish a “perfect tender” of the subject
matter of the contract, and the buyer may reject any nonconforming goods, but must give the breaching party
the opportunity to fix the problem.

Case           Value v. Cost of          What Would Cardozo Say?
               Completion
Jacob &        Diminution in Value       Substantial performance on part of builder, so substantial
Youngs                                   performance is needed on part of π (payment), damages are
                                         difference in value.
Peevyhouse     Diminution in Value       Very similar to reasoning in Jacob except the substantial
                                         performance isn’t at issue here.
Groves         Cost of Completion        Similar to Peevyhouse in that there is a question about conditions
                                         and damages. Comes out opposite of Peevyhouse.
Ramirez        Perfect Tender            Perfect Tender is required with the sale of goods.


Substantial Performance Cases
(1) Repudiation – In the context of goods, the perfect tender rule prevails although it is softened by allowing
the breaching party the time to cure the defects. When dealing outside of the context of goods, the non-
breaching party can only repudiate if the breaching party has not completed substantial performance.
(2) Compensation – The dominant view is that we grant diminution in value. The minority rule is that we
grant the non-breaching party what they really wanted.
(3) Use chart below to argue whichever side you are on!




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Alisa Waxman                                                             Contracts Outline, Katz, Fall 2008

                              Difference in Value v. Perfect Tender – Which one Wins?
Economic/Policy       What is the correct default rule?
Economic Waste        Difference in Value v. Perfect Tender – 2 Possibility
(inefficiency)        -Beneficiary really is benefited perfect tender happens and then there is no economic waste, market
                      wasn’t properly valuing it OR Cosean bargaining will occur but the land will go unrestored (if
                      there is really a threat of economic waste).
                      - At least on surface economic waste issue seems like a major worry (because forcing to tear down
                      something that is substantially complete) but in reality neither rule will not cause a large amount of
                      economic waste because of Cosean bargaining.
                      *Need low transaction costs for Cosean bargaining.
Opportunism           PRO CARDOZO RULE
(Moral Hazard         We have the right default rule if the parties will stick with it and the wrong one if parties
Disincentives)        consistently cross out the Cardozo rule and replace it with a perfectionist standard.
                      -With perfect tender it would be routine for the party to find some tiny fault and then negotiate to
                      get money for it. Even if the party has behaved really well and the downfall is really tiny we will
                      get people trying to get money for this minimal shortfall.
Right Default Rules   -Basically the risk would be that all of this would be treated with a penalty clause. So if are
(Liquidated           worried about liquidated damages the draconian perfect tender rule may be better – if too extreme
Damages Focus         courts strike down.
Effect)               -One other virtue of picking draconian view is that it forces the parties to address the issue and put
                      what they want into the contract.
                      -With eccentric valuation it is the CARDOZO rule that will be clearer to the court what was
                      important to the contract (because will have to address it in the contract).
MORAL/Doctrinal       Cardozo or Perfect Tender? – Which one causes less worry?
Unjust Enrichment     -Under the perfectionist approach there is a possibility of unjust enrichment for nitpicker.
                      -With perfect standard you generally get a higher price so no unjust enrichment worry.
                      -With substantial performance the consideration for entering into the contract could include the
                      work being fully done, so price could be lower because it includes the cost of doing the work. So
                      with Cardozo rule the breaching party could be unjustly enriched.
                      *Unjust enrichment is a misplaced concern in most contracts cases*
Autonomy              -The worry is that some core aspect of freedom of contract is violated if we go with the Cardozo
                      approach. You in essence tell every producer that regardless of what other party tells you, you
                      don’t have to do anything perfectly. It infringes on a person’s autonomy for making an
                      arrangement to getting everything right.
Coherence with        VALUATION in torts: 1 is amount of care to take (Hand), 2 we don’t take personal valuation into
Torts                 effect, we want to use a reasonable standard.
                      -Example: Extremely minor difference between Reading pipes and others, he paid a lot to indulge
                      his desires, now there is a contractor in the area who may do trivial harm to his pipes – reduce from
                      Reading standard to next best standard (almost equivalent).
                      -Is there a tension with the different approaches with contract damages and whether tort law pushes
                      us in one way or another?
                      -Perfectionist standard is not efficient because require that builder take extraordinary amount of
                      care but builder next door would only compensate at diminution in value.
                      -CARDOZO’s rule wins here.
                      -There is a tension because we take a subjective approach with contracts and an objective
                      approach with torts.
Mitigation            -Presumably something one can contract out of. i.e. with McClaine you can assume that she gave
                      the studio this option to use her or not for the movie but to pay her regardless and if you view in
                      this way then she just contracted out of the mitigation rule.
                      -Since we should require people to contract out of the mitigation rule we should force them to
                      contract into the perfect tender rule, giving support for having Cardozo’s rule be the default rule.
                      -i.e. With Ramirez by not accepting van and discount he was not mitigating damages.
Contract Damage       -Undertake to either perform your promise or to pay damages.
“philosophy”          -This pushes us toward substantial performance Cardozo type.
IN SUM                - The matter is unsettled. Some courts have used this set of considerations as a way to decide
                      which rule is better in the circumstance



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Alisa Waxman                                                       Contracts Outline, Katz, Fall 2008


C. Breach – Anticipatory Repudiation
-Promisor makes clear statements that he will not perform, uses ambiguous language accompanied by
conduct that evinces unwillingness to perform, or commits a voluntary act that renders his performance
impossible.
*The non breaching party can sue immediately for breach, even though time for performance has not arrived
*An anticipatory repudiation may generally be retracted if done before other party has materially changed
*The non breaching party may not ignore the repudiation and continue performing – duty to mitigate.

UCC §2-610 – Anticipatory Repudiation
When either party repudiates the contract with respect to a performance not yet due the loss of which will
substantially impair the value of the contract to the other, the aggrieved party may
(a) for a commercially reasonable time await performance by the repudiation party; or
(b) resort to any remedy for breach even though he has notified the repudiating party that he would await the
    latter’s performance and has urged retraction; and
(c) in either case suspend his own performance or proceed in accordance with the provisions of this Article
    on the seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished
    goods.

UCC §2-611 – Retraction of Anticipatory Repudiation
(1) Until the repudiating party’s next performance is due he can retract his repudiation unless the aggrieved
party has since the repudiation cancelled or materially changed his position or otherwise indicated that he
considers the repudiation final.
(2) Retraction may be by an method which clearly indicates to the aggrieved party that the repudiating party
intends to perform, but must include any assurance justifiably demanded
(3) Retraction reinstates the repudiating party’s rights under the contract with due excuse and allowance to
the aggrieved party for any delay occasioned by the repudiation.

Albert Hochster v. Edgar de La Tour (Queen’s Bench 1853)
Facts – π was a courier engaged by ∆ to accompany him on a tour. ∆ changed his mind and declined π
services. π brought suit before the time for beginning performance (contract was supposed to begin 6/1 and
he brought the suit on 5/22). π had found another job.
Holding – Anticipatory breach is okay, π can recover for his losses.
Issues with this Doctrine –
(1) Strange dissonance between contracts and torts/crim law. Here we are okay with requiring the party who
has not yet breached to have to pay π significant damages. BUT we are not okay with paying torts damages
or using ‘self defense’ for the actual event occurs.
(2) The main worry is that with anticipatory breach it can quickly escalate to imposing liability on something
that is only foreseeable in a probabilistic manner (i.e. we aren’t 100% sure that the breach will occur).
*There is something quite unusual about this doctrine in that the law is generally quite wary of taking
preemptive action of sorts. This is imposing liability before the violations and harm have come to pass.
-This can have a peculiar outcome in torts and criminal but also in contracts.

VII. DEFENSES
-Here we are dealing with cases where all the basic requisites of the contract have been met: exchange of
promises, no problem with consideration, but ∆ has breached and is saying that should not be held to the
contract because it is unfair.
-The ways to get out of a contract that has been entered in to!
-It is dealing with issues that undermine meaningful consent because without it you do not understand what
you are agreeing to and there is thus no contract.

The Defenses – essentially variations on mistake!

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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

View 1 – If have innocently misinformed parties, buyer or seller, then their consent isn’t real.
View 2 – It’s a market economy, must the buyer really share with seller the research that he did prior to
purchase/entering into contract?
A. Misrepresentation
-A claim of misrepresentation can be used either as a defense against enforcement in a suit brought by the
misrepresenting party, or as grounds for rescission or damages by the misrepresented-to party suing as π.

Restatement §159 – Misrepresentation Defined
-A misrepresentation is an assertion that is not in accord with the facts.

Restatement §162 – When a Misrepresentation is Fraudulent or Material
(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his
assent and the maker
(a) knows or believes that the assertion is not in accord with the facts, or
(b) does not have the confidence that he states or implies in the truth of the assertion, or
(c) knows that he does not have the basis that he states or implies for the assertion.
(2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent,
or if the maker knows that it would be likely to induce the recipient to do so.

Restatement §164 – When a Misrepresentation Makes a Contract Voidable
(1) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the
other party upon which the recipient is justified in relying, the contract is voidable by the recipient.
(2) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by
one who is not a party to the transaction upon which the recipient is justified in relying, the contract is
voidable by the recipient, unless the other party to the transaction in good faith and without reason to know
of the misrepresentation either gives value or relies on the transaction.

Restatement §167 – When a Misrepresentation is an Inducing Cause
-A misrepresentation induces a party’s manifestation of assent if it substantially contributes to his decision to
manifest his assent.

Why Were These Provisions Included/ What Litigated Issues Were Meant to Be Disposed Of?
Restatement §159 – Perfectly innocent/inadvertent statements that you believe to be true count as misrep.
Warranties – If we treat the misrepresentation as a warranty the only remedy is damages for the defective
party but if characterize it as misrep is excused from the contract and does not have to wait for damages.

Restatement §162 – Fraud v. innocent misrepresentation (misrepresentation only matters if material, fraud
doesn’t need to rise to that level)
1(a) – Knows or believes: included to preclude the nitpicking arguments of differences between belief
(relatively sure but not positive) and knows.
1(b)(c) – does not have confidence or basis that states/implies – if you say things are okay but you aren’t sure
if they are then the dishonesty is present and it counts as misrepresentation
* Misrepresentation if material if we happen to know that a particular fact is important to a certain person,
we cannot lie to induce action even though a reasonable person would not be swayed.
*Material is generally substantial but there can be issues with determining whether something is or is not
material. (i.e. if buyer is really on fence about buying house, ask has anyone ever expressed any worries
about termites? No one has except for an OCD relative who sellers don’t mention. Is it material? How
about when know the case is in the balance – would seller be held liable for every tiny lie that may tip
balance?)
(2) – Induced by fraud/material misrep by one who is not party to contract also makes contract voidable
because the instinct is we hold someone to a contract if they consent/is not consent if not properly informed.


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Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008



Restatement §164 – How would parties feel ex ante about setting up rules for fraud and innocent misrep?
Fraud – If there were no fraud liability then transaction costs would be very high because it would take time,
money and effort for each of the parties to prove that they were not being fraudulent.
-This provision is welcomed by both buyer and seller.
Innocent Misrepresentation – Sellers will have to be much more careful in light of this rule. It is possible for
the seller to stumble into this rule. It is far from clear that sellers would welcome this sort of liability. It is
similar to sellers not being willing to be held liable for small defects found in purchased products!

Restatement §167 – If a party does not believe the misrepresentation it does not void the contract. Need for
the misrep to induce action!

Elements of Proof Required
1. Other party’s state of mind – a negligent or innocent misrepresentation is generally sufficient to avoid
   the contract if it goes to a material fact. (Restatement 2d §164)
2. Justifiable Reliance – The party asserting misrepresentation must show that he justifiably relied on the
   misstatement. This requires a showing that not only did he in fact rely, but that the reliance was
   justifiable.
3. Must be a misrepresentation of fact – The misrepresentation must be one of fact rather than opinion.
   (Restatement 2d §§ 168 and 169)
        a. Exceptions – Where there is a fiduciary relationship between the parties, or the person making
            the statement holds himself out as an expert.
4. Failure to Disclose - Generally, a misrepresentation is an affirmative statement. If a party has failed to
   disclosed information it is much harder to make a case for misrepresentation.
        a. Exceptions – If part of the truth is told but another is not so as to create an overall misleading
            impression, if party has taking positive action to conceal the truth, knowledge that the disclosure
            of a fact is needed to prevent a previous assertion from being misleading, fiduciary relationship,
            failure to correct a mistake.

Halpert v. Rosenthal (SC of RI 1970)
Facts – House has termites, buyer asks if there are termites. Seller doesn’t know that it does and says no.
Buyer wants out of contract because learns that there are termites.
Holding – Ct finds for buyer because an innocent misrepresentation of material fact voids a contract.
Hypo – Seller warns buyer that product will perform badly; buyer is persuaded to purchase less. Product
performs well, any way to get liability out of this using misrepresentation?
-If you describe misstatement as inducing party to manifest assent at a lower amount, look to next best thing
if had been properly informed ->buy more. Some hope of success in this argument.

Restatement §168 – Reliance on Assertions of Opinion
(1) An assertion is one of opinion if it expresses only a belief, without certainty, as to the existence of a fact
or expresses only a judgment as to quality, value, authenticity or similar matters.
(2) If it is reasonable to do so, the recipient of an assertion of a person’s opinion as to facts not disclosed and
not otherwise known to the recipient may properly interpret it as an assertion
          (a) that the facts known to that person are not incompatible with his opinion
          (b) that he knows facts sufficient to justify him in forming it

Restatement §169 – When Reliance on an Assertion of Opinion is Not Justified
To the extent that an assertion is one of opinion only, the recipient is not justified in relying on it unless the
recipient
(a) stands in such a relation of trust and confidence to the person whose opinion is asserted that the recipient
    is reasonable in relying on it, or
(b) reasonably believes that, as compared with himself, the person whose opinion is asserted has special

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    skill, judgment or objectivity with respect to the subject matter, or
(c) is for some other special reason particularly susceptible to a misrep of type involved.

Vokes v. Arthur Murray (FL Ap. 1968)
Facts – Widow takes dance lessons at studio, employees tell her she has potential to be amazing dancer (she
in fact has no talent) and get her to buy 31k worth of dancing lessons. She brings suit for misrep.
Holding – Because it could be reasonably supposed that ∆ had superior knowledge re π dance potential, it is
reasonably to assume that π was justified in relying on it and entitle π to day in court.
Arguments – Use §168 to determine if reliance on the assertion of opinion is reasonable or not.
-Use §169 for argument to say it was or was not reasonably to rely on opinion. Either play up the reasonable
person or special person requirement.

B. Duress
-Defense available if ∆ can show that was unfairly coerced into entering into the contract or modifying it.
Essential rule is that any wrongful act or threat which overcomes free will of party.
-Formation of a contract requires “assent” on the part of each of the contracting parties, and a forced assent is
not a legitimate assent so contract law is wary of enforcing it.
Restatement § 174 - When Duress by Physical Compulsion Prevents Formation of a Contract
If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that
conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.

Restatement § 175 - When Duress by Threat Makes a Contract Voidable
(1) If a party's manifestation of assent is induced by an improper threat by the other party that leaves the
victim no reasonable alternative, the contract is voidable by the victim.
(2) if a party's manifestation of assent is induced by one who is not a party to the transaction, the contract is
voidable by the victim unless the other party to the transaction in good faith and without reason to know of
the duress either gives value or relies materially on the transaction.

Restatement § 176 - When a Threat is Improper
(1) A threat is improper if
         (a) What is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted
          in obtaining property
         (b) What is threatened is a criminal prosecution
         (c) What is threatened is the use of civil process and the threat is made in bad faith, or
         (d) The threat is a breach of the duty of good faith and fair dealing under a contract with the
         recipient.
Ways of Committing Distress
    1. Violence or threats of it
    2. Imprisonment or threats of it
    3. Wrongful taking or keeping of a party’s property, or threats to do so
    4. Threats to breach a contract or to commit other wrongful acts (exercise legal rights in oppressive
         ways – i.e. threaten to start litigation)
    *It is irrelevant if party threatening to act in a certain way has a legal right to act if the threat or the
    ensuing bargain are abusive or oppressive.

Remedy for Duress – Generally remedy is restitutionary in nature – party claiming it is allowed to recover an
amount sufficient to undo the unjust enrichment that other party has obtained.

Austin Instrument v. Loral Corp. (NY Ct of Ap 1971)
Facts – ∆ had contract with government. Subcontracted with π to make military radars. π set up specific
price increase/minimum quantity for sale. Said if both weren’t agreed to then would stop delivery. ∆ agreed


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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008

to price increase and to quantity because was worried about making deliveries to Navy on time/no other
companies around to purchase them from.
Rule - A contract is voidable on the ground of duress when it is established that the party making the claim
was forced to agree to it by means of a wrongful threat precluding the exercise of free will. The existence of
economic duress or business compulsion is demonstrated by proof that immediate possession of needful
goods is threatened.
-A mere threat by one party to breach by not delivering, though wrongful, does not in itself constitute duress.
It must also appear that the threatened party could not obtain the goods from another source and that the
ordinary remedy of an action for breach of contract would not be adequate.
Holding - Duress existed. Loral needed the supplies and could not obtain them elsewhere. Normal breach
remedies would not be appropriate because in addition to losing the Navy contract for non-delivery and
having to pay liquidated damages, Loral would lose its relationship with the Navy which may jeopardize
future contracts.

C. Unconscionability
-absence of meaningful choice on the buyer’s part (in effect) and the presence of contract terms
“unreasonably favorable” to the seller
*Issue is how to protect people from being dealt with in ways that violate their expectations as consumers
while at the same time continuing to honor “freedom of contract” as a fundamental tenant of the legal
system.
*Arguably operates as a device by which the choice function is allocated to court rather than contracting
party where the circumstances show consumer cannot choose for herself
UCC § 2-302 - Unconscionable Contract or Term
(1) If the court as a matter of law finds the contract or term of the contract to have been unconscionable at the
time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract
without the unconscionable term, or it may so limit the application of any unconscionable term as to avoid
any unconscionable result.
(2) When it is claimed or appears to the court that the contract or any term thereof may be unconscionable
the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting,
purpose and effect to aid the court in making the determination.

Restatement § 208 - Unconscionable Contract or Term
If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce
the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit
the application of any unconscionable term as to avoid any unconscionable result.

Williams v. Walker Thomas Furniture Co (DC Ct of Appeals 1965)
Facts – Appellants charged that installment contract for goods purchased was unconscionable and should be
void. The contract contained a clause that pooled all purchases and gave right of replevy for all purchases if
default occurred. The trial and appellate courts found for store, although they thought the contract would
raise some public policy concerns. Note that when seller repossess goods and sells them has to give any
money above debt owed to the buyer so the seller gets no windfall (court doesn’t mention this).
Holding “Where the element of Unconscionability is present at the time a contract is made, the contract
should generally not be enforced. Unconscionability has generally been recognized to include an absence of
meaningful choice on the part of one of the parties together with contract terms which are unreasonably
favorable to the other party.”
*If look at contract from coercion point of view, unconscionable seems apt – unlikely that repossessing will
come close to paying off debt – seems like punishment rather than repayment of debt.
When is there an absence of meaningful choice
-When there is gross inequality in bargaining power – for example if this is the only furniture place in town
or if there are others, they all have the same terms


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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

-Contracting process: When there is no reasonable opportunity to understand the terms
     Consider each party’s obvious education or lack of it
     Are important terms hidden in fine print
     Are important terms minimized by deceptive sales practices
     When can terms be considered unreasonably favorable:
Consider circumstances surrounding contract, commercial background
     When terms are “so extreme as to appear unconscionable according to the mores and business
         practices of the time and place.
Hypo – Suppose buy and item for 1,000, pay of 300 then default. Seller repossesses the one item and sells
for 100. You still owe 600 so will have to bring claim with court and then take the rest of your stuff.
-So when all is said and done, doing things the “fair way” comes out with the same result.
-Onerous seeming clause actually just avoids transaction costs.
Implication of Court’s Invalidation of the Contract
*In the future you will have sellers who are unwilling to sell to risky buyers because are not entitled to
enforce the clause. So now an entire class of persons is w/o buying opportunity. So while current π may be
happy others in the future may be less happy with this result.

Procedural Unconscionability – did the party at the time they signed the contract fully comprehend the
meaning of the contract? (defects in the bargaining process)
-refers to fact that one party was induced to enter into a contract without having any meaningful choice.
*If we don’t have misrep and mistake (informational deficiencies) or duress (impairment of choice
deficiencies) then this is supposed to supplement these defenses.
-Question is if it is only a mild impairment of choice why should it even be a defense?
Substantive Unconscionability – actual terms of the contract. Even though the party entered into the contract
freely, fully informed, without pressure, the terms of the contract make is so unfair that we honor the ex post
regret and let them out of the contract despite the fact that others in the same position will no longer be able
to enter into same type of contract after this point.

Gatton v. T-Mobile USA (CT of App CA 2007)
Facts – π sued ∆ because subjected to termination fee, locked cell phones and forced into arbitration/not
permitted to bring a class action suit. The terms were all part of an adhesion contract (consisting of a large
number of non-negotiated pre-drafted terms put together by one party with room for negotiation as to only a
few aspects of the deal).
Holding – Ct found procedurally unconscionable because of the waiver of a class action.
Class Action – Usually if you are cheated in a small way it isn’t worth it to go after the person (litigation is
too expensive). Class action deals with this by allowing one π to bring suit on behalf of others similarly
situated. This is the right that the π in case have signed away.
Procedural – We are assuming that customers understood procedure and lack of choice shouldn’t bother us
because if aren’t bothered by termination fees and locked cells then shouldn’t be bothered by signing away
right to a class action.
Substantive – Individual want to sign the contract for the short term interest of a cheaper phone but does not
want others to sign the contract so can fight his battle (similar to analogy in 1 person selling vote okay,
everyone is not okay and prisoner dilemma – by being self interested ends up harming self in end).
-Law needs to protect individuals from doing something that seems individually beneficial but harmful as a
party.
Issues with Argument
-It is always the case that if buyers get together they will get the best deal. As much as we don’t like the
prisoner dilemma it is necessary because we need it for competition.
-Also if we say that unless consumer got the best possible bargain, contract should be undone then we are
undoing many agreements that should not be undone – freedom of contract is key!
*The problem with a waiver is that we do not quite know what the issue is but feel quite strongly that it
shouldn’t be enforced then Unconscionability is used because it is a vague not fully articulated doctrine.

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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008



D. Mistake – Mutual Mistake
*A mistake only covers those situations involving mistake as to the facts as they existed just prior to the
contract (not future events!!!).
-Buyer and seller make the same mistake leading to voidable contracts
*Remember to check if the risk has been assumed/born by the party before determining that a contract is
voidable due to mistake.
*Parties fully agree as to the identity of the particular property to be exchanged but one or both are mistaken
as to what they understand the property to be.

A party seeking rescission for a mutual mistake must show:
    1. That the mistake concerns a basic assumption on which the contract was made
    2. That the mistake had a material effect on the fairness of the deal
    3. That the risk of this type of mistake was not allocated to the party who is trying to rescind.
A party seeking rescission for a unilateral mistake must also show that:
    4. enforcement of the contract would be unconscionable or
    5. the other party had reason to know of the mistake or actually caused it.
Restatement § 151 - Mistake Defined
A mistake is a belief not in accord with the facts.
Comment - "A party's prediction or judgment as to events to occur in the future, even if erroneous, is not a
"mistake" as that word is defined here. An erroneous belief as to the contents or effect of a writing that
expresses the agreement is, however, a mistake"

Restatement § 152 - When Mistake of Both Parties Makes a Contract Voidable
(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the
contract was made has a material effect on the agreed exchange of performances, the contract is voidable by
the adversely affected party unless he bears the risk of the mistake under the rule state in 154.
*Court can make an adjustment to the contract rather than permitting either party to avoid it entirely
due to mistake (i.e. if such adjustment would redress the unfairness)
Restatement §154 – When a Party Bears the Risk of a Mistake
A party bears the risk of a mistake when
(a) the risk is allocated to him by agreement of the parties
(b) he is aware at the time the contract is made that he has only limited knowledge with respect to the facts to
which the mistake relates but treats limited knowledge as sufficient or
(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

Restatement §157 – Effect of Fault on Party Seeking Relief
A mistaken party’s fault in failing to know or discover the facts before making a contract does not bar him
from avoidance or reformation under the rules stated in this chapter, unless his fault amounts to a failure to
act in good faith and in accordance with reasonable standards of fair dealing.
*The fact that the party who seeks to avoid the contract negligently made a mistake does not generally
prevent relief.

Restatement §158 – Relief Including Restitution
(1) Either party may have a claim for relief including restitution
(2) the court may grant relief on such terms as justice requires including protection of parties reliance inter.
*Each party must return to the other benefits received from the other so that the contract can be truly avoided
by returning each party to the position he was in prior to the execution of the contract.

Sherwood v. Walker (SC of Michigan 1887)
Facts - D agreed to sell P a cow, which they believed was a barren cow. P didn’t think cow was pregnant but


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Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008

that it might be able to breed. Contract price was for a barren cow; fertile cow could have been sold for
much more. When D discovered the cow was pregnant, they refused to deliver it and P brought suit.
Rule - Where the parties to a contract for the sale of personal property are mutually mistaken as to a material
fact which affects the substance of the whole consideration, the contract is unenforceable.
-Court says that when a thing actually delivered is different in substance from the thing bargained for and
intended to be sold, there is NO contract. The mutual mistake must not only be as to some material fact but
must also affect the substance of the whole consideration.
Majority – Easy case for invalidity because the mistake about the cow affected the character of the animal for
all time. The difference between barren/fertile cow is equivalent to difference between car/cow.
Dissent – Both parties agreed to a contract that involved risk and you cannot invalidate all contracts that
involve risk or you will invalidate many types of contracts.
-The risk was the small probability that the cow could potentially be fertile which is the risk that ∆ took when
he entered into agreement with π.
-If parties are aware that there are only two possiblities: 90% is barren cow 10% is fertile cow then both
parties take the risk that they will either be under/over paying/paid.
Difference from Raffles – One party thought was selling a cow; other party thought was buying a car. There
was simply no meeting of the minds. (This goes to the issue of misunderstanding an initial intention causing
ct to find that no contract existed because no mutual assent – each party assented to a different proposition so
there was nothing to enforce that the contract is void).

Sherwood - Here they are both contracting for an infertile cow but were mistaken about an essential quality
of the cow. The minds did essentially meet at one level (however misguided) so at least conceptually the
threshold question of whether there ever was a contract has been answered (YES).

*The two cases do ultimately go to the same issue – lack of consent due to misconception.

E. Mistake - Unilateral Mistake
-NO K when 1 party was mistaken and the other knew or should have known of the mistake.

Restatement § 153 - When Mistake of One Party Makes a Contract Voidable
Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the
contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is
voidable by him if he does not bear the risk of the mistake under the rule stated in 154 and
a. The effect of the mistake is such that enforcement of the contract would be unconscionable, or
b. The other party had reason to know of the mistake or his fault caused the mistake.

Restatement §154 – When a Party Bears the Risk of a Mistake
A party bears the risk of a mistake when
(a) the risk is allocated to him by agreement of the parties
(b) he is aware at the time the contract is made that he has only limited knowledge with respect to the facts to
which the mistake relates but treats limited knowledge as sufficient or
(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

Tyra v. Cheney (SC of Minnesota 1915)
Facts - P sent a bid to D to perform sub-contracting work under D’s contract. P submitted an oral bid of
$4025 and was then told to submit the bid in writing. Bid in writing mistakenly omitted an item valued at
$963. P was awarded the subcontract and D claimed he only received the written bid. Trial court said that if
P could prove that D knew about the error, she could recover the amount. P won.
Rule - Where one party to a contract is unilaterally mistaken as to an essential contract term, and the other
party is aware of his error, the agreement fails to constitute a binding contract.
NOTICE: Court awarded restitution damages because they are saying the contract is void and there is no


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Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008

breach.
§153 – Other party had reason to know of the miskate.

Sherwood – Suppose that seller thinks cow is barren, buyer knows otherwise. Seller wants out. Can he?
-There must be reasonable reliance on the part of the deceived person. If the buyer were a banker it would be
difficult to prove reliance because not reasonable for seller to rely on banker’s opinion.
-But if the buyer were an expert in cow fertility it would be much easier to argue for reasonable reliance.

F. Impossibility and Impracticability

Restatement § 261: Discharge by Supervening Impracticability
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.

R § 263: Destruction, Deterioration or Failure to Come into Existence of thing Necessary for Performance
If the existence of a specific thing is necessary for the performance of a duty, its failure to come into
existence, destruction, or such deterioration as makes performance impracticable is an event the non-
occurrence of which was a basic assumption on which the contract was made.

UCC §2-613: Casualty to Identified Goods
Where the contract requires for its performance goods identified when the contract is made, and the goods
suffer casualty without the fault of either party before the risk of loss passes to the buyer, or in a proper case
under a “no arrival, no sale” term (§2-324) then
(a) if the loss is total the contract is avoided; and
(b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer
may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods
with due allowance from the contract price for the deterioration or the deficiency in quantity but without
further right against the seller.

Paradine v. Jane, England (1647)
Facts: P landlord sued D tenant for rent under their lease agreement; D claimed he was discharged from his
duty to perform because he had been ousted from the premises by an invading army.
Rule: Where a party to a contract agrees to perform certain obligations, he is not relieved of his contractual
duties by the occurrence of an extraneous event rendering the other party’s performance thereunder
impossible.
-Court distinguishes 2 different kinds of duties: duties created by law (as in tort) and duties created by a
contract. Self-imposed, contractual duties are completely voluntarily assumed; an obligation under this duty
can provide for unforeseen consequences. It would be unfair for the law to enforce a duty under unforeseen
circumstances in cases where the duty is created by law and can’t be contracted around but not unfair to
enforce a duty voluntarily entered into.

Taylor v. Caldwell, England (1863)
Facts: P entered into a contract to lease a musical hall from D, lessor, for a series of concerts to be promoted
by P. After the contract was formed but prior to the concerts, the music hall burned down. P sued to recover
its reliance damages.
Rule: In a contract where performance depends on the ongoing existence of a specific person or chattel, there
is an implied condition that the destruction of the subject matter rendering performance impossible may
excuse the parties from executing their contractual obligations.



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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

Sherwood – Buyer buys cow’s offspring, she is fertile, but gets disease and becomes barren. Seller wants
out.
§261 – Grounds for buyer to defeat impossibility defense: 1. Seller could have taken better care of cow. 2.
This is a risk that the seller took – he promised to deliver babies or pay damages.
§262 (Mutual Mistake) – Argument that this was a speculative agreement, the risk was part of the bargain.

G. Frustration of Purposes

Restatement § 265: Discharge by Supervening Frustration
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.

Krell v. Henry, England (1903)
Facts: D had rented an apartment from P which had been advertised as a prime location from which to view
the King’s coronation. D had sent partial deposit, but when the coronation was cancelled, he refused to pay
the balance of the rental fee. Written contract was silent as to the condition of the procession taking place. P
sued D for the contract rental price.
Rule: Where the performance of a contract becomes impossible due to a change in circumstances thereby
altering the basis of the agreement, the parties may be excused from performance of their contractual
obligations.
-Court says that it can be inferred that the coronation was an implied condition of the contract.

Sherwood Variation – Seller is able to deliver promised offspring to buyer who is also in the cattle business.
His business collapses and he is no longer able to pay creditors so wants to avoid paying for things no longer
needs.
Buyer – Use §265 – implied condition of the purchase was the he continue to have a cattle business
Seller – Argue that the risk was assumed into the contract
*Always a counter argument to any of these instances

VIII. REMEDIES
A. Damages
3 Damage Interests:
Expectation
   promisee in the position they would have been had the contract been performed
   generally the highest measure
Reliance
   promisee in the position they would have been had the promise not been made
       Doesn’t take into account promisee’s lost profit
   anything that was a loss as before the contract was entered into
   generally higher than restitution because it usually includes restitution and other costs incurred
   the same as expectation damages if you are going to break even on the contract
   any costs incurred in reliance of the contract
Restitution
   forces ∆ to pay π an amount equal to the benefit which ∆ has received from π performance
   very rare; based on unjust enrichment - Focuses on party in breach and asks whether that party has
    benefited from transaction and whether they should return such a benefit

If price starts to rise

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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

  Seller is likely to breach a fixed price contract
  Probably, you should find a substitute seller and sue for the difference in price (Cover)
If the price starts to fall,
   The buyer is likely to breach
   Disappointed seller will try to find a substitute buyer

Theory of Efficient Breach
-The law says that a party to a contract is free to either perform or not perform provided only that if he
breaches he shall be obligated to pay the injured party an amount in cash sufficient to give the latter the
benefit originally expected.
-In the largely commercial setting with which contract law is concerned, keeping or breaking one’s word
appears to be an ethically neutral event, of which the proof, perhaps, is that punitive or exemplary damages
are not recoverable by an injured promisee.
-The law thus promotes an efficient disposition of material resources. Assuming the breaching promisor
has acted rationally, there is, or should be, a net social gain to the parties; yet no one is left worse off.
Example – U contracts to sell G a machine for 10K, worth 12K to G. Prior to delivery date, R offers U 15K
for the machine. Assume that U reacts by deliberately breaching contract with G and selling to R. U will
owe 2K in damages to G but will still have netted a 3K extra then would have if kept promise.
-G is as well of as expected to be when entered into contract, person who values the machine the most owns
it and U is better off.
*But remember with the Coase Theorem a rule of specific performance that required U to sell to G would
lead to an equally efficient outcome because G could sell to R (assuming low enough transaction costs) and
R’s ability to locate G (U is still in better position because is a seller). G could also reach an agreement with
U as long as they had sufficiently low transaction costs.
-A rule of specific performance would lower litigation fees – no need to put $ amount on G expectations or
pay the cost of judicial determination with respect to amount of an injured party’s damages and the danger
that the court might underestimate such damages.

A. Expectation
–put in position would have been if contract performed
Restatement §347 – Measure of damages in general
Subject to the limitations stated in §§350-353, the injured party has a right to damages based on his
expectation interest as measured by
(a) the loss in value to him of the other party’s performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.
*Injured party has a right to damages based on his expectation interest (benefit of the bargain) PLUS any
expenditures made in carrying out obligations MINUS any costs by not having to perform.

-Point is to put the injured party in as good a position as he would have been if the contract had been
performed in accordance with its terms!
-Default calculation measure for damages in contracts.

Damages under the UCC – Sale of goods
UCC §1-106 – Remedies to be Liberally Administered
(1) The remedies provided by this Act shall be liberally administered to the end that the aggrieved party may
be put in as good a position as if the other party had fully performed but neither consequential or special nor
penal damages may be had except as specifically provided by this Act or by other rule of law
-party is put in as good a position as if other party had fully performed, general expectations rule
under the UCC



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Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008


UCC §2-712 – “Cover”; Buyer’s Procurement of Substitute Goods
(1) After a breach within the preceding section the buyer may “cover” by making in good faith and without
unreasonably delay and reasonable purchase of or contract to purchase goods in substitution for those due
from the seller.
(2) The buyer may recover from the seller as damages the difference between the cost of cover and the
contract price together with any incidental or consequential damages as hereinafter defined (2-715), but less
expenses saved in consequence of the seller’s breach.
(3) Failure by the buyer to effect cover within this section does not bar him from any other remedy.
Damage rule re the purchase and sale of goods - Buyer may “cover” by making purchase of substitute
goods and have damages from Seller equal to difference between “cost of cover” and contract price.
i.e. if contract price were $1 and had to cover at $1.5 damages would be at 50 cents per unit.

UCC §2-713 – Buyer’s Damages for Non-Delivery or Repudiation
(1) Subject to the provisions of this Article with respect to proof of market price (2-723), the measure of
damages for non-delivery or repudiation by the seller is the difference between the market price at the time
when the buyer learned of the breach and the contract price together with any incidental and consequential
damages provided in this Article (2-715), but less expenses saved in consequences of the seller’s breach.
(2) Market price is to be determined as of the place for tender, or in cases of rejection after arrival or
revocation of acceptance, as of the place of arrival.
Mirrors §2-712 BUT answers what happens if decide not to buy again. You still get damages in the
same amount as if had “covered”.
i.e. if contract price was $1 and market price goes up to $3, damages would be 2 even though you
decided not to purchase replacement.

§2-715 – Buyer’s Incidental and Consequential Damages
(1) Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection,
receipt, transportation and care and custody of goods rightfully rejected, and commercially reasonable
charges, expenses or commissions in connection with effecting cover and any other reasonable expense
incident to the delay or other breach.
(2) Consequential damages resulting from the seller’s breach include
         (a) any loss resulting from general or particular requirements and needs of which the seller at the
time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise;
         (b) injury to person or property proximately resulting from any breach of warranty.

§2-717 – Deduction of Damages from the Price
The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting
from any breach of the contract from any part of the price still due under the same contract.

UCC §2-706 – If the Buyer breaches the Seller may resell those goods to other customers at a reasonable
price and claim damages equal to difference between contract price and resale price.

Calculating Expectation Damages
The injured party has a right to damages based on his expectation interest as measured by
(a) the loss in the value to him of the other party's performance caused by its failure or deficiency, plus [diff
b/t promise and where he was after the operation]
+
(b) any other loss, including incidental or consequential loss, caused by the breach, [i.e. additional expenses-
bandages, time off work, maybe attorney's fees] less
-
(c) any cost or other loss that he has avoided by not having to perform [not having to pay the doctor for
surgery]
* Basically lost profits + expenditures in reliance of contracts – any expenses saved = damages

                                                       36
Alisa Waxman                                                       Contracts Outline, Katz, Fall 2008



Hawkins v. McGee (SC of NH, 1929) - Expectation Damages
Facts - ∆ doctor promised π patient that he would make his hand 100% perfect but in fact made the hand
worse than ever.
Held - Court found that due to the guaranty there had been a contract and thus damages should be the
DIFFERENCE between promised PERFECT hand and the hand as a result of the surgery. No damages for
cost of surgery or pain and suffering because these “costs” would have be incurred if surgery was successful.
Issue - The actual value of hand to π is difficult to value. Use experts on both sides.
Rule - Damages for contract generally expectation – put in as good a position as would have been if
contract had been fulfilled as specified – here a perfect hand was contracted for.

J.O. Hooker & Sons v. Roberts Cabinet Co. (SC of MS, 1996)
Facts - Hooker gets contract to redo a house subcontracts with Roberts for cabinets. Parties have a
disagreement re disposal of contracts. ∆ claims contract no longer valid (anticipatory breach)
Issue – How do you calculate expectation damages here? Here “costs + profits = damages”. AND is this a
contract for goods (governed by UCC) or contract for services (Restatement).
Reasoning - Contract for services, so governed by restatement NOT UCC §2-102 (article applies to
transactions of goods)
Held – He can only recover damages that incurred as a result of the breach so that will be left in position
would have been if not for the breach. If are expenses that would of incurred regardless of breach CANNOT
recover. Expectation is good as not better than if breach had not occurred.
- Claim 1: Administrative – yes compensate because employee could have been working on something
else/generally calculated into estimate
- Claim 2: Court says aren’t expenses incurred due to contract because already had storage space BEFORE
entering into contract. If allow these costs then you will be BETTER off than if the contract had been
fulfilled because would have had to pay costs anyway. So NO recovery.
- Claim 3: Profit calculation – okay because not implausible. Disparity between parties based on calculation
(inclusion of expense or not)
Rule – Damages are appropriate up to amount that would have achieved if contract had been fulfilled
but no more otherwise is unjust enrichment.

Tongish v. Thomas (SC of KS, 1992)
Facts – Tongish has k to sell seeds to Coop who has a contract to sell seeds to Bambino for a minimal
handling fee. Price of crop doubles so Tongish breaches and sells to Thomas for a much higher profit than
with Coop. (T –k – C – k – B) and (T – k – T (higher price))
Issue – Where buyer is entitled to actual lost profits or the difference between the market price and contract
price. Seller wants to apply UCC §1-106 so Buyer can only recover his expected benefits (the handling fee)
but Coop wants to apply UCC §2-712/713 (“cover”).
Holding – The correct measure of damages is the difference between market and contract price.
Rule – Where is a contract for the sale of goods, damages are the difference between contract price and
cost at time of breach. 712 – buy, 713 – don’t buy DAMAGES are same.
Reasoning –C is in a better position then if contract completed, okay because we want to deter breaches and
create market stability. BUT do we want to encourage efficient breach?

Anglia Television Ltd. v. Reed (Ct. of Appeal, 1971)
Facts - ∆ entered into agreement with π to be in a TV show, breaks contracts. π sues to recover expenses
incurred before ∆ entered into contract.
Holding – π in a case such as this must EITHER claim lost profits or wasted expenditures. It is reasonable
that π contemplated that if breached contract all expenditure would be wasted.
Note – This is parallel to Chicago Coliseum but is found in the opposite manner. Also, sound like reliance
damages but are really expectation – cost incurred in anticipation of expected profits.
Rule – §349 Reliance damages are appropriate to put party in place would have been if contract never


                                                     37
Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

existed, such as any costs incurred BUT expected profits are not included.
Possible ∆ arguments – Could argue that there were problems with foreseeability (as in Chicago Coliseum)
or could argue that profits in π mind were already so low that he wasn’t liable for them.
Reasoning – The ∆ must have contemplated that if he broke his contract, all that expenditure would be
wasted, whether or not it was incurred before or after the contract.

B. Reliance
– put back in position would have been if contract NEVER occurred
- §349 – Alternative to damages under §347(expectation), can recover based on reliance interests. Includes
expenses made in light of contract minus any loss that breaching party can prove injured party would have
suffered if contract had been performed.
The purpose is to restore victim back to position he would have been in if the transaction had never occurred.
- The looser is allowed to recover for costs and losses associated with the contract but not for profits.
- There is a large similarity here with TORTS. The idea is to put the person back to where would have been
if there had been no contract. With a contract there is absolute liability so once prove the existence of a
contract and proving that there was a breach is enough to prove liability. Don’t need wrongful or negligent
conduct for liability as with tort.

Restatement §346: Availability of Damages.
1)      The injured party has a right to damages for any breach by a party against whom the contract is
enforceable unless the claim for damages has been suspended or discharged.
2)      If the breach caused no loss or if the amount of the loss is not proved under the rules stated in this
Chapter, a small sum fixed without regard to the amount of loss will be awarded as nominal damages.

Restatement §349: Damages Based on Reliance Interest.
As an alternative to the measure of damages stated in §347, the injured party has a right to damages based on
his reliance interest, including expenditures made in preparation for performance or in performance, less any
loss that the party in breach can prove with reasonable certainty the injured party would have suffered had
the contract been performed.
*This section is clarified in Anglia, which says that pre-contract expenses become part of damages. It
allows reasoning behind this section, which is basically to come up with expectation damages minus
profits. In Anglia, the contract was a loss anyway so was the best-case scenario for the network.

Restatement §352: Uncertainty as a Limitation on Damages.
Damages are not recoverable for loss beyond an amount that the evidence permits to be established with
reasonable certainty.
*Chicago Coliseum announces this doctrine. The expected profits were too uncertain to be recoverable
(there are a number of manners in which an event which was simply planned for one day would not achieve
the expected results (i.e. rain).

Sullivan v. O’Connor (SC of MA, 1973)
Facts - π enters into contract for nose job, after 3 surgeries ends up with much worse nose “bulbous and
asymmetrical”
Held - Court found that π could recover for cost of surgeries, WORSENING of nose (before and after
surgery nose) and pain and suffering from THIRD surgery.
Reasoning - Court implicitly rejected EXPECTATION as too high and RESTITUTION (only 622 paid for
surgery as too low) and chooses reliance. Court says that reliance appropriate because probably not dealing
with contract
Issue - π argued for contract violation instead of tort because with contracts there is ABSOLUTE liability. If
breach occurs, damages follow. Whereas in torts must prove negligence first which makes recovery more
difficult. BUT here if as the judges seem to think, there were no damages, the use of reliance is strange.


                                                       38
Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008

Seems to be that court is warning against over pushing of medical procedures and wants to protect the public
from “charlatan” doctors – sending a warning to doctors.

Chicago Coliseum Club v. Dempsey (IL Ct. of Appeals, 1932)
Facts – π entered into contract with ∆ for a public boxing exhibit. ∆ claimed contract wasn’t valid and
π attempted to claim lost profits and expenses incurred as a result of fight not occurring.
Holding – Since the profits are too unpredictable, damages are purely speculative and thus cannot be
recovered. Also, since expenses were incurred prior to signing of contracts π has no obligation for them but
does have obligation for any expenses incurred AFTER signing contract.
Rule – Under Restatement §352 damages are not recoverable for losses beyond an amount that can be
established with reasonable certainty by evidence.


C. Restitution
– Based on concept of unjust enrichment (unlike expectation and reliance which are based on enforcing
contract in accordance of terms and figure out how to best measure the appropriate damages)
-Where partial performance has occurred before breach, partial payment is generally required.
-Occasionally used when contract is discharged by reason of mistake or impossibility.
-Recovery is measured by value of the benefits conferred upon the promisor to the promisee rather than by
reference to loss resulting from promisor’s failure to meet obligations under the contract.
-If buyer pays in advance for undelivered goods or services, goods fall below contract price and seller
breaches then restitution is often used – easier to compute/less time than expectation.
Breaching π – if contracts to deliver product worth $1 and delivers something worth only 90 cents and buyer
sues, seller gets credit for his goods. Thus damages are difference between goods requested and goods
delivered. So get a damage of 10 cents per good. (UCC §2-714(2))

§371. Measure of Restitution Interest.
If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured
by either
        (a)the reasonable value to the other party of what he received in terms of what it would have cost
        him to obtain it from a person in the claimant’s position, or
        (b)the extent to which the other party’s property has been increased in value or his other interests
        advanced

-Might still be better under restitution than expectation if you have severely underestimated the market value
of your services/how much the other party will gain

§373. Restitution When Other Party is in Breach.
1) Subject to the rule stated in Subsection (2), on a breach by nonperformance that gives rise to a claim for
damages for total breach or on a repudiation, the injured party is entitled to restitution for any benefit
that he has conferred on the other party by way of part performance or reliance
2) The injured party has no right to restitution if he has performed all of his duties under the contract and no
performance by the other party remains due other than payment of a definite sum of money for that
performance.
*Bush v. Canfield

§374. Restitution in Favor of Party in Breach.
1) Subject to the rule stated in Subsection (2), if a party justifiably refuses to perform on the ground that his
remaining duties of performance have been discharged by the other party’s breach, the party in breach is
entitled to restitution for any benefit that he has conferred by way of part performance or reliance in


                                                        39
Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

excess of the loss that he has caused by his own breach. (to prevent windfall)
2) To the extent that, under the manifested assent of the parties, a party’s performance is to be retained in the
case of breach, that party is not entitled to restitution if the value of the performance as liquidated damages is
reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of
loss *Britton v. Turner (breaching party gets benefits conferred – loss caused)(1)

UCC §2-714 – Buyer’s Damages for Breach in Regards to Accepted Goods
(2) The Measure of damages for breach of warranty is the difference at the time and place of acceptance
between the value of the goods accepted and the value they would have had if they had been as warranted,
unless special circumstances show proximate damages of a different amount.

Bush v. Canfield (SC of Errors, 1818)
Facts – π paid ∆ $5,000 deposit for flour valued at $7 per barrel. The price of flour drops to $5.50 and ∆
(winning party) breaches. π sues for return of his deposit.
Arguments - ∆ argues that by breaching he saved π money because price dropped so the contract was clearly
a loosing bid (π would have had to sell at $1.5 less than bought on open market). If give π deposit back then
it will be like π never entered into contract, but this is a loosing contract so you should not be put back into
spot where would have been pre-contract.
Holding/Rule – Restatement §373 says injured party is entitled to restitution for any benefit he has
conferred on the other party, so π should get all $5,000 back.
-§373(2) – BUT if seller had delivered flour and buyer hadn’t paid for it, seller couldn’t get the flour back,
could only get monetary damages. (injured party has no right to restitution if he has performed all of his
duties under contract and no performance by other party remains due other than payment of definite sum of
money for the performance.

Britton v. Turner (SC of NH, 1834)
Facts – π is contracted to work for 12 months with payment at end of contract period. Only works for 9.5
months and sues ∆ for payment of portion of term that has worked.
Issue – Is the π entitled to payment for his part performance?
Arguments – π argues that ∆ gets windfall of 9.5 months labor for free, there is a moral hazard because ∆
may try to get worker to leave right before contract ends and if you pay for something and it isn’t built to
specification if you keep it you are only compensated for the shortfall.
-∆ argues that π made a contract and breached it, argues that should be able to return goods and that the
burden of proof should be on the breaching party (worker).
Holding – Yes π is entitled to $95, because ∆ realized an economic benefit from π services which can not be
rejected or returned. Damages could have been lowered by any damages ∆ had suffered as a result of π
breach.
Restatement §374(1) – Breaching party is entitled to restitution for “any benefit that he has conferred”
on the injured party through part performance “in excess of the loss he has caused by his own
breach.”

Cotnam v. Wisdom (SC of AK, 1907)
Facts – π are surgeons who help a severely injured person who never recovers consciousness. π bring suit for
recovery of fee for services.
Holding – Yes this is an “implied” or “quasi” contract – patient would have agreed to services if able to.
This is a legal fiction that is used to be able to calculate damages – here Dr services. Here services must be
paid for.
Rule – where a person can’t assent to a contract, we imply it in certain emergency situations
*(look to see what the parties would have agreed to ex ante if were able to agree – also notice similarity
with moral consideration which may be better dealt with under a quasi/implied contract).
Interesting Issues – I have a house, I am not around and the wall in front of my house collapses, my mason
fixes it and I die. Should estate have to pay for it?

                                                       40
Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008

-I am going to buy painting from art dealer, agree but on day I am going to go sign contract there is a
snowstorm. By time clears up I learn that paintings are fake. Art dealer says contract is implied under
Cotnam. Is implied contract okay here? Clearly no. Need to be careful about deciding implied contracts
exist – seems to be only in emergency cases.

Limitations on Damages
A. Mitigation
-Parties have a duty to pre-mitigate. This is a default rule that comes into place if haven’t contracted around
it. If didn’t have it then would be stuck with ALL consequence of breach under §347 which would make
damages disproportionate.
– injured promisee cannot recover for damages that could have avoided with reasonable effort after breach
became known. This includes either stopping performance or making reasonable effort to substitute contract
with similar arrangement (new job/house, etc.)
Duty to Stop – Rockingham County – Duty to mitigate, no undue burden
Duty to Act – Maclaine – No duty to mitigate because of undue burden

§350. Avoidability as a Limitation on Damages.
1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have
avoided without undue risk, burden or humiliation.
2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he
has made reasonable but unsuccessful efforts to avoid loss
*Non-breaching party has a duty to mitigate damages – must make at least a reasonable effort.

Rockingham County v. Luten Bridge Co. (4th Circuit, 1929)
Facts - ∆ employed π to construct bridge then decided didn’t want to pursue the project so sent letters to π
ordering not to continue building the bridge. π continued to build bridge and at completion sued for
damages.
Holding – ∆ were only liable for expenses incurred up until point at which they informed that bridge was no
longer needed.
Oddities – π had no reason to continue building, appears that were afraid that if stopped would not receive
expectation damages because generally if only small outlays put forth no expectation. ∆ could have just paid
everything due at time of repudiation to prevent this fear on π part.
Rule – After a breach of contract, aggrieved party has duty to mitigate damages; many not continue to
perform after absolute repudiation but may recover for all expenses incurred in part performance
PRIOR to repudiation plus any profit that would have been received if contract had been carried out
to full terms. This is a DUTY to STOP
Precedent – Clark v. Marsiglia – Painter was ordered to stop painting and didn’t. Held that painter couldn’t
continue to paint when court was cancelled halfway through in order to pile up damages. Court doesn’t want
money or time to be wasted.

Shirley Maclaine Parker v. Twentieth Century-Fox (SC of CA, 1970)
Facts - ∆ contracted with π to star in “Bloomer Girl” for $750K, ∆ rescinded offer and instead asked her to
star in “Big Country” for same pay. π refused.
Issue – Could π have mitigated damages by appearing in second film? NO not “comparable”
Holding – π had no duty to mitigate damages if other job available is not “comparable” or is of a “different or
inferior kind.”
Rule – You only have a duty to mitigate with other employment if it is “comparable” and not of an
“inferior or different kind.” This is a DUTY to ACT.


Lost Volume – where seller could have sold to multiple customers and one customer cannot properly


                                                      41
Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

substitute or replace the lost sale, damages are measured under §2-708(2)

UCC
§1-106: put the aggrieved party in as good a position as if the other party had fully performed (UCC’s
expectation provision – analogous to Restatement’s 347 provision on damages)

§2-706 Seller’s Resale Including Contract for Resale
(1) Under the conditions stated in Section 2-703 on seller’s remedies, the seller may resell the goods
concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially
reasonable manner the seller may recover the difference between the resale price and the contract price
together with any incidental damages allowed under the provisions of this Article (2-710), but less expenses
saved in consequence of buyer’s breach.
*Seller’s damages – analogous to 712 (cover) plus any incidental damages!
Example – If contract price were $2 and seller was able to resell for $1.50 then the damages would be
.50 + and incidental damages incurred in locating a new buyer.

§2-708. Seller’s damages for non-acceptance or repudiation
(1) measure of damages for non-acceptance or repudiation of buyer is the difference between the market
price at the time and place for tender and the unpaid contract price together with any incidental
damages, but less any expenses saved in consequence of buyer’s breach”;
(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position
as performance would have done then the measure of damages is the profit (including reasonable
overhead) which the seller would have made from full performance by the buyer, together with any
incidental damages provided in this Article (§2-710), due allowance for costs reasonably incurred and due
credit for payments or proceeds of resale.
*Analagous to §2-713; dif between market and contract price (but seller rather than buyer remedy)
*(2) is the lost volume doctrine (“the buyer’s breach, in such a case, depletes the dealer’s sales to the extent
of one, and the measure of damages should be the dealer’s profits on one sale.”

§2-710 – Seller’s Incidental Damages
Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or
commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s
breach, in connection with return or resale of the goods or otherwise resulting from the breach.

§2-718 – Liquidation or Limitation of Damages; Deposits
(1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is
reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss,
and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing
unreasonably large liquidated damages is void as penalty.
(2) Where the seller justifiably withholds delivery of goods because of the buyer’s breach the buyer is
entitled to restitution of any amount by which the sum of his payment exceeds
         (a) the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in
         accordance with subsection (1), or
         (b) in the absence of such terms, 20% of the value of the total performance for which buyer is
         obligated under the contract or $500, whichever is smaller.
(3) The buyer’s right to restitution under subsection (2) is subject to offset to the extent that the seller
establishes
         (a) a right to recover damages under the provisions of this Article other than subsection (1), and
         (b) the amount or value of any benefits received by buyer directly/indirectly by reason of K
(4) Where a seller has received payment in goods their reasonable value or the proceeds of their resale shall
be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer’s breach
before reselling godos received in part performance, his resale is subject to the conditions laid down in this

                                                       42
Alisa Waxman                                                         Contracts Outline, Katz, Fall 2008

Article on resale by an aggrieved seller (2-706).

Neri v. Retail Marine Corp. (NY Ct. of Appeals, 1972)
Facts – π contract to purchase new boat from ∆ for $12,500, put down a deposit of $4,250 and within a week
rescinded the contract due to illness. ∆ had already ordered and received the boat and refused to refund
deposit. ∆ sold boat to another buyer at same price contracted for with π.
Holding – Court held that the contract-resale measure of damages (§2-706) (seller may recover difference
between resale price and contract price plus any incidental damages) was clearly inadequate to put seller in
as good a position as would have been if contract happened. §2-708 applies. Court could have used §2-718
or §2-708(1).
Rule– If seller could have sold to first customer PLUS second customer and thus had two sales instead of one
so should be able to recover as if π hadn’t breached. §2-208.
Standard Operation – Generally in the US you can back out of any retail deal. It may actually be a better
policy for sellers because will increase customers (more willing to purchase if aren’t worried that cannot
return).
 Problems with this ruling – Nowhere in the code is there a special provision dealing with lost profits. The
courts argument that they don’t have to stick to specific damages rule if they don’t work adequately is
alarming. If changed the one boat to thirty boats ordered and not wanted the argument sounds a bit false.
Incidental damages probably more correct.
-MOST importantly, is unlikely that parties would have put this in a contract if had contemplated it in
advance. IT doesn’t make sense to have a damage rule that wouldn’t be done in contracts.
-General rule should be NO LOST PROFITS LIABILITY – MINOR AMOUNT (deposit/incidental
costs) – as is already set forth in §2-718 and §2-708. UCC looks, sees what is usually done, in retail buyers
are allowed to cancel out of deals, so that is the default law. If parties don’t like can CONTRACT
AROUND.
-Dam. Calc: π (boat buyer) was entitled to his deposit - ∆ seller lost profits - ∆ seller incidental damages

B. Foreseeability
 – breaching party is only liable for damages that were contemplated by both parties when entering into
contract. You can become liable for consequential damage (i.e. lost profits) but ONLY where they have
been made foreseeable through special notification.

§351. Unforeseeability and Related Limitations on Damages.
1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable
result of the breach when the contract was made.
2) Loss may be foreseeable as a probable result of a breach because it follows from the breach
         a. In the ordinary course of events, or
         b. As a result of special circumstances, beyond the ordinary course of events, that the party in breach
          had reason to know. Specific damages
3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing
recovery only for loss incurred in reliance or otherwise if it concludes that in the circumstances justice so
requires in order to avoid disproportionate compensation.
*Use section three to determine the limits on foreseeable damages!!

- Loss is foreseeable if would occur in the ordinary course of events or as a result of special circumstances
that breaching party has a reason to know about.
-Damages
Majority rule: mere notice to overcome foreseeability issue
Minority rule: tacit agreement test (must not only know about but also implicitly agree to)
Certainty – damages for breach are recoverable only to the extent that the injured party’s loss can be
established with reasonable certainty. Issue generally arises with lost profits which are difficult to predict


                                                       43
Alisa Waxman                                                           Contracts Outline, Katz, Fall 2008

and often speculative (i.e. lost profits are generally difficult to determine)

Hadley v. Baxendale (Court of Exchequer, Englad 1854) – Lack of Foreseeability
Facts – π representative tells ∆ shipper that crankshaft must get to repair in Greenwich and be returned
ASAP. ∆ says okay will be quick but due to mistake the shaft isn’t returned for a number of days. π sues for
lost profits.
Issue – Where the damages for lost profit foreseeable to the breaching party?
Holding – No it would not ordinarily be contemplated that delaying delivery of a shaft would cause a mill to
completely stop production. If special circumstances had been told to ∆, then presumably ∆ would have
required insurance or charged a higher fee!
Rule - Where losses caused by a breach of contract are not foreseeable to the breaching party,
damages cannot be recovered. Creates a duty to “pre-mitigate” by either carrying extra inventory or
informing of the special circumstances at time of contract.

Fed Ex Example: If Fed Ex had not limited its damages in such a way, what would be the likely result of
such a regime?
Dramatically increased costs to consumers - Have to adopt liability insurance
-What if Fed Ex used the tacit agreement test?
Fed Ex probably wouldn't need all of the contract terms on its air bill--- it could limit its
terms per high risk customers
-Majority rule + optional insurance v. minority rule
Almost look the same--- w/ minority rule have company opting out and assessing the risk
w/ majority have consumers opting in and assessing the risk (are in best position)

Martinez v. Southern Pacific Transportation (5th Circuit, 1979)
Facts – π ordered a dragline that was delayed and damaged during shipment. π files suit, claiming cost of
repair, storage costs and compensation for loss of dragline use during delay.
Issue – What damages are foreseeable? π doesn’t have to show that harm suffered was most foreseeable,
only need demonstrate that losses were not so remote as to make them unforeseeable to breaching party at
time of contracting.
Holding – Foreseeable that the absence of an ENTIRE machine would cause loss. Appropriate method for
calculating damages is to use loss rental value (§2-713 – “cover” as if had rented a new machine). But lost
profits would not be recoverable (if business relied on dragline were shutdown for 1 month).
Rule – Where is a delay due to delivery and losses are foreseeable damages are appropriate. If it is an
entire machine one way to compute is using §2-712/713 (cost of rental).

Morrow v. First National Bank of Hot Springs (SC of AK, 1977)
Facts – πs collected coins, paid for security boxes at bank, bank had promised to notify when boxes were
ready but did not and coins were stolen. π brought suit for lost coins.
Issue – Did the parties enter into an agreement where would be foreseeable for bank to assume liability for
damages in amount of value of lost coins?
Holding – NO, there was no “tacit agreement” (this is a minority rule), very likely that bank would not have
agreed to contract if knew was essentially acting as insurance carrier for π.
Rule – Under tacit agreement rule π must prove that ∆ not only had knowledge that breach will entail
special damages BUT ALSO must appear that ∆ tacitly agreed to assume responsibility.


C. Liquidated Damages v. Penalty Clauses
 Restatement §355 – Punitive Damages
Punitive damages are not recoverable for breach of contract unless the conduct constituting the breach is also
a tort for which punitive damages are recoverable.


                                                        44
Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008



Restatement §356 – Liquidated Damages and Penalites
(1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is
reasonable in the light of anticipated or actual loss caused by the breach and the difficulties of proof of loss.
A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy.
(2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of
the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused
by such non-occurrence.

*Damages for a breach by either party may be liquidated (pre-determined) in the contract but only in an
amount that is reasonable in light of the loss caused by breach and the difficulties of proof of loss.
Unreasonably large liquidated damages (penalty clauses) are not enforceable. Basically can contract around
but unlike other self-created rules this one is subject to review and can be rejected because public policy
prohibits enforcement of penalties in contract.
EX: Builder must pay $1000 for every day completion is delayed. Will be enforced if reasonably
approximate owners losses and actual loss would be difficult to prove but loss is clearly less than $1000 a
day the clause will be treated as a penalty and not be enforced.

-UCC §2-718(1) – Mirrors Restatement section exactly. (See section on Lost Profits for text)
- More likely to be enforced if damages would otherwise be difficult to ascertain.
- Cannot contract around damages to such an extent to make them penalties BUT it is easy to write a contract
that operates like a penalty clause but doesn’t admit it (get one amount if finish by this date but different
amount if finish by second date)
No penalty allowed because – courts generally say it would discourage effective breach (although
economists are friendly to them so it doesn’t really hold up)

Wassenaar v. Towne Hotel (SC of WI, 1983)
Facts – π was hired by ∆ to be hotel manager for three years and in contract is stipulated that if ∆ ends
contract before the 3 years then π receives damages in amount of remainder of contract. π unreasonably
discharged 21 months before contract expires.
Holding – The liquidated clause in the contract is NOT a penalty clause so it is enforceable. In this instance
damages are hard to calculate and there was no unequal bargaining power (if any was on side of hotel not
employee). Salary from new job is excluded because with liquidated damages, no duty to mitigate.
Rule – Where contracted for damages are reasonable then liquidated will be enforced where are an
unreasonable penalty will not be enforced.



EQUITABLE REMEDIES
A. Specific Performance
– Specific performance (delivery of good as opposed to monetary damages) may be ordered when goods are
unique or in other proper circumstances (generally when damages are difficult to ascertain).

UCC §2-716: Buyer’s Right to Specific Performance or Replevin.
(1) Specific performance may be ordered where the goods are unique or in other proper circumstances
(2) The judgment (decree) for specific performance may include such terms and conditions as to payment of
the price, damages, or other relief as the court may deem just.
(3) The buyer has a right of replevin (suit for recovery of the goods) for goods identified to the contract if
after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate
that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the


                                                       45
Alisa Waxman                                                          Contracts Outline, Katz, Fall 2008

security interest in them has been made or tendered
(4) The buyer’s right under subsection (3) vets upon acquisition of a special property, even if the seller had
not then repudiated or failed to deliver

Restatement §359. Effect of Adequacy of Damages.
(1) Specific performance or an injunction will not be ordered if damages would be adequate to protect the
expectation interest of the injured party.
(2) The adequacy of the damage remedy for failure to render one part of the performance due does not
preclude specific performance or injunction as to the contract as a whole.
(3) Specific performance or an injunction will not be refused merely because there is a remedy for breach
other than damages, but such a remedy may be considered in exercising discretion under the rule stated in
§357.

Restatement §360. Factors Affecting Adequacy of Damages.
In determining whether the remedy in damages would be adequate the following circumstances are
significant:
a) the difficulty of proving damages with reasonable certainty
b) the difficulty of procuring a suitable substitute performance by means of money awarded as damages, and
c) the likelihood that an award of damages could not be collected


Sedmak v. Charlies’s Chevrolet, Inc. (MI Ct of Appeals, 1981)
Facts – π contracted with ∆ for limited edition corvette. Seller ultimately defaults because car appreciated in
value after agreement is made. π sues for car (not damages) arguing that this is a case of special perforance.
Issue – Is the car contracted for so “unique” that specific performance is necessary?
Holding – Court rules that due to the difficulties of putting a reliable dollar figure to the car the best thing to
do is turn over the car.
Rule – Where an object contracted for is unique or difficult to put a monetary value to and traditional
damages aren’t efficient, specific performance is appropriate.
Other – in this case it is likely that the couple may sell their entitlement to the dealer – if parties find it
mutually beneficial to trade car for a higher price (where dealer can then sell at even higher price (Coase
Theorem) then they will. It puts the bargaining power in hand of wronged party.


B. Personal Service – Exception to Specific Performance
Case of Mary Clark, (SC of IN)
Facts – π was a slave, then freed and voluntarily indentured herself for 20 years.
Issue – Can she be compelled to perform her contract?
Holding – No, you cannot make a commitment that promises your services for certain amount of time. Court
says this is akin to the degrading aspects of slavery that was outlawed.
Reasoning – Court isn’t saying that won’t enforce with money but since people entering into contracts such
as these don’t have any money, the decision renders them invalid.
Rule – Contracts for personal service cannot be enforced through specific performance.
Counter-argument – Why if both parties think is advantageous don’t’ allow someone to sell themselves for a
certain amount of time? May be the only way for a person with no funds to enter into an agreement.

Lumley v. Wagner (Chancery Division, 1852)
Facts – π enters into exclusive contract with ∆ singer for three months. ∆ tried to perform somewhere else
and π bring suit asking for specific performance.
Holding – Court says that cannot force her to perform but can prevent from performing.


                                                        46
Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008

-Essentially grant an injunction to prevent her from breaching the contract.

Bailey v. State of Alabama (US SC, 1911)
Facts – π worked for company as farm hand and accepted $15 at start of contract, was to be paid monthly
salary, quit working after a month and refused to refund money. Is ordered to pay and since cannot is
ordered to work it off.
Issue – Is the enforcement of personal service as repayment for debt in violation of 13 and 14th amendment?
Holding – The state’s statute coercing work as repayment for debt owed in a contract is in violation of the
constitution.
Dissent – Holmes argues that court should be providing incentives for compliance with contracts. Also
advocates states’ rights to police power and authority to regulate citizens’ conduct. Suggests that there was
no difference between enforcing a contract with enforced labor and a criminal being forced to work in prison
(both forms of involuntary servitude but necessary to uphold laws of the state).
Rule – States don’t have the right to regulate their own citizens if enforcement is in conflict with the 13th
amendment against involuntary servitude.

C. Promissory Estoppel
-Promises which foreseeably induce reliance on the part of the promisee will often be enforceable without
consideration. The promisee must actually rely on the promise and the reliance has to have been reasonably
foreseeable to the promisor. The remedy for this can be limited as justice requires.
*Recovery for foreseeable reasonable detriment in reliance of an express/implied promise!!!
*When discussing that a contract is enforceable due to PE, first discuss conclusion that consideration is
lacking and then move on to discussion of why the contract is enforceable in light of the flaw.
Restatement §90 – Promise Reasonably Inducing Action or Forbearance
(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the
promisee or a third person and which does induce such action or forbearance is binding if injustice can be
avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice
requires.
(2) A charitable subscription or a marriage settlement is binding under subsection (1) without proof that
the promise induced action or forbearance.
*must be a written promise to a charity for the rule that no reliance is necessary to apply.

Restatement of Torts §526 – Conditions Under Which Misrepresentation is Fraudulent
A misrepresentation is fraudulent if the maker
(a) knows or believes that the matter is not as he represented it to be
(b) does not have the confidence in the accuracy of his representation that he states or implies
(c) knows that he does not have the basis for his representation that he states or implies

Restatement of Torts §530 – Misrepresentation of Intention
(1) A representation of the maker’s own intention to do or not to do a particular thing is fraudulent if he does
not have that intention.
(2) A representation of the intention of a third person is fraudulent under the conditions stated in §526.
* Many authorities view PE as having a large component of tort law. “One person has caused harm to
another by making a promise that he should reasonably expected would cause such harm, and he is therefore
held liable for the harm caused. “ Under this view reliance damages are appropriate.
*Other courts (and R) view the doctrine as supplying consideration which would otherwise be lacking.
Under this approach reliance is still generally provided.

1. The Basics
Goodman v. Dicker (D.C. Court of Appeals 1948)

                                                      47
Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008

Facts - ∆ are distributors for Emerson Radio and π wanted to be a part of the franchise. π set up everything
in preparation of the franchise because ∆ represented that their application would be granted. They spend
money employing salesmen and soliciting orders for radios.
Holding – The π detrimentally relied on ∆ assurances and having given these assurances the ∆ is thus
estopped from denying that there was a contract.
Traditional Methods – Did the court have to invent this doctrine of promissory estoppel?
(1) Actual Contract – We can say that the verbal exchange amounted to an actual contract. We don’t need
any extra contractual doctrines because it is an ordinary oral contract that would have been binding to the
franchisor but the franchisee could back out.
-Why doesn’t the court do this rather than use promissory estoppel?
(2) Fraudulent Misrepresentation under Tort Law
Ways Not Treated Like a Contract
(a) It is imposing liability not on the party that π thinks is contracting with (franchise) but with the
intermediaries who engaged in the negations regarding the franchise.
(b) If the court were just enforcing the contract there would be no liability because there was a cancellation
clause.
(c) Damages resemble reliance rather than the expectation measure generally used in contracts

Hoffman v. Red Owl Stores, Inc. (Supreme Court of Wisconsin)
Facts – π entered into negotiations with ∆ for obtaining a franchise. π sold his bakery, bought a small
grocery store to obtain experience, and on advice of ∆ agent, sold the store after assurance that ∆ would
provide him with a larger store. π put deposit on lot in another town where store was to be located. ∆ kept
on raising amount needed to invest in the franchise and π eventually declined to purchase franchise.
Holding – Court says that under promissory estoppel there is no requirement that the promise that π relied on
be so definite as to constitute a contract. This is not contract liability so definiteness is not required. It
would be a mistake to regard an action grounded on promissory estoppel as the equivalent of a breach of
contract action. Rather the purpose is to award damages to the extent necessary to prevent injustice.
Oddity – We don’t even have a contract so we require less definiteness from the π but if there had been a
contract we would require more definiteness. So π gets an extra break. If one is going to have §90 you will
have to do it without a definiteness requirement.
Damages – The damage measure is reliance because this is not a contract so we need to use a torts measure.
Interesting Issue – Court says that not only did ∆ foresee that it would be necessary for wife (3rd party) but
also requested that she do it. Why is her 3rd party damage included?
Imagine – There are a bunch of suppliers who have made preparations with some cost associated with them.
Now that Hoffman doesn’t get the deal their hopes are also dashed. They have disappointed expectations
and also reliance. Should they recover?
-This is a tort so it is foreseeable to some extent to the supplier. But with economic harm we generally do
not extend it because it is problematic. When would the liability ever end? There is always foreseeability.
-Mrs. Hoffman stands at the vortex of these two different sets of intuitions: 3rd party liability and also the
public policy interests in limiting it.
Damage Calculation – You could argue that π is not entitled to lost profits because it would be double
counting (same as with Hooker where he could not recover for the cabinets because it would be getting
damages for storage x2) since when you calculate the sale of a store you include the expected profits in the
sale price. The only think π could argue is that he got less for the store than would have because had to sell
in a hurry.




Promissory Estoppel Applied to Other Cases
(1) Parole Evidence Cases
Thompson v. Libbey – Buyer unsuccessfully wanted to bring in record of their conversations. Court said no


                                                      48
Alisa Waxman                                                        Contracts Outline, Katz, Fall 2008

because of the parol evidence rule. What if the buyer brings in §90 and argues that injustice an only be
avoided if can recover for the reliance on the seller’s promise?
-Does §90 make the parol evidence rule irrelevant?

(2) Indefinite Profits
Chicago Coliseum v. Dempsey – Wanted to recover their costs but court said no because they were too
speculative. If §90 had been available to them they could have made the argument that recovery was
necessary to prevent injustice.
-Probably would not have recovered all damages but could recover those made in reliance on promise.

(3) Unilateral Offers (Revocation can occur at any time before performance begins)
Dickinson v. Dodd – Offeree tried to accept but it was too late, offeror did not have to keep the offer open.
-Does §90 give us any other answer? Dickinson had relied on the promise and felt unjustly treated so it
seems like he could use it.

Petterson v. Pattsburg – offeror said would give offeree a break on mortgage if paid by certain day, came to
pay and the offer was unilaterally revoked.
-Sometimes courts use §90 and other times they don’t because this is the law of contracts.

(4) Indefinite Terms
Sun Printing – How do we decide damages if there is a claim under §90? It certainly seems that at some
point indefiniteness becomes too great for detrimental reliance. Although you have more leeway than with
an actual contract, it has to be definite enough to have induced reliance.

(5) Modifications
Step Saver – does §90 change anything about the relative position of the parties in the transaction?
-The buyer now has two weapons, UCC 2-207 (no last shot allowed) and §90.
-The seller can also argue under §90 that were relying on being able to protect themselves with §90. So it
basically brings back the old ‘last shot’ regime through the backdoor.

Hypo – Person is using a contractor, a friend tells him that he habitually only pays 90%. In this instance, the
contractor sues (although he never has before). Can the ∆ sue under promissory estoppel?
-It isn’t a hopeless case because ∆ relied on π past performance in his actions.
- Promissory estoppel is a landmine. Whatever other arguments you have made or given up on there is
always the possibility of converting any kind of reliance into a promissory estoppel claim.
-Even something that is not allowed into court because of parol evidence rule may be revivable because of
promissory estoppel.
*§90 is one of those nuclear weapons that we can always try when every other contract argument has
failed. It has an indeterminate reach. Every loosing party has a right to be hopeful because of it.

B. Injustice of Nonenforcement

Cohen v. Cowles Media Co. (Supreme Court of Minnesota 1990)
Facts – π sued ∆ because they breached their promise to keep his name out of the newspapers when he gave
them information about a political candidate. As a result of this π was fired from his job. He sued claiming
fraudulent misrepresentation and breach of contract.
Holding – there was not contract reliability but the promise made by the journalists needs to be honored,
resulting in reliance liability.
Issue – It seems that ultimately the reason for enforcement is that a promise was made, which means we are
back in contracts world. But since the court found that there was no contract, their justification is as phony
as that of the excuse given by newspaper for reason that needed to release π name.
Worry – If we confuse inducement to do something with consideration then consideration will be no more.

                                                      49
Alisa Waxman                                                       Contracts Outline, Katz, Fall 2008

You have to realize that at least some things that might induce a person to do something is in fact inducement
(think about waving $10 across the street from someone) rather than consideration.
-In this case it seems like the handing over of information for the promise of silence seems like inducement,
not consideration.




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